UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

TOPSPIN MEDICAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		510394637
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Lechi 25
Bnei-Brak
Israel
(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: 972-3-9470921

Securities registered pursuant to Section 12(b) of the Act: Not applicable

Securities registered pursuant to Section 12(g) of the Act: Not applicable

Indicate by check mark if the registrant is a well-known seasoned, issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes þ No o

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 past 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 þ No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicated by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o

As of April [•], 2011, 11,645,405 shares of the registrant’s Common Stock, $0.001 par value per share, were outstanding. As of June 30, 2010 (the last day of the registrant’s second fiscal quarter), the aggregate market value of the common equity held by non-affiliates of the registrant was approximately NIS 58 million (approximately $16 million, based upon the New Israeli Shekel (“NIS”)/U.S. Dollar exchange rate of NIS 3.611 for every U.S. Dollar as of June 30, 2010). Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the Tel Aviv Stock Exchange on June 30, 2010. For purposes of determining this amount only, the registrant has defined affiliates as including the executive officers and directors of the registrant on June 30, 2010.

 

 

TABLE OF CONTENTS

		Page
Part I
Item 1. Business			3
Item 1A. Risk Factors			5
Item 1B. Unresolved Staff Comments			5
Item 2. Properties			5
Item 3. Legal Proceedings			5
Item 4. Reserved			5
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			6
Item 6. Selected Financial Data			7
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			9
Item 8. Financial Statements and Supplementary Data			10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A(T). Controls and Procedures			43
Item 9B. Other Information			43
Part III
Item 10. Directors, Executive Officers and Corporate Governance			44
Item 11. Executive Compensation			46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			49
Item 13. Certain Relationships and Related Transactions, and Director Independence			50
Item 14. Principal Accountant Fees and Services			50
Item 15. Exhibits, financial statements			51
Signatures			53
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1

PART I

This Annual Report on Form 10-K of TopSpin Medical, Inc. and its subsidiaries (“TopSpin” or the “Company”, or “us”, or “we” or “our”) for the fiscal year ending December 31, 2010 contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Those statements are therefore entitled to the protection of the safe harbor provisions of these laws. These forward-looking statements, which are usually accompanied by words such as “may,” “might,” “will,” “should,” “could,” “intends,” “estimates,” “predicts,” “potential,” “continue,” “believes,” “anticipates,” “plans,” “expects” and similar expressions, involve risks and uncertainties, and relate to, without limitation, statements about our market opportunities, our strategy, our competition, our projected revenue and expense levels and the adequacy of our available cash resources. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or forecasted in, or implied by, such forward-looking statements.

Although we believe that the expectations reflected in these forward-looking statements are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K for the fiscal year ending December 31, 2010 may not occur and our actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We disclaim any obligation or undertaking to disseminate any updates or revision to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Unless specified otherwise, all U.S. Dollar amounts in this Annual Report on Form 10-K are calculated using the NIS/U.S. Dollar exchange rate of NIS 3.549 for every U.S. Dollar as of December 31, 2010. Historical numbers are calculated according to historical exchange rates. Profit and loss numbers are calculated using average exchange rates for years 2009 and 2010.

Item 1. Description of Business.

Overview

We were incorporated in Delaware on September 20, 1999. We have conducted all of our business operations through our wholly-owned Israeli subsidiary, TopSpin Medical (Israel) Ltd. (TopSpin Israel). TopSpin Israel was incorporated on October 5, 1999 to engage in research and development of MRI technology using miniaturized MRI sensors. Until we suspended our activities due to financial considerations in October 2008, we were engaged through TopSpin Israel, in the design, research, development and manufacture of imaging devices that utilize MRI technology by means of miniature probes for various body organs.

On September 1, 2005, we issued securities to the public in Israel and our shares of common stock began to trade on the Tel Aviv Stock Exchange (TASE). In 2007, we registered some of our securities with the U.S. Securities and Exchange Commission (SEC). Our securities are traded only on the TASE in NIS. (See PART II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”—“Market for Common Equity and Related Stockholder Matters”). On February 4, 2010, the Tel Aviv Stock Exchange (TASE) notified the Company that it failed to satisfy the minimum requirement that issuers whose securities are listed on TASE maintain a minimum equity value of NIS 2 million (approximately $509,609). Following two extensions, the Company will need to comply with this minimum required on or before June 18, 2012 in order to retain its listing on TASE.

In October 2008, we paid NIS 12,513,000 (approximately $3,291,163) as part of a settlement with holders of our Series A Debentures (see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation”). In addition, grants due to us for the years 2007 and 2008 from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor (OCS), an Israeli governmental agency, were not paid. As a result of the combination of the substantial outlay of cash in connection with the settlement and the lack of cash inflow from the OCS grants, on October 27, 2008, we decided to terminate the employment of all of TopSpin Israel’s employees (excluding the finance department and employees who were pregnant or on maternity leave) and suspend our operational activities.

In February 2009, we raised an aggregate of NIS 900,000 (approximately $238,410) through the issuance of shares of our Common Stock to support efforts to continue our activities.

On January 27, 2010, the Company entered into an investment agreement (the “Investment Agreement”) with Medgenesis Partners Ltd., a private company organized under the laws of Israel and controlled by Ascher Shmulewits (“Medgenesis” and the “Stockholder”, respectively). Under the terms of the Investment Agreement, the Company agreed to issue to Medgenesis (i) 423,346 shares of Common Stock of the Company; (ii) a warrant to purchase 245,871 shares of Common Stock; and (iii) a warrant to purchase 116,129 shares of Common Shares, all in exchange for payment by Medgenesis in the amount of $211,673 and the cancellation of a certain warrant issued by the Company to the Stockholder pursuant to a certain agreement, dated February 2, 2009, filed with the Securities and Exchange Commission on February 5, 2009.

On February 1, 2010 Medgenesis transferred $53,804 pursuant to the Investment Agreement (“Initial Payment”). The Investment Agreement has not been consummated since the Company failed to fulfill a precondition to the Closing pursuant to the Investment Agreement. The Initial Payment has been converted into Funds (as defined below) pursuant to the Loan Agreement entered into between the parties, as further detailed below.

In addition, the Company, Medgenesis and the Stockholder entered into a memorandum of understanding pursuant to which Medgenesis and the Stockholder will assist the Company to acquire interests in commercial and/or industrial biotech companies and/or assets. We are currently pursuing acquisition options.

Under the terms of the Investment Agreement, on April 29, 2010, we entered into a loan agreement (the “Loan Agreement”) with Medgenesis, pursuant to which Medgenesis agreed to loan the Company a total of $353,804 (the “Funds”), consisting of: (i) $53,804 already paid to the Company on February 1, 2010, pursuant to the Investment Agreement and (ii) an additional $300,000 to be placed in an escrow account and to be disbursed pursuant to an Escrow Instruction Letter (the “Letter”), dated April 29, 2010, between the Company, Medgenesis and the escrow agent. The Loan Agreement and the Letter provide that the Company may use the Funds for payment of legal fees, including fees associated with retaining its current counsel for bankruptcy counseling advice, and for the payment of all other outstanding obligations as may be required by the Plan (as defined below). The Loan Agreement also provides for the termination of the Investment Agreement and all obligations of the parties there-under.

Pursuant to the Loan Agreement, the Company filed a petition seeking relief under Chapter 11 of Title 11 of the United States Code, pursuant to which the Company applied to the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to authorize the approval of transactions and all other actions required according to a plan to be prepared by the Company and approved by Medgenesis in writing prior to any filing (the “Plan”). Further, the Company covenanted not to engage in certain conduct while Funds loaned under the Loan Agreement are outstanding, including (i) hiring employees; (ii) applying for any credit or loan from a banking institution; (iii) amending any of the Company’s organizational documents; and (iv) acting in any manner that would result in a material adverse effect on the Company or in non-compliance with the Plan.

On June 28, 2010 the Company received a letter from Medgenesis requesting full repayment of the loan because, at that time, the Company had not yet filed its Chapter 11 petition pursuant to the Loan Agreement. On June 29, 2010, Medgenesis withdrew the remaining amount from the escrow account. As of December 31, 2010, the outstanding loan balance, including unpaid interest at a rate of 4.0%, was $427,695.

On July 12, 2010, in accordance with the Loan Agreement, the Company filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code with the Bankruptcy Court (Case No. 10-12213 (CSS)). As part of the Plan that the Company submitted to the Bankruptcy Court, the Company requested that the Bankruptcy Court approve an increase in its registered capital, a reverse split of the Company’s reorganized Common Stock (as further detailed below) and the conversion of the outstanding Funds into Company’s shares of Common Stock (all under terms that have not yet been authorized by the Company’s shareholders).

On September 26, 2010, the Company and Medgenesis signed another loan agreement totaling up to $200,000. The purpose of the loan is to cover the Company’s then current expenses, complete the Chapter 11 proceeding and settle some of the unsecured creditors’ claims based on the settlement approved by the Bankruptcy Court and the relevant regulatory entities. The loan agreement was contingent on the Bankruptcy Court’s approval of the Chapter 11 proceeding in Delaware (the “Second Loan”). As of December 30, 2010, the Company borrowed approximately NIS 485,613 (approximately $136,831) under the Second Loan.

On October 22, 2010, the Bankruptcy Court entered the Order Granting Motion Of Debtor And Debtor-In-Possession For Authority To Incur Unsecured Debt Under Loan Agreement And For Approval Of Loan Agreement, pursuant to which the Bankruptcy Court authorized the Company to incur up to an additional $200,000.00 under the Second Loan.

On December 13, 2010 the Plan was approved by the general meeting of the equity interest holders of the Company, and on December 21, 2010 the Plan was approved by the Bankruptcy Court. In accordance with the provisions of the Plan, the consolidation of the capital of the Company was approved, in such way that each 500 shares par value US$0.001 US$ each shall be consolidated into 1 share par value US$0.001 US$ each, and each warrant exercisable into 1 share par value US$0.001 each, shall be exercisable into 0.0002 shares par value US$0.001 each, with the exercise price remaining the same. The Amended and Restated Certificate of Incorporation of the Company was amended, in such way that the authorized share capital of the Company was increased to a total of 50,000,000 shares par value US$0.001 each. The aforesaid amendments to the Amended and Restated Certificate of Incorporation of the Company and the authorized capital of the Company were executed on February 13, 2011. In the course of the Plan, on February 13, 2011 the Company has allocated 10,122,463 shares to a Medgenesis as a repayment of a debt of US$484,000 of the Company to Medgenesis.

We have not generated any revenues to date and have not achieved profitable operations or positive cash flows from operations. We have an accumulated deficit of NIS 184,432,000 (approximately $51,967,315) as of December 31, 2010, and have incurred a net loss of NIS 2,315,000 (approximately $620,145) and negative cash flow from operating activities in the amount of NIS 2,570,000 (approximately $688,454) for the year ended December 31, 2010.

Expenditures on Research and Development

From the time of our inception in 1999 through December 31, 2010, we invested a total of NIS 135,023,000 (approximately $35,513,677) in gross research and development expenses. We funded our research and development expenses from our own resources and from the OCS. Due to the suspension of our operations in October 2008, we have not engaged in any research and development activities in 2010.

Intellectual Property

As of December 31, 2010, TopSpin Israel owned one registered patent in the United States. TopSpin Israel holds the exclusive rights to U.S. Patent No. 6,704,594 entitled Magnetic Resonance Imaging Device, issued March 9, 2004 concerning the basic technology for local MRI imaging from a miniature imaging probe that expires on September 9, 2011.

TopSpin Israel also registered Israel patent No. 149945 which concerns our basic technology for local MRI imaging from a miniature probe; this patent was abandoned on November 24, 2010.

On January 24, 2010, we decided to discontinue the maintenance and development of our intellectual property due to management’s assessment that the Company will not be able to complete the development of our intellectual property or sell products based on such intellectual property.

Employees

Due to financial difficulties, as of December 31, 2010, we had only one full-time employee, Mr. Eitan Shtarkman, serving as the Company’s CEO. We do not have any other employees. The Company is also receiving services from CFO Direct Ltd., a company providing financial services through Mr. Uri Ben-Or, CPA serving as the Company’s CFO.

Our employee is not represented by a collective bargaining agreement, nor have we experienced any work stoppages. We believe that our relations with our remaining employee are good. As of December 31, 2010, we have not adopted a code of ethics but intend to do so if and when we restart our suspended activities or enter into new business activities.

Availability of SEC Reports

We file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other information with the SEC. Members of the public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Members of the public may also obtain information in the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers, including TopSpin, that file electronically with the SEC. The address of that site is http://www.sec.gov. We are not required to deliver an annual report to our shareholders; electronic copies of such reports, however, are available on the SEC website described above.

Item 1A. Risk Factors.

Not applicable.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

From January 2010 to May 2010, we leased offices located at Rothschild 65, Tel Aviv, Israel for a monthly rent payment of NIS 4,200 (approximately $1,125). In May 2010, the lease expired and the Company vacated the premises and sold certain technological and office equipment and supplies.

On June 15, 2010, the Company entered into an agreement with Tapuz Clothing Industry Ltd (“Tapuz”), a company affiliated with Mr. Zvi Linkovsky, one our directors, pursuant to which Tapuz provides us with office space and services for a monthly payment of NIS 2,000 (approximately $536). The agreement with Tapuz is on a month-to-month basis. Both parties may terminate the agreement upon 15 days’ notice. We believe that this arrangement is sufficient to meet our current needs. However, in the long-term, we will reevaluate the need for additional facilities based on our growth and future needs with respect to management, administration, marketing and manufacturing requirements.

Item 3. Legal Proceedings.

The Company filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware, as detailed in Item 1 above. Except for the Chapter 11 proceedings, as of December 31, 2010, we were not a party to any material legal proceeding.

Item 4. Removed and Reserved.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Common Equity and Related Stockholder Matters

Our shares of Common Stock are listed for trading on the TASE. On February 28, 2008, 22,522 of our outstanding Series 1 Warrants were converted into shares of our Common Stock and all warrants that remained unexercised as of the close of business of such date expired and were delisted from TASE. The information below refers to shares of our Common Stock that are currently traded on TASE under the symbols “TOPMD”. Public trading of our Common Stock commenced on September 6, 2005.

On February 11, 2011, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware (Restated Charter). Pursuant to the Restated Charter, the Company effected a reverse split of its common stock (Split), such that every 500 shares of the common stock existing prior to the Split were automatically combined into 1 share of the Company’s common stock (such combined common stock, the “New Common Stock”). Pursuant to the Restated Charter, the authorized capital stock of the Company was reduced to 50,000,000 shares of New Common Stock.

The following tables set forth, for the periods indicated, the range of high and low per share sale prices for our Common Stock as reported on TASE.

Common Stock

2009

High

Low

First Quarter

NIS

0.014

NIS

0.01

Second Quarter

NIS

0.053

NIS

0.01

Third Quarter

NIS

0.034

NIS

0.025

Fourth Quarter

NIS

0.03

NIS

0.018

2010

High

Low

First Quarter

NIS

0.022

NIS

0.014

Second Quarter

NIS

0.022

NIS

0.013

Third Quarter

NIS

0.015

NIS

0.01

Fourth Quarter

NIS

0.018

NIS

0.01

Holders of Securities

As of December 31, 2010, we had 34 stockholders.

Dividends

Holders of our Common Stock are entitled to equal ratable rights to dividends and distributions with respect to the Common Stock, as may be declared by the Board of Directors out of funds legally available. We have never declared any dividends on any of our securities, and do not intend to do so in the foreseeable future.

Securities Authorized For Issuance Under the Equity Compensation Plans

The following table sets forth the aggregate number of securities to be issued upon the exercise of outstanding options, warrants and rights under our equity compensation plans, and the number of securities remaining available for future issuance under our equity compensation plans as of December 31, 2010:

Equity Compensation Plan Information

Number of

securities

remaining

available for

future

issuance

Weighted-

Weighted-

under

Number of

average

average

equity

securities to be

exercise price

exercise price

compensation

issued upon

of

of

plans

exercise of

outstanding

outstanding

(excluding

outstanding

options,

options,

securities

options,

warrants and

warrants and

reflected in

Plan category

warrants and Rights

rights

rights

column (a))

(a)

(b)(1)

(c)

Equity compensation plans approved by security holders

0

0

0

Equity compensation plans not approved by security holders

232,813

NIS

0.003

USD

0.001

24,832,438

Total

232,813

NIS

0.003

USD

0.001

24,832,438

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Financial Statements and Notes and the other financial information included elsewhere in this Annual Report on Form 10-K for the fiscal year ending December 31, 2010. In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors.

Overview

Until suspension of our business activities due to financial considerations in October 2008, we, through our subsidiary, TopSpin Israel, were engaged in the design, research, development and manufacturing of imaging devices that utilize MRI technology by means of miniature probes that image various body organs. Until 2008, our main product was an intravascular MRI, or IVMRI, catheter system for imaging and characterizing the tissue composition of coronary plaque during a conventional cardiac catheterization procedure.

As previously disclosed in current reports on Form 8-K filed on September 25, 2008, September 29, 2008 and October 16, 2008, we executed a supplemental indenture with Wilmington Trust Company (in its capacity as Trustee for our Series A Debentures) and the Ziv Haft Trust Company Ltd. (in its capacity as Co-Trustee of our Series A Debentures) which supplemented the original indenture governing the Series A Debentures and provided for the conversion of each NIS 1.00 of principal amount of Series A Debentures held by eligible bondholders into nine (9) shares of our common stock and NIS 0.25 in cash.

As contemplated by the supplemental indenture and the settlement agreement, dated July 13, 2008, between the Company and the Co-Trustee, on October 12, 2008, all of the outstanding NIS 50,000,000 of the Series A Debentures were converted into 450,000,000 shares of our Common Stock. Upon the completion of this conversion, all of our outstanding Series A Debentures were removed from trading on the TASE. We issued the cash payment contemplated by the settlement agreement on October 26, 2008 in the amount of NIS 12,513,000 (approximately $3,291,162).

This payment significantly reduced our cash resources, and, together with the discontinuation of grants from OCS, materially and adversely affected our business and the cash we have available to maintain research and development, marketing, and other activities conducted in the ordinary course of our business. Our reduced cash position caused us to suspend our activities as of October 27, 2008. We were forced to terminate all of our employees except three employees in our finance department and three employees who were on maternity leave at the time (each of whose employment was terminated prior to March 31, 2009), and we incurred termination fees in connection with the early termination of our property and motor vehicle lease. As of December 31, 2010, we employed only one full-time employee—our CEO—and our financial function is currently satisfied by third-party provider.

Critical Accounting Policies

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP), applied on a consistent basis, as follows:

Financial statements in NIS: A majority of the Company’s costs and expenses are incurred in New Israeli Shekels, or NIS. In addition, the Company finances its operations from mainly NIS denominated resources, mainly from equity raisings. The Company’s management believes that the NIS is the primary currency of the economic environment in which the Company operates. Thus, the functional currency of the Company is the NIS. Accordingly, monetary accounts maintained in currencies other than the NIS are re-measured into NIS in accordance with ASC 830 (formerly — SFAS No. 52), “Foreign Currency Matters”.

All transaction gains and losses of re-measured monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate. Substantially all the operations and assets of the Company are conducted in NIS in Israel and it has no assets and operations in the US. The Company’s equity securities are traded in Israel in NIS. As such the Company’s management believes that the functional and reporting currency is NIS.

Use of estimates: The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of consolidation: The consolidated financial statements include the accounts of the subsidiary over which the Company exercises control. Significant inter-company balances and transactions between the two companies have been eliminated in the consolidated financial statements.

Results of Operations

Years Ended December 31, 2009 and 2010

Revenue — We did not have any revenues in 2010 or 2009.

Research and Development — We had no research and development expenses in 2010 or 2009 due to suspension of operations in October 2008.

Marketing and Sales — We had no marketing and sales expenses in 2010 or 2009 due to suspension of operations in October 2008.

General and Administrative — General and administrative expenses consist primarily of professional fees, rent, office maintenance, payroll related expenses and directors’ fees. General and administrative expenses increased by approximately 30% to NIS 2,512,000 (approximately $672,917) in 2010 from NIS 1,930,000 (approximately $490,769) in 2009. This increase was the result of reorganization of the Company in connection with our bankruptcy proceedings.

Financial Income, Net — In 2010, our financial income decreased by 22% to NIS 197,000 (approximately $52,773) as compared to financial income of NIS 254,000 (approximately $64,588) in 2009. This decrease is attributable primarily to the interest expenses from related party loan and foreign currency translation adjustments.

Taxes on income — Since its formation, the Company has had no income from operations and has no deferred tax liabilities. As a result of the settlement with our bondholders in 2008, we recorded a reserve in the amount of NIS 1,344,000 (approximately $374,603) for possible tax payments.

Net Loss — Our net loss for 2010 was NIS 2,315,000 (approximately $620,145) compared to a net loss of NIS 1,676,000 (approximately $426,181) in 2009, an increase of approximately 40% which is attributable to a reorganization of the company in connection with out bankruptcy proceedings.

Liquidity and Capital Resources

We have not had any revenues from operations since our inception in September 1999. We financed our operations principally through private and public sales of equity securities, convertible notes and through grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, an Israeli governmental agency.

In February 2009, we raised net proceeds of NIS 900,000 (approximately $236,717) through the sale of 240,000 shares of our common shares of $0.001 par value and 58,064,516 warrants exercisable into 116,129 common. Each warrant is exercisable into one common share for the exercise price of NIS 0.01 for a period of 4 years following the issuance date.

As of December 31, 2010, our assets were approximately NIS 82,000 (approximately $23,105), of which cash and cash equivalents were approximately NIS 33,000 (approximately $9,298). As of December 31, 2010, our liabilities were approximately NIS 1,975,000 (approximately $529,065).

We believe that our cash resources are insufficient for our operations at current levels for the next twelve months. We are contemplating and pursuing possibilities for new business activities for the Company and new avenues for raising capital.

We may not be able to raise additional funds required to resume our regular business operations or to engage in new fields of business that we may decide to pursue. The global stock and credit markets are experiencing significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases have resulted in the unavailability of certain types of financing. Continued uncertainty in the stock and credit markets may negatively affect our ability to raise necessary additional funds

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8. Financial Statements and Supplementary Data.

TOPSPIN MEDICAL, INC.

CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2010

INDEX

		Page
Report of Independent Registered Public Accounting Firm			12
Consolidated Balance Sheets			13 - 14
Consolidated Statements of Operations			15
Statements of Changes in Shareholders’ Deficiency			16
Consolidated Statements of Cash Flows			17 -18
Notes to Consolidated Financial Statements			19 - 42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

TOPSPIN MEDICAL, INC.

We have audited the accompanying consolidated balance sheets of Topspin Medical, Inc. (“the Company”) and its subsidiary as of December 31, 2009 and 2010, and the related consolidated statements of operations, changes in shareholders’ deficiency and cash flows for each of the two years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included considerations of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary as of December 31, 2009 and 2010 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1b and 1c in the last quarter of 2009, the Company terminated the employment of most of its employees and suspended its operational activities. On July 7, 2010 the Company’s board of directors unanimously approved the filing of chapter 11 (see note 1d). The Company has incurred losses in the amount of NIS 2,315 thousand during the year ended December 31, 2010 and has an accumulated deficit in the amount of NIS 184,432 thousand as of that date. These factors, among other factors described in that Note, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the carrying amounts and classification of assets and liabilities that might result should the Company be unable to continue to operate as a going concern.

Tal Aviv, Israel		KOST FORER GABBAY & KASIERER
April 14, 2011		A Member of Ernst & Young Global

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

				December 31,
		Note		2009				2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		3			1,002				33
Other receivables and prepaid expenses		4			242				49
Restricted deposits		9d			59				—
					1,303				82
PROPERTY AND EQUIPMENT, NET		5			9				—
					1,312				82

The accompanying notes are an integral part of the consolidated financial statements.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
NIS in thousands (except share and per share data)

				December 31,
		Note		2009				2010
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
CURRENT LIABILITIES:
Trade payables		6			140				658
Other payables and accrued expenses		7			1,011				63
Liabilities in respect of options to employees and consultants		11			3				—
Tax provision		13			1,334				1,254
					2,488				1,975
CONTINGENT LIABILITIES, COMMITMENTS AND CHARGES		8
SHAREHOLDERS’ DEFICIENCY:		10
Share capital:
Common shares of $0.001 par value:
Authorized 2,000,000 shares as of December 31, 2009 and 2010; Issued and outstanding 1,522,942 shares as of December 31, 2009 and 2010					6				6
Additional paid-in capital					180,935				181,015
Receipts on account of shares					—				1,518
Accumulated deficit					(182,117	)			(184,432	)
					(1,176	)			(1,893	)
					1,312				82

The accompanying notes are an integral part of the consolidated financial statements.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

				Year ended
				December 31,
		Note		2009				2010
General and administrative expenses					1,930				2,512
Financial income, net		12			254				197
Net loss					(1,676	)			(2,315	)
Basic and diluted net loss per Common share					(1.1	)			(1.52	)
Weighted average number of Common shares outstanding used in basic and diluted net loss per share calculation					1,522,942				1,522,942

The accompanying notes are an integral part of the consolidated financial statements.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIENCY

		Number of
		outstanding								Additional				Receipts								Total
		shares				Share				paid-in				on account				Accumulated				shareholders’
		Common **)				capital				capital				of shares				deficit				deficiency
Balance as of January 1, 2009			1,273,742				5				179,639				—				(180,441	)			(797	)
Exercise of options			9,200				—	*)			19				—				—				19
Issuance of Common shares and warrants (series 3)			240,000				1				899				—				—				900
Classification of liability into equity in respect of exercise of options			—				—				161				—				—				161
Stock-based compensation expense			—				—				217				—				—				217
Net loss			—				—				—				—				(1,676	)			(1,676	)
Balance as of December 31, 2009			1,522,942				6				180,935				—				(182,117	)			(1,176	)
Stock-based compensation expense											80				—				—				80
Receipts on account of shares			—				—				—				1,518				—				1,518
Net loss			—				—				—				—				(2,315	)			(2,315	)
Balance as of December 31, 2010			1,522,942				6				181,015				1,518				(184,432	)			(1,893	)

The accompanying notes are an integral part of the consolidated financial statements.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year ended
		December 31,
		2009				2010
Cash flows from operating activities:
Net loss			(1,676	)			(2,315	)
Adjustments to reconcile net loss to net cash used in operating activities (a)			(2,123	)			(255	)
Net cash used in operating activities			(3,799	)			(2,570	)
Cash flows from investing activities:
Change in restricted deposits, net			503				59
Purchase of property and equipment			(6	)			—
Net cash provided by investing activities			497				59
Cash flows from financing activities:
Exercise of stock options and warrants			19				—
Proceeds from issuance of shares and warrants (series 3), net of issuance expenses			900				—
Loan from related party			—				1,542
Net cash provided by financing activities			919				1,542
Decrease in cash and cash equivalents			(2,383	)			(969	)
Cash and cash equivalents at the beginning of the year			3,385				1,002
Cash and cash equivalents at the end of the year			1,002				33

The accompanying notes are an integral part of the consolidated financial statements.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
NIS in thousands

		Year ended
		December 31,
		2009				2010
(a) Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			7				9
Interest on loan from related party			—				(24	)
Change in fair value of liability in respect of warrants (series 2)			(250	)			—
Change in fair value of embedded derivative			(500	)			—
Stock-based compensation			217				80
Change in fair value and amortization of stock options classified as a liability			115				—
Accrued severance pay, net			(270	)			—
Decrease in other receivables and prepaid expenses			192				193
Increase (decrease) in trade payables			(315	)			518
Decrease in liabilities in respect of options to employees and consultants			—				(3	)
Decrease in tax provision, other payables and accrued expenses			(1,319	)			(1,028	)
Total adjustments			(2,123	)			(255	)
(b) Supplemental disclosure of non cash flows activities:
Classification of liabilities into equity			161				—
Loan converted into receipts on account of shares			—				1,518

The accompanying notes are an integral part of the consolidated financial statements.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 1:- GENERAL

	a.		TopSpin Medical, Inc. (“the Company”) and its subsidiary, TopSpin Medical (Israel) Ltd. (“the subsidiary”) (collectively “the Group”) were engaged in research and development of a medical MRI technology.
			In October 2008, the Company suspended its activities as described below.
			The Company was incorporated and commenced operation in September 1999 as a private company registered in Delaware, U.S. On September 1, 2005, the Company issued securities to the public in Israel and became publicly traded on the Tel Aviv Stock Exchange (“TASE”). In 2007, the Company listed some of its securities with the U.S. Securities and Exchange Commission (“SEC”). The Company’s shares are traded only in Israel in NIS.
			In October 2008, the Company terminated the employment of all of its subsidiary’s employees (excluding two employees from the finance department) and suspended its operational activities.
			On January 24, 2010, the Company decided to discontinue the development of its intellectual property due to management’s assessment from December 2009 that the Company will not be able to finalize the development of its intellectual property or sell products based on such intellectual property.
	b.		Since the suspension of the Company’s operational activity and as of the date of the financial statements the Company is not engaged in any operational activity. Additionally, in January 2010, Company’s management decided to suspend the support in protection of its intellectual property (registered patent and patent applications).
	c.		The Group has not generated any revenues and has not achieved profitable operations or positive cash flows from operations. The Company has an accumulated deficit of NIS 184,432 as of December 31, 2010, and it incurred a net loss of NIS 2,315 and negative cash flows from operating activities in the amount of NIS 2,570 for the year ended December 31, 2010.
			There is uncertainty about the Company’s ability to generate revenues or raise sufficient funds in the near term, if any. These factors, among other factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 1:- GENERAL (Cont.)

	d.		On July 7, 2010 the Company’s Board of Directors unanimously approved the filing of Chapter 11. Subject to the approval of the Company’s request the Company will be able to increase its capital, change its capital structure and convert the loan from with Medgenesis Partners Ltd. (“Medgenesis”), a private company incorporated under the laws of Israel and controlled by Mr. Ascher Shmuelevich (“the Investor” and “the Shareholder”, respectively) (see details on the loan in note 14b). The request was filed in Delaware on July 12, 2010.
			As part of the restructuring plan, the Company requested the Bankruptcy Court to approve an increase in its registered capital, approve a reverse split of the Company’s reorganized Common Stock and approve converting the Medgenesis loan into Company’s common stock (under terms that have not yet been authorized by the Bankruptcy Court or the Company’s shareholders).
			On August 30, 2010, the United Stated Bankruptcy Court — District of Delaware approved the Chapter 11 settlement sought by the Company (“the first proposed settlement”). The first proposed settlement consists of capital consolidation at a ratio of 1:500 without derogating from the rights arising from holding the Company’s shares or stock options. The first proposed settlement also prescribes that following the capital consolidation, 2,806,524 of the Company’s shares will be allocated to Medgenesis against the waiver of the first loan which as of the date of the approval of the first proposed settlement amounted to approximately $284 thousand. According to the first proposed settlement, after said share allocation, Medgenesis would hold 55.94% of the Company’s issued and outstanding share capital and the Shareholder would hold directly and through Medgenesis 71.7% of the issued and outstanding share capital.
			On October 4, 2010, the Company’s Audit Committee and Board of Directors approved an amended Chapter 11 settlement (“the settlement”) according to which:

	1.		A capital consolidation at a ratio of 1:500 will be carried out in the context of the consolidation.
	2.		The conversion of loans totaling $484 thousand which were extended and/or will be extended to the Company by Medgenesis into 10,122,463 Company’s shares.

According to the settlement, after the share allocation, Medgenesis would hold 86.92% of the Company’s issued and outstanding share capital and the Shareholder would hold directly and through Medgenesis 88.68% of the issued and outstanding share capital.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 1:- GENERAL (Cont.)

			On December 13, 2010 the settlement was approved by the Company’s general shareholders’ meeting. Accordingly, the capital consolidation was approved and the shares allocation was performed as described above. See more information on note 10b6. On December 21, 2010 the court approved the settlement. As of December 31, 2010 the shares were not issued to the Shareholder and Medgenesis.
	e.		On March 18, 2010, due to lack of resources, the Company’s Board of Directors terminated the employment of the Company’s remaining finance department employees.
			On April 28, 2010, the Company’s Board of Directors rescinded the termination of one finance employee of the Company and appointed her as controller and secretary of the Company. On September 12, 2010, the Company’s controller ceased her employment with the Company. On September 20, 2010, an outsourcing company provided financial services to the Company including a chief financial officer services.
	f.		The Company’s management is currently operating to raise the necessary funds for the operation of the company and for finding operational activity for the Company in the field of life science or other fields.
	g.		On February 4, 2010, the Tel Aviv Stock Exchange (“TASE”) notified the Company that it does not comply with the maintenance regulations since the Company’s equity is lower than NIS 2,000 in the last four reporting quarters. The Company was given an extension until June 30, 2010 to increase its equity.
			On July 18, the Company received notification from TASE that w the Company’s shares will be transfer to the maintenance list beginning July 19, 2010. The Company was given an extension until July 18, 2012 to increase its equity, otherwise, its shares will be eliminated from trading commencing July 20, 2012.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), applied on a consistent basis, as follows:

	a.		Financial statements in NIS:
			A majority portion of the Company’s costs and expenses are incurred in New Israeli Shekels (“NIS”). In addition, the Company finances its operations from mainly NIS denominated resources, mainly from equity raisings.
			The Company’s management believes that the NIS is the primary currency of the economic environment in which the Company operates. Thus, the functional currency of the Company is the NIS.
			Accordingly, monetary accounts maintained in currencies other than the NIS are re-measured into NIS in accordance with ASC 830, “Foreign Currency Matters”. All transaction gains and losses of the re-measured monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate.
			Substantially all the operations and assets of the Company are conducted in NIS in Israel and it has no assets and operations in the US. The Company’s stocks are traded in Israel in NIS. As such the Company’s management believes that the functional and reporting currency is NIS.
	b.		Use of estimates:
			The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Actual results could differ from those estimates.
	c.		Principles of consolidation:
			The consolidated financial statements include the accounts of the subsidiary over which the Company exercises control. Significant inter-company balances and transactions between the two companies have been eliminated in the consolidated financial statements.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	d.		Cash equivalents:
			Cash equivalents are short-term highly liquid investments that are readily convertible to cash with maturities of three months or less at the date of acquisition.
	e.		Property and equipment:
			Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets at the following annual rates:

		%
Computers and software		33
Office furniture and equipment		7 – 15

	f.		Impairment of long-lived assets:
			The Company’s long-lived assets are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. For the year ended December 31, 2010, no impairment losses on its property and equipment were recorded.
	g.		Severance pay:
			The Company’s liability for severance pay to the Israeli employees of the subsidiary is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability for all of its employees is partially provided by monthly deposits with insurance policies. The value of these policies is recorded as an asset in the Company’s balance sheet. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

			Commencing 2009, the Company has defined deposited funds for all of its employees, pursuant to section 14 to the Severance Pay Law, under which, the Company pays fixed contributions and will have no legal or constructive obligations to pay further contributions upon termination of employees. As of December 31, 2010 the Company terminated the employment of all its employees.
			Severance pay expenses for the years ended December 31, 2009 and 2010 amounted to approximately NIS 54 and NIS 16, respectively.
	h.		Stock-based compensation:
			ASC 718 requires the use of a valuation model to calculate the fair value of stock based awards. The Company has elected to use the binomial pricing model to determine the fair value of stock based awards on the dates of grant.
			The following assumptions were used to estimate the fair value of the stock options granted during the years ended December 31, 2008, 2009 and 2010:
			The Company recognizes compensation expenses for the value of its options based on the accelerated method over the requisite service period of the options.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company estimates the fair value of stock options granted using the Binomial model with the following assumptions:

Binomial model		2009
Dividend yield		0%
Expected volatility		113%-136.4%
Risk-free interest rate		4.5%
Suboptimal exercise factor		3.09 for employees,
		3.56 for officers

			Risk-free interest rates are based on the yield from U.S. Treasury zero-coupon bonds with a term equivalent to the contractual life of the options; Expected volatilities are based on historical volatilities from traded stock of the Company and of similar companies. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.
			The suboptimal exercise factor represents the value of the underlying stock as a multiple of the exercise price of the option which, if achieved, results in exercise of the option.
			The Company has historically not paid dividends and has no foreseeable plans to declare dividends.
			The Company applies ASC 718 and ASC 505-50, “Equity-Based Payment to Non-employees”, with respect to options issued to non-employees. ASC 718 requires the use of option valuation models to measure the fair value of the options and warrants. The Company uses the Binomial model to measure the fair value of options granted to non-employees. In 2010, no options were granted to non-employees.
	i.		Fair value of financial instruments:
			The carrying amount reported in the consolidated balance sheet for cash and cash equivalents, other receivables and prepaid expenses, trade payables and other payables approximate their fair values due to the short-term maturities of such instruments.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	j.		Basic and diluted net loss per share:
			Basic net loss per share is computed based on the weighted average number of Common shares outstanding during each year. Diluted net loss per share is computed based on the weighted average number of Common shares outstanding during each period, plus dilutive potential Common shares considered outstanding during the year in accordance with ASC 260, “Earning per Share”. All outstanding stock options have been excluded from the calculation of the diluted loss per Common share because all such securities are anti-dilutive for each of the periods presented.
	k.		Concentration of credit risks:
			Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents and other receivables. The Group’s cash and cash equivalents are invested in NIS and U.S. dollar instruments of major banks in Israel and in the United States. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. The Company and its subsidiary have no significant off-balance sheet concentration of financial instruments subject to credit risk such as foreign exchange contracts, option contracts or other hedging arrangements.
	l.		Income taxes:
			The Group accounts for income taxes in accordance with ASC 740 (, “Income Taxes”. This Statement prescribes the use of the liability method, whereby deferred tax assets and liability account balances are calculated for temporary differences between financial reporting and tax bases of assets and liabilities and net operating loss carryforward. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
			The Company and its subsidiary provide a valuation allowance if necessary, to reduce deferred tax assets to their estimated realizable value.
			As for tax uncertainties, the Statement establishes a single model to address accounting for uncertain tax positions. The Statement clarified the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The Statement also provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company elected to classify interest expenses and penalties recognized in the financial statements as income taxes. For the years 2009 and 2010, no penalties were recognized.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	m.		Impact of recently issued Accounting Standards:
			Adoption of New Accounting Standards during the period:
			ASU 2010-06 — In January 2010, the FASB updated the “Fair Value Measurements Disclosures” codified in ASC 820. More specifically, this update require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value, and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. As applicable to the Company, this update became effective as of the first quarter ended December 31, 2010, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting of December 31, 2010. The adoption of the new guidance did not have a material impact on its consolidated financial statements.

NOTE 3:- CASH AND CASH EQUIVALENTS

		December 31,
		2009				2010
In New Israeli Shekels			978				9
In other currencies (mainly in U.S. dollars)			24				24
			1,002				33

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except share and per share data

NOTE 4:- OTHER RECEIVABLES AND PREPAID EXPENSES

		December 31,
		2009				2010
Prepaid expenses and suppliers advances			8				9
Government of Israel — VAT refund			45				37
Deduction of tax			175				—
Prepaid lease and other			14				3
			242				49

NOTE 5:- PROPERTY AND EQUIPMENT, NET

		December 31,
		2009				2010
Cost:
Computers and software			36				36
Office furniture and equipment			17				17
			53				53
Accumulated depreciation:
Computers and software			29				36
Office furniture and equipment			15				17
			44				53
			9				—

Depreciation expenses amounted to NIS 7 and NIS 9 for the years ended December 31, 2009 and 2010, respectively.

NOTE 6:- TRADE PAYABLES

		December 31,
		2009				2010
Open accounts			98				198
Accrued expenses			—				455
Notes payable			42				5
			140				658

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 7:- OTHER PAYABLES AND ACCRUED EXPENSES

		December 31,
		2009				2010
Provision for payroll and related expenses			49				—
Vacation pay and recreation pay			11				—
Accrued expenses			951				63
			1,011				63

NOTE 8:- CONTINGENT LIABILITIES, COMMITMENTS AND CHARGES

Commitments to pay royalties to the Chief Scientist:

The Company’s subsidiary participated in program sponsored by the Israeli Government for the support of research and development activities. The Company is obligated to pay royalties to the Office of the Chief Scientist (“OCS”), amounting to 3%-3.5% of the sales of the products and other related revenues generated from such projects, up to 100% of the grants received, linked to the U.S. dollar and bearing interest at the rate of LIBOR. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required.

As of December 31, 2010, the Company had not paid or accrued royalties to the OCS and its outstanding contingent obligation for royalties amounted to approximately NIS 17,985 plus interest.

NOTE 9:- CONVERTIBLE DEBENTURES AND WARRANTS

	a.		On November 21, 2006, the Company issued in a private placement NIS 50,000,000 par value of bonds (series A) (“the bonds (series A)” or “the convertible debentures”) and 25,000,000 warrants (series 2) (“the warrants” or “the warrants (series 2)”) such that each issuance of two bonds (series A) entitled the holder of bonds (series A) to receive from the Company, at no consideration, one warrant (series 2).
			The warrants (series 2) are convertible into 50,000 Common shares of the Company, par value $0.001, such that each warrant is exercisable into one Common share of the Company in consideration of NIS 0.84 linked to the Israeli Consumer Price Index.
			The bonds (series A) were offered at a purchase price equaling 95% of their par value and for total consideration of NIS 47,500 and issuance costs of approximately NIS 5,000. The warrants (series 2) were offered at no consideration. The share’s quoted market price at November 21, 2006, was NIS 0.752.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 9:- CONVERTIBLE DEBENTURES AND WARRANTS (Cont.)

	b.		On September 11, 2007, a registration statement pursuant to the United States Securities Act of 1933 (“the registration statement”) with the U.S. Securities and Exchange Commission (“SEC”) for the registration of the bonds (series A), warrants (series 2) and the shares underlying the conversion of the bonds (series A) and the exercise of the warrants (series 2) became effective.
	c.		On September 17, 2007, the bonds (series A) and the warrants (series 2) and the shares underlying the conversion of the bonds (series A) and the exercise of the warrants (series 2) were listed for trade on the TASE.
	d.		On July 13, 2008, the Company and Ziv Haft Trust Company, the Co-Trustee acting on behalf of the holders of the Series A Convertible Bonds (the “Co-Trustee”, the “Bondholders” and the “Series A Bonds”, respectively), executed a settlement agreement (the “Settlement Agreement”). Pursuant to the Settlement Agreement, and subject to its terms and the approval of an Israeli court (the “Israeli Court”), the Indenture will be amended such that in consideration of each NIS 1 par value of the Series A Bonds, each Bondholder will be entitled to receive 9 shares of Common stock of the Company and the sum of NIS 0.25 in cash. Pursuant to this arrangement, the Bondholders will be paid an aggregate amount of NIS 12,500 in cash, and will be issued Common stock such that following the execution of the arrangement, the Bondholders will hold 71% of the issued and outstanding capital of the Company. Pursuant to the Settlement Agreement, the Company deposited within 3 days following the execution of the Settlement Agreement NIS 12,500 in an account on behalf of the Co-Trustee.
			By September 25, 2008, the above mentioned amounts were deposited and all of the conditions for amending the Indenture were satisfied.
	e.		On October 12, 2008, following the settlement, the bonds were converted into 900,000 shares of Common stock (see also Note 10b2). On October 26, 2008, the amount was paid in such a manner that each bond was exercisable into one share of Common stock of the Company, in consideration for a cash payment of NIS 0.0.250263.
	f.		According to ASC 470-50, “Debt — Modifications and Extinguishments” (formerly: EITF 96-19 and EITF 06-6), the Company determined that the terms of the convertible debentures do not constitute a substantial change compared to the original terms. Consequently, a new effective interest rate was determined based on the carrying amount of the original debt instrument, adjusted for an increase in the fair value of an embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) resulting from the modification, and the revised cash flows.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 9:- CONVERTIBLE DEBENTURES AND WARRANTS (Cont.)

	g.		Series 2 expired on May 31, 2009. As a result, the entire liability in the amount of NIS 250 on account of series 2 was written off against finance expenses.
	h.		Due to the implementation of the Settlement Agreement, the Company recorded a tax provision in its financial statements (see Note 13).
	i.		The Company had 22,800,000 registered options (series 1) which were exercisable into 45,600 Common shares of $0.001 par value with an exercise price of NIS 1.1 per share, linked to the changes in the dollar/NIS exchange rate from August 25, 2005. The options were exercisable up to February 28, 2008. In February 2008, 22,522 options (series 1) have been exercised and the rest have been forfeited.

NOTE 10:- SHAREHOLDERS’ DEFICIENCY

	a.		Composition of share capital:
			The Company’s authorized Common stock consists of 2,000,000 shares with a par value of $0.001 per share. All shares have equal voting rights and are entitled to one non-cumulative vote per share in all matters to be voted upon by shareholders. The shares have no preemptive, subscription, conversion or redemption rights and may be issued only as fully paid and non-assessable shares. Holders of the Common stock are entitled to equal ratable rights to dividends and distributions with respect to the Common stock, as may be declared by the Board of Directors out of funds legally available. The Common stock are listed and publicly traded on the Tel-Aviv Stock Exchange (“TASE”).
	b.		Share capital:

1.

On April 19, 2007, the Company filed a registration statement pursuant to the United States Securities Act of 1933 (“the registration statement” and “Securities Act”, respectively) with the U.S. Securities and Exchange Commission (“SEC”) regarding the sale of shares of Common stock and warrants (series 3) and the shares resulting from the exercise of the warrants (series 3). On June 4, 2007, the registration statement became effective.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 10:- SHAREHOLDERS’ DEFICIENCY (Cont.)

			On June 6, 2007, the Company issued 48,797 shares of Common stock which are listed for trade on the TASE together with 12,199,201 warrants C (series 3) that are listed for trade on the TASE since September 17, 2007. The issued securities were issued in consideration for NIS 1.586 in cash per Unit. The total net proceeds from the issuance amounted to approximately NIS 18,336 (net of issuance expenses of NIS 1,013).
			Each warrant (series 3) was exercisable into one share of Common stock of the Company until June 30, 2009, in consideration for a cash payment of NIS 0.84.
			On June 30, 2009, no warrants (series 3) were exercised and all were forfeited.
	2.		On October 12, 2008, the Company issued 900,000 shares of Common stock following the settlement with convertible bond holders (see Note 9e).
	3.		On February 2, 2009, the Company entered into a private placement agreement with an investor. According to the agreement, the Company issued 240,000 Common shares of $0.001 par value and 58,064,516 warrants exercisable into 116,129 Common shares of the Company for total consideration of NIS 900,000. Each warrant is exercisable into one Common share for the exercise price of NIS 0.01 for a period of 4 years following the issuance date. According to the Binomial model, with 92.96% volatility and 3.39% risk-free interest rate, the fair value of the warrants amounted to approximately NIS 401,000.
	4.		On July 15, 2009, the Board of Directors decided to obtain the approval of the shareholders of the Company to increase the registered capital of the Company by 500,000 shares of Common stock and to amend the corporation’s certificate of incorporation whereby the total number of authorized shares of Common stock shall be increased by 500,000 shares.
			A shareholders’ meeting was set for September 3, 2009. Since a sufficient quorum was not present at the shareholders’ meeting, the number of authorized shares of the Company was not increased. As of December 31, 2010, the increase in the Company’s number of authorized shares has not been approved.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 10:- SHAREHOLDERS’ DEFICIENCY (Cont.)

	5.		On January 27, 2010, the Company entered into an investment agreement (“the Agreement”) with Medgenesis Partners Ltd. (“Medgenesis”), a private company incorporated under the laws of Israel and controlled by Mr. Ascher Shmuelevich (“the Investor” and “the Shareholder”, respectively). Under the terms of the Agreement, the Company will issue to the Investor: (i) 423,346 Common shares of the Company, par value $0.001; (ii) a warrant to purchase 245,871 Common shares (“the Investment Warrant”); and (iii) a warrant to purchase 116,129 Common shares (“the Substituted Warrant”, and together with the shares and the Investment Warrant, “the Securities”) in exchange for payment by the Investor of the amount of $212 thousand and the cancellation of a certain warrant issued by the Company to the Shareholder pursuant to a certain agreement, dated February 2, 2009, filed with the Securities and Exchange Commission on February 5, 2009 (“the Cancelled Warrant”) (collectively, “the Transaction”). The Common shares and the Investment Warrant will constitute 33.25% of the Company’s fully diluted equity. In total, the investor will hold privately and through Medgenesis 43.4% of the Company’s fully diluted equity. All the Securities issued in connection with the Agreement will be subject to certain transfer restrictions in compliance with U.S. and Israeli securities laws.
			In addition, the Company, Medgenesis and the Shareholder signed an understanding agreement according to which they would assist the Company to acquire a commercial and industrial bio-tech activity.
			On April 28, 2010, the investment agreement described above was cancelled and replaced by a loan agreement. See note 14b.
	5.		On February 4, 2010, the Tel Aviv Stock Exchange (TASE) notified the Company that it does not withstand the maintenance regulations due to having equity lower than NIS 2 million in the last four reporting quarters. For more information see note 1g.
	6.		On February 13, 2011 the Company effected the Chapter 11 settlement (see note 1d) according to which the Company’s capital structure was modified effective from that date. The Company’s authorized share capital increased to 50,000,000 shares of $0.001 par value each. The Company also initiated a proceeding for swapping the (unquoted) share and warrant certificates with the holders of shares and warrants that are registered at the registry of the Company’s shareholders and warrant holders. In addition, as part of the settlement, on February 13, 2011, the Company completed the allocation of 10,122,463 shares to Medgenesis against the write off of the Company’s debt totaling $484 thousand.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 11:- STOCK-BASED COMPENSATION

	a.		The Company grants options to its employees, directors and consultants under the 2001 and 2003 Share Option Plans. As of December 31, 2010, there are 24,832,438 options available for future grant. Any options, which are canceled or forfeited before the expiration date, become available for future grants.
	b.		On February 26, 2009, the Board of Directors approved an increase of an additional 25,000,000 shares of Common stock to be granted under the 2003 Israeli Share Option Plan. On January 24, 2010, the Board of Directors cancelled this decision.
	c.		On December 30, 2008, the Board of Directors approved agreements with the former CEO, Yaron Tal, and the former CFO, Eyal Kolka, which include a modification to their option terms. According to the agreements:

	1.		The exercise price of the 2,500,000 vested options out of all the options granted to Yaron Tal was reduced to $0.001 and will be exercisable until December 30, 2010. All the unvested options were canceled. The compensation resulting from the modification amounted to approximately NIS 17.
	2.		The exercise price of the 2,100,000 options from the 2003 Option Plan granted to Eyal Kolka was reduced to $0.001, 862,500 out of the 2,100,000 options which were unvested will become immediately vested and all of the aforementioned options will be exercisable until November 30, 2010. The compensation resulting from the modification amounted to approximately NIS 14.

Both Yaron Tal and Eyal Kolka exercised their above mentioned options during 2009.

According to ASC 718, modifications of the expiration date and reduction in the exercise price of the options are treated as an exchange of the original award, resulting in additional compensation expenses based on the differences between the fair value of the new award and the original award immediately before modification. Compensation expenses were recognized immediately as the modified options were fully vested. As a result of the modification, the Company recorded additional compensation expenses in the amount of approximately NIS 31 in 2008, using the Binomial model.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 11:- STOCK-BASED COMPENSATION (Cont.)

	d.		On March 2, 2010, the Board of Directors approved to grant Mr. Zvi Linkovski, director in the Company, 10 million options which are exercisable into 10 million Common shares of $0.001 par value each constituting 1.19% of the Company’s fully diluted equity. The options’ exercise price is NIS 0.0143. 50% of the options would vest on February 16, 2011 and after then, every quarter 6.25% of the options would vest. The grant is conditional on expanding the option pool as part of increasing the Company’s issued stock, changing the Company’s status from a shell company (as defined in the ‘Securities Exchange Act of 1934’) into an active one. As of the date of the financial statements, the option pool and the Company’s status were not expanded. The compensation resulting from the grant amounted to approximately NIS 83.
	e.		Options to employees:
			A summary of the Company’s share option activities for options granted to employees under the plans excluding performance based options is as follows:

										Weighted
										average
						Weighted				remaining
						average				contractual				Aggregate
						exercise				terms				intrinsic
		Number				price (*)				(in years)				Value
Options outstanding at January 1, 2010			11,232,813				0.015				1.44				0.8
Options granted			—
Options exercised			—
Options forfeited and expired			(11,000,000	)			0.015
Options outstanding at December 31, 2010			232,813				0.003				0.40				0.3
Options vested and expected to vest at December 31, 2010			232,813				0.003				0.40				0.3
Options exercisable at December 31, 2010			232,813				0.003				0.40				0.3

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 11:- STOCK-BASED COMPENSATION (Cont.)

The aggregate intrinsic value in the tables above represents the total intrinsic value (the difference between the Company’s closing stock price on the last trading day of December 2010 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2010. This amount changes based on the fair market value of the Company’s stock.

As of December 31, 2010, there was NIS 62 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 3 years.

On December 10, 2009 two of the Company’s directors resigned. As a result 9,500,000 of their unvested options were forfeited. On March 10, 2010 the remaining 9,500,000 of the directors vested options became forfeited.

Compensation expenses (income) related to options granted to employees were recorded to research and development expenses and general and administrative expenses, as follows:

		Year ended
		December 31,
		2009				2010
Research and development expenses			(8	)			—
General and administrative expenses			340				80
			332				80

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 11:- STOCK-BASED COMPENSATION (Cont.)

	f.		Options to non-employees:
			A summary of the Company’s share option activities for options granted to non-employees under the plans excluding performance-based options is as follows:

Weighted

average

Weighted

remaining

average

contractual

exercise

terms

Number

price

(in years)

Options outstanding at January 1, 2010

566,010

1.31

4.04

Options expired

(566,010

)

1.31

Options outstanding at December 31, 2010

—

The Company accounted for its options to non-employees under the fair value method in accordance of ASC 718 (formerly SFAS 123(R)) and ASC 505 (formerly EITF 96-18). The fair value for options granted to non-employees was estimated according to the principles determined in ASC 718 based on binomial option pricing model and amounts to approximately NIS 4. For the weighted-average assumptions see Note 2h.

A summary of the activity under the performance share-based options granted to non-employees is as follows:

Weighted

average

Weighted

remaining

average

contractual

exercise

terms

Number

price

(in years)

Options outstanding at January 1, 2010

900,000

0.42

6.7

Options expired

(900,000

)

0.42

Options outstanding at December 31, 2010

—

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 12:- FINANCIAL INCOME, NET

		Year ended
		December 31,
		2009				2010
Bank commissions			(7	)			(16	)
Interest income (expenses)			3				(34	)
Change in fair value of liability in respect of warrants			250				—
Gain (loss) from exchange rates differences			(2	)			177
Gain on short-term deposits			10				70
			254				197

NOTE 13:- INCOME TAXES

a.

Tax laws applicable to the companies:

	1.		The Company is taxed under U.S. tax laws.
	2.		The subsidiary is taxed under the Israeli Income Tax Ordinance.

	b.		Tax assessments:
			The Company has not received final tax assessments since its incorporation. The subsidiary has tax assessments considered as final through 2005.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 13:- INCOME TAXES (Cont.)

c.

Tax rates applicable to the Group:

	1.		The subsidiary:
			The rate of the Israeli corporate tax is as follows: 2008 — 27%, 2009 — 26%, 2010 — 25%. Tax at a reduced rate of 25% applies on capital gains arising after January 1, 2003, instead of the regular tax rate. In July 2009, the Israeli Parliament (the Knesset) passed the Economic Efficiency Law 2009 (Amended Legislation for Implementing the Economic Plan for 2009 and 2010) which prescribes, among other things, an additional gradual reduction in Israeli corporate tax rate starting from 2011 to the following tax rates: 2011 — 24%, 2012 — 23%, 2013 — 22%, 2014 — 21%, 2015 — 20%, 2016 and thereafter — 18%.
			The Company estimates that the Economic Efficiency Law is not expected to affect the Company’s consolidated financial statements.
	2.		The Company:
			The tax rates applicable to the Company whose place of incorporation is the U.S. are corporate (progressive) tax at the rate of up to 35%, including State tax and Local tax which rates are dependent on the country and city in which the Company will conduct its business.
			According to the tax laws applicable to Israeli residents, dividend received from a foreign resident company is subject to tax in Israel at the rate of 25% by its recipient. According to the tax laws applicable in the U.S., tax at the rate of 30% is withheld and, based on the treaty for the avoidance of double taxation of Israel and the U.S., it may be reduced to either 25% or 12.5% (dependent on the identity of the shareholder). To enjoy the benefits of the tax treaty, certain procedural requirements need to be satisfied.

	d.		Carryforward losses for tax purposes:
			In the year ended December 31, 2010, the main reconciling items from the statutory tax rate of the Company (25%) to the effective tax rate (0%) are carryforward tax losses for which a full valuation allowance was provided.
			Carryforward tax losses of the Company amount to approximately NIS 42,000 as of December 31, 2010. According to the tax laws in the U.S., these losses may be gradually carried forward until 2025. Carryforward tax losses of the subsidiary in Israel, which may be carried forward for an indefinite period, total approximately NIS 134,000 as of December 31, 2010. Deferred tax assets relating to these carryforward losses were not recorded due to the uncertainty of their utilization and as a result, the Company provided a valuation allowance on the total amount of the deferred assets.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 13:- INCOME TAXES (Cont.)

	e.		Deferred tax assets:
			Significant components of the Company’s deferred tax assets are as follows:

		December 31, 2010
Tax assets with respect to tax loss carryforwards			38,820
Less — valuation allowance			(38,820	)
Net deferred tax assets			—

			Realization of deferred tax assets is depended on generating sufficient taxable income in the period that the deferred tax assets are realized. Based upon all available information and because of the Company’s lack of earnings history, deferred tax assets have been fully offset by a valuation allowance.
			The Company has not been assessed for tax purposes since incorporation.
	f.		Tax provision:
			In 2008, as a result of the Settlement Agreement (see Note 9d), the Company recorded taxable income. The Company believes it has reasonable arguments to enable it to offset the taxable income against taxable losses from other sources. Due to uncertainties with respect to this matter and in accordance with ASC 740, “Income Taxes”, the Company has provided NIS 1,254 (2009 — NIS 1,344) for the potential tax exposure. The subsidiary filed its tax return in the U.S. during 2009.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 14:- RELATED PARTY TRANSACTIONS

	a.		Investment agreement:
			On January 27, 2010, the Company entered into an investment agreement (“the Agreement”) with Medgenesis Partners Ltd. (“Medgenesis”), a private company incorporated under the laws of Israel and controlled by Mr. Ascher Shmuelevich (“the Investor” and “the Shareholder”, respectively). For more information see note 10b5.
	b.		Loan agreement:
			On April 28, 2010 the Company’s Board of Directors entered into a loan and escrow agreement with Medgenesis. Pursuant to the loan agreement, Medgenesis will lend the Company approximately $354 thousand. An amount of $54 thousand was paid to the Company on February 1, 2010, and pursuant to the Investment Agreement (see a above), was used for on-going expenses of the Company. The remaining amount of $300 thousand was placed in escrow.
			This amount was used for Chapter 11 proceedings in the U.S. as follows:

	1.		An amount of $100,000 will be paid to the Company’s law firm in the United Stated ($25,000 on account of legal services rendered in the past and $75,000 on account of expected legal fees in connection with the Chapter 11 proceeding) for handling the filing of the Chapter 11 application to the Delaware Court.
	2.		An amount of $200,000 will be paid once Medgenesis grants the order or at the close of the Chapter 11 proceeding and after all the required regulatory and corporate approvals are obtained, provided that a vesting event has not occurred. Upon the occurrence of a vesting event, all the funds still held with the trustee will be returned to Medgensis. A vesting event will occur in the following circumstances: (1) four weeks from the date of signing the loan agreement if the Company does not file for Chapter 11, (2) 90 days after filing for Chapter 11 in the event that the Court does not approve the application, (3) the Company does not complete the Chapter 11 proceeding and does not obtain all the required approvals from the Delaware Court, the Stock Exchange and the SEC within 120 days, (4) the Company is removed from the list of traded companies with no possibility of returning to be traded on the Stock Exchange, (5) the Company initiates liquidation proceedings, a claim is filed against the Company in respect of all or substantially all of its assets or the Company does not meet material conditions of the loan agreement.

The loan bears interest at an annual rate of 4%. The loan shall be paid with the accrued interest thereon upon the occurrence of certain events as defined in the loan agreement.

In the event that the loan, including interest, are not repaid on the maturity date (as defined in the agreement), then the interest, on the outstanding loan shall be at a rate of 12% per year, for the actual number of days elapsed from the maturity date until the Lender receives payment of the full loan and related interest.

TOPSPIN MEDICAL, INC. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NIS in thousands, except share and per share data

NOTE 14:- RELATED PARTY TRANSACTIONS (Cont.)

Pursuant to the loan and escrow agreement, the Company undertook, among other things, to file a petition seeking relief under Chapter 11 of Title 11 of the United States Code, pursuant to which the Company will apply to the U.S. bankruptcy court for the District of Delaware to authorize approval of transactions and all other actions required according to a plan to be prepared by the Company and approved by the lender in writing prior to any filing (the “Plan”). Further, the Company covenanted not to engage in certain conduct while funds loaned under the agreement are outstanding, including: (i) hiring employees; (ii) applying for any credit or loan from a banking institution; (iii) amending any of the Company’s organizational documents; and (iv) acting in any manner that would result in a material adverse effect on the Company or in non-compliance with the Plan.

On June 28, 2010 the Company received a letter from Medgenesis requesting full payment of the loan since as of June 29, 2010 the Company has not yet filed Chapter 11. On June 29, 2010 Medgenesis withdrew the remaining amount from the escrow account.

On September 26, 2010, the Company and Medgenesis signed another loan agreement totaling up to $200 thousand to cover the Company’s current expenses, complete the Chapter 11 proceeding and settle some of the unsecured creditors’ claims in accordance with the settlement approved by the Court. As of December 31, 2010, the Company received approximately NIS 486 (approximately $137 thousand).

As of December 31, 2010, the Company’s outstanding debt to Medgenesis approximates $428 thousand (for both loans).

Following the approval of the Chapter 11 proceedings by the Company’s general shareholders’ meeting on December 13, 2010 and by the court on December 21, 2010, as of the date of the financial statements the outstanding debt was classified as receipts on account of shares.

NOTE 15:- SUBSEQUENT EVENTS

For details on capital consolidation, increasing capital and private allocation, see note 10b6.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission rules, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and its principal financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) or Exchange Act Rule 15d-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Management

As of December 31, 2010, our directors and executive officers, their ages and positions held, were as follows:

Name		Age				Position
Ran Ben-Or (1)(2)(3)(4)			47			Director
Zvi Linkovsy (2)			60			Director
Orly Ben Ami (2)(4)			45			Director
Eran Feldhay (1)(2)(4)			38			Director
Hanan Waksman (4)(5)			36			Director
Uri Ben-Or (6)			40			Chief Financial Officer

The following is a brief account of the education and business experience during the past five years of each director, executive officer and key employee, indicating the principal occupation during that period of time, and the name and principal business of the organization in which such occupation and employment were carried out:

Ran Ben-Or has served as a director of the Company since March 25, 2008. From 1994 to 2004, Mr. Ben-Or was a partner in Prof. Itzhak Swary & Co. Since 2004, he has served as the Chief Executive Officer and Founder of Bagira Investments Ltd. and also as it’s Chief Executive Officer. Since 2005 he has served as a Managing Partner of the Tene Private Equity Funds. Mr. Ben-Or also serves as a director of Hanita Coating RCA, Omen Die Casting RCA, Teldor Cables & Systems Ltd., Blue I Technologies Ltd., Gazit Industries RCA and Macabident Ltd. Until May 2010, Mr. Ben-Or also served as a director of Cidav Printed Circles Ltd. Mr. Ben-Or received a B.Sc. in Computer Science and Accounting and an M.B.A. from the Hebrew University of Jerusalem. Mr. Ben-Or is also a licensed Israeli C.P.A. Mr. Ben-Or’s accounting and investment experience will assist the Board in identifying, valuing and accounting for any future acquisition.

Zvi Linkovsky has served as a director of the Company since December 17, 2009. Since 2000, Mr. Linkovsky has been the CEO of Tapuz and main representative and advisor to Kuohwa in Israel. Since 2001, Mr. Linkovsky has also served as a Director of Rabintex Industries Ltd, and since 2002, he also served as the director of Mandarin, Israel. Mr. Linkovsky holds a B.Sc. in Textile Technologies from Shenkar College. Mr. Linkovski brings to the Board substantial experience with multinational corporations and will be able to guide the Company in developing future operations both inside and beyond Israel.

Eran Feldhay has served as a director of the Company since December 10, 2008. From 1998 to 2004, Dr. Feldhay served as the Product Manager of Medcon Systems (1993) Ltd.; from 2004 to 2006 he served as the VP of Marketing of Medcon Systems (1993) Ltd.; and from 2006 he served as the General Manager of Medcon Systems (1993) Ltd. Dr. Feldhay received a B.Sc and an M.D. from the Tel-Aviv University. Mr. Feldhay brings to the Board expertise in product development, which will serve the Board well in developing product lines acquired in the course of any future acquisitions.

Orly Ben Ami has served as a director of the Company since June 9, 2010. Ms Ben Ami has previously worked as an advocate in the private sector and was the manager of the Northern District at Bank Leumi LeMashkanteot Ltd. (mortgages specialization). Ms Ben Ami holds an LLB from Sha’arei Mishpat College and holds as degree in Management of Education and General Studies from Haifa University. Ms Ben Ami’s legal and banking experience will be a great asset to the Board in identifying potential issues and in advising with respect regulatory matters

Hanan Waksman has served as a director of the Company since June 9, 2010. Mr Waksman has previously served as the vice president for business and property development at Capital Investment and as vice president for business development at Sage Capital Growth. Mr Waksman is currently serving as an external director at Rabintex Industries Ltd, an Israeli defense contractor which is publicly listed on the Tel-Aviv Stock Exchange. Mr Waksman holds an M.B.A, specializing in Finance from Baruch College in New York. Mr Waksman brings substantial experience in business and property development will assist the Board in evaluating future acquisition opportunities.

Uri Ben-Or, has served as the CFO of the Company since September 20, 2010. Mr. Ben-Or has served as the chief executive officer of CFO Direct Ltd. since January 2007; through CFO Direct, he has provided chief financial officer services to a number of biotechnology companies based in Israel and traded on the Tel-Aviv Stock Exchange. Prior to founding CFO Direct, Mr. Ben-Or served as the Vice President, Finance of Glycominds Ltd., a leading biotechnology company from 2001 until 2005. Mr. Ben-Or holds a BA (Business) from the College of Administration and an MBA from the Bar Ilan University, both in Israel; he is a Certified Public Accountant.

During the fiscal year ending December 31, 2010, the following directors and executive officers ceased their affiliation with the Company: (i) Fufi Fatal ceased serving as the Chairman of the Board of Directors, Acting Principal Executive Officer on May 26, 2010; (ii) Shlomit Oren ceased serving as a Director of the Company on April 11, 2010; (iii) Eldad Yehiely ceased serving as a Director of the Company on May 2, 2010; and (iv) Shiri Blackman served as a Controller of the Company since May 2, 2010 until September 26, 2010.

The following are additional directors, executive officers and key employees appointed after December 31, 2010 (both appointed to the Board on March 7, 2011):

Eitan Shtarkman			53			Chief Executive Officer and Director
Ascher Shmulewitz			54			Chairman of the Board of Directors

The following is a brief account of the education and business experience during the past five years of each additional director, executive officer and key employee appointed after December 31, 2010, indicating the principal occupation during that period of time, and the name and principal business of the organization in which such occupation and employment were carried out:

Eitan Shtarkman: From January 2009 until joining the Company as Chief Executive Officer in February  ,2011, Mr. Shtarkman worked as an entrepreneur in the dental medicine arena. He participated in the founding and management of three companies during this period: Precise Implant Systems, which manufactures dental implants based on proprietary technology; IGS Dental, which creates real-time positioning and monitoring technology for dental implant surgery; and ChainPlant, which developed the first dental implant system capable of being extended or shortened. Between January 2005 and December 2008, Mr. Shtarkman served as Chief Executive Officer of Chmir-Nir, a public Israeli avionics company. Mr. Shtarkman holds a B. Sc. in Physics from Tel Aviv University and a diploma from The Institute of Capital Market Studies.

Ascher Shmulewitz is the Company’s controlling shareholder and owns 88.98% of the outstanding voting securities of the Company. On April 4, 2011, he was appointed Chairman of the Board. Since 2002, Mr. Shmulewitz has led and managed Medgenesis Partners Ltd., an Israeli company that invests in, develops and commercializes innovative products, technologies and devices in various medical and wellness fields, aimed at improving the health and well-being of consumers and patients, and assisting medical practitioners. Dr. Shmulewitz holds a Ph.D in Engineering from Tel Aviv University and an MD from the Israel Institute of Technology (Technion).

Beneficial Ownership Reporting Compliance

As none of our securities have been registered as a class under Section 12 of the Exchange Act, none of our directors, executive officers and beneficial owners of more than ten percent of any class of our equity securities are required to file reports of ownership and changes in ownership with the SEC on Forms 3, 4 or 5.

Code of Ethics

As of December 31, 2010, we have not adopted a code of ethics but intend to do so if and when we restart our suspended activities or enter into new business activities.

Corporate Governance

We are not listed as an issuer, nor have we applied to be listed as an issuer, on any national securities exchange or inter-dealer quotation system in the United States. For the purposes of compliance with applicable securities rules, our Board of Directors affirmatively determines the independence of each of our directors using the independence standards required by a national securities exchange, the NASDAQ Stock Market, including the consideration of any relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the director’s responsibilities as a member of our Board of Directors. During its annual review of director independence, our Board of Directors determined that Messrs. Ben-Or and Mr. Feldhay and Ms. Ben Ami are each independent under the director independence standards of the NASDAQ Stock Market, Inc. as of December 31, 2010.

Although our Board of Directors has not separately designated a nominating committee or a committee performing similar functions, our Board of Directors determined that Messrs. Ben-Or and Feldhay and Ms. Ben Ami each would be independent under the NASDAQ nominating committee independence standards.

Our Board has a separately-designated standing audit committee composed of the following directors: Messrs. Ben-Or and Feldhay and Ms. Ben Ami. Under the independence standards required by a national securities exchange, the NASDAQ Stock Market for audit committee members, as of December 31, 2010, each of the audit committee members were independent.

Our Board of Directors determined that as of December 31, 2010, the Company had at least two audit committee financial experts serving on the Company’s Audit Committee: Hanan Waksman and Ran Ben-Or.

Item 11. Executive Compensation.

Executive Compensation

Summary Compensation Table

The following table sets forth the aggregate cash compensation paid during the 2010 fiscal year to Mr. Fatal, who served as our Chief Executive Officer during the fiscal year ending December 31, 2010 (our “Named Executive Officer”). We did not have any other executive officers who received compensation in excess of $100,000 during the fiscal year ended December 31, 2010.

Name of Named														Option				All Other
Executive Officer and						Salary				Bonus				Awards				Compensation				Total
Principal Position		Year				($)				($)				($)				($)(1)				($)(1)
Fufi Fatal (4)			2010				—				—				—				30,867				30,867
			2009				—				—				—				—				—

Employment Agreements

Fufi Fatal

On January 28, 2010, the Company entered into a consulting agreement with Nichsey F.N. Fatal Ltd., a private company organized under the laws of Israel and controlled by Mr. Fufi Fatal, who serves as a director of the Company with an effective date of March 1, 2010.

Pursuant to the terms of Mr. Fatal’s consulting agreement, the Company engages him to provide certain consulting services to the Company as may reasonably be requested by the Board. Mr. Fatal is required to provide at least 80 hours of services to the Company per month, which services shall be provided solely by Mr. Fatal. In exchange for these services, the Company will pay Mr. Fatal a monthly fee equal to NIS 34,105 (approximately $9,100) beginning on March 1, 2010. In addition to this monthly fee, we will issue to Mr. Fatal (subject to requisite approvals) options to purchase shares of the Common Stock representing ten percent (10%) of issued and outstanding shares of Common Stock immediately preceding such option issuance. The grant of these options is subject to: (i) execution of an investment in the Company by a third party (or, if earlier to occur, a rights offering), and (ii) the increase of the registered share capital of the Company. The options will vest as follows: (i) fifty percent (50%) of the Consultant Options will vest on December 17, 2010, and (ii) the remaining fifty percent (50%) will vest on December 17, 2011. The options will expire, if unexercised, on the earlier of the occurrence of a “merger or acquisition event” (as such term is defined in the consulting agreement) and the date that is seven (7) years after the date of grant. Unvested options will be cancelled and will cease to vest only upon termination of the agreement by Mr. Fatal or termination of the agreement by the Company for cause. The options issued in connection with the agreement will be subject to certain transfer restrictions in compliance with U.S. and Israeli securities laws. Fufi Fatal ceased serving as the Chairman of the Board of Directors, and Acting Principal Executive Officer on May 26, 2010 and his options expired.

Outstanding Equity Awards at Fiscal-Year End Table

There were no unexercised options, unvested shares of Common Stock or any awards under an equity incentive plan as of December 31, 2010 outstanding with respect to our Named Executive Officer.

Compensation of Directors

The following table sets forth information regarding the compensation paid to each individual who served as our director during the 2010 fiscal year:

		Fees																Nonqualified
		Earned												Non-Equity				Deferred
		or Paid in				Stock				Option				Incentive Plan				Compensation				All Other
		Cash				Awards				Awards				Compensation				Earnings				Compensation				Total
Name		($)				($)				($)				($)				($)				($)				($)
Ran Ben-Or (1)			19,420				—				—				—				—				—				19,420
Eran Feldhay (2)			26,010				—				—				—				—				—				26,010
Shlomit Oren (3)			7,401				—				—				—				—				—				7,401
Hanan Waksman (4)			—				—				—				—				—				—				—
Orly Ben-Ami (5)			—				—				—				—				—				—				—
Fufi Fatal (6)			—				—				—				—				—				—				—