F-1/A 1 zk1109785.htm F-1/A zk1109785.htm
As filed with the Securities and Exchange Commission on April 28, 2011.
Registration No. 333-173437

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 

 
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 

 
BRAINSWAY LTD.
(Exact Name of Registrant as Specified in its Charter)
 
State of Israel
3841
Not Applicable
(State or other jurisdiction of incorporation or organization)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer Identification No.)
 

 
Brainsway Ltd.
19 Hartum Street
Bynet Building, 1st Floor
Har HaHotzvim
Jerusalem 91451, Israel
(+972-2) 581-3140
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 

 
Brainsway, Inc.
c/o The Corporation Trust Company, Corporation Trust Center
1209 Orange Street, Wilmington, Delaware 19801
(302) 658-7581
 
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies of all correspondence to:
 
Cheryl V. Reicin, Esq.
Torys LLP
237 Park Avenue
New York, New York 10017
Tel: (212) 880-6000
Clifford M.J. Felig, Adv.
Michael Rimon, Adv.
Meitar Liquornik Geva & Leshem Brandwein
16 Abba Hillel Silver Rd.
Ramat Gan 52506, Israel
Tel: (+972-3)-610-3100
Steven M. Skolnick, Esq.
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, New Jersey 07068
Tel: (973) 597-2382
Perry Wildes, Adv.
Heather Stone, Adv.
Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co.
One Azrieli Center, Round Building
Tel Aviv 67021 Israel
Tel: (+972-3)-607-4444
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 

 
CALCULATION OF REGISTRATION FEE
 
Title of each class of securities to be registered
Proposed maximum aggregate offering price(1)(2)
Amount of registration fee (3)
Ordinary Shares, par value NIS 0.04 per share
$23,000,000
$2,670.30

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
(2) Includes ordinary shares that the underwriters may purchase to cover over-allotments, if any.
(3) Based on the previous estimated maximum aggregate offering price of $30,000,000, a registration fee of $3,483 has been previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 
 
 

 

The information in this preliminary prospectus is not complete and may be changed.  We may not sell these securities until the Securities and Exchange Commission has declared this registration statement effective.  This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state or jurisdiction where such offer or sale is not permitted.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL 28, 2011



1,818,182 Ordinary Shares

 
        We are offering 1,818,182 of our ordinary shares, par value NIS 0.04 per share.  This is our initial public offering in the United States, and no public market currently exists in the United States for our ordinary shares.  All of the 1,818,182 ordinary shares to be sold in the offering are being sold by us.  We have applied to have our ordinary shares listed on the NASDAQ Capital Market under the symbol “BRIN”.  We anticipate that the initial public offering price for our ordinary shares will be between $10.00 and $12.00 per share
 
Our ordinary shares are listed on the Tel Aviv Stock Exchange, or the TASE, under the symbol “BRIN”.  On April 26, 2011, the last reported sale price of our ordinary shares of the TASE was NIS 34.60, or $10.15 per share (based on the exchange rate reported by the Bank of Israel on such date, which was NIS 3.41 = US$1.00, and after giving effect to a one–for–four reverse stock split for our ordinary shares that will be effected immediately prior to the date of this prospectus).
 
 

 
Investing in our ordinary shares involves a high degree of risk.
See “Risk Factors” beginning on page 11 for a discussion of information that should be considered in connection with an investment in our ordinary shares.
 
   
Per Share
   
Total
 
Public Offering Price
  $       $    
Underwriting Discounts and Commissions (1)
  $       $    
Proceeds, Before Expenses, to Us
  $       $    
 

(1) Includes a $150,000 fee payable by us to a financial advisor retained by us in Israel.
 
Neither the U.S. Securities and Exchange Commission, the Israel Securities Authority nor any state or other foreign regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.
 
We have granted the underwriters a 45-day option to purchase up to an additional 272,727 ordinary shares from us to cover over-allotments, if any, at the initial public offering price per share, less underwriting discounts and commissions.
 
The underwriters expect to deliver the ordinary shares against payment in New York, New York on or about                  , 2011.

______________________________
 
Roth Capital Partners
 
Maxim Group LLC
 
The date of this prospectus is                    , 2011
 
 
 

 

 
 

 

­           TABLE OF CONTENTS
 
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This summary highlights selected information contained elsewhere in this prospectus that we consider important.  This summary does not contain all of the information you should consider before investing in our ordinary shares.  You should read this summary together with the more detailed information appearing in this  prospectus, including “Risk Factors,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our consolidated financial statements and the related notes included at the end of this prospectus, before making an investment in our ordinary shares. Certain industry-specific standards and terms that appear in this prospectus are defined under “Glossary of Industry Terms.”  Unless the context otherwise requires, all references to “Brainsway,” “we,” “us,” “our,” the “Company” and similar designations refer to Brainsway Ltd. and its wholly-owned subsidiaries: Brainsway, Inc., a Delaware corporation, and Brain Research and Development Services Ltd., an Israeli limited liability company, which we refer to as Brain Research Services.  The term “NIS” refers to New Israeli Shekels, the lawful currency of the State of Israel, the terms “dollar”, “US$” or “$” refer to U.S. dollars, the lawful currency of the United States, and the term “euros” refers to euros, the lawful currency of the European Union. Unless otherwise indicated, U.S. dollar translations of NIS amounts presented in this prospectus are translated using the rate of NIS 3.55 to US$1.00, the exchange rate reported by the Bank of Israel on December 31, 2010.  Unless otherwise indicated, U.S. dollar translations of euro amounts presented in this prospectus are translated using the rate of € 0.75 to US$1.00, the exchange rate reported at www.Bloomberg.com on December 31, 2010.  The numbers and prices relating to our ordinary shares in this prospectus reflect a one–for–four reverse stock split of our ordinary shares that we will effect immediately prior to the date of this prospectus. See “Reverse Stock Split.”
 
Our Business
 
We are a medical device company dedicated to the development and commercialization of our Deep Transcranial Magnetic Stimulation, or Deep TMS, system.  Our proprietary Deep TMS system is a versatile, noninvasive medical device that is designed to assist in the treatment of various brain-related medical disorders, including major or clinical depression, schizophrenia, bi-polar disorder (manic depression) and Alzheimer’s disease.  Because our Deep TMS system represents a new approach to treatment of such disorders that has not yet been adopted by healthcare professionals, we have performed and continue to perform clinical trials to demonstrate the safety and efficacy of our technology and its ability to stimulate or inhibit deep brain regions at a number of hospitals and medical centers, including Hadassah Medical Center, Shalvata Mental Health Center, Tel Aviv Sourasky Medical Center and the Weizmann Institute of Science in Israel, Johns Hopkins and Columbia University in the United States, University of Bonn and Ludwig-Maximilians University in Germany and the Alfred Psychiatry Research Center in Australia.  In addition, we are working with third party researchers and clinical institutions such as VA Pittsburgh Healthcare System (representing the U.S. Department of Veteran Affairs), Charité - Universitätsmedizin Berlin and the Medical Neurology Branch of the U.S. National Institute of Neurological Disorders and Stroke to conduct preclinical and clinical trials for additional central nervous system, or CNS, indications, primarily at their expense.
 
We have received EC (European Commission, which serves as the executive body of the European Union) Certification enabling us to affix the conformité européene, or CE, mark and market our Deep TMS system in the European Economic Area, or EEA, member countries for treatment of patients suffering from clinical depression, schizophrenia (negative symptoms) and bi-polar disorder.  We have also submitted applications for regulatory approvals in Israel and other countries, but have not yet obtained these regulatory approvals.  In the United States, the U.S. Food and Drug Administration, or FDA, has informed us that our Deep TMS system is subject to regulation as a Class III device which would require us to submit an application for pre-market approval, or PMA, to the FDA for regulatory approval of our device for the treatment of clinical depression in the United States.  We intend to have additional discussions with the FDA regarding this classification of our Deep TMS system and hope to be able to utilize the FDA’s 510(k) “de novo” review process in lieu of submitting a PMA application.  The “de novo” process would permit a lower-risk classification of the Deep TMS system and generally provides a shorter time period for the FDA’s review and final determination.  We currently intend to submit our PMA in early 2012, and the process for receipt of final FDA regulatory approval generally takes one to three years after such submission.  If the FDA permits us to instead pursue marketing clearance through the 510(k) “de novo” pathway, the process of obtaining such clearance can, in some cases, take as little as several months to a year.
 
 
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        Our technology is based on the use of our proprietary coil, or the H-Coil, to rapidly pass a variable electrical current that creates an electromagnetic field which, according to the frequency of the electrical current, can be used to affect various areas of the deep brain by nerve excitation or inhibition.  Unlike the currently available, surface TMS device, which can only reach up to approximately 1.5 centimeters from its coil, our Deep TMS system can reach up to 5.5 centimeters from the H-coil, thereby enabling the treatment of mental diseases and disorders that are caused by malfunctions in deeper regions of the brain.  We have developed several forms of the H-Coil, each with a unique configuration adjusted to affect the neuronal structures relevant to a particular disorder or illness.  Our Deep TMS therapeutic solution is supported by our exclusive, worldwide licenses for patents and pending patent applications owned by the National Institutes of Health, or NIH (deriving its authority from the United States Department of Health and Human Services, or the DHHS), and the Weizmann Institute of Science in Israel, among others.  Based upon the results of clinical trials to date, we believe that our therapeutic technology presents advantages over existing therapeutic methodologies for depression, including drug and other therapies, which are often of long duration or are accompanied by significant side effects, and electroconvulsive therapy, or ECT, which requires hospitalization and anesthesia and exposes the body to severe stress.
 
        Our commercialization strategy focuses upon marketing research, promotional activities, and dialogue with key opinion leaders, or KOLs, in third party research institutions to gain broad support for our treatment methodology.  We intend to lease rather than sell our Deep TMS device and intend to allocate financial and human resources to promote the adoption of our treatment methodology by healthcare professionals, many of whom are unaware of, or unfamiliar with, and who have not yet adopted, such methodology.  To date, we have generated only minimal revenues, although, primarily on the basis of our CE approval, we have recently commenced the commercial distribution of our Deep TMS system in Italy and anticipate commencing commercial distribution in Brazil as well in the next several months, pending receipt of final Brazilian regulatory approvals.
 
Primary Applications of Our Technology
 
While our Deep TMS platform is potentially usable for treatment of a wide range of neurological and psychiatric conditions, we have initially focused upon its application to clinical (major) depression, schizophrenia, bi-polar disorder (manic depression) and Alzheimer’s disease, which present the largest potential market opportunities and each indication of which includes a significant patient population which is unresponsive to drug therapy.  Our ability to commence commercial distribution of our Deep TMS system in Israel and the United States, as well as other countries, will depend on the results of our clinical trials, our receipt of regulatory approvals in such countries and availability of reimbursement by third party payors for our therapy.
 
Clinical Depression
 
Clinical depression is a chronic condition, characterized by episodes of physiological symptoms (such as sleep and eating disorders), emotional symptoms (such as sadness, despair, extreme mood swings, apathy, feeling of emptiness, criticism and self-hate) and cognitive symptoms (such as decline in concentration and memory, suicidal thoughts and impaired judgment of reality).
 
According to figures currently provided by the World Health Organization, or the WHO, more than 150 million people in developed countries suffer from depression, which is the second largest cause globally of disability and impaired functioning.  The WHO also estimates that in the future, the effect of depression relative to all illnesses will increase.  A comprehensive STAR*D Investigators Group trial that was reported upon in 2009 demonstrated that only approximately one-third of depression patients meet remission requirements following the first antidepressant drug prescribed to them, while between 8% and 39% of remaining patients who do not meet remission requirements following the first intervention will remit following multiple interventions.
 
We have obtained an EC Certificate of Conformity enabling us to affix the CE mark for clinical depression for use without an accompanying drug therapy, and in the next few months expect to apply for an extension of the CE mark’s scope of application to cover clinical depression treatment in tandem with any therapy.  We are currently undertaking multicenter clinical trials in order to support our applications for U.S. and Israeli regulatory approvals.
 
Schizophrenia
 
Schizophrenia is a severe mental disease that usually involves psychotic symptoms marked by hallucinations. The prevalence rate for schizophrenia is approximately 1.1% of the U.S. population over the age of 18 in a given year, as reported by the National Institute of Mental Health (NIMH). This translates to approximately 2.2 million people in the U.S. suffering from the disease at any given time.  There is currently no widely accepted, effective treatment, including drug treatment, for negative symptoms of schizophrenia.  Nevertheless, as reported by the International Mental Health Organization in 2007, the treatment success rate for schizophrenia generally with medications and psycho-social therapies can be potentially high, and there are also over 15 new medications, and many new and improving psycho-social treatments and cognitive therapies that are currently being developed for the treatment of schizophrenia.
 
        We have obtained the required EC Certificate of Conformity enabling us to affix the CE mark for the treatment of negative symptoms of schizophrenia, such as apathy, lack of emotion, and poor social functioning, for schizophrenia and are completing ongoing double-blind follow-up clinical trials.
 
 
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Bi-polar Disorder (Manic Depression)
 
Bi-polar disorder, also known as manic depression, is a mental illness which causes abnormal fluctuations in mood, energy and functionality, unlike typical mood swings experienced by all people.  This debilitating disease affects 5.7 million Americans, about 2.6% of the U.S. population according to a 2005 report in the Archives of General Psychiatry.   Based on a study published in the New England Journal of Medicine in 2007, approximately 75% of bi-polar disorder patients do not exhibit a durable recovery in response to drug therapy.
 
We have obtained the required EC Certificate of Conformity enabling us to affix the CE mark for the treatment of bi-polar disorder and await the results of our follow-up double-blind, placebo controlled clinical trial.
 
Alzheimer’s Disease
 
Alzheimer’s disease is characterized by a gradual decline in cognitive and practical functioning.  In particular, complex behavior, such as driving, is affected, short-term memory difficulties emerge, and sometimes behavioral disorders, such as rage attacks, appear.  At more advanced stages, dementia, as well as other chronic diseases and advanced diseases of the brain, may develop.
 
According to a 2010 report by the Alzheimer’s Association, or the 2010 Alzheimer’s report, an estimated 5.3 million Americans have Alzheimer’s disease.  This figure includes 5.1 million people aged 65 and older (constituting 13% of such age category) and 200,000 individuals under age 65 who have younger-onset Alzheimer’s.  Due to advances in medicine and medical technology, as well as social and environmental conditions, the number of Americans living longer lives is expected to grow dramatically, and, accordingly, so will the prevalence of Alzheimer’s disease.  Based on a study published in the New England Journal of Medicine in 2006, 75% of sufferers of Alzheimer’s disease are unresponsive or intolerant to medication.  The 2010 Alzheimer’s report indicates that approximately 90 experimental therapies aimed at slowing or stopping the progression of Alzheimer’s disease are currently in clinical testing in human volunteers.
 
In 2009, we commenced a double-blind clinical trial with respect to this condition, the interim results of which have exhibited statistically significant cognitive improvements in participants, and recently commenced a second trial.
 
Our Competitive Strengths
 
We believe that our Deep TMS technology bears important advantages over existing or potential competing methodologies and products for the treatment of CNS disorders, including drug therapy, psychotherapy or counseling, ECT (in the case of severe depression and bi-polar disorder), deep brain stimulation, or DBS (in the case of Parkinson’s disease), vagus nerve stimulation, or VNS (in the case of epilepsy), and current, surface TMS.  Our competitive strengths include, among others:
 
·      Ability to Treat Previously Unresponsive Patients.  Our Deep TMS technology device provides an alternative for the significant portion of patients who are unresponsive or intolerant to drug or other therapies, including surface TMS, and have therefore been unable to obtain relief from their often-debilitating symptoms.
 
·      Deeper Stimulation/Inhibition Capability.  While our Deep TMS technology is based on technology similar to that employed by current surface TMS therapy, its ability to penetrate much deeper regions of the human brain opens up a broader range of treatment applications.  Many mental diseases and disorders are caused by malfunctions in deeper regions of the brain and cannot effectively be treated by surface TMS therapy.  Because of our Deep TMS device’s technological characteristics, and the broader patient population indicated for, and deeper stimulation ability of, Deep TMS treatment compared to surface TMS, the FDA deems such differences to carry with them risks as to how the additional patient population and deeper regions of the brain treated by our device will react to such treatment.  Consequently, the FDA has informed us that it believes there is no predicate device (including the surface TMS device) to which our device is substantially equivalent, and has classified our device as subject to regulation as a Class III medical device, in contrast to the Class II medical device classification accorded to the surface TMS device.  The FDA requires stringent clinical investigations and a lengthier, costlier and more thorough premarket regulatory approval process for Class III medical devices like ours than it does for devices classified as Class II.

 
 
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·      Non-Invasiveness.  Our Deep TMS treatment is applied in a non-invasive, localized manner, through the placement of a helmet on the patient’s head and the application of electromagnetic fields to the brain alone.  Our non-surgical treatment solution takes place on an out-patient basis in a clinic, medical center or doctor’s office.  ECT, by contrast, while constituting an important treatment option for the management of severe depression (based on an analysis described in The Lancet, a leading general medical journal, in 2003, or the 2003 Lancet article), nevertheless requires hospitalization, full anesthesia and simultaneous use of a muscle relaxant, and each of DBS and VNS requires surgery.
 
·      Minimal Side Effects.  Our therapeutic solution has exhibited minimal or no side effects in the majority of clinical trials that we have conducted to date.  By contrast, ECT, while exhibiting high effectiveness in a significant portion of depression patients (as reported in the 2003 Lancet article), carries with it numerous severe side effects owing to its extreme, electrical interaction with the brain and the accompanying anesthesia, including muscle aches, nausea, mood changes and headaches.  DBS is associated not only with the complications related to brain surgery, but also with personality changes.  VNS often carries with it sleep disordered breathing, alteration of voice and other problems related to the larynx.  Drug therapies also have a variety of side effects, including weight gain and sexual and neurologic disorders, which manifest in some patients more than others.
 
·      Versatility of Technology Platform.  Unlike other therapeutic methodologies, our Deep TMS system is capable of addressing multiple disorders.  By pinpointing the locations within the brain that contain the relevant neurons that need to be excited or inhibited to treat a certain condition or symptom, and developing different forms of helmets containing distinct coils that can be attached to our device as appropriate to best reach and affect those neurons, our technology can address multiple symptoms or multiple conditions as part of the same treatment program.
 
Our Strategy
 
Specific elements of our current strategy include the following:
 
·      Obtain Regulatory Approval for Clinical Depression Application.  In order to commence full-scale commercialization of our Deep TMS system, it is essential that we obtain FDA and other regulatory clearances or approvals for our leading therapeutic application, clinical depression. As a prerequisite to filing an application for FDA approval, we need to successfully complete, and report upon, multi-center trials that are testing the safety and efficacy of the treatment of clinical depression with our device, which we anticipate will conclude towards the end of 2011.
 
·      Advance Additional Therapeutic Applications along Clinical Trial Path.  By simply switching the H-Coil and varying the strength and frequency of the electric current applied, our Deep TMS system can be used to treat additional therapeutic applications.  We have commenced, or entered into agreements with medical centers for, clinical trials for numerous other applications, including post-traumatic stress disorder, or PTSD, pain treatment, Parkinson’s disease, smoking addiction, autism, Multiple Sclerosis, blinking-blepharospasm, attention deficit disorder (ADD), drug addiction, Tourette syndrome and obesity.
 
·      Take Advantage of Collaborations with Third-Party Research Institutions to Advance Therapeutic Applications.  Often third-party researchers and clinical institutions approach us with new applications for our technology and are willing to bear the costs involved in conducting initial or additional clinical trials.  We intend to further build these relationships for entry into new treatment application markets in a cost-effective manner.
 
 
 
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·      Leverage Support of KOLs to Gain Market Acceptance.  We intend to solicit the support of KOLs within third-party research institutions throughout the world as a means of facilitating the market acceptance of our Deep TMS system.  We plan to publish articles in peer-reviewed scientific journals, attend scientific gatherings worldwide, and engage in dialogue with researchers in the field concerning our Deep TMS treatment methodology as a means of soliciting clinical research collaborations and support by KOLs for such treatment methodology.
 
·      Utilize Leasing Distribution Model to Maximize Revenues.  By entering into leasing, rather than sales, distribution arrangements and charging monthly rental and pay-per-use fees with respect to our Deep TMS system, we can preserve for our company the upside accompanying the potential widespread acceptance, and extensive use, of our device in the therapeutic marketplace.
 
·      Ensure Medical Insurance Coverage/Health Package Coverage for Our Device’s Therapy.  A key prerequisite to the market acceptance of our treatment device involves ensuring healthcare insurance coverage for treatments with our device.  The scope and level of the coverage are also key factors in our ability to penetrate the market.  The use of our device is not currently covered or reimbursed by any third-party payor in any jurisdiction.  However, we believe that we can use the CPT I code category, which has been recently approved by the American Medical Association for reimbursement by private insurance companies of TMS treatment, for the reimbursement of Deep TMS treatment as well once, and if, we receive FDA approval for the commercial use of our Deep TMS device.  We believe that the clinical efficacy and economic efficiency exhibited by our device compared to alternative treatments will play a key role in enabling us to obtain reimbursement through insurance coverage generally.
 
Risks and Challenges
 
We face certain risks and challenges, which are described in detail below in this prospectus under the heading “Risk Factors,” which may impact our ability to successfully implement our business strategy and may thereby also adversely affect our results of operations and financial condition, and the value of your investment in our ordinary shares, including the following risks and challenges:
 
·      Ability to Achieve Profitability.  Our status as a clinical stage medical technology company with a limited history that has been characterized by limited revenues and significant operating losses, and our expectation that such performance will continue for some time, together raise the risk that we may be unable to generate significant revenues or achieve profitability.
 
·      Success with Clinical Trials and Regulatory Approval Processes.  The lengthiness of the clinical trials for applications of our Deep TMS system, which will continue for several years, raises the risk that we will encounter problems or failures, which would cause us or regulatory authorities to delay or suspend clinical trials and thereby delay or prevent commercialization of our Deep TMS system for particular, or even for all, applications.
 
·      Market Acceptance for New Approach.  The status of Deep TMS treatment as a new approach to the treatment of CNS disorders raises the risk that healthcare professionals, including physicians, may not recommend or prescribe our product to their patients, thereby precluding our product from achieving market acceptance and thereby also preventing us from becoming profitable.
 
·      Reliance Upon Single Product.  Our focus on the Deep TMS system, a single product, leaves us vulnerable to any failure related to this product, whether at the clinical trial stage, in our efforts to achieve regulatory approvals or in subsequent marketing and commercialization with respect to this product.
 
·      Competition.  Our operation in an intensely competitive medical devices industry, which puts us in competition with larger, better-capitalized industry players, such as large pharmaceutical companies, some of which have achieved regulatory approvals prior to us, raises a significant challenge for our efforts to capture market share for the applications of our Deep TMS technology.
 
·      Reliance Upon Limited Number of Key Executives.  Our substantial reliance upon a handful of key executives and scientific personnel for the advancement of our research and development activities and the implementation of our strategy renders us vulnerable to the loss of any such individuals.
 
 
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·      Intellectual Property Risks Related to Our Technology.  Our technology is dependent on three key patent families that are partially or wholly licensed to us under terms that could potentially cause us to lose our rights to use such patents, should we not comply with those license terms, especially given our potentially conflicting obligations to Israel’s Office of the Chief Scientist related to research and development grants that we have received.
 
 Reverse Stock Split
 
We have received our shareholders’ approval for a one-for-four reverse stock split to be effective immediately prior to the date of this prospectus.  Fractional ordinary shares may be issued in connection with the reverse stock split, as we will not round up or down to the nearest whole number of ordinary shares (but only whole shares will be issued in this offering).
 
Our Corporate Information
 
We are a limited liability company that was incorporated under the laws of the State of Israel in November 2006.  We completed our initial public offering on the TASE in January 2007 and our ordinary shares are currently listed on the TASE under the symbol “BRIN”.  Our principal executive offices are located at 19 Hartum Street, Bynet Building, 1st Floor, Har HaHotzvim, Jerusalem 91451, Israel, and our telephone number is +972-2-581-3140.  Our address on the internet is www.brainsway.com.  Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus and is not incorporated by reference herein.  We have included our website address in this prospectus solely as an inactive textual reference.
 
We commenced operations in 2003, through Brainsway, Inc., which was incorporated in Delaware on March 31, 2003, and its wholly-owned subsidiary, Brain Research Services, a limited liability company incorporated in Israel on August 13, 2003.  Following our incorporation in November 2006 and immediately prior to the consummation of our initial public offering on the TASE in January 2007, all outstanding shares of Brainsway, Inc. were transferred by our shareholders to us, at which point Brainsway, Inc. became our wholly-owned direct subsidiary and Brain Research Services became our wholly-owned indirect subsidiary.  Brainsway, Inc. has its registered address at c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, and its telephone number at such address is (302) 658-7581.  Brain Research Services shares our address and telephone number in Jerusalem, Israel.
 
The “Brainsway” design logo is our property. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
 
 
 
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THE OFFERING
Ordinary shares we are offering
1,818,182 ordinary shares
Ordinary shares to be outstanding immediately after
this offering
13,647,148 ordinary shares
Offering price
We anticipate that the initial public offering price for our ordinary shares will be between $10.00 and $12.00 per share.  The initial public offering price will be determined, in part, by reference to the closing price of our ordinary shares on the TASE on the pricing date, and by taking into account prevailing market conditions and through negotiations between us and the underwriters.  Among the factors to be considered in these negotiations will be our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.  On April 26, 2011, the last reported sale price of our ordinary shares on the TASE was NIS 34.60, or $10.15, per share (based on the exchange rate reported by the Bank of Israel on such date, which was NIS 3.41=US$1.00, and after giving effect to a one-for-four reverse stock split for our ordinary shares that we will effect immediately prior to the date of this prospectus).
Over-allotment option
We have granted the underwriters a 45-day option to purchase up to an additional 272,727 ordinary shares from us to cover over- allotments, if any, at the initial public offering price per share, less underwriting discounts and commissions.
Use of proceeds
We estimate that we will receive net proceeds, after deducting the underwriting discounts and commissions and the estimated offering expenses, of $17.4 million from our sale of ordinary shares in this offering, based on an assumed public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this prospectus.
 
We expect to use the net proceeds of this offering for manufacturing and commercializing our product, ongoing and future clinical trials, research and development, working capital, and general corporate purposes.  See “Use of Proceeds.”
Risk factors
Investing in our ordinary shares involves a high degree of risk and purchasers of our ordinary shares may lose part or all of their investment. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.
TASE symbol
“BRIN”.
Proposed NASDAQ Capital Market symbol
We have applied to have our ordinary shares listed on the NASDAQ Capital Market under the symbol “BRIN”.
 
 
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The number of ordinary shares to be outstanding after this offering is based on 11,828,966 ordinary shares outstanding as of the date of this prospectus.  The number of outstanding ordinary shares excludes:
 
the 762,388 ordinary shares that we have reserved for issuance upon the exercise of outstanding options under our 2006 Stock Option Plan as of April 26, 2011 at a weighted average exercise price of NIS 7.68, or $2.16, per share; and
 
the 250,000 ordinary shares issuable upon exercise of outstanding Series 4 Warrants at a per share exercise price of NIS 80.00, or $22.54 (as of April 26, 2011).
Unless otherwise indicated, all information in this prospectus assumes:
that we have effected the one-for-four reverse stock split, which will be effected immediately prior to the date of this prospectus;
an initial public offering price of $11.00 per ordinary share, the mid-point of the range on the cover of this prospectus; and
no exercise by the underwriters of their option to purchase up to an additional 272,727 ordinary shares from us.
 
 
8

 

SUMMARY CONSOLIDATED FINANCIAL DATA
 
 
The following table is a summary of our historical consolidated financial data, which is derived from our consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards, or IFRS.  The summary consolidated financial statement data as of December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010 were derived from our audited consolidated financial statements included elsewhere in this prospectus.  The summary consolidated financial statement data as of December 31, 2006, 2007 and 2008 and for the years ended December 31, 2006 and 2007 have been derived from audited consolidated financial statements not included in this prospectus.  Because our company, Brainsway Ltd., was only incorporated in November 2006, the summary consolidated financial statement data presented as of, and for the first ten months of the year ended, December 31, 2006 actually represent the financial position and the results of operations of our wholly-owned subsidiaries, Brainsway, Inc. and Brain Research Services, which were each incorporated in 2003 and are considered our predecessor entities under the rules of the Securities and Exchange Commission, or the SEC.
 
You should read this summary financial data in conjunction with, and it is qualified in its entirety by, reference to our historical financial information and other information provided in this prospectus including, “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.  The historical results set forth below are not necessarily indicative of the results to be expected in future periods.  The unaudited consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of our management, all adjustments necessary for the fair presentation of the financial information contained in those statements.  The number of shares and per share data appearing in the table reflect the one-for-four reverse stock split that we will effect immediately prior to the date of this prospectus.
 
 
   
Year Ended December 31,
 
Consolidated Statements Of Loss Data:
 
2006(1)
   
2007
   
2008
   
2009
   
2010
 
   
(in thousands US$, except share and per share data)
 
Revenues
    -       -       -       3       86  
Cost of revenues
    -       -       -       *       10  
Gross profit
    -       -       -       3       76  
Operating expenses:
                                       
Research and development expenses, net
    1,390       926       929       1,929       4,264  
Selling and marketing expenses
    -       -       -       -       95  
General and administrative expenses
    505       300       631       795       1,015  
Total operating expenses
    1,895       1,226       1,560       2,724       5,374  
Operating loss
    1,895       1,226       1,560       2,721       5,298  
Financial expenses (income) from changes in fair value of warrants
    -       1,258       647       5,226       (4,836 )
Other financial expenses
    37       6       545       208       693  
Other financial income
    -       (99 )     (502 )     (203 )     (19 )
Financial expenses (income), net
    37       1,165       690       5,231       (4,162 )
Loss before taxes on income
    1,932       2,391       2,250       7,952       1,136  
Tax
    -       -       -       -       -  
Loss
    1,932       2,391       2,250       7,952       1,136  
Loss per share:**
                                       
Basic
    -       (0.28 )     (0.24 )     (0.84 )     (0.12 )
Diluted
    -       (0.28 )     (0.24 )     (0.84 )     (0.56 )
Weighted average number of shares:**
                                       
Basic
    -      
8,744,974
     
8,917,558
     
9,610,504
     
9,913,536
 
Diluted
    -      
8,744,974
     
8,917,558
     
9,610,504
     
10,645,003
 
 
* Represents an amount less than $1.
** Reflects the one-for-four reverse stock split we will effect immediately prior to the date of this prospectus.
(1) The consolidated statements of loss data for the first ten months of 2006 represent financial data for Brainsway Ltd.’s predecessors.
 
 

 
9

 

   
   
As of December 31,
  Consolidated Balance Sheets Data:  
2006
   
2007
   
2008
   
2009
   
2010
Actual
 
2010
As Adjusted (1)
   
(in thousands US$)
  Cash and cash equivalents     -       655       3,635       2,868       10,176  
27,576
  Property, and equipment, net     22       80       78       118       393   393
  Total assets                                                   123       6,662       7,653       6,754       12,252  
29,652
  Total  liabilities                                                   1,478       4,549       4,722       10,081       4,331   4,331
  Share capital     *       84       89       93       109   129
  Total equity (deficiency)     (1,392 )     2,113       2,881       (3,327 )     7,921  
25,321
   
 (1)
The “as adjusted” data gives effect to the sale of 1,818,182 ordinary shares in the offering (other than pursuant to the underwriters’ over-allotment option), including the application of the related gross proceeds of $20 million and the payment of the underwriting discounts and commissions of $1.4 million and the estimated offering costs and expenses of $1.2 million from such sale.
 
 
10

 
 
 
Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks we describe below, in addition to the other information set forth elsewhere in this prospectus, including our consolidated financial statements and the related notes beginning on page F-1, before deciding to invest in our ordinary shares.  These material risks could adversely affect our business, financial condition and results of operations, possibly causing the trading price of our ordinary shares to decline, and you could lose all or part of your investment.
 
Risks Related to Our Financial Condition and Capital Requirements
 
We are a clinical stage medical technology company with a history of operating losses.  We expect to incur additional losses in the future and may never be profitable.
 
We are a clinical stage medical technology company.  Since our inception in 2006, we have been focused on research and development and have not generated any substantial revenues.  We have incurred losses since inception, largely reflecting research and development and general and administrative expenses, as well as expenses due to increases in the fair market value of our inflation-linked outstanding warrants, which are classified as liabilities in our financial statements, and have experienced net losses of approximately $1.1 million in 2010, approximately $8.0 million in 2009 and approximately $2.3 million in 2008.  As of December 31, 2010, we had an accumulated deficit of approximately $15.4 million.  While we have commenced small-scale commercial distribution of our Deep TMS system in Italy with respect to applications for the treatment of clinical depression, schizophrenia (negative symptoms) and bi- polar disorder (also known as manic depression) and have entered into an agreement for distribution pending regulatory approval in Brazil, we will be required to conduct significant additional clinical trials and/or face additional obstacles before we start generating significant revenues.  As a result, we anticipate that we will continue to incur significant additional losses, and we may never be profitable nor achieve significant revenues.
 
We cannot ensure that our existing capital and the net proceeds of this offering will be sufficient to meet our future capital requirements.
 
We believe that our existing capital, other sources of liquidity and the net proceeds from this offering will be sufficient to meet our requirements approximately through the conclusion of 2014.  To date, we have funded our operations primarily through public and private offerings of our securities and research and development grants from Israel’s Office of the Chief Scientist, or OCS.  We expect to generate revenues primarily through rental fees and usage fees generated by the commercial distribution of our Deep TMS system.  However, to date, we have only generated minimal revenues.  The adequacy of our available funds to meet our operating and capital requirements will depend on many factors, including the progress and results of our further research, product development and clinical programs; the costs and timing of obtaining regulatory approvals for the various applications of our Deep TMS system; the terms and conditions of commercial agreements for marketing, distribution and therapeutic usage of our Deep TMS system; and costs incurred in enforcing and defending certain of the patents and other intellectual property rights upon which our technologies are based, to the extent such rights are challenged.
 
While we will continue to explore alternative financing sources, including the possibility of future offerings of our equity and debt and continued government funding, we cannot be certain that in the future these liquidity sources will be available to us or whether we can negotiate commercially reasonable terms or at all, or that our actual cash requirements will not be greater than anticipated.  If we are unable to obtain future financing through the methods we describe above or through other means, we may be unable to complete our business objectives and may be unable to continue operations.
 
Our limited operating history makes it difficult to evaluate our business and prospects.
 
We have a limited operating history.  While we have obtained EEA regulatory approval for certain applications of our Deep TMS system, we have not yet demonstrated an ability to obtain regulatory approvals from the EEA for other applications or from the FDA, the Israeli Ministry of Health or other foreign regulatory bodies for any applications, and have only recently started commercializing our Deep TMS technology in Italy.  We must obtain and maintain appropriate clearances or regulatory approvals for our Deep TMS system from regulatory entities in each of the markets in which we intend to sell our products before we may sell them.  Consequently, any predictions about our future performance may not be as accurate since we have not had a history of successfully developing and commercializing medical devices.
 
 
11

 
 
Risks Related to Our Business and Regulatory Matters
 
Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.
 
Development of medical devices includes pre-clinical studies and sometimes clinical trials, and is a long, expensive and uncertain process, subject to delays and failure at any stage.  Moreover, our research and development, pre-clinical and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities.  We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials, which would cause us or regulatory authorities to delay or suspend clinical trials, or delay the analysis of data from completed or ongoing clinical trials.  We estimate that clinical trials involving various applications of our Deep TMS system will continue for several years; however, such trials may also take significantly longer to complete and may cost more money than we have expected.  Furthermore, the data obtained from the studies and trials may be inadequate to support regulatory approvals or to enable market acceptance of our Deep TMS system.  Failure can occur at any stage of testing, and we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent commercialization of the current, or a future, more advanced version of, our Deep TMS system, for any particular therapeutic application, including but not limited to:
 
 
·
delays in securing clinical investigators or trial sites for the clinical trials;
 
·
delays in obtaining institutional review board and other regulatory approvals to commence a clinical trial;
 
·
slower than anticipated patient recruitment and enrollment;
 
·
negative or inconclusive results from clinical trials;
 
·
unforeseen safety issues;
 
·
an inability to monitor patients adequately during or after treatment;
 
·
placement of a clinical trial on hold by the FDA, institutional review boards/ethics committees or other regulatory authorities;
 
·
changes in governmental regulations or administrative actions, including governmental changes in permissible endpoints or other measures utilized in clinical trials; and
 
·
problems with investigator or patient compliance with the trial protocols.
 
Additionally, the FDA, EEA, or other regulatory entities may disagree with our interpretation of the data from our pre-clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to demonstrate safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical trials, which could further delay approval of our Deep TMS system.  A number of companies in the medical device and biotechnology industries, including those with greater resources and experience than us, have suffered significant setbacks in advanced clinical trials, even after seeing promising results in earlier clinical trials.  Despite the successful results reported in earlier clinical trials for various applications of our Deep TMS system, we do not know whether any clinical trials we or our clinical partners may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market our product for such applications.  If later-stage clinical trials involving applications of our Deep TMS system do not produce favorable results, our ability to obtain regulatory approval for such applications may be adversely impacted, which will have a material adverse effect on our business, financial condition and results of operations.
 
Our inability to successfully commercialize our product could severely harm our ability to generate revenues and become profitable.
 
Even if our therapeutic Deep TMS system receives certain approvals for commercialization, such approval may be subject to various limitations which could materially and adversely affect the marketability and profitability of the product.  In addition, any of our therapeutic products may not result in commercial success for various reasons, including:
 
 
12

 
 
 
·
inability to receive regulatory clearance or approval for our product or for certain uses of our product;
 
·
receipt of regulatory clearances or approval for more limited indications than we desire or which require extensive warnings or contraindications in our labeling;
 
·
lack of familiarity of health care providers and patients with the benefits of TMS generally;
 
·
insufficient or unfavorable levels of reimbursement from government or third-party payors;
 
·
infringement of proprietary rights of others for which we (or our licensees, if any) have not received licenses;
 
·
incompatibility with other therapeutic products;
 
·
other potential advantages of alternative treatment methods;
 
·
ineffective marketing and distribution support;
 
·
lack of cost-effectiveness;
 
·
timing of market introduction of competitive products;
 
·
difficulties related to large-scale manufacturing;
 
·
infringement by third parties of our intellectual property rights; or
 
·
the possibility of unforeseen side effects after use of the product has commenced.
 
If we are unable to develop commercially viable products, our business, results of operations and financial condition will be materially and adversely affected.
 
Deep TMS is a new approach to the treatment of brain disease, and if healthcare professionals do not accept and recommend our product to their patients, our product may not achieve market acceptance and we may not become profitable.

Deep TMS is a new approach to the treatment of brain disease and if healthcare professionals, including physicians, do not recommend or prescribe our product to their patients, our product may not achieve market acceptance and we may not become profitable. In addition, physicians have historically been slow to change their medical treatment practices because of perceived liability risks arising from the use of new products. Delayed adoption of our product by healthcare professionals could lead to a delayed adoption by patients and third-party payors. Healthcare professionals may not recommend or prescribe our product until, among others:

 
·
there is sufficient long-term clinical evidence to convince them to alter their existing treatment methods and device recommendations;
 
 
·
there are recommendations from other prominent psychiatrists, neurologists, CNS educators and/or professional associations that our product is safe and effective;
 
 
·
we obtain favorable data from clinical studies for our product;
 
 
·
reimbursement or insurance coverage from third party payors is available; and
 
 
·
they become familiar with the complexities of our product.
 
We cannot predict when, if ever, healthcare professionals and patients may adopt the use of our product. Since we have only begun to commercialize our product, long-term clinical evidence is not yet available. Even if favorable data is obtained from clinical studies for our product, healthcare professionals and third-party payors may not endorse our product and future clinical studies may not continue to produce favorable data regarding our product. In addition, prolonged market experience may also be a prerequisite to reimbursement or insurance coverage from third-party payors. If our product does not achieve an adequate level of acceptance by patients, healthcare professionals and third-party payors, we may not generate significant product revenues and we may not become profitable.
 
 
13

 
 
We are completely dependent upon the successful development of our Deep TMS system.  If we fail to successfully complete its development and commercialization, we will not generate operating revenue.
 
All of our efforts are focused on the development of a single product—our Deep TMS system—along with a more advanced, early-stage multiple-field version of such product.  There is no guarantee that we will succeed in developing additional products based on our Deep TMS technology.  If we are unable to consummate the manufacture of our product for the treatment of various neurological and psychopathological disorders in a safe, usable, commercial end-product form, we will be unable to generate any revenues.  There is no certainty as to our success, whether within a given time frame or at all.  Any delays in our schedule for clinical trials, regulatory approvals or other stages in the development of our product are likely to cause us additional expense, and may even prevent the successful finalization of the product.  Delays in the timing for development of our product may also have a material adverse effect on our business, financial condition and results of operations due to the possible absence of financing sources for our operations during such additional periods of time.
 
We have no experience in leasing, marketing or distributing products and no internal capability to do so, and are therefore entirely dependent upon outside third parties for such activities, which subjects us to certain risks.
 
We currently do not intend to develop an internal, direct sales force to market and lease our Deep TMS system, due to the expense and use of resources that would be required.  Therefore, we must enter into arrangements with third parties to conduct leasing and marketing activities on our behalf.  Such arrangements usually result in lower profit margins than if we marketed and leased our systems directly.  We have entered into agreements with exclusive distributors in Italy and Brazil to distribute our systems and are entirely dependent on their efforts for the successful distribution of our systems in those countries.  Although our agreement with the Italian distributor prohibits it from marketing, promoting or otherwise being involved with the commercialization of other, competing brain stimulation products, our Brazilian distribution agreement does not contain such a restriction, and we cannot be certain that any future distribution agreements will impose such a restriction.  In the event future distribution agreements do not restrict third party distributors from marketing, promoting and otherwise being involved with the commercialization of other, competing brain stimulation products, the leases of our product and related revenues may be adversely affected.  Our current or future distributors may not be successful or effective in leasing and marketing our Deep TMS systems.  If we fail to create effective marketing and distribution channels, our ability to generate revenue and achieve our anticipated growth could be adversely affected.  Furthermore, if these distributors experience financial or other difficulties, leases of our systems could be reduced, and our business, financial condition and results of operations could be harmed.
 
We are dependent upon third-party suppliers, which makes us vulnerable to supply problems and price fluctuations.

We rely on a number of third-party suppliers to manufacture certain components of our Deep TMS system and expect to continue to rely on such suppliers to manufacture components for our system when we begin its commercialization. Although none of our third-party suppliers is a sole-source supplier, we currently do not have a second-source supplier for any of our components. We also do not have supply agreements with our third-party suppliers and we generally make our purchases on a purchase order basis. Our third-party suppliers may encounter problems during manufacturing due to a variety of reasons, including, among others, failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunctions and environmental factors, any of which could delay or impede their ability to meet our demand for components. Our reliance on third-party suppliers also subjects us to additional risks that could harm our business, including, among others:

 
·
we may not be able to obtain an adequate supply of our components in a timely manner or on commercially reasonable terms;
 
 
·
our suppliers may prioritize other customers’ needs since we may not be a major customer;
 
 
·
our third-party suppliers, especially new suppliers, may make manufacturing errors that may not be detected by our quality assurance testing, which could negatively affect the efficacy or safety of our product or cause shipment delays due to such errors;
 
 
14

 
 
 
·
our suppliers may fail to comply with applicable regulatory requirements or take satisfactory corrective action in response to an adverse inspection by a regulatory agency, which could result in enforcement actions and inhibit their ability to fulfill our orders and meet our requirements; and
 
 
·
our suppliers may encounter financial or other hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.
 
In the future, we may approach alternative third-party suppliers to manufacture our components. However, we may not be able to obtain a new third-party supplier that is able to manufacture exactly the same component to our custom specifications, which may require us to redesign a product and potentially re-submit an application for approval to the FDA and other applicable regulatory authorities. Any interruption or delay in obtaining components from our third-party suppliers, or our inability to obtain products from alternate suppliers at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competing products, which, in turn, could harm our business, financial condition and results of operations.

In addition, after we establish the manufacturing procedures for our product, we may also enter into contract manufacturing arrangements with third parties to manufacture and assemble complete products. In that case, we will maintain only limited in-house manufacturing capabilities with respect such products and our contract manufacturing arrangements may subject us to risks similar to those described above for our third-party suppliers.
 
We rely on collaborative arrangements with third parties for the conduct of our clinical trials and for the provision of other services, and those third parties may not perform satisfactorily, including by failing to meet established deadlines for the completion of such services.
 
We rely on third parties, such as contract laboratories, research organizations, medical institutions and clinical investigators, to conduct certain preclinical studies and clinical trials with respect to various applications of our Deep TMS technology, which limits our control over these activities.  The third-party contractors may not assign as great of a priority to our clinical development programs or pursue them as diligently as we would if we were undertaking such programs directly and, accordingly, may not complete activities on schedule, or may not conduct the studies or our clinical trials in accordance with regulatory requirements or with our trial design.  If these third parties do not successfully carry out their contractual duties or meet expected deadlines, or if their performance is substandard or fails to meet regulatory requirements, we may be required to replace them.  Although we believe that there are a number of other third-party contractors that we could engage to continue these activities, replacement of these third parties would result in increased costs and delays, primarily due to the training and familiarization that their replacements would need to undergo.  Consequently, our efforts to obtain regulatory approvals for, and to commercialize, our Deep TMS system for various applications would be delayed.  The third-party contractors may also have relationships with other commercial entities, some of whom may compete with us.  If the third-party contractors work with our competitors, our competitive position may be harmed.
 
In addition, although we attempt to audit and control the quality of third-party data, we cannot guarantee the authenticity or accuracy of such data, nor can we be certain that such data has not been fraudulently generated.  The failure of third parties to carry out their obligations towards us would materially adversely affect our ability to develop and market our Deep TMS system and to implement our strategies.
 
If our competitors develop and market products that are more effective, safer or less expensive than, or that capture market share prior to, our current or future Deep TMS system, our future prospects will be negatively impacted.
 
The industry in which we operate is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants, particularly in the United States and Europe. Most of our competitors are large, well-capitalized companies with significantly larger market shares and resources than we have and they are able to spend more aggressively on product development, marketing, sales and other product initiatives than we can.
 
Developments in the pharmaceuticals industry, including the development of a new drug treatment for clinical depression that may serve as a substitute for the treatment that we offer, may adversely impact our business.  In addition, the development of similar devices to ours, which seek to minimize the impact of neurological and psychopathological disturbances on patients’ daily lives, may increase or decrease the demand for our product.  Third parties may in the future succeed in introducing technological changes that avoid our patent protections and enable development of products that compete with, and thereby reduce the profitability of, our product.
 
 
15

 
 
Many of the large pharmaceutical companies that currently market and/or are in the process of developing therapeutic products for the treatment of many of the conditions to which our Deep TMS system may be applied, including Johnson & Johnson, Eli Lilly and Company, AstraZeneca International, Bristol-Myers Squibb/Otsuka Pharmaceutical Co., Ltd. and Pfizer Inc., have greater financial, manufacturing, marketing and treatment development resources than we do, while also possessing significantly greater research and marketing capabilities than ours.
 
In addition, other companies are commercializing TMS technologies, including Neuronetics, which developed a TMS device that received 510(k) approval in October 2008 for the treatment of depression.
 
Technologies are also being commercialized that involve surgery, including Cyberonics, Inc.’s, or Cyberonics, vagus nerve stimulation technology and Medtronic, Inc.’s, or Medtronic, deep brain stimulation technology.  In addition, ECT technology is also being commercialized by certain companies.
 
Many of these and other competitors have, among others:
 
 
·
significant brand name recognition;
 
·
established relationships with healthcare professionals, customers and third-party payors;
 
·
established distribution networks and channel penetration;
 
·
additional product lines and the ability to offer rebates or bundle products to offer higher discounts or other incentives to gain a competitive advantage; and/or
 
·
greater financial and human resources for product development, sales and marketing, customer support and intellectual property litigation.
 
Our ability to compete effectively in our market depends upon our ability to distinguish our company and our product from our competitors and their products based on various factors, including, among others:
 
 
·
product performance;
 
·
product pricing;
 
·
brand name recognition;
 
·
compliance with supply obligations and customer support;
 
·
customer retention rates;
 
·
intellectual property protection;
 
·
the success and timing of new product development and introductions; and
 
·
the development of successful distribution channels.
 
In addition, because most of our competitors have significantly greater product development resources than us, they or other well-capitalized companies may at any time develop additional products which could render our product obsolete or substantially reduce our revenues.
 
While we believe in the superiority of our noninvasive Deep TMS technology, if our competitors’ products prove to be more effective, safer or less expensive than our Deep TMS system, or reach the market sooner than, and thereby capture the potential market for, our Deep TMS system, we may not achieve commercial success.
 
 
16

 
 
We intend to distribute our product worldwide and, if we are unable to manage our international operations, our business, financial condition and results of operations could be harmed.

Our headquarters and all of operations and employees are located in Israel but we intend to market our product globally. Accordingly, we are subject to risks associated with global operations and our international distribution activities and operations will require significant management attention and financial resources. In addition, our international distribution activities and operations will subject us to risks inherent in international business activities, many of which are beyond our control and include, among others:

 
·
foreign certification, registration and other regulatory requirements;
 
·
customs clearance and shipping delays;
 
·
import and export controls;
 
·
trade restrictions (mostly in Arab countries);
 
·
multiple and possibly overlapping tax structures;
 
·
difficulty forecasting the results of our international operations and managing our inventory due to our reliance on third-party distributors;
 
·
differing laws and regulations, business and clinical practices, third-party payor reimbursement policies and patient preferences;
 
·
differing intellectual property protection among countries, and insufficient intellectual property protection in certain countries in southeast Asia and South America in particular, including China and India;
 
·
difficulties staffing and managing our international operations;
 
·
difficulties in penetrating markets in which our competitors’ products arc more established, including North America;
 
·
currency exchange rate fluctuations; and
 
·
political and economic instability, war or acts of terrorism.

If we are unable to manage our international operations effectively, our business, financial condition and results of operations could be harmed.
 
If we do not effectively manage our growth, our ability to increase distribution of our product and cash flow will be limited and we may not become profitable.
 
If the commercialization of our Deep TMS system proceeds forward, our business will need to grow. Continued growth would subject us to numerous challenges, including, among others;
 
 
·
implementing appropriate operational and financial systems and controls;
 
·
expanding our manufacturing capacity and scaling up production;
 
·
expanding our leasing and marketing capabilities;
 
·
managing our international operations effectively;
 
·
providing adequate training and supervision to maintain high quality standards; and
 
·
preserving our culture and values.
 
In addition, our expected growth will continue to place additional significant demands on our management and our financial and operational resources. If we are unable to manage our growth, our business, financial condition and results of operations could be harmed.
 
Our business faces a substantial risk of clinical trial and product liability claims.  If we are unable to obtain and maintain appropriate levels of insurance, a claim could adversely affect our business, financial condition and results of operations.
 
Our business exposes us to significant potential clinical trial and product liability risks that are inherent in the development, manufacturing and leasing and marketing of human therapeutic products.  Although we have not yet commenced whole-scale commercialization of our Deep TMS system, claims could be made against us based on the use of our system in clinical trials.  Furthermore, once we achieve a greater level of commercial distribution of our system, although our distributors are required to ensure that our system is only administered by a trained professional, the potential for misuse of our system will still exist due to its complexity.  We currently carry clinical trial insurance covering bodily and personal injury with an annual coverage amount of $5 million in the aggregate.  However, our insurance may not provide adequate coverage against potential liabilities.  Furthermore, clinical trial and product liability insurance is becoming increasingly expensive.  As a result, we may be unable to maintain current amounts of insurance coverage or obtain additional or sufficient insurance at a reasonable cost to protect against losses that could have a material adverse effect on us.  If a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as damages awards beyond the coverage of our insurance policies resulting from a claim brought successfully against us.  Furthermore, whether or not we are ultimately successful in defending any claims, we might be required to direct significant financial and managerial resources to such defense, and adverse publicity is likely to result, which could harm our business, financial condition and results of operations.
 
 
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Our business could suffer if we are unable to attract and retain key employees.
 
Our success depends upon the continued service and performance of our senior management and other key personnel, including Uzi Sofer, our Chief Executive Officer, Dr. Yiftach Roth, our R&D Manager, and Professor Abraham Zangen, our Neurobiological Consultant.  The loss of the services of these personnel could delay or prevent the successful completion of our planned clinical trials or the commercialization of various applications of our Deep TMS system or otherwise affect our ability to manage our company effectively and to carry out our business plan.  We do not maintain key-man life insurance.  Although we (through Brain Research Services) have entered into employment or consulting agreements with all of the members of our senior management team, members of our senior management team may resign at any time. A high demand exists for senior management and other key personnel in the medical technology industry in Israel.  We may not be able to continue to retain and attract such personnel.  Our failure to retain any of such senior personnel would cause a delay in our ability to implement our product commercialization strategy.
 
Our growth and success also depend on our ability to attract and retain additional highly qualified scientific, technical, managerial and finance personnel.  We experience intense competition for qualified personnel, and the existence of non-competition agreements between prospective employees and their former employers may prevent us from hiring or continuing to employ those individuals or subject us to suit from their former employers.
 
While we attempt to provide competitive compensation packages to attract and retain key personnel, many of our competitors are likely to have greater resources and more experience than we have, making it difficult for us to compete successfully for key personnel.  If we cannot attract and retain sufficiently qualified technical and scientific employees on acceptable terms, we may not be able to develop and commercialize our product competitively for specific therapeutic applications.  Further, any failure to effectively integrate new personnel could prevent us from successfully growing our company.
 
If we or our licensees are unable to obtain U.S. and/or additional foreign regulatory clearances and approvals for the applications of our Deep TMS system, we will be unable to commercialize our product for those applications in those jurisdictions.
 
Our Deep TMS system is a medical device subject to extensive regulations which are meant to assure its safety, effectiveness and compliance with applicable consumer laws.  If we fail to obtain and maintain required clearances and approvals, our ability to rent our Deep TMS system and generate revenues will be harmed.  These regulations relate to the design, development, testing, manufacturing, storage, labeling, packaging, record-keeping, content and language of the instructions for use of the Deep TMS system, and the sale, promotion, distribution, importing and exporting, shipping, post-sale surveillance and withdrawal from market of our device.  Most notably, we must comply with the EEA’s Medical Devices Directive and we are subject to extensive regulation in the United States by the FDA and other federal, state, and local authorities.  To date, we have not marketed, distributed, sold or supplied our Deep TMS system (other than in minimal quantities, pursuant to our Italian distribution agreement with Advanced Technologies Innovation Distribution SRL, or ATID).  While we have obtained the EC Certificate of Conformity that enables us to affix the CE mark, signifying EEA regulatory approval, for certain applications of our Deep TMS system, we have not yet obtained approval from an EEA Notified Body for other applications.  We have furthermore not received required regulatory approvals from the FDA, the Israeli Ministry of Health, or other foreign regulatory bodies for any applications of such system, and we may not obtain such approvals in a timely manner or at all.
 
In the United States, before a new medical device, or a new use of, or claim for, an existing product can be marketed, it must first receive either premarket clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FDCA, or premarket approval, or PMA, from the FDA, unless an exemption applies.  In the 510(k) clearance process, the FDA must determine that the proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology, safety and effectiveness to clear the proposed device for marketing.  If the FDA determines through its review of a submitted 510(k) notification claiming substantial equivalence to a predicate device that the device is not substantially equivalent, the device is automatically designated as a Class III device and generally must pursue regulatory approval through the more stringent and resource-intensive PMA process.  However, for certain low-risk devices, the manufacturer may request a “de novo” classification of its device.  Pursuant to the FDA’s “de novo” review process, if the FDA determines that the automatic Class III designation should be changed, it will issue a written order to reclassify the device.  This order permits the submitter to market the device and the device may serve as a predicate device for future 510(k) notifications.  The process of obtaining marketing clearance through the “de novo” review process typically can take several months to a year or longer.
 
 
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The FDA has determined that there are no appropriate predicate devices for our Deep TMS system and that our Deep TMS system is a Class III device, which will require us to seek FDA approval through the PMA process.  The FDA does not view the surface TMS device as an appropriate predicate device for our Deep TMS device, given the broader patient population indication for, and deeper stimulation within the brain by, our Deep TMS device, which creates uncertainty as to how the additional patient population and deeper regions of the brain not treated by surface TMS will respond to such treatment. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices.  Products that are approved through a PMA application generally require FDA approval before they can be modified.  The PMA process can be expensive and lengthy and entail significant user fees, unless exempt.  The PMA pathway can be expensive, time consuming and uncertain, requires detailed and comprehensive scientific and human clinical data, generally takes one to three years after a premarket approval application is filed and may never result in the FDA granting the approval.  We may not be able to obtain our required approvals in a timely manner, if at all.  The FDA can delay, limit or deny approval of a device for many reasons, including: our inability to demonstrate to the FDA’s satisfaction that our product is safe or effective for its intended uses; the data from our pre-clinical studies and clinical trials may be insufficient to support approval; the manufacturing process or facilities we use may not meet applicable requirements; and changes in FDA approval policies or the adoption of new regulations may require additional data.  Any delay in, or failure to receive or maintain, approval for the applications of our product under development could prevent us from generating revenue from these applications or achieving profitability.
 
In connection with the ongoing clinical trials for our Deep TMS system, we face the risk that:
 
 
·
it may not prove entirely safe or efficacious in those trials;
 
·
the therapeutic results with respect to it may not confirm the positive results from earlier preclinical studies or clinical trials;
 
·
the results may not meet the level of statistical significance required by the FDA, an EEA Notified Body or other regulatory authorities; and
 
·
the results will justify only limited and/or restrictive uses, and will require the inclusion of warnings and contraindication, which could significantly limit its marketability and profitability.
 
Any delay in obtaining, or the failure to obtain, required regulatory approvals, and any limitations thereon, will materially and adversely affect our ability to generate future revenues from our Deep TMS system.  We and our distributors and/or sub-licensees, as applicable, also are, and will be, subject to numerous foreign regulatory requirements that govern the conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement.  The approval procedures vary among countries and regions and can involve additional testing, and the time required to obtain approvals may differ.  Approval by one country or region does not ensure or even predict approval by regulatory authorities in other countries or by the FDA.  The non-U.S. regulatory approval processes include all of the risks associated with the approval process that we describe above, and may also include additional risks attributable to the satisfaction of particular non-U.S. requirements.
 
 
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Even if we obtain regulatory approvals, our therapeutic products will be subject to ongoing regulatory review and if we fail to comply with continuing U.S. and applicable foreign regulations, we could lose those approvals and our business, financial condition and results of operations would be seriously harmed.
 
Even if our Deep TMS system receives initial regulatory approval or clearance for specific therapeutic applications, we will still be subject to post-marketing regulatory requirements, which include medical device ongoing reporting obligations, and quality system regulations related to the manufacturing of our device which will be subject to continuing regulatory review, including FDA inspections.  This ongoing review may result in the withdrawal of our product from the market, the interruption of our manufacturing operations and/or the imposition of labeling and/or marketing limitations related to specific applications of our product.  Since many more patients will be exposed to our Deep TMS system following its marketing approval, serious but infrequent adverse reactions that were not observed in clinical trials may be observed during the commercial marketing of such product.  Post-marketing regulatory requirements will require us to report if our device causes or contributes to a death or serious injury, or malfunctions in a way that would likely cause or contribute to a death or serious injury.  In addition, the manufacturer(s) and the manufacturing facilities that we will use to produce our system will be subject to periodic review and inspection by the FDA and other, similar foreign regulators.  Late discovery of previously unknown problems with any product, manufacturer or manufacturing process, or failure to comply with regulatory requirements, may result in actions, such as:
 
·           restrictions or partial suspension or total shutdown of production on such product, manufacturer or manufacturing process;
·           warning letters from the FDA or other regulatory authorities;
·           the withdrawal of the product from the market;
·           the suspension or withdrawal of regulatory approvals;
·           a refusal by such regulator to approve pending applications or supplements to approved applications that we or our licensees (if any) submit;
·           a voluntary or mandatory recall;
·           fines;
·           a refusal to permit the import or export of our product;
·           product seizures or detentions;
·           criminal prosecution;
·           injunctions or the imposition of civil or criminal penalties; and
·           adverse publicity.
 
In addition, from time to time, legislation is drafted and introduced in the United States that could significantly change the statutory provisions governing any regulatory clearance or approval that we receive from the United States.  FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our product.  For example, in January 2011, the FDA announced twenty-five specific action items it intends to take with respect to the 510(k) process.  The FDA issued its recommendations and proposed action items in response to concerns from both within, and outside of, the FDA about the 510(k) program.  Although the FDA has not detailed the specific modifications or clarifications that it intends to make to its guidance, policies, and regulations pertaining to the 510(k) process, the FDA’s announced action items signal that additional regulatory requirements are likely.  Included in the FDA’s announced reform is a continuing consideration of changes that would streamline the FDA’s 510(k) “de novo” process.  Moreover, in March 2010, United States President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, which substantially changed the way health care is financed by both governmental and private insurers, encourages improvements in the quality of health care items and services, and significantly impacts the medical device industry.  The PPACA includes, among other things, the following measures:
 
 
·
an excise tax on any entity that manufactures or imports medical devices offered for sale in the United States;
 
 
·
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;
 
 
·
new reporting and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers, effective March 30, 2013;
 
 
·
payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain health care services through bundled payment models, beginning on or before January 1, 2013;
 
 
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·
an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate; and
 
 
·
a new licensure framework for follow-on biologic products.
 
These provisions could meaningfully change the way healthcare is and delivered and financed, and may materially impact numerous aspects of our business.
 
In the future there may continue to be additional proposals relating to the reform of the U.S. healthcare system.  Certain of these proposals could limit the prices we are able to charge for rental of, or treatment with, our product, or the amounts of reimbursement available for our product, and could limit the acceptance and availability of our product.  The adoption of some or all of these proposals could have a material adverse effect on our financial position and results of operations.
 
We cannot predict what additional changes there will be, how or when they will occur or what effect they will have on the regulation of our product.  For example, we cannot predict whether the FDA’s ongoing effort to improve the 510(k) “de novo” process will make this marketing pathway more or less viable for our product.  If we, or our licensees, suppliers, collaborative research partners or clinical investigators are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements or the adoption of new regulatory requirements or policies, we may lose marketing approval for any of the therapeutic applications of our product (to the extent that such applications are initially approved), resulting in decreased or lost revenue from milestones, product rental or usage fees, or royalties.
 
Our current or future therapeutic products are subject to recalls even after receiving regulatory clearances, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.
 
The FDA and similar governmental bodies in other countries have the authority to require the recall of our Deep TMS system if we or our component suppliers fail to comply with relevant regulations pertaining to the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of this product, or if new information is obtained concerning the safety or efficacy of this product.  Manufacturers may also, by their own initiative, recall a product if any material deficiency in such product is found.  Any recall of our product could materially disrupt our operations and materially adversely affect our results of operations.  A government-mandated recall could occur, for example, if a regulatory body finds that there is a reasonable probability that the Deep TMS system would cause serious, adverse health consequences or death.  In the EEA, member state authorities can take interim measures ordering the withdrawal of devices from the market or prohibiting or restricting their introduction to the market if they consider that when correctly installed, maintained and used for their intended purpose, the devices may compromise the health and/or safety of patients, users or other persons.  A voluntary recall of our product by us could occur as a result of manufacturing defects, labeling deficiencies, packaging defects or other failures to comply with applicable regulations.  Any recall of our product would divert our management’s attention and financial resources and damage our reputation with customers.  A recall involving our Deep TMS system would be particularly harmful to our business, financial condition and results of operations because we currently rely (and expect to continue to rely) on its commercial distribution for various applications as our only source of revenue from operations.
 
Post-commercialization modifications to the current version of our Deep TMS system, or to any further advanced version for which we may receive regulatory approval in the future, may require new regulatory clearances or approvals or may require us to recall or cease marketing such products until clearances are obtained.
 
Modifications to our current Deep TMS system or to any other, more advanced version of it, for which we may successfully achieve regulatory approval in the future, may require new regulatory clearance or approvals, and, if necessitated by a problem with a marketed version of it, may result in the recall or suspension of marketing of the previously approved and marketed version until clearances or approvals of the modified version are obtained.  If the FDA requires new clearances or approvals for any application of our Deep TMS system for which we receive marketing approval, we may be required to recall our product and to stop marketing it as modified, which could require us to redesign the product, resulting in a material adverse affect on our business, financial condition and results of operations.  Under such circumstances, we could be subject to significant enforcement actions.
 
 
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If a manufacturer determines that a modification to an FDA-cleared device could significantly affect the safety or efficacy of the device, would constitute a major change in its intended use, or otherwise requires pre-clearance, the modification may not be implemented without the requisite clearance, which we may not be able to obtain in a timely manner or at all.  Delays in obtaining required future clearances or approvals would materially and adversely affect our ability to introduce new or enhanced versions of our Deep TMS system in a timely manner, or to apply our Deep TMS system towards additional therapeutic applications, which in turn would have a material adverse effect on our business, financial condition and results of operations.
 
We have limited manufacturing capabilities and, if we are unable to scale our manufacturing operations to meet anticipated market demand, or to comply with applicable FDA or other comparable agency quality standards in our manufacturing activities, our growth could be limited and our business, financial condition and results of operations could be harmed.
 
We currently conduct our manufacturing internally and have limited resources, facilities and experience in commercially manufacturing sufficient quantities of our product to meet the demand we expect from our expanded commercialization efforts.  We expect to face certain technical challenges as we increase manufacturing capacity, including, among others, equipment design and automation, material procurement, lower than expected yields and increased scrap costs.  If we are unable to scale our manufacturing capabilities to meet market demand, our growth could be limited and our business, financial condition and results of operations could be harmed.
 
Our internal manufacturing activities also subject us to challenges related to maintaining quality control and assurance standards.  We and certain of our third-party manufacturers or suppliers are required to comply with the FDA’s Quality System Regulation, or QSR, which covers the methods of documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our product.  We and our manufacturers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process for our product as marketed outside of the United States.  We may not be able to comply with applicable QSR regulations for our therapeutic Deep TMS system.  The FDA enforces the QSR through periodic and unannounced inspections of manufacturing facilities.  Our failure to comply with applicable regulations could result in the imposition of sanctions on us, including fines, injunctions, civil penalties, refusal of regulatory authorities to grant marketing approval of our product, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of our product, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect regulatory approval and supplies of our product, and materially and adversely affect our business.
 
We are, and may, in the future, be subject to further, extensive European and U.S. regulatory provisions that restrict the advertising and promotion of our product.
 
In the EEA, the advertising and promotion of our product is subject to EEA Member States’ laws implementing the Directive 93/42/EEC concerning Medical Devices, or the Medical Devices Directive, the Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices.  These laws may restrict the advertising and promotion of our product to the general public and may also impose limitations on our promotional activities with healthcare professionals.  Similarly, any regulatory approvals that we obtain in the United States will be for the use of our Deep TMS system under specific circumstances for specific indications.  Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition on the promotion of a medical device for a use that has not been cleared or approved by the FDA.  Use of a device outside of its cleared or approved indication is known as “off-label” use.  We cannot, however, prevent a physician from using our device for off-label use, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine.  However, if the FDA determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or could subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties.  Other federal, state or foreign governmental authorities might also take action if they consider our promotion or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.
 
 
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We intend to eventually commence commercial operations in the United States and will then be subject to, among others, the federal anti-kickback law and similar state laws, which prohibit payments that are intended to induce physicians or other healthcare professionals either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare product or services. These laws could constrain our leasing, marketing and other promotional activities by limiting the kinds of financial arrangements, including leasing programs, we may have with hospitals, physicians or other potential renters of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Because we may provide some coding and billing information to purchasers of our product, and because we cannot be certain that the U.S. government will regard any billing errors that may be made as inadvertent, these laws are potentially applicable to us. In addition, these laws may apply to us because we intend to provide reimbursement to healthcare professionals for training patients on the use of our product. Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance, which can be substantial. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and/or be costly to respond to, either of which could have a material adverse effect on our business, financial condition and results of operations.
 
In addition, healthcare laws and regulations may change significantly in the future. We try to monitor these developments through our distributors, who are contractually obligated to inform us of all relevant developments. Any new healthcare laws or regulations could restrict our operations or otherwise harm our business, financial condition and results of operations.
 
Risks Related to Our Industry
 
Our industry is subject to changes in preferred methods of treatment due to a variety of factors, which may decrease or alter the demand for various applications of our product unexpectedly.
 
The field of neurological and psychopathological disorders has evolved and is subject to further unexpected change that we may be unable to anticipate.  Developments such as results of current and future research and clinical studies by our competitors or us, changes in frequency of different neurological and psychopathological disorders within the general population, and the impact of different methods of treatment on the threat that such disorders pose to patients and on such patients’ quality of life will all impact (either by increasing or decreasing) the market for various treatments, thereby affecting the demand for our Deep TMS treatment relative to competing treatments.  We cannot predict the overall result of the confluence of such factors upon the degree of preference for treatment with our Deep TMS system as opposed to competing treatments for various applications.  If changes in our industry reduce the favorability of, or demand for, treatment with our Deep TMS system, our future revenues, financial condition and results of operations will be adversely affected.
 
We could be adversely affected if healthcare reform measures substantially change the market for medical care or healthcare coverage in the United States.
 
Under new legislation adopted recently by the U.S. Congress regarding health insurance, substantial changes are going to be made to the current system for paying for healthcare in the United States, including changes made in order to extend medical benefits to those who currently lack insurance coverage, which in turn are likely to change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices.  Restructuring the coverage of medical care in the United States could impact the reimbursement for prescribed treatments with medical devices, such as the therapeutic applications of our Deep TMS system.  If reimbursement for our approved applications, if any, is substantially reduced in the future, or rebate obligations associated with them are substantially increased, our business, financial condition and results of operations could be materially and adversely impacted.
 
Extending medical benefits to those who currently lack coverage will likely result in substantial cost to the U.S. federal government, which may force significant changes to the healthcare system in the United States.  Much of the funding for expanded healthcare coverage may be sought through cost savings.  Much of the cost savings may come from reducing the cost of care, including by decreasing the level of reimbursement for treatment with medical products (including the Deep TMS system currently being developed by us), or by restricting coverage (and, thereby, utilization) of medical services or products.  In either case, a reduction in the utilization of, or reimbursement for, our Deep TMS system for therapeutic applications (assuming receipt of marketing approval therefor) in the future could have a materially adverse effect on our business, financial condition and results of operations.
 
 
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If third-party payors do not adequately reimburse customers for treatment with our Deep TMS system following approval for marketing (in countries, such as the United States, with private healthcare systems), or if our product is not included in the approved basket of government-sponsored health benefits (in countries, such as Canada, with public healthcare systems), it might not be purchased or used, and our revenues and profits will not develop or increase.
 
Our revenues and profits will depend heavily upon the availability of adequate reimbursement for treatment of applications of our approved Deep TMS system from third-party payors in countries in which private healthcare is prevalent, and upon the inclusion of such treatment in the approved basket of government-sponsored healthcare benefits in countries with public healthcare systems.  Reimbursement by a third-party payor and/or inclusion in a government-sponsored basket may depend upon a number of factors, including the third-party payor’s or government’s determination that the use of an approved product is:
 
·           a covered benefit under its health plan or basket;
·           safe, effective and medically necessary;
·           appropriate for the specific patient;
·           cost-effective; and
·           neither experimental nor investigational.
 
Obtaining approval for covered benefits or reimbursement for a therapeutic application of our product from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our product for such application to each payor.  It is a process that is subject to the following risks:
 
 
·
the imposition of coverage limitations that preclude payment for certain applications, even if approved by the FDA or comparable foreign regulatory authorities;
 
·
a change in the coverage or reimbursement rate according to the use of the product and the clinical setting in which it is used;
 
·
a limitation on the reimbursement rate due to the inclusion of a lower-cost product that is already reimbursed (such as our competitor’s surface TMS product); and
 
·
a limitation on reimbursement rates reflecting budgetary constraints and/or imperfections in Medicare, Medicaid, other governmental or private health coverage programs, or other data used to calculate these rates.
 
In the United States, there have been, and we expect that there will continue to be, federal and state proposals to constrain expenditures for medical products and services, which may affect payments for our product in the United States.  We believe that legislation that reduces reimbursement for our Deep TMS system could adversely impact how much or under what circumstances healthcare providers will prescribe or administer such products, if approved.  This could materially and adversely impact our business by reducing our ability to generate revenue, raise capital, obtain additional collaborators and market our product, if approved.
 
Further, the Centers for Medicare and Medicaid Services, or CMS, frequently change product descriptors, coverage policies, product and service codes, payment methodologies, and reimbursement values.  Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and both CMS and other third-party payors may have sufficient market power to demand significant price reductions.  Any such price reductions could materially and adversely impact our business, financial condition and results of operations by reducing our ability to generate revenue.
 
Consolidation in the healthcare industry could materially adversely affect our future revenues and operating income.
 
The medical device industry has experienced a significant amount of consolidation resulting in increased competition and pricing pressures.  Additionally, group purchasing organizations and similar networks have concentrated purchasing decisions for customers, which has placed additional pricing pressures on medical device manufacturers and suppliers.  Further consolidation in the industry would exert more pressure on the price of treatment with our product and could have a materially adverse effect on our business, financial condition and results of operations.
 
 
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Adverse changes in general economic conditions in all major markets could harm us.
 
We are subject to the risks arising from adverse changes in general economic conditions.  The world economy remains sluggish as it seeks to recover from the recession and related economic downturn in recent years.  The economic downturn and related uncertainty about future economic conditions could materially adversely affect our current and prospective customers, the financial ability of health insurers to pay claims and our ability to finance our operations.  It could also cause delays with manufacturers of key components of our Deep TMS system.  We cannot predict the strength or duration of the current economic environment or any future recovery.
 
Healthcare spending in the United States and elsewhere has been, and is expected to continue to be, negatively affected by these recessionary trends. Since the usage of our product is generally dependent on the availability of third-party reimbursement and may require a patient to make a significant co-payment, the impact of the recession on our potential customers may reduce the desirability of our product.
 
In addition, the severe recession has impacted the financial stability of many private health insurers globally.  As a result, some insurers are scrutinizing claims more rigorously and delaying or denying reimbursement for treatments with new products. Since we hope to obtain third-party reimbursement for treatment with our product, we may be harmed by these changes.
 
Risks Related to Intellectual Property
 
Our right to the essential intellectual property upon which our Deep TMS technology is based results from in-license agreements with government agencies and research institutions, the termination of which would prevent us from commercializing our Deep TMS system.
 
There is no assurance that the in-licenses or related rights on which we base our technology will not be terminated or expire due to a material breach of the underlying agreements, such as a failure on our part to make certain progress milestone payments set forth in the terms of the in-licenses, the failure on our part to obtain applicable approvals from governmental authorities for our activities, or due to the loss of the rights to the underlying intellectual property by any such licensors.  There is no assurance that we will be able to renew or renegotiate an in-licensing agreement on acceptable terms if and when such agreement terminates.  We cannot guarantee that any in-license is enforceable or will not be terminated in the future.  The termination of any in-license or our inability to enforce our rights under any in-license would materially and adversely affect our ability to commercialize our therapeutic Deep TMS system.  For a description of our key in-licensing agreements, please see “Business— Product Research and Development Approach— In-Licensing Agreements— In-Licensing Agreements for Core Deep TMS Technology Intellectual Property Rights.”
 
Our exclusive, in-license agreements for our critical patents and related intellectual property impose significant monetary obligations and other requirements that may adversely affect our ability to successfully execute our business plan.
 
We depend upon an in-licensing agreement with the U.S. Public Health Service, or PHS, which refers collectively to the National Institutes of Health, or NIH, the Centers for Disease Control and Prevention, and the FDA, as agencies of the PHS  within the United States Department of Health and Human Services, or the DHHS, for our intellectual property rights to our Deep TMS technology, which was developed by our founders, among others, prior to our founding over the course of their work for the NIH.  The key family of patents and patent applications upon which the unique coil of our Deep TMS technology is based is owned by the DHHS (based on an assignment of the related rights from the PHS) and is exclusively licensed to us under this in-licensing agreement.  In addition, a second family of patent applications covering additional functions of our Deep TMS system (including the advanced stimulator that we are developing for use in a more advanced version of our system), which is jointly owned by the NIH, Yeda Research and Development Company Ltd., or Yeda, the technology transfer arm of the Weizmann Institute of Science, or the Weizmann Institute, and Brainsway, Inc., is also licensed to us under this in-licensing agreement and the research and licensing agreement with Yeda described below.
 
 
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We have also entered into a research and licensing agreement with Yeda, pursuant to which we have in-licensed rights to both the second family of patent applications and a third family of patent applications that covers additional characteristics of our Deep TMS system (including several Deep TMS coils and stimulators and methods of use), and have commissioned research at the Weizmann Institute related to our Deep TMS system under this agreement.
 
These agreements provide us an exclusive (subject to certain standard exceptions and such as described below), worldwide license, with a right to sublicense, subject to the approval of PHS and Yeda, respectively, for the life of the relevant patents (in the case of Yeda, on a per country basis or, until the 15-year anniversary of the first commercial sale (per country) of a product developed on the basis of the agreement, if later) for the development, creation, use, import, offer and sale of any product or treatment that relates to Deep TMS technology and that is developed on the basis of such patents or (in the case of the agreement with Yeda) such research.  These agreements require us, as a condition to the maintenance of our license and other rights, to make milestone and royalty payments and satisfy certain performance obligations.  They also impose on us certain milestones and milestone payments, which, in the case of the milestones themselves, which have been achieved by us, have been acknowledged by the licensors, expressly or by implication, as having been met by us due to our receipt of the EC Certificate of Conformity enabling us to affix a CE mark in Europe and our commencement of commercial distribution of our system in Italy.  Furthermore, our agreement with the PHS requires us to manufacture primarily in the United States those products that we use or market in the United States and embody products and/or processes which are on the basis of the license, which, in turn, will require us to either (i): obtain a written waiver from the PHS regarding this requirement; or (ii) meet certain conditions under Israeli law, obtain the approval of Israel’s Office of the Chief Scientist, or the OCS, for the transfer of our manufacturing activities to the US, and increase our royalty payments to the OCS (see “Government Regulation and Funding—Israeli Government Programs—Israel Office of the Chief Scientist”).
 
All of the above-described obligations impose significant financial and logistical burdens upon our ability to carry out our business plan.  Furthermore, if we do not meet such obligations in a timely manner, and, in the case of milestone payment requirements, if we are unable to obtain an extension of the deadlines for meeting such payment requirements, we could lose the rights to our proprietary technology, which would have a material adverse effect on our business, financial condition and results of operations.
 
The key patents that underlie our Deep TMS technology are subject to the U.S. government’s royalty free usage rights on a worldwide basis for any discovery based on such patents, which may have unexpected, adverse consequences upon the market for our product.
 
Under our key in-licensing agreement with the PHS, the U.S. government possesses a non-cancellable, non-assignable, non-exclusive, royalty-free license for the practice of inventions based on the inventions upon which our Deep TMS technology is based, for the benefit of the U.S. government, foreign governments, or international organizations under any existing or future treaty or agreement to which the United States government is then party or subject.  Furthermore, the PHS may grant, or may cause us to grant, nonexclusive research licenses, for the purpose of encouraging basic research at academic or corporate facilities (but, in the case of any license to a commercial entity, subject to our right to object if we believe that such license would adversely impact the exclusivity of our rights under the agreement).  The PHS may also require us to grant sublicenses to responsible applicants if the public health and safety so require, subject to our right to demonstrate that any such sublicense will not materially increase the availability to the public of our licensed rights or that such public health and safety requirements may be otherwise met without any such sublicense.
 
No material limits have been placed on the license held by the U.S. government for its own (or for its treaty partners’ or agreement counter-parties’) benefit, and it is possible that the U.S. government, a foreign government or an international organization could even commercialize a product on the basis of this license and the related technology. We cannot assure that these rights will not be exploited in a manner that infringes upon our exclusive license to the NIH-owned patents, that does not develop or advance products that compete with our own, or that does not otherwise adversely impact our business.  Because our rights with respect to the NIH-owned patents are critical to our Deep TMS-based technologies and system, any unexpected consequences from the U.S. government’s or other third party’s exploitation of such rights could have an adverse impact on the market for our product and, hence, on our business, financial condition and results of operations.
 
 
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Patent protection for our product is important and uncertain.
 
Our success depends, in part, on our ability, and the ability of our licensors to obtain patent protection for the technology that underlies our Deep TMS system, maintain the confidentiality of our trade secrets and know-how, operate without infringing the proprietary rights of others and prevent others from infringing our proprietary rights.
 
We try to protect our proprietary position by, among other things, filing U.S., European Union, or EU, Israeli and other patent applications related to our proprietary products, technologies, inventions and improvements that may be important to the continuing development of our Deep TMS system.  Currently, our portfolio of owned and licensed patents consists of one family of four issued patents and four patent applications, and two additional families of patent applications consisting of seven and two patent applications, respectively.
 
Because the patent position of biomedical companies involves complex legal and factual questions, we cannot predict the validity and enforceability of patents with certainty.  Our issued patents and the issued patents of our licensors may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties.  Thus, any patents that we own or license from others may not provide any protection against competitors.  Our pending patent applications, those we may file in the future or those we may license from third parties may not result in patents being issued.  If these patents are issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology.  The degree of future protection to be afforded by our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
 
Competitors may successfully challenge our patents or the patents of our licensors, produce similar devices that do not infringe our patent or the patents of our licensors, or produce devices in countries where we or our licensors have not applied for patent protection or that do not respect our patents, respectively.  Furthermore, it is not possible to know the scope of claims that will be allowed in published applications and it is also not possible to know which claims of granted patents, if any, will be deemed enforceable in a court of law.
 
Our technology may infringe the rights of third parties.  The nature of claims contained in unpublished patent filings around the world is unknown to us and it is not possible to know which countries patent holders may choose for the extension of their filings under the Patent Cooperation Treaty or other mechanisms.  Any infringement by us of the proprietary rights of third parties may have a material adverse effect on our business, financial condition and results of operations.
 
If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us.  In addition, current and former employees of our company may be entitled to be paid royalties with respect to the commercialization of our products.
 
We rely on a combination of patents, trade secrets, know-how, technology, trademarks and regulatory exclusivity to maintain our competitive position.  We generally try to protect trade secrets, know-how and technology by entering into confidentiality or non-disclosure agreements with parties that have access to our trade secrets, know-how and technology, such as our employees, contractors and consultants (and any future licensees).  We also enter into agreements that purport to require the disclosure and assignment to us (or, in a rare instant, the assignment to our research collaborator and the exclusive license to us) of the rights to the ideas, developments, discoveries and inventions of our employees, advisors, research collaborators, contractors and consultants while we employ or engage them.  However, these agreements can be difficult and costly to enforce or may not provide adequate remedies.  Any of these parties may breach the confidentiality agreements and willfully or unintentionally disclose our confidential information, or our competitors might learn of the information in some other way.  The disclosure to, or independent development by, a competitor of any trade secrets, know-how or other technologies not protected by a patent could materially adversely affect any competitive advantage we may have over any such competitor.
 
To the extent that any of our employees, advisors, research collaborators, contractors or consultants independently develop, or use independently developed, intellectual property in connection with any of our projects, disputes may arise as to the proprietary rights to this type of information.  If a dispute arises with respect to any proprietary right, the enforcement by us of rights may be costly and unpredictable and a court may determine that the right belongs to a third party.  Furthermore, under a recent decision by a committee empowered with determining royalties and other payments under Israel’s Patent Law, current or former employees of a company such as ours who are or were involved in developing technology for the company may be entitled to receive royalties from proceeds of rentals, sales, sub-licenses or other commercialization arrangements with respect to such technology, despite the assignment of their intellectual property rights in such technology to the company.  While essentially all of our employees and consultants, in their employment and consulting agreements with us, waive their right to receive royalties or any other economic benefit in respect of such intellectual property, former employees may claim that they are entitled to such royalties.
 
 
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Legal proceedings or third-party claims of intellectual property infringement may require us to spend substantial time and money and could prevent us from developing or commercializing applications of our product.
 
The development, manufacture, use, offer for lease, lease or importation of our Deep TMS system may infringe on the claims of third-party patents.  A party might file an infringement action against us.  The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial.  Some of our competitors may be better able to bear the costs of such litigation or proceedings because of their substantially greater financial resources.  Uncertainties resulting from the initiation and continuation or defense of a patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.  Patent litigation and other proceedings may also absorb significant management time.  Consequently, we are unable to guarantee that we will be able to manufacture, use, offer for lease, lease or import our therapeutic Deep TMS system in the event of an infringement action.
 
In the event of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license from a third party and would most likely be required to pay license fees or royalties or both.  These licenses may not be available on acceptable terms, or at all.  Even if we were able to obtain a license, the rights may be non-exclusive, which could potentially limit our competitive advantage.  Ultimately, we could be prevented from commercializing the therapeutic system or be forced to cease some aspect of our business operations (e.g., a certain application of our Deep TMS system) if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.  This inability to enter into licenses could harm our business, financial condition and results of operations significantly.
 
Our in-license agreements with the PHS and Yeda contain provisions that obligate us to indemnify the licensors (and in the case of Yeda, also the Weizmann Institute and any employee, director or officer of both entities) against liabilities arising from (i) the use of the licensed patents or the manufacture, design or distribution of any products, processes or materials in connection with or arising out of the licensed patents, by us, sublicensees, directors, employees or third parties, under the PHS agreement, and (ii) such in-license agreement or the exercise of the licenses by us, our sublicensees, or anyone acting on behalf thereof or any purchaser of the products based upon the licensed patents, under the Yeda agreement.  In addition, any out-licensing contract that we may enter into with sub-licensees in the future will likely contain indemnity provisions that obligate us to indemnify the licensees against any losses that arise from third-party claims that are brought alleging that our Deep TMS system infringes third-party intellectual property rights.
 
We may be subject to other patent-related litigation or proceedings that could be costly to defend and uncertain in their outcome.
 
In addition to infringement claims against us, we may in the future become a party to other patent litigation or proceedings, including interference or re-examination proceedings filed with the U.S. Patent and Trademark Office or opposition proceedings in other foreign patent offices regarding intellectual property rights with respect to our product and technology, as well as other disputes regarding intellectual property rights with licensees, licensors or others with whom we have contractual or other business relationships.  Post-issuance oppositions are not uncommon and we, our licensee or our licensor will be required to defend these opposition procedures as a matter of course.  Opposition procedures may be costly, and there is no assurance that we will prevail.  Additionally, we may be subject to monetary claims made by our current or former employees or contractors pursuant to the Israeli Patent Law – 1967 to obtain compensation for their contribution to inventions owned by us, which such employees or contractors invented during and as a result of their employment with or engagement by our company.
 
 
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We may be subject to claims that we or our former or current employees or contractors have wrongfully used or disclosed alleged trade secrets of their former or current third party employers and/or that such third party employers have a proprietary interest in our intellectual property.
 
Some of our key employees and contractors were previously engaged (as employees, consultants, students or otherwise), or continue to be engaged by third parties, including publicly owned entities such as universities and hospitals, or private sector biotechnology or pharmaceutical companies.  Although no claims against us are currently pending, we may be subject to claims by such third parties with respect to proprietary rights in our intellectual property resulting from the involvement of our employees or contractors who are, or were in the past, also engaged by such third parties. We may also be subject to claims that we or any such employee or contractor has inadvertently or otherwise used or disclosed trade secrets or other proprietary information or intellectual property of his or her other employers or such other third parties.  Litigation may be necessary to defend against these claims.  If we fail in defending such claims, in addition to being subject to monetary remedies, we may lose valuable intellectual property rights and/or personnel.  A loss of key research personnel or their work product could hamper or prevent our ability to commercialize applications of our Deep TMS system, which could severely harm our business, financial condition and results of operations.  Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management.
 
Risks Related to an Investment in our Ordinary Shares
 
Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.
 
Upon completion of this offering, our executive officers, directors and their affiliates will beneficially own, in the aggregate, approximately 46.55% of our outstanding ordinary shares, and if the underwriters’ option to purchase additional shares is exercised in full, such persons and their affiliates will beneficially own, in the aggregate, approximately 45.67% of our outstanding ordinary shares.  In particular, Dr. Yiftach Roth, our R&D Manager and a director, Dr. David Zacut, our Chairman of the Board, Avner Hagai, a director, and Uzi Sofer, our Chief Executive Officer and director, will beneficially own approximately 15.19%, 12.80%, 11.45% and 8.28% of our outstanding ordinary shares, respectively, upon completion of this offering, and if the underwriters’ option to purchase additional ordinary shares is exercised in full, they will beneficially own approximately 14.90%, 12.56%, 11.23% and 8.12% of our outstanding ordinary shares, respectively.  Because of the quorum provision that requires only one-third of the voting rights in our company to be present at our shareholders meetings, and the simple majority vote of shares present in person or by proxy that is sufficient for the approval of most actions at any such meeting, in each case as prescribed by our articles of association (and, with respect to the approval of transactions, also as prescribed by Israeli law), our executive officers, directors and their affiliates will be able to exercise a significant level of control over most matters requiring shareholder approval, including the election of directors (other than external directors), amendment of our articles of association and approval of significant corporate transactions (other than (i) certain related party transactions with our controlling shareholders that require the approval of a special majority among non-interested shareholders, (ii) mergers involving our company, with respect to which the approval of a majority among all shareholders other than the aforementioned shareholders may be required and (iii) the voluntary winding up of, or other reorganization involving, our company pursuant to Section 350 of the Israeli Companies Law, which requires the approval of at least 75% of the votes represented at a meeting of our shareholders).  This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these shareholders.
 
The market price of our ordinary shares is subject to fluctuation, which could result in substantial losses by our shareholders.
 
Securities prices in general, and the market price of our ordinary shares on the TASE (and, prospectively, on the NASDAQ Capital Market as well, following this offering) in particular, are subject to fluctuation, especially given our status as a clinical stage technology and medical device company, and changes in our share price may be unrelated to our operating performance.  The market price of our ordinary shares on the TASE has fluctuated in the past, and we expect it will continue to do so (and on the NASDAQ Capital Market as well, following this offering), as a result of a number of factors, including:
 
 
·
results of our clinical trials;
 
 
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·
announcements of technological innovations or new products or applications of products by us or others;
 
·
public concern as to the safety of devices or drugs that we or others develop;
 
·
general market conditions;
 
·
the general volatility of market prices for shares of biotechnology companies;
 
·
success of research and development projects;
 
·
developments concerning intellectual property rights or regulatory approvals;
 
·
variations in our and our competitors’ results of operations;
 
·
changes in earnings estimates or recommendations by securities analysts, if our ordinary shares are covered by analysts;
 
·
changes in government regulations or patent decisions;
 
·
developments by our future licensees (if any);  and
 
·
general market conditions and other factors, including factors unrelated to our operating performance.
 
These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses for our investors.
 
Additionally, market prices for securities of clinical stage technology and medical device companies historically have been very volatile.  The market for these securities has from time to time experienced significant price and volume fluctuations for reasons unrelated to the operating performance of any one company.  In the past, following periods of market volatility, shareholders have often instituted securities class action litigation.  If we are involved in securities litigation, it could have a substantial cost and divert the resources and attention of our management from our business.
 
Future sales of our ordinary shares could reduce the market price of our ordinary shares.
 
If we or our shareholders sell substantial amounts of our ordinary shares, either on the TASE or on the NASDAQ Capital Market, or if there is a public perception that these sales may occur in the future, the market price of our ordinary shares may decline.  We and the beneficial owners of 53.10% of our outstanding ordinary shares (such shares representing holdings immediately prior to the consummation of this offering) have agreed with the underwriters of this offering not to sell any ordinary shares, other than the shares offered through this prospectus, for a period of at least 180 days following the date of this prospectus.  The ordinary shares we are offering for sale in this offering will be freely tradable immediately following this offering.  In addition, all of our outstanding ordinary shares are registered and available for sale on the TASE.  Except for the holders of 53.10% of our outstanding ordinary shares that are the subject of lock-up agreements entered into by the holders thereof in connection with this offering, all of our outstanding shares are available for sale on the TASE without restriction.
 
Raising additional capital by issuing securities may cause dilution to existing shareholders.
 
We may need to raise in the future substantial capital to continue to complete clinical development and commercialization of the applications of our Deep TMS system and to conduct the research and development and clinical and regulatory activities necessary to bring our product to market for such applications.  Our future capital requirements will depend on many factors, including:
 
 
·
our ability (or failure) to obtain regulatory approval for, or achieve commercial success with, various therapeutic applications of our Deep TMS system;
 
·
our success in distributing our system;
 
·
the results of our preclinical studies and clinical trials for earlier stage applications of our system, and any decisions to initiate clinical trials if supported by the preclinical results;
 
·
the costs, timing and outcome of regulatory review of therapeutic applications of our system that progress to clinical trials;
 
·
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our issued patents and defending intellectual property-related claims;
 
·
the extent to which we acquire or invest in businesses, products or technologies and other strategic relationships; and
 
·
the costs of financing unanticipated working capital requirements and responding to competitive pressures.
 
 
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If we raise additional funds by issuing equity or convertible debt securities, we will reduce the percentage ownership of our then-existing shareholders.  See also “—Future sales of our ordinary shares could reduce the market price of our ordinary shares.”  If we raise capital through debt financing, we could become subject to restrictions and covenants that may hamper our ability to operate our business as we deem most favorable and could furthermore cause financial difficulties related to the repayment of such debt.
 
Investors in this offering will immediately experience substantial dilution in net tangible book value.
 
The initial public offering price of our ordinary shares in this offering is considerably greater than the pro forma net tangible book value per share of our outstanding ordinary shares.  Accordingly, investors purchasing ordinary shares in this offering will incur immediate dilution of $9.04 per share, based on an assumed initial public offering price of $11.00 per share, the mid-point of the range shown on the cover of this prospectus.  See “Dilution.” In addition, as of December 31, 2010, there were outstanding and exercisable options to purchase 762,388 of our ordinary shares, at a weighted average exercise price equal to NIS 7.68 (or approximately $2.16 based on the exchange rate reported by the Bank of Israel for December 31, 2010) per share, an aggregate of 731,716 ordinary shares issuable upon exercise of outstanding Series 2 Warrants at an exercise price of approximately NIS 23.29, or $6.56, per share (of which 729,866 were exercised in January 2011 and the remainder expired) and an additional 250,000 ordinary shares issuable upon exercise of outstanding Series 4 Warrants at an exercise price of NIS 80.00, or $22.54, per share.  Assuming that the over-allotment option of the underwriters is not exercised in this offering, such options and warrants, if exercised (other than the Series 4 Warrants, which due to their higher exercise price, would have an antidilutive effect) would cause (or, in the case of the Series 2 Warrants, would have caused) the issuance of additional ordinary shares constituting approximately 10% of our outstanding share capital immediately following this offering (and immediately following the issuance of such additional shares), thereby causing additional dilution, due to the lower average exercise price at which the underlying ordinary shares would have be issued relative to the mid-point of the range shown on the cover of this prospectus.  Moreover, we expect, in the future, to issue additional options to purchase our ordinary shares to compensate employees, consultants and directors and may issue additional shares to raise capital, to pay for services, or for other corporate purposes.  To the extent these outstanding options are exercised at a price below net tangible book value per share, there will be additional dilution to our then-shareholders.
 
We have broad discretion as to the use of the net proceeds from this offering and may not use them effectively.
 
We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering.  Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described under “Use of Proceeds.”   Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds from this offering.  The failure by our management to apply these funds effectively could have a material adverse effect on our business, financial condition and results of operation.  Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
 
An active, liquid and orderly trading market for our ordinary shares may not develop, the price of our ordinary shares may be volatile, and you could lose all or part of your investment.
 
Prior to this offering, there has been no public market in the United States for our ordinary shares.  The initial public offering price of our ordinary shares in this offering will be determined through negotiation with the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our ordinary shares following this offering.  Although we have applied to have our ordinary shares listed on the NASDAQ Capital Market, an active trading market for our ordinary shares may never develop or may not be sustained following this offering.  If an active market for our ordinary shares does not develop, it may be difficult to sell your ordinary shares.  The initial public offering price in the United States will be determined through our negotiations with the underwriters and may be higher than the market price of our ordinary shares after the closing of this offering, which price is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control.  Consequently, you may not be able to sell our ordinary shares that you purchase in this offering at prices equal to or greater than the initial public offering price.
 
In addition, the stock market in general and the market for early stage companies, and the market for companies such as ours in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies.  Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our ordinary shares shortly following this offering.
 
 
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If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
 
The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our ordinary shares adversely, or provide more favorable relative recommendations about our competitors, the price of our ordinary shares would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause our share price and/or trading volume to decline.
 
After the completion of this offering, we do not expect to declare any dividends in the foreseeable future.
 
After the completion of this offering, we do not anticipate declaring any cash dividends to holders of our ordinary shares in the foreseeable future. Consequently, investors may need to rely on sales of their ordinary shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our ordinary shares. See “Dividend Policy.”
 
Risks Associated with the Dual Listing of our Ordinary Shares
 
Our ordinary shares will be traded on more than one market and this may result in price variations.
 
Our ordinary shares have been traded on the TASE since January 2007 and we have applied to have our ordinary shares listed on the NASDAQ Capital Market.  Trading in our ordinary shares on these markets will take place in different currencies (dollars on the NASDAQ Capital Market and NIS on the TASE), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel).  The trading prices of our ordinary shares on these two markets may differ due to these and other factors.  Any decrease in the price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares on the other market.
 
We will incur significant additional increased costs as a result of registering our ordinary shares with the Securities and Exchange Commission, or the SEC, under the Securities Exchange Act of 1934, as amended, or the Exchange Act, upon consummation of this offering, and our management will be required to devote substantial time to new compliance initiatives.
 
As a public company in the United States, we will incur additional significant accounting, legal and other expenses that we did not incur before this offering.  We also anticipate that we will incur costs associated with the corporate governance requirements of the SEC and the Listing Rules of the NASDAQ Stock Market applicable to us after the consummation of this offering, as well as the requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act.  We expect these rules and regulations to increase our legal and financial compliance costs, introduce new costs, such as investor relations, stock exchange listing fees and shareholder reporting, and to make some activities more time consuming and costly.  The implementation and testing of such processes and systems may require us to hire outside consultants and incur other significant costs.  Although we will likely be exempt from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act due to our status as a non-accelerated filer under the SEC rules, we will still be subject to the annual requirements related to management’s assessment of internal control over financial reporting, which are costly.  Changes in the laws and regulations affecting public companies, including Section 404 and other provisions of the Sarbanes-Oxley Act, the rules and regulations adopted by the SEC and the Listing Rules of the NASDAQ Stock Market, will result in increased costs to us as we respond to such requirements.  These laws, rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
 
 
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As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of applicable SEC and NASDAQ requirements, which may result in less protection than is accorded to shareholders under rules applicable to domestic issuers.
 
As a foreign private issuer, we will be permitted to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic issuers.  For instance, we may follow home country practice in Israel with regard to, among other things, composition of the board of directors, director nomination procedure, approval of compensation of officers, and quorum at shareholders’ meetings.  For example, under Israeli law, there is no requirement for a majority of our directors to be independent.  In addition, we may follow our home country law, instead of the Listing Rules of the NASDAQ Stock Market, which require that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company.  We will evaluate the extent to which we will avail ourselves of the exemptions available to foreign private issuers in connection with the actual listing of our ordinary shares for trading on the NASDAQ Capital Market.  Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the NASDAQ Capital Market may provide less protection than is accorded to investors under the Listing Rules of the NASDAQ Stock Market applicable to domestic issuers.
 
As a foreign private issuer, we will be exempt from those rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.  In addition, we will not be required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies.
 
If, after this offering, we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act applicable to a foreign private issuer that is listed on a U.S. national securities exchange for the first time, or our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned and our share price may suffer.
 
After the completion of this offering, we will become subject to the requirements of the Sarbanes-Oxley Act.  Section 404 of the Sarbanes-Oxley Act requires companies subject to the reporting requirements of the U.S. securities laws to comprehensively evaluate its and its subsidiaries’ internal controls over financial reporting.  To comply with this statute, we will be required to document and test our internal control procedures, and our management will be required to assess and issue a report concerning our internal controls over financial reporting.  Due to recent legislation passed in the U.S. Congress, we do, however, expect to be exempt from the requirement that our independent registered public accounting firm issue an opinion on management’s assessment of those matters, given our likely status as a non-accelerated filer under the SEC rules.
 
We will need to prepare for compliance with Section 404 by strengthening, assessing and testing our system of internal controls to provide the basis for our management’s report.  However, the continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming.  Furthermore, as our business continues to grow both domestically and internationally, our internal controls will become more complex and will require significantly more resources and attention to ensure our internal controls remain effective overall.  During the course of its testing, our management may identify material weaknesses or significant deficiencies, which may not be remedied in a timely manner to meet the deadline imposed by the Sarbanes-Oxley Act.  If our management cannot favorably assess the effectiveness of our internal controls over financial reporting, or our management or independent registered public accounting firm identifies material weaknesses in our internal controls, investor confidence in our financial results may weaken, and our share price may suffer.
 
 
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Risks Related to Our Operations in Israel
 
We conduct our operations in Israel and therefore our business, financial condition and results of operations may be adversely affected by political, economic and military instability in Israel.
 
Our headquarters, all of our operations and many of our research and clinical trial collaborative partners are located in central Israel, and our key employees, officers and most of our directors are residents of Israel.  Accordingly, political, economic and military conditions in Israel may directly affect our business.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors.  Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our business, financial condition and results of operations and could make it more difficult for us to raise capital.  During the winter of 2008, Israel was engaged in an armed conflict with Hamas, a militia group and political party operating in the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party.  These conflicts involved missile strikes against civilian targets in various parts of Israel, and negatively affected business conditions in Israel.  Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions and could harm our business, financial condition and results of operations.  For example, any major escalation in hostilities in the region could result in a portion of our employees, including executive officers, directors, and key personnel and consultants, being called up to perform military duty for an extended period of time or otherwise disrupt our normal operations. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists.  Our operations could be disrupted by the absence of a significant number of our employees or of one or more of our key employees.  Such disruption could materially adversely affect our business, financial condition and results of operations.  Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary.  In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in the agreements.
 
Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East, such as damages to our facilities resulting in disruption of our operations.  Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or will be adequate in the event we submit a claim.  Any losses or damages incurred by us could have a material adverse effect on our business, financial condition and results of operations.  Any armed conflicts or political instability in the region would likely negatively affect business conditions and could harm our business, financial condition and results of operations.
 
Further, in the past, the State of Israel and Israeli companies have been subjected to an economic boycott.  Several countries still restrict business with the State of Israel and with Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases.  These restrictive laws and policies may have an adverse impact on our business and financial condition.
 
Because we incur a substantial portion of our expenses in currencies other than the U.S. dollar, our financial condition and results of operations may be harmed by currency fluctuations and inflation.
 
While our reporting currency is the U.S. dollar, our functional currency is the NIS, and we pay a meaningful portion of our expenses in NIS and other foreign currencies.  All of the salaries of our employees, and our general and administrative expenses (including rent for our real property facility in Jerusalem, Israel), and the fees that we pay to certain of our clinical trial partners, are denominated in NIS.  As a result, we are exposed to the currency fluctuation risks relating to the denomination of our future revenues in U.S. dollars.  More specifically, if the U.S. dollar devaluates against the NIS, as it did in 2008, 2009 and 2010 (by 1.1%, 0.7% and 6.0%, respectively) our NIS denominated expenses will be greater than anticipated when reported in U.S. dollars.  Inflation in Israel compounds the adverse impact of such devaluation by further increasing the amount of our Israeli expenses.  Israeli inflation may also (in the future) outweigh the positive effect of any appreciation of the U.S. dollar relative to the NIS, if, and to the extent that, it outpaces such appreciation or precedes such appreciation.  To date, we have not engaged in formal hedging transactions, although the manner in which we invest our cash reserves is designed to mitigate against currency fluctuation exposure.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Exchange Risk”.  The Israeli rate of inflation (3.8%, 3.9% and 2.7% in 2008, 2009 and 2010, respectively) has not had a material adverse effect on our financial condition during 2008, 2009 or 2010.  Given our general lack of currency hedging arrangements to protect us from fluctuations in the exchange rates of the NIS and other foreign currencies in relation to the U.S. dollar (and/or from inflation of such foreign currencies), we may be exposed to material adverse effects from such movements.
 
 
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We have received Israeli government grants for certain of our research and development activities.  The terms of these grants may require us to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel.  We may be required to pay penalties in addition to repayment of the grants.  Such grants may be terminated or reduced in the future, which would increase our costs.
 
Our research and development efforts have been financed, in large part, through grants that we have received from the OCS.  We therefore must comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, 1984, and related regulations, or the Research Law.  As of March 31, 2011, we have received $3.4 million (approximately NIS 12.1 million, based on the dollar-NIS exchange rate on December 31, 2010) on which interest of approximately $0.35 million has accrued.  In December 2010, we furthermore received approval from the OCS for the grant of an additional 60% of our NIS 7.1 million ($2.0 million) budget for our Deep TMS development project related to depression for the period of July 1, 2010 through June 30, 2011— i.e., approximately NIS 4.26 million ($1.2 million)— subject to our submission of supporting documentation that evidences our related expenditures, of which we have received an advance payment of NIS 1.48 million (approximately $417,000, based on the dollar-NIS exchange rate on December 31, 2010) in January 2011, but the remainder of which we have not yet received. When we develop know-how, technology or products using OCS grants, the terms of these grants and the Research Law restrict the transfer of know-how if such know-how is related to products, know-how and/or technologies which were developed using the OCS grants, and the transfer of manufacturing or manufacturing rights of such products, technologies and/or know-how outside of Israel without the prior approval, pursuant to the Research Law, of the appropriate authority of the OCS.  Therefore, the discretionary approval of an OCS committee will be required for any transfer to third parties outside of Israel of rights related to our Deep TMS technology, which has been developed with OCS funding, including through exclusive out-licensing arrangements pursuant to which we may commercialize our Deep TMS system.  We may not receive the required approvals should we wish to transfer this technology, manufacturing and/or development outside of Israel in the future. Because we have undertaken in our exclusive in-licensing agreement with the PHS (with respect to certain of the patents underlying our Deep TMS technology) to manufacture substantially in the United States products which embody those PHS-license based products and/or processes that will be used or sold in the United States, we will likely need to seek such approvals from the OCS for such manufacture outside of Israel.  If the OCS does not provide such approval, we could be in material breach of our agreement with the PHS, which could cause us to lose our exclusive license under our in-licensing agreement with the PHS, which would have a material adverse effect on our business, financial condition and results of operations.  Furthermore, the OCS may impose certain conditions on any arrangement under which we transfer technology or development out of Israel.  Overseas transfers of technology, manufacturing and/or development from OCS funded programs, even if approved by the OCS, may be subject to restrictions set forth in the Research Law, as described in greater detail under “Government Regulation and Funding—Israeli Government Programs—Office of the Chief Scientist.”
 
The transfer outside of Israel of the manufacturing of any OCS-supported product or technology is also subject to various conditions, including the payment of increased royalties equal to, in the aggregate, up to 300% of the total grant amounts received in connection with the product, know-how or technology, plus interest, depending on the portion of total manufacturing that is performed outside of Israel.  In the case of our company, we could be required to repay up to $10.2 million (constituting 300% of the amount of grants that we have received to date from the OCS).  Payment of the increased royalties would constitute the total repayment amount required with respect to the OCS grants received for the development of the products, know-how or technology for which the manufacturing is performed outside of Israel.  In addition, any decrease in the percentage of manufacturing performed in Israel of any product or technology, as originally declared in the application to the OCS with respect to the product or technology, may require us to notify, or to obtain the approval of, the OCS, and may result in increased royalty payments to the OCS of up to 300% of the total grant amounts received in connection with the product or technology (i.e., up to $10.2 million, in the case of our company), plus interest, depending on the portion of total manufacturing that is performed outside of Israel.  These restrictions may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel.  These restrictions continue to apply even after we have repaid any grants, in whole or in part.
 
 
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We cannot be certain that any approval of the OCS will be obtained on terms that are acceptable to us, or at all.  Furthermore, if we undertake a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the OCS plus additional amounts depending on the amount of the proceeds.  If we fail to comply with the conditions imposed by the OCS, including the payment of royalties with respect to grants received, we may be required to refund any payments previously received, together with interest and penalties, and may be subject to criminal penalties.  As of December 31, 2010, we recorded in our financial statements a liability of approximately $2.1 million (NIS 7.5 million) in respect of our obligations to the OCS. See “Government Regulation and Funding—Israeli Government Programs.”
 
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.
 
Israeli corporate law regulates mergers, requires that acquisitions of shares above specified thresholds be conducted through special tender offers, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions.  For example, a merger may not be consummated unless at least 50 days have passed from the date that a merger proposal was filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date that the shareholders of both merging companies approved the merger.  In addition, a majority of each class of securities of the target company must approve a merger.  If a merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same audit committee, board of directors’ and special shareholder majority approvals that govern all extraordinary transactions with controlling shareholders (as described below under “Management— Approval of Related Party Transactions Under Israeli Law”).  Moreover, a tender offer that results in the acquirer holding 90% or more of a public company’s shares, class of shares or voting rights, may only be completed if (a) holders of less than 5% of the issued share capital of the company (or of the applicable class) do not accept the offer and a majority (in number) of the offerees that do not have a personal interest in the tender offer accept it, or (b) the shareholders who did not accept the tender offer hold less than 2% of the issued and outstanding share capital of the company (or of the applicable class).  Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition the court to alter the consideration for the acquisition, unless the offeror stipulated in the tender offer documents that a shareholder that accepts the offer may not seek such appraisal rights.
 
Israeli tax considerations may also make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax or who are not exempt under the provisions of the Israeli Income Tax Ordinance from Israeli capital gains tax on the sale of the Company’s shares.  For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law.  With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of various conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are restricted.  Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred.
 
Furthermore, under the Research Law, to which we are subject due to our receipt of OCS grants (as described above in this prospectus), a recipient of OCS grants such as us must report to the applicable authority of the OCS any change in the holding of the means of control of our company which transforms any non-Israeli citizen or resident into a direct interested party in our company. The OCS Guidelines interpretation issued by the OCS provides that prior OCS approval is required for such change in the holding of the means of control.
 
These and other similar provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders, and it may therefore limit the price that investors may be willing to pay in the future for our ordinary shares.  See “Description of Share Capital— Acquisitions Under Israeli Law.”
 
 
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It may be difficult to enforce a U.S. judgment against us and our officers and directors named in this prospectus in Israel or the United States, or to serve process on our officers and directors.
 
We are incorporated under Israeli law.  All of our executive officers and all of our directors listed in this prospectus reside outside of the United States, and substantially all of our assets are located outside of the United States.  Therefore, a judgment obtained against us or, in all likelihood, most of our executive officers and directors in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court.  It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel.  See “Enforceability of Civil Liabilities” for additional information on your ability to enforce a civil claim against us and our executive officers or directors named in this prospectus.
 
Your rights and responsibilities as a shareholder will be governed by Israeli law which may differ in some respects from the rights and responsibilities of shareholders of U.S. companies.
 
We are incorporated under Israeli law.  The rights and responsibilities of the holders of our ordinary shares are governed by our Articles of Association and Israeli law.  These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S.-based corporations.  In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations toward the company and other shareholders, as well as a duty not to discriminate against other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and interested party transactions requiring shareholder approval.  In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company or has another power with respect to the company, has a duty of fairness toward the company.  However, Israeli law does not define the substance of this duty of fairness.  Because Israeli corporate law underwent extensive revisions approximately ten years ago (in addition to subsequent revisions), the parameters and implications of the provisions that govern shareholder conduct have not been clearly determined and there is limited case law available to assist us in understanding the implications of these provisions that govern shareholders’ actions.  These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
 
Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
 
We currently have non-competition agreements with all of our employees.  These agreements prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors.  Recently, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property.  If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
 
Risks Related to Taxation
 
The tax benefits that are available to our subsidiary Brain Research Services require it to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.
 
Some of the facilities of our indirect subsidiary, Brain Research Services, have commenced a “Benefited Enterprise” program, which makes us eligible for certain tax benefits for a certain period under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law.  To remain eligible for these tax benefits, we must continue to meet various conditions stipulated in the Investment Law and its regulations, as amended, which may include, among other things, making specified investments in fixed assets and equipment, meeting certain export requirements and complying with Israeli intellectual property laws.  Please see the discussion below in this prospectus under the heading “Taxation and Government Programs Israeli Tax Considerations Tax Benefits Under the Law for the Encouragement of Capital Investments, 5719-1959 Tax Benefits Subsequent to the April 2005 Amendment” for a complete description of the conditions that we must meet in order to maintain the subject tax benefits.  If we do not meet these requirements, the tax benefits would be canceled, and we could be required to refund any tax benefits that are received for the years in which these requirements are not fulfilled, plus interest and penalties thereon. Further, in the future these tax benefits may be reduced or discontinued.  If these tax benefits are cancelled, our Israeli taxable income will be subject to regular Israeli corporate tax rates.  The standard corporate tax rate for Israeli companies in 2011 is 24% (in 2010, it was 25%) and is scheduled to be reduced to 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter.  Because these tax benefits are dependent on future profits and because Brain Research Services does not have taxable income yet, we cannot estimate the amount of these tax benefits for which we may qualify, or for which we may subsequently lose qualification, as of the current time.
 
 
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There may be negative tax consequences for U.S. taxpayers that are holders of our ordinary shares if we are characterized as a passive foreign investment company for U.S. federal income tax purposes in 2011 or in any subsequent year.
 
Although we believe that we were not a passive foreign investment company, or PFIC, in 2010, we cannot assure you that we will not become a PFIC in 2011 or in any subsequent year or that the U.S. Internal Revenue Service, or the IRS, will agree with our position concerning our PFIC status in any such year.  We will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of our gross income is “passive income” or (ii) on average at least 50% of our assets by value produce passive income or are held for the production of passive income.  Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income.  Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in a public offering.  In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.
 
In 2009 and prior years, we may have been a PFIC due to a small amount of passive income earned from investment of free cash.  In 2010, as a result of an increase in our non-passive income, especially in the last quarter of the fiscal year, we believe that less than 75% of our gross income was passive income and that we were therefore not a PFIC.  Whether we are treated as a PFIC in 2011 or in any subsequent year will largely depend on the ratios of our passive/non-passive assets and income.  If we were to be considered a PFIC in 2011 or in any subsequent year, and a U.S. shareholder does not make an election to treat us as a “qualified electing fund,” or QEF, or make a “mark-to-market” election, then “excess distributions” to a U.S. shareholder, and any gain realized on the sale or other disposition of our ordinary shares will be subject to special rules.  Under these rules: (i) the excess distribution or gain would be allocated ratably over the U.S. shareholder’s holding period for the ordinary shares; (ii) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (iii) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.  In addition, if the IRS determines that we are a PFIC for a year with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. shareholder to make a timely QEF or mark-to-market election.
 
U.S. shareholders who hold our ordinary shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in subsequent years, subject to exceptions for U.S. shareholders who made a timely QEF or mark-to-market election.  A U.S. shareholder can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto.  Upon request, we will annually furnish U.S. shareholders with information needed in order to complete IRS Form 8621 (which form would be required to be filed with the IRS on an annual basis by the U.S. shareholder) and to make and maintain a valid QEF election for any year in which we or any of our subsidiaries are a PFIC.
 
 
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This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business”, contains forward-looking statements.  These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms including “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including those described in “Risk Factors”.  In addition, the sections of this prospectus entitled “Summary” and “Business” contain information obtained from independent industry sources that we have not independently verified.  You should not put undue reliance on any forward-looking statements.  Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.
 
Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:
 
 
·
the initiation, timing, progress and results of our preclinical studies, clinical trials, and other product development efforts with respect to our Deep TMS system;
 
 
·
our ability to advance our Deep TMS system into clinical trials or to successfully complete our preclinical studies or clinical trials;
 
 
·
our receipt of regulatory approvals for our Deep TMS system, and the timing of regulatory filings and approvals;
 
 
·
the clinical development, commercialization, and market acceptance of our Deep TMS system;
 
 
·
our ability to establish and maintain corporate collaborations;
 
 
·
the interpretation of the results obtained with our Deep TMS system in preclinical studies or clinical trials;
 
 
·
the implementation of our business model, strategic plans for our business and Deep TMS system;
 
 
·
the scope of protection we are able to establish and maintain for intellectual property rights covering our proprietary Deep TMS technology and our ability to operate our business without infringing the intellectual property rights of others;
 
 
·
estimates of our expenses, future revenues, capital requirements and needs for additional financing;
 
 
·
competition that we face from other companies and technologies within our industry;
 
 
·
the impact of the political and security situation in Israel on our business; and
 
 
·
our use of the net proceeds from this offering.
 
 
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You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on our behalf.  We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus or any such free writing prospectus.  If anyone provides you with different or inconsistent information, you should not rely on it.  We are not, and the underwriters are not, offering to sell or solicit any security other than the ordinary shares offered by this prospectus.  In addition, we are not offering, and the underwriters are not offering, to sell or solicit any securities to or from any person in any jurisdiction where it is unlawful to make this offer to or solicit an offer from a person in that jurisdiction.  The information contained in this prospectus is accurate as of the date on the front of this prospectus.  In order to assure that such information remains accurate throughout the current offering, we will update the prospectus via the filing of prospectus supplements and, if necessary, will request the suspension of the effectiveness of the registration statement of which this prospectus is a part in order to update the information contained therein via the filing of a post-effective amendment, in each case, to the extent required under the rules and regulations of the Securities and Exchange Commission.
 
Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required other than the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our ordinary shares and the distribution of this prospectus outside of the United States.
 
This prospectus includes statistical data, market data and other industry data and forecasts, which we obtained from market research, publicly available information and independent industry publications and reports that we believe to be reliable sources.
 
 
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We have obtained our shareholders’ approval for a one-for-four reverse stock split to be effective immediately prior to the date of this prospectus, conditioned upon the effectiveness of the registration statement of which this prospectus is a part.  Fractional ordinary shares may be issued in connection with the reverse stock split, as we will not round up or down to the nearest whole number of ordinary shares (but only whole shares will be issued in this offering).  We have also received our shareholders’ approval (also subject to the closing of this offering) for our transitioning to reporting standards under U.S. securities laws in connection with our anticipated listing on the NASDAQ Capital Market, in accordance with an exemption under Israeli law.
 
 
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Our ordinary shares have been trading on the TASE under the symbol “BRIN” since January 2007.  No trading market currently exists for our ordinary shares in the United States.  We have applied to have our ordinary shares listed on the NASDAQ Capital Market under the symbol “BRIN”.
 
The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ordinary shares on the TASE in NIS and U.S. dollars, after giving effect to a one-for-four reverse stock split of our ordinary shares that we will effect immediately prior to the date of this prospectus.  U.S. dollar per ordinary share amounts are calculated using the U.S. dollar representative rate of exchange of US$1 = NIS 3.55 on December 31, 2010, as reported by the Bank of Israel.
   
NIS
   
US$
 
   
Price Per
Ordinary Share
   
Price Per
Ordinary Share
 
   
High
   
Low
   
High
   
Low
 
Annual:
                       
2011 (through April 26, 2011)                                                             
    37.92       29.20       10.68       8.24  
2010                                                             
    53.36       27.60       15.04       7.76  
2009                                                             
    54.68       19.20       15.40       5.40  
2008                                                             
    30.56       8.64       8.60       2.44  
2007 (from March 28, 2007)                                                             
    21.92       10.60       6.16       3.00  
Quarterly:
                               
Second Quarter 2011 (through April 26, 2011)
    36.36       34.16       10.24       9.64  
First Quarter 2011                                                             
    37.92       29.20       10.68       8.24  
Fourth Quarter 2010                                                             
    35.88       27.60       10.12       7.76  
Third Quarter 2010
    35.76       28.52       10.08       8.04  
Second Quarter 2010                                                             
    49.76       31.52       14.00       8.88  
First Quarter 2010
    53.36       42.84       15.04       12.08  
Fourth Quarter 2009                                                             
    49.28       35.88       13.88       10.12  
Third Quarter 2009                                                             
    52.60       40.76       14.80       11.48  
Second Quarter 2009                                                             
    54.68       24.56       15.40       6.92  
First Quarter 2009                                                             
    27.20       19.20       7.68       5.40  
Most Recent Six Months:
                               
April 2011 (through April 26, 2011)
    36.36       34.16       10.24       9.64  
March 2011
    35.52       32.00       10.00       9.00  
February 2011
    37.92       31.40       10.68       8.84  
January 2011
    32.48       29.20       9.16       8.24  
December 2010
    30.80       27.60       8.68       7.76  
November 2010
    35.88       28.48       10.12       8.04  
October 2010
    34.60       28.60       9.76       8.04  
 
On April 26, 2011, the last reported sales price of our ordinary shares on the TASE was NIS 34.60 per share, or $10.15 per share (based on the exchange rate of US$1.00 = NIS 3.41 reported by the Bank of Israel as of such date), after giving effect to the one-for-four reverse stock split of our ordinary shares that we will effect immediately prior to the date of this prospectus.  As of April 26, 2011, there was one shareholder of record of our ordinary shares.  The number of record holders is not representative of the number of beneficial holders of our ordinary shares, as the shares of all shareholders who hold shares on the TASE are recorded in the name of our Israeli share registrar, Bank Leumi Le’Israel Registration Company Ltd.  There were no record holders of our ordinary shares in the United States as of April 26, 2011.
 
Our Series 4 Warrants are also traded on the TASE.  As of April 26, 2011, 250,000 Series 4 Warrants are outstanding, all of which are exercisable for one ordinary share at a per share exercise price of NIS 80.00, or $22.54 (based on the exchange rate of US$1.00 = NIS 3.55 on December 31, 2010), which in each case gives effect to the one-for-four reverse stock split of our ordinary shares that we will effect immediately prior to the date of this prospectus.  The Series 4 Warrants expire on December 31, 2011.  As of April 26, 2011, there was one holder of record of our Series 4 Warrants.  The number of record holders of our Series 4 Warrants is not representative of the number of beneficial holders of such Warrants, as all Series 4 Warrants held on the TASE are recorded in the name of our Israeli share registrar, Bank Leumi Le’Israel Registration Company Ltd.  On April 26, 2011, the last reported sales price of our Series 4 Warrants on the TASE was NIS 3.84 per underlying ordinary share (or $1.13 per underlying ordinary share (based on the exchange rate of US$1.00 = NIS 3.41 on such date)), after giving effect to the one-for-four reverse stock split of our ordinary shares that we will effect immediately prior to the date of this prospectus.
 
42

 
 
EXCHANGE RATE INFORMATION
 
The following table shows: (1) for each of the years indicated, the average exchange rate between the NIS and the U.S. dollar, expressed as NIS per U.S. dollar and calculated based on the average of the representative rate of exchange reported by the Bank of Israel during the relevant period; and (2) for each of the months indicated, the high and low exchange rates between the NIS and the U.S. dollar based on the daily representative rate of exchange reported by the Bank of Israel:
 
Year
 
Average
 
   
NIS
 
2006
    4.4565  
2007
    4.1081  
2008
    3.5878  
2009
    3.9326  
2010
    3.7330  
 
Month
 
High
   
Low
 
   
NIS
   
NIS
 
January 2010
    3.765       3.667  
February 2010
    3.752       3.704  
March 2010
    3.787       3.713  
April 2010
    3.749       3.682  
May 2010
    3.870       3.730  
June 2010
    3.888       3.814  
July 2010
    3.894       3.779  
August 2010
    3.829       3.753  
September 2010
    3.798       3.665  
October 2010
    3.645       3.569  
November 2010
    3.684       3.580  
December 2010
    3.665       3.549  
January 2011
    3.710       3.528  
February 2011
    3.713       3.602  
March 2011
    3.635       3.481  
April 2011 (through April 26, 2011)
    3.473       3.405  
 
As of April 26, 2011, the daily representative rate of exchange between the NIS and the U.S. dollar as reported by the Bank of Israel was NIS 3.413 to US$1.00 (which has been rounded to NIS 3.41 to US$1.00 when presented elsewhere in this prospectus). We make no representation that any NIS or U.S. dollar amount could have been, or could be, converted into U.S. dollars or NIS, as the case may be, at any particular rate, the rates stated above, or at all.
 
The effect of the exchange rate fluctuations on our business and operations is discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
 
43

 
 
 
We estimate that we will receive net proceeds from this offering of $17.4 million, based on an assumed initial public offering price per ordinary share of $11.00, the midpoint of the estimated initial public offering price range, after deducting the underwriting discounts and the estimated offering expenses payable by us.  If the underwriters exercise their over-allotment option in full, we will receive additional proceeds of $2.8 million, after deducting underwriting discounts and commissions and the estimated expenses payable by us.
 
We expect to use the net proceeds of this offering as follows:
 
 
·
approximately 70-75% of the net proceeds in the aggregate will be applied towards market penetration, including marketing research, promotional activities, use of consultants and, as necessary, lending our Deep TMS device to KOLs in various countries for clinical trials and manufacturing for commercial distribution;
 
 
·
approximately 15% of the net proceeds will be used to fund our ongoing and future clinical trials for all applications of our Deep TMS system, including multi-center clinical trials with respect to the clinical depression application of our Deep TMS system, which will be needed to obtain the approval of the FDA and other countries’ regulatory bodies for such treatment application, as well as clinical trials addressing additional neurological and psychopathological disorders that are required for obtaining the required Notified Body EC Certifications in the EEA and potential approval from other countries’ regulatory bodies for such additional applications.  Due to multiple variables, such as the degree of success of our clinical trials (if at all), possible required repetition of various trials, unanticipated regulatory requests for additional trials, and the degree of funding for particular trials by third party collaborative partners, the relative percentages of funds and amounts required for completion of clinical trials for specific applications cannot be predicted precisely; and
 
 
·
approximately 10-15% of the net proceeds will be applied towards the funding of our operations and for general corporate purposes.
 
We may also use a portion of the net proceeds for the potential acquisition of, or investment in, technologies, products or companies that complement our business, although we have no current understandings, commitments or agreements to do so.
 
The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our research, development and commercialization efforts, the progress of our preclinical and clinical trials, our ability to enter into additional strategic collaborations and our operating costs and expenditures.  We may find it necessary or advisable to use the net proceeds for other purposes.  Accordingly, our management will have significant flexibility in applying the net proceeds of this offering.  Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing investment-grade securities.
 
 
44

 
 
 
We have never declared or paid cash dividends to our shareholders and we do not intend to pay cash dividends in the foreseeable future.  We intend to reinvest any earnings in developing and expanding our business.  Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, applicable law and other factors that our board of directors may deem relevant.
 
Under the Israeli Companies Law, dividends must be paid out of our profits and other surplus funds (as defined in the Companies Law) as of the end of the most recent year or as accrued over a period of the most recent two years, whichever amount is greater, provided that there is no reasonable concern that payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.  In addition, because we have applied for certain benefits under the Israeli law relating to Approved Enterprises (as described below under “Taxation— Israeli Tax Considerations— Tax Benefits Under the Law for the Encouragement of Capital Investments, 5719-1959”), if we qualify and receive such benefits, our payment of dividends (derived from tax-exempt income) may subject us to certain Israeli taxes to which we would not otherwise be subject.

 
45

 
 
 
The following table sets forth our consolidated capitalization as determined in accordance with IFRS as of December 31, 2010:
 
 
·
on an actual basis;
 
 
·
as adjusted to reflect the sale of 1,818,182 ordinary shares at an assumed initial public offering price of $11.00, the midpoint of the estimated initial public offering price range, and the receipt by us of net proceeds of approximately $17.4 million, after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us.
  
This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
   
As of December 31, 2010
 
   
Actual
   
As adjusted
 
   
(unaudited)
(US$ in thousands)
 
       
Warrants
  $ 1,032     $ 1,032  
                 
Equity:
               
Share capital                                                               
    109       129  
Warrants                                                               
    217       217  
Additional paid-in capital and other capital reserves
    22,951      
40,331
 
Foreign currency translation adjustments
    (2 )     (2 )
Accumulated deficits                                                               
    (15,354 )     (15,354 )
                 
Total equity                                                               
    7,921      
25,321
 
Total capitalization
  $ 8,953     $
26,353
 
 
 
46

 
 
 
Our net tangible book value on December 31, 2010 was approximately $7.88 million, equivalent to $0.71 per ordinary share.  We have calculated our net tangible book value per share by:
 
 
·
subtracting our liabilities from our total tangible assets; and
 
 
·
dividing the difference by the number of ordinary shares outstanding.
 
After giving effect to adjustments relating to this offering, our pro forma net tangible book value on December 31, 2010 would have been approximately $25.28 million, equivalent to $1.96 per ordinary share.  The adjustments made to determine our pro forma net tangible book value are as follows:
 
 
·
an increase in total tangible assets to reflect the net proceeds of this offering received by us as described under “Use of Proceeds;” and
 
 
·
the addition of the 1,818,182 ordinary shares offered in this prospectus to the number of ordinary shares outstanding.
 
The following table illustrates the immediate increase in our pro forma net tangible book value of $1.25 per ordinary share and the immediate pro forma dilution to new investors:
 
Assumed public offering price per ordinary share                                                                                                                            
  $ 11.00  
Net tangible book value per share as of December 31, 2010                                                                                                                            
  $ 0.71  
Increase in net tangible book value per share attributable to the offering                                                                                                                            
  $
1.25
 
Pro forma net tangible book value per share as of December 31, 2010 after giving effect to the offering
  $
1.96
 
Dilution per ordinary share to new investors                                                                                                                            
  $
9.04
 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share (the midpoint of the range on the cover of this prospectus) would increase (decrease) the net tangible book value by $1.69 million, the net tangible book value per ordinary share after this offering by $0.13 per ordinary share and the dilution in net tangible book value per ordinary share to investors in this offering by $0.87 per ordinary share, assuming that the number of ordinary shares offered by us remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.
 
The table below summarizes, as of December 31, 2010, the differences for our existing shareholders and new shareholders in this offering, with respect to the number of ordinary shares purchased from us, the total consideration paid and the average per ordinary share price paid before deducting the underwriting discounts and commissions and the estimated offering expenses.
 
   
Shares Issued
   
Total Consideration
   
Average Price
per Share
 
   
Number
   
%
   
Amount
   
%
     
   
(in thousands US$, except per share data)
 
Our existing shareholders                                            
    11,099,100       86 %   $ 23,264,000       54 %   $ 2.10  
New shareholders in this offering
    1,818,182       14 %   $
20,000,000
      46 %   $ 11.00  
Total                                            
    12,917,282       100 %   $ 43,264,000       100 %        
 
 
47

 
 
The discussion and table above assume no exercise of the underwriters’ over-allotment option.  If the underwriters exercise their over-allotment option, the pro forma number of our ordinary shares held by new shareholders will increase to 2,090,909, or approximately 16%, of the total pro forma number of our ordinary shares outstanding after this offering.
 
The discussion and table above also do not include (i) an aggregate of 762,388 ordinary shares we have reserved for issuance upon the exercise of outstanding options as of December 31, 2010, (ii) an aggregate of 731,716 ordinary shares issuable upon exercise of our outstanding Series 2 Warrants (as of December 31, 2010) and (iii) an aggregate of 250,000 ordinary shares issuable upon exercise of our outstanding Series 4 Warrants (as of December 31, 2010).  If all of such outstanding options and warrants were exercised (excluding the Series 4 Warrants, which, due to their higher exercise price, would have an antidilutive effect), pro forma net tangible book value per ordinary share would be $2.20, dilution per ordinary share to new investors would be $8.80, the number of shares held by our existing shareholders would increase to 12,593,204, constituting 87% of our total issued shares (while new shareholders in this offering would only hold 13% of our issued shares), the total consideration amount paid by existing shareholders would increase to $29.7 million, or 60% of total consideration received by us for our shares (while the percentage of consideration paid by new shareholders in this offering would drop to 40%) and the average price per share paid by our existing shareholders would instead be $2.36.
 
48

 
 
 
The following table sets forth our selected consolidated financial data, which is derived from our consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards, or IFRS.  The selected consolidated financial statement data as of December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010, were derived from our audited consolidated financial statements included elsewhere in this prospectus.  The selected consolidated financial statement data as of December 31, 2006, 2007 and 2008 and for the years ended December 31, 2006 and 2007 have been derived from audited consolidated financial statements not included in this prospectus.  Because our company, Brainsway Ltd., was only incorporated in November 2006, the selected consolidated financial statement data presented for the first ten months of the year ended December 31, 2006 actually represent the financial position and the results of operations of our wholly-owned subsidiaries, Brainsway, Inc. and Brain Research Services, which were each incorporated in 2003 and are considered our predecessor entities under the SEC’s rules.
 
You should read this selected financial data in conjunction with, and it is qualified in its entirety by, reference to our historical financial information and other information provided in this prospectus including, “Summary Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.  The historical results set forth below are not necessarily indicative of the results to be expected in future periods.  The number of shares and per share data appearing in the table below reflect the one-for-four reverse stock split that we will effect immediately prior to the date of this prospectus.
 
   
Year Ended December 31,
 
Consolidated Statements Of Loss Data:
 
2006(1)
   
2007
   
2008
   
2009
   
2010
 
   
(in thousands US$, except share and per share data)
 
Revenues
    -       -       -       3       86  
Cost of revenues
    -       -       -       *       10  
Gross profit
    -       -       -       3       76  
Operating expenses:
                                       
Research and development expenses, net
    1,390       926       929       1,929       4,264  
Selling and marketing expenses
    -       -       -       -       95  
General and administrative expenses
    505       300       631       795       1,015  
Total operating expenses
    1,895       1,226       1,560       2,724       5,374  
Operating loss
    1,895       1,226       1,560       2,721       5,298  
Financial expenses (income) from changes in fair value of warrants
    -       1,258       647       5,226       (4,836 )
Other financial expenses
    37       6       545       208       693  
Other financial income
    -       (99 )     (502 )     (203 )     (19 )
Financial expenses (income), net
    37       1,165       690       5,231       (4,162 )
Loss before taxes on income
    1,932       2,391       2,250       7,952       1,136  
Tax
    -       -       -       -       -  
Loss
    1,932       2,391       2,250       7,952       1,136  
Loss per share:**
                                       
Basic
    -       (0.28 )     (0.24 )     (0.84 )     (0.12 )
Diluted
    -       (0.28 )     (0.24 )     (0.84 )     (0.56 )
Weighted average number of shares:**
                                       
Basic
    -      
8,744,974
     
8,917,558
     
9,610,504
     
9,913,536
 
Diluted
    -      
8,744,974
     
8,917,558
     
9,610,504
     
10,645,003
 
 
* Represents an amount less than $1.
** Reflects the one-for-four reverse stock split we will effect immediately prior to the date of this prospectus.
(1)  The consolidated statements of loss data for the first ten months of 2006 represent financial data for Brainsway Ltd.’s predecessors.

 
49

 
 
   
As of December 31,
 
Consolidated Balance Sheets Data:
 
2006
   
2007
   
2008
   
2009
   
2010
 
   
(in thousands US$)
 
Cash and cash  equivalents                                                
    -       655       3,635       2,868       10,176  
Property, and equipment, net
    22       80       78       118       393  
Total assets                                              
    123       6,662       7,653       6,754       12,252  
Total  liabilities                                              
    1,478       4,549       4,722       10,081       4,331  
Share capital                                              
    *       84       89       93       109  
Total equity (deficiency)                                              
    (1,392 )     2,113       2,881       (3,327 )     7,921  
 
* Represents an amount less than $1.
 
 
50

 
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this prospectus.  The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly those in the “Risk Factors.”
 
Overview
 
We are a medical device company dedicated to the development and commercialization of our Deep TMS system.  Our proprietary Deep TMS system is a versatile, noninvasive medical device that is designed to assist in the treatment of various brain-related medical disorders, including major or clinical depression, schizophrenia, bi-polar disorder (manic depression) and Alzheimer’s disease.  Because our Deep TMS system constitutes a new approach to treatment that has not yet been adopted by healthcare professionals, we have performed and continue to perform clinical trials to demonstrate the safety and efficacy of our technology and its ability to stimulate or inhibit deep brain regions at a number of hospitals and medical centers, including Hadassah Medical Center, Shalvata Mental Health Center, Tel Aviv Sourasky Medical Center and the Weizmann Institute of Science in Israel, Johns Hopkins and Columbia University in the United States, University of Bonn and Ludwig-Maximilians University in Germany and the Alfred Psychiatry Research Center in Australia.  In addition, we are working with third party researchers and clinical institutions such as VA Pittsburgh Healthcare System (representing the U.S. Department of Veteran Affairs), Charité - Universitätsmedizin Berlin and the Medical Neurology Branch of the (U.S.) National Institute of Neurological Disorders and Stroke to conduct preclinical and clinical trials for additional CNS indications, primarily at their expense.  We have received the required EC Certificate of Conformity enabling us to affix the CE mark and market and sell our Deep TMS system in EEA member countries for treatment of patients suffering from clinical depression, schizophrenia (negative symptoms) and bi-polar disorder.  We have also submitted applications for regulatory approvals in Israel and other countries, but have not yet obtained these regulatory approvals.  We currently intend to submit an application for pre-market approval, or PMA, to the FDA for regulatory approval of our Deep TMS system for the treatment of clinical depression in the United States in early 2012, and the process for receipt of final FDA regulatory approval generally takes one to three years after such submission.
 
We have only recently initiated revenue-generating commercial distribution of our Deep TMS system, and we anticipate increasing our distribution activities in the near future.  We intend to market and distribute the device in countries in which we receive requisite regulatory approvals.  Our currently planned distribution model involves the lease by us or by third parties, on our behalf, of our Deep TMS system to healthcare or psychiatric/ psychological care providers from whom monthly rental fees will be collected at first and, after an initial period for each system, fees will be collected on a per-usage basis, with such third-party distributors committing to certain minimum levels of installed devices and treatments.  In the future, we may decide to alter such model to provide for a large, up-front rental fee in lieu of smaller monthly rental fees, in addition to the pay-per-use fees to date depending upon particular circumstances or market conditions.  We do not, however, plan to sell our Deep TMS system outright at all under our current distribution model.
 
Our only definitive agreements to date with respect to the commercialization of our Deep TMS system are 10-year, exclusive marketing and distribution agreements that we have entered into with Italian and Brazilian distributors-Advanced Technologies Innovation Distribution SRL, or ATID, and Meizler Biopharma S.A., or Meizler, respectively.  We will receive monthly rental and pay-per-use fees under these agreements.  ATID’s and Meizler’s exclusive distributor status in Italy and Brazil, respectively, is subject to their commitment to achieve certain minimum levels of orders for, and usage of, the device throughout most of the terms of the agreements.  ATID and Meizler have undertaken to perform all administrative work related to regulatory approvals in Italy (which have been obtained with respect to treatment of clinical depression, schizophrenia (negative symptoms) and bi-polar disorder) and Brazil (which have not yet been obtained), respectively, as well as to ensure that treatments with our device will be recognized by private health insurance companies and public health services in Italy and Brazil, respectively.  We received the first order under the Italian agreement in October 2009 and have received subsequent orders throughout 2010.  Regulatory approvals have not yet been obtained in Brazil (although we expect them to be received within the next several months), and we have not yet received any orders under the Brazilian agreement.
 
 
51

 
 
Since inception, we have generated significant losses in connection with our operations (primarily research and development activities, and to a lesser extent, general and administrative expenses), focusing primarily upon the clinical development of our Deep TMS system.  As of December 31, 2010, we had an accumulated deficit of $15.4 million, $2.3 million of which reflects financing expenses resulting from changes in the fair market value of our TASE-traded Series 1 Warrants and Series 2 Warrants, the exercise prices of which had been indexed to the Israeli consumer price index, or CPI (the exercise periods for such series of warrants expired on December 31, 2008 and January 2, 2011, respectively).  See “—Financial Expense and Income.”  Our research and development activities are expected to expand over time, especially as we proceed with multi-center trials in the United States, Europe and Israel for the treatment of clinical depression with our Deep TMS system.  The trials serve as a prerequisite for FDA and other regulatory approvals for commercialization of our device for that treatment application.  Furthermore, as we proceed towards commercialization in Europe and elsewhere, the cost of the production of our Deep TMS system for commercial distribution in requisite quantities under our distribution agreements will also require a significant investment of capital.  Accordingly, we will require further resources in order to expand our operations and generate substantial revenues.  As a result, we may continue to incur operating losses, which may be substantial over the next couple of years, and we will need to obtain additional funds to support our increased manufacturing activities and further develop our research and development program.
 
We have funded our operations primarily through sales of equity securities, both in private placements and in public offerings on the TASE, and research and development grants received from the OCS, which have amounted to $3.4 million to date.  We expect to continue to fund our operations over the next several years through our existing cash resources; the net proceeds of this offering; future cash flows from operations; continued funding from the OCS (including approximately NIS 4.26 million ($1.20 million) of funding, constituting 60% of our NIS 7.1 million ($2.0 million) budget for our Deep TMS development project related to depression for the period of July 1, 2010 through June 30, 2011, which was approved by the OCS in December 2010 and of which NIS 1.48 million (approximately $417,000) has been received thus far); interest earned on our investments; proceeds from exercise of employee stock options and outstanding warrants; and additional capital to be raised through public or private equity offerings or debt financings.  As of December 31, 2010, we had approximately $10.2 million of cash and cash equivalents, and short-term investments.
 
Revenues
 
We expect to derive our revenues for the next several years primarily from payments under our current agreements with ATID and Meizler, as well as under additional marketing and distribution agreements that we may enter into for other countries or regions in the future, especially with respect to the depression, schizophrenia (negative symptoms) and bi-polar disorder (manic depression) applications of our Deep TMS system.  Dependent upon the success of our multi-center trials for treatment of clinical depression, and subsequent discussions with U.S. and other regulatory authorities, we may achieve final regulatory approvals that are required in order to proceed towards commercialization for clinical depression in those countries as well, which will increase our revenue generation.  We currently anticipate submission of a PMA to the FDA for regulatory approval with respect to clinical depression in the United States in early 2012, and the process for final regulatory approval generally takes one to three years thereafter.
 
The remaining applications of our Deep TMS technology (beyond clinical depression, schizophrenia (negative symptoms) and bi-polar disorder (manic depression)) are currently in the clinical stage of development and have not yet received any final regulatory approvals for commercialization.  We do, however, anticipate receiving the required approvals from the EEA Notified Body with respect to certain of these additional applications, including Post-Traumatic Stress Disorder, or PTSD, and, potentially, Parkinson’s disease, within the next 12 months, thereby enabling the potential generation of revenues from commercialization thereafter.
 
The anticipated timing for receipt of both FDA approval for clinical depression and the EEA Notified Body approvals with respect to additional applications of our Deep TMS technology is highly uncertain and subject to a number of factors, several of which are beyond our control.  Therefore, we may not receive FDA or EEA Notified Body approval within our timetables or at all.
 
 
52

 
 
 
Cost of Revenues
 
Our cost of revenues, reflecting primarily depreciation, have generally been minimal to date, due to the fact that we maintain ownership of our system under our revenue-generating distribution model, in which we rent out the system for use by end-customers, rather than sell it outright.  The costs of producing the device are not expensed immediately, but are rather depreciated over the course of its useful life.  We expect to continue with our ownership of our system under our distribution model for the foreseeable future, which will maintain our relatively low cost of revenues, although upon our achievement of a more significant number of systems being distributed, post-commercialization, our depreciation expense reflected in cost of revenues will rise.  In addition, cost of revenues includes royalties that are owed as a percentage of revenues that we generate.
 
Operating Expenses
 
Our current operating expenses consist of three components— research and development expenses, selling and marketing expenses, and general and administrative expenses.
 
Research and Development Expenses
 
Our research and development expenses consist primarily of salaries and related personnel expenses; fees paid to external partners with whom we collaborate on clinical trials; fees paid to other external service providers; costs of preclinical studies and clinical trials; laboratory supplies and costs for facilities and equipment; and share-based compensation expenses to research and development employees.  We charge all research and development expenses to operations as they are incurred.
 
The grants that we receive from the OCS are presented in our financial statements as a deduction from research and development expenses as long as there is reasonable assurance that there will be no future benefits associated with the related research and development activities.  When this assessment changes such that it is no longer reasonably assured that there will be no future benefits associated with our research activities, then we will recognize a liability for our obligations to the OCS.  Please see Note 2(k) to our consolidated financial statements appearing elsewhere in this prospectus.
 
We expect that our research and development expenses will remain significant in the near future and that a large percentage of such expenses will be incurred in support of our current and future preclinical and clinical trials and related activities for applications of our Deep TMS technology, including our multi-center trials currently being conducted with respect to clinical depression in the United States, Europe and Israel.  Due to the inherently unpredictable nature of preclinical and clinical development processes and given the early stage of those applications that are at a preclinical stage, we are currently unable to estimate with any certainty the costs that we will incur in the continued development of these applications for potential commercialization.  Beyond clinical depression, schizophrenia (negative symptoms) and bi-polar disorder, for which we have received EEA regulatory approval and commenced commercial distribution in Italy (and for which we are also attempting to obtain regulatory approval and commence distribution in Brazil within the next several months), we cannot forecast with any degree of certainty which (if any) additional therapeutic application of our Deep TMS system may be subject to future commercial distribution, when such distribution will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.  Clinical development timelines, the probability of success and development costs can differ materially from expectations.  We expect to continue to test these applications in preclinical studies for safety and efficacy, and to conduct, together with our collaborative partners (usually, medical centers) initial or additional (as appropriate) clinical trials for each specific application.   See “Risk Factors—If we or our licensees are unable to obtain U.S. and/or additional foreign regulatory approvals for the applications of our Deep TMS system, we will be unable to commercialize our product for those applications in those jurisdictions.”
 
As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain therapeutic applications of our product in order to focus our resources on more promising therapeutic applications.  Completion of clinical trials by us (and/or our collaborative partners) may take several years, but the length of time generally varies according to the type, complexity, novelty and intended use of a therapeutic application.  The cost of clinical trials may vary significantly over the course of development of a therapeutic application as a result of differences arising during clinical development, including, among others:
 
 
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·
the number of sites included in the clinical trials;
 
·
the length of time required to enroll suitable patients;
 
·
the number of patients that participate in the clinical trials;
 
·
the duration of patient follow-up;
 
·
the development stage of the therapeutic application;
 
·
the efficacy and safety profile of the application; and
 
·
any uncertainty in interpreting any results obtained.
 
Selling and Marketing Expenses
 
Our selling and marketing expenses consist of amounts paid to the distributors of our Deep TMS system— currently, ATID and, we expect in the near future, Meizler as well— in respect of market penetration activities that they conduct on our behalf, including advertising and promotional activities.  We have recently commenced commercialization of our Deep TMS system and do not maintain an internal sales and marketing team.  Nevertheless, we effectively outsource such activities to the distributors of our device pursuant to our distribution agreements with them, and have begun (in the year ended December 31, 2010) to recognize selling and marketing expenses for payments made to them.  We expect that with the expansion of the scope and volume of market penetration activities related to our Deep TMS system in the near future, we (and the distributors of our Deep TMS system) will engage in further activities that will lead to the recording of further selling and marketing expenses related to such activities.  In particular, we intend to utilize a significant portion of the net proceeds from this offering towards marketing activities.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of salaries and compensation costs for our executives and administrative personnel, including finance, legal, bookkeeping, business development, investor relations, information technology and human resources.  Other significant general and administrative costs include facilities costs (including rent expense for our facility in Jerusalem, Israel), professional service fees for accounting and legal services, travel costs, insurance premiums, and depreciation.
 
We expect our general and administrative expenses to increase as a result of our becoming a U.S. public company, such as accounting and legal fees, and expected increases in the number of our executive, accounting and administrative personnel due to the expected growth of our company.
 
Financial Expense and Income
 
Financial expense and income consist of: (i) expense or income incurred due to changes in fair market value of our TASE-traded, outstanding Series 1 Warrants and Series 2 Warrants, the exercise prices of which were indexed to the Israeli CPI, which are presented as liabilities in our consolidated financial statements (as the market price of these warrants increased or decreased, we recorded financial expense and financial income, respectively, accordingly) (these series of warrants are no longer outstanding, as they expired on December 31, 2008 and January 2, 2011, respectively); (ii) bank fees and other transactional costs; (iii) expense or income resulting from fluctuations of the U.S. dollar and other currencies, in which a portion of our assets and liabilities are denominated, against the NIS (our functional currency); and (iv) interest earned on our cash, cash equivalents and short-term investments.
 
Critical Accounting Policies and Estimates
 
We describe our significant accounting policies more fully in Note 2 to our consolidated financial statements for the year ended December 31, 2010.  We believe that the accounting policies below are critical in order to fully understand and evaluate our financial condition and results of operations.
 
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we prepare in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods.  On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below.  We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions. 
 
 
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Revenue Recognition
 
We generate revenues from monthly rental fees for our Deep TMS system devices.  We usually rent our Deep TMS system devices to our customers subject to the following terms: (i) we do not transfer our device to a customer at the end of the lease term; (ii) the customer does not have the option to purchase our device; (iii) the lease term is often relatively short, which is sufficiently shorter than the economic life of our device; and (iv) at the inception of the rental, the present value of the minimum rental fees is substantially less than the fair value of the rented device.  Therefore, in accordance with the accounting treatment set forth in IAS 17, we have determined that we do not transfer substantially all of the risks and benefits of ownership of our devices to our customers and, accordingly, the rental is classified as an operating lease.
 
We recognize revenues in accordance with IAS 17. Under IAS 17, rental fees from the operating leases for our Deep TMS system devices are recognized on a monthly basis over the rental period commencing on the date on which we complete the installation of our device at a distributor’s end user’s site.  Pay-per-use fees in excess of minimum rental fees, if any, will be recognized for the period earned, based on periodical reports received from the distributors prior to issuance of financial statements. In the future, we will implement procedures to trace the number of uses of the devices such as pre-payment for fixed number of uses. Up until now, only monthly minimum rental fees have been recognized, as our rented devices are still within their initial, “acquaintance familiarization periods.”  Subsequent to these periods, the amount of revenues that we will recognize may vary from period to period due to the variability in the number of procedures that will be performed with the devices.
 
Research and Development
 
Expenditures relating to research activities, undertaken with the goal of gaining new scientific or technical knowledge and understanding, are recognized in our consolidated statements of loss as incurred.
 
Development activities are activities relating to a plan for the creation of new products or processes or the significant improvement of existing products or processes. Expenditures in respect of development activities are recognized as an intangible asset only if all of the following exist:
 
 
·
the development costs can be reliably measured;
 
 
·
the product or process is technically and commercially feasible;
 
 
·
future economic benefits from the product are probable; and
 
 
·
we intend to, and have sufficient resources to, complete the development and to use or sell the asset.
 
As of December 31, 2010, we believe that the above-described criteria were not met and, therefore, all development expenditures were recognized in our consolidated statements of loss as incurred.
 
Royalty Bearing Government Grants
 
Royalty bearing government grants are recognized in accordance with IAS 20.8, when there is reasonable assurance that (a) we have complied with the conditions attached to the grant, and (b) the grant will be received.  The grant is recognized at the same time that we recognize the related research and development costs for which the grant is received, based on the participation rate approved by the OCS.  Government grants from the OCS in Israel for supporting research and development activities qualify as forgivable loans in accordance with International Accounting Standard No. 20, or IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance,” since the grants are repayable only if we generate revenues related to the supported project.
 
When there is reasonable assurance that a grant will not be paid back, the grant is offset against research and development expenses. In such an event, the royalty commitment is accounted for as a contingent liability pursuant to International Accounting Standard No. 37, or IAS 37 “Provisions, contingent liabilities and contingent assets” until the date on which the liability is recognized.
 
 
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When there is no reasonable assurance that a grant will not be paid back, a liability is recognized.  The liability to pay royalties is measured at fair value discounted at the market rate of interest existent when the grant was received.  The difference between the amount of the grant and the fair value of the liability is recognized as a reduction from research and development expenses. Amounts paid as royalties are recognized as settlement of liability.
 
In the event that grants were recorded to profit and loss and in subsequent periods the probability for the success of the project and for the payment of royalties to the OCS becomes probable, then a liability is recorded. The liability is measured based on our best estimation of the amount required to settle our obligation at the end of each reporting period.
 
Therefore, we are required to evaluate whether there is reasonable assurance that a grant received will be repaid. The net present value of the liability recognized in respect of government grants is dependent upon our estimation and assumptions as to future revenues and interest rates.
 
Deferred Taxes
 
Deferred tax assets are recognized for carryforward tax losses and temporary differences to the extent that future utilization of the related tax benefit is probable. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies.
 
Our operating losses are significant, thus it is not probable that taxable profits will be generated in the very near future. Accordingly, we believe that currently it is not probable that loss carryforwards will be utilized in the foreseeable future.
 
Recent Accounting Pronouncements
 
Initial Application of New Accounting Standard:

IAS 1 - Presentation
 
Commencing January 1, 2009, we applied International Accounting Standard 1, “Presentation of Financial Statements”, as amended, or IAS 1.  IAS 1 permits presentation of the total income in one statement (a combined statement of income (loss) and other comprehensive income (loss)), or in two separate statements— a statement of income (loss) and a statement of other comprehensive income (loss). We chose to present items of income and expense and items of other comprehensive income in two statements— a statement of loss and thereafter a statement of comprehensive loss.
 
IAS 7 - Statements of Cash Flows
 
The amendment to International Accounting Standard 7, “Statement of Cash Flows” requires that only expenditures that result in a recognized asset in the consolidated balance sheets can be classified as investing activities.  The amendment is effective for annual periods beginning on or after July 1, 2010 with earlier application permitted.  We implemented the amendment as of January 1, 2010.  The implementation of the amendment did not have an effect on our consolidated statements of cash flow.

IFRS 7 - Financial Instruments: Disclosures
 
The amendment to IFRS 7, “Financial Instruments: Disclosures,” or IFRS 7, requires additional disclosures about fair value measurement and liquidity risk. According to the amendment, additional disclosures should be made, among others, as to the source of inputs used in making the measurements, using a three level fair value hierarchy for all financial instruments recognized at fair value. In addition, a reconciliation between the beginning and ending balance for Level 3 fair value measurements is required (source of inputs that is not based on market data), as well as disclosure of significant transfers between levels in the fair value hierarchy. The amendment was prospectively adopted starting from the financial statements for periods beginning on January 1, 2009.

 
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IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments
 
International Financial Reporting Interpretations Committee 19, “Extinguishing Financial Liabilities with Equity Instruments”, published in November 2009, addresses the accounting treatment of transactions in which financial liabilities are settled by issuing equity instruments.  According to IFRIC 19, which we refer to as the Interpretation, equity instruments issued as a replacement of a debt instrument are measured at fair value of the equity instruments issued unless the fair value cannot be reliably measured. If the fair value of the equity instruments issued cannot be reliably measured, then the equity instruments are measured to reflect the fair value of the financial liability extinguished when extinguished.  The difference between the carrying amount of the financial liability extinguished and the fair value of the equity instruments issued is recognized in the consolidated statements of loss.
 
The Interpretation was adopted on January 1, 2010. The Interpretation had no effect on our financial statements.
 
New Accounting Standards and Interpretations Issued But Not Yet Effective

IFRS 9 - Financial Instruments
 
In November 2009, the IASB issued IFRS 9, “Financial Instruments”, which represents the first phase of a project to replace IAS 39, “Financial Instruments: Recognition and Measurement,” or IAS 39.  IFRS 9 focuses mainly on the classification and measurement of financial assets and it applies to all financial assets within the scope of IAS 39.
 
According to IFRS 9, “Financial Instruments”, upon initial recognition, all of the financial assets (including hybrid contracts with financial asset hosts) will be measured at fair value. In subsequent periods, debt instruments can be measured at amortized cost if both of the following conditions are met:
 
 
·
the asset is held within a business model whose objective is to hold assets in order to collect the contractual cash flows.
 
 
·
the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
 
Subsequent measurement of all other debt instruments and financial assets will be at fair value.
 
Financial assets that are equity instruments will be measured in subsequent periods at fair value and the changes will be recognized in the statement of income or in other loss, in accordance with the election of the accounting policy, on an instrument-by-instrument basis. Nevertheless, if the equity instruments are held for trading, they must be measured at fair value through profit or loss. This election is final and irrevocable. When an entity changes its business model for managing financial assets it shall reclassify all affected financial assets. In all other circumstances, reclassification of financial instruments is not permitted.
 
This accounting standard will be effective starting January 1, 2013. Earlier application is permitted.  Early adoption will be made with a retrospective restatement of comparative figures, subject to the reliefs set out in the standard. We are evaluating the possible effect of the adoption of this new standard on our consolidated financial statements but are presently unable to assess such effect, if any. We believe that the effect of the standard on our consolidated financial statements will not be material
 
IAS 24 - Related Party Disclosure
 
The amendment to International Accounting Standard 24, “Related Party Disclosures” requires disclosure of related party relationships, transactions and outstanding balances, including commitments, in the consolidated and separate financial statements of a parent, venturer or investor presented in accordance with International Accounting Standard 27, “Consolidated and Separate Financial Statements”. This standard also applies to individual financial statements. This amendment is effective for accounting periods beginning on or after January 1, 2011.

 
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IFRS 7 - Financial Instruments: Disclosure
 
The amendment to IFRS 7 clarifies the disclosure requirements prescribed by this accounting standard. The standard highlights the connection between the quantitative and qualitative disclosures and the nature and scope of the risks arising from financial instruments. The disclosure requirements regarding securities held by us have been minimized and the disclosure requirements regarding credit risk have been revised. The amendment will be adopted retrospectively in our consolidated financial statements for periods starting from January 1, 2011. Early adoption is possible.
 
We estimate that the amendment will not have a material effect on the financial instruments presented in our consolidated financial statements.
 
IAS 34 - Interim Financial Reporting
 
Pursuant to the amendment to International Accounting Standard 34, “Interim Financial Reporting”, new disclosure requirements were introduced to interim financial reporting regarding the circumstances that are likely to affect the fair value of financial instruments and their classification, the transfers of financial instruments between different fair value levels, changes in the classification of financial assets and changes in contingent liabilities and contingent assets.  The amendment will be adopted retrospectively in our consolidated financial statements for periods starting from January 1, 2011.  Early adoption is possible.

IAS 1 - Presentation of Financial Statements
 
According to the amendment to International Accounting Standard 1, “Presentation of Financial Statements”, the changes between the opening and the closing balances of each other comprehensive income component may be presented in the statement of changes in equity or in the notes accompanying the annual financial statements. The amendment will be adopted retrospectively in our consolidated financial statements for periods starting from January 1, 2011.  Early adoption is possible.  The amendment is not expected to have a material effect on our consolidated financial statements.

 
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Results of Operations
 
   
Year Ended December 31,
 
Consolidated Statements Of Loss Data:
 
2006(1)
   
2007
   
2008
   
2009
   
2010
 
   
(in thousands US$, except share and per share data)
 
Revenues
    -       -       -       3       86  
Cost of revenues
    -       -       -       *       10  
Gross profit
    -       -       -       3       76  
Operating expenses:
                                       
Research and development expenses, net
    1,390       926       929       1,929       4,264  
Selling and marketing expenses
    -       -       -       -       95  
General and administrative expenses
    505       300       631       795       1,015  
Total operating expenses
    1,895       1,226       1,560       2,724       5,374  
Operating loss
    1,895       1,226       1,560       2,721       5,298  
Financial expenses (income) from changes in fair value of warrants
    -       1,258       647       5,226       (4,836 )
Other financial expenses
    37       6       545       208       693  
Other financial income
    -       (99 )     (502 )     (203 )     (19 )
Financial expenses (income), net
    37       1,165       690       5,231       (4,162 )
Loss before taxes on income
    1,932       2,391       2,250       7,952       1,136  
Tax
    -       -       -