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† The term “new or revised financial
accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
Unless the context otherwise requires, all references to “BrainsWay,”
“we,” “us,” “our,” the “Company” and similar designations refer to BrainsWay Ltd.,
a limited liability company incorporated under the laws of the State of Israel, and its consolidated subsidiaries. The term “including”
means “including but not limited to”, whether or not explicitly so stated. The term “NIS” refers to New Israeli
Shekels, the lawful currency of the State of Israel, the terms “dollar”, “US$”, “$” or “U.S.”
refer to U.S. dollars, the lawful currency of the United States of America. Our functional and presentation currency is the U.S. dollar.
Unless otherwise indicated, U.S. dollar amounts herein (other than amounts originally receivable or payable in dollars) have been translated
for the convenience of the reader from the original NIS amounts at the representative rate of exchange as of December 31, 2021 ($1 = NIS
3.11). The dollar amounts presented should not be construed as representing amounts that are receivable or payable in dollars or convertible
into dollars, unless otherwise indicated. Foreign currency transactions in currencies other than U.S. dollars are translated in this Annual
Report into U.S. dollars using exchange rates in effect at the date of the transactions.
The “BrainsWay” name and design logo
are our registered trademarks. BrainsWay also asserts all rights, including but not limited to trademark, with respect to the term “Deep
TMS.” Solely for convenience, the trademarks, service marks, and trade names referred to in this Annual Report are without the ®
and TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent
under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. This Annual
Report contains additional trademarks, service marks, and trade names of others, which are the property of their respective owners. All
trademarks, service marks, and trade names appearing in this Annual Report are, to our knowledge, the property of their respective owners.
We do not intend our use or display of other companies’ trademarks, service marks or trade names to imply a relationship with, or
endorsement or sponsorship of us by, any other companies.
This Annual Report includes statistics and other
data relating to markets, market sizes, and other industry data pertaining to our business that we have obtained from industry publications,
surveys, and other information available to us. Industry publications and surveys generally state that the information contained therein
has been obtained from sources believed to be reliable. Market data and statistics are inherently predictive, speculative and are not
necessarily reflective of actual market conditions. Such statistics are based on market research, which itself is based on sampling and
subjective judgments by both the researchers and the respondents, including judgments about what types of products and transactions should
be included in the relevant market. In addition, the value of comparisons of statistics for different markets is limited by many factors,
including that (i) the markets are defined differently, (ii) the underlying information was gathered by different methods, and
(iii) different assumptions were applied in compiling the data. Likewise, market size calculations and definitions are based on shifting
and sometimes limited assumptions, including but not limited to relating to pricing models for our products. Accordingly, the market statistics
included in this Annual Report should be viewed with caution. We believe that information from these industry publications included in
this Annual Report is reliable.
Some of the statements under the sections entitled
“Item 3. Key Information — Risk Factors,” “Item 4. Information on the Company,” “Item 5.
Operating and Financial Review and Prospects” and elsewhere in this Annual Report may include 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. In addition, the sections of this Annual Report entitled “Item 4.
Information on the Company” contain information obtained from independent industry and other sources that we may not have independently
validated. 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:
ITEM 1. |
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
ITEM 2. |
OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
B. |
Capitalization and Indebtedness |
Not applicable.
C. |
Reasons for the Offer and Use of Proceeds |
Not applicable.
You should carefully consider the risks we
describe below, in addition to the other information set forth elsewhere in this Annual Report, including our financial statements and
the related notes beginning on page F-1, before deciding to invest in our ordinary shares (the “Ordinary Shares”) or our American
Depositary Shares (“ADSs”). The risks and uncertainties described below in this annual report on Form 20-F for the year ended
December 31, 2021 are not the only risks facing us. We may face additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial. Any of the risks described below or incorporated by reference in this Form 20-F, and any such additional
risks, could materially adversely affect our reputation, business, financial condition or results of operations. In such case, you may
lose all or part of your investment.
Summary of Risk Factors
The following is a summary
of some of the principal risks we face. The list below is not exhaustive, and investors should read this “Risk factors” section
in full.
|
· |
We have a history of operating losses. We expect to incur additional losses in the future and may never be profitable. |
|
· |
We cannot ensure that our existing capital will be sufficient to meet our capital requirements. |
|
· |
Raising additional capital may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our technologies or product candidate(s). |
|
· |
Our success depends on Deep TMS as a safe treatment option for patients, as well as market perception and acceptance of TMS generally, and patient satisfaction with the effectiveness of Deep TMS. |
|
· |
Our long-term growth depends on our ability to increase market penetration and further commercialize Deep TMS, as well as develop enhancements and features to the Deep TMS system through our research and development efforts. If we fail to do so, we may be unable to achieve future growth. |
|
· |
We operate in a very competitive environment and if we are unable to compete successfully against our existing or potential competitors, our revenues and operating results may be negatively affected. |
|
· |
If we are unable to adequately train physicians and other treatment providers and operators on the safe and appropriate use of our Deep TMS systems, we may be unable to achieve our expected growth. |
|
· |
Failure to secure or maintain adequate coverage and reimbursement of our Deep TMS system for the currently authorized indications and other indications for which we obtain FDA authorization in the future, if any, may make physicians reluctant to use or recommend Deep TMS and have a material adverse effect on our sales, results of operations, and financial condition. |
|
· |
We rely on third-party suppliers for some components used in manufacturing our Deep TMS products, and we may be unable to immediately transition to alternative parties for these components. |
|
· |
We rely, and in the future, expect to rely on a network of third-party distributors to market and distribute our products internationally, and if we are unable to maintain and expand this network, we may be unable to generate anticipated revenues. |
|
· |
Clinical trials involve a lengthy and expensive process with an uncertain outcome, which may delay or cause us to abandon the development of Deep TMS for additional indications. |
|
· |
We rely in part on third parties to conduct our clinical trials. If these third parties fail to perform their duties on time or as expected, we may not be able to obtain regulatory authorization for additional indications that we may seek for Deep TMS. |
|
· |
Our collaboration arrangements may not be successful, which could adversely affect our ability to develop and commercialize our products. |
|
· |
If product liability lawsuits are brought against us, our business may be harmed, and we may be required to pay damages that exceed our insurance coverage. |
|
· |
Our insurance policies protect us only from some business risks, which will leave us exposed to significant uninsured liabilities. |
|
· |
Our operations could be affected in the event of further COVID-19
global pandemic outbreaks. |
|
|
|
|
· |
Our operations could be adversely affected by negative global trends, including
supply chain disruptions and the “Great Resignation.”. |
|
· |
Performance issues, service interruptions, or price increases by our shipping carriers could adversely affect our business and harm our reputation and ability to provide our services on a timely basis. |
|
· |
If we experience significant disruptions in our information technology systems, our business may be adversely affected. |
|
· |
We rely on the use of technology and may become subject to cyber-terrorism or other compromises and shut-downs. |
|
· |
Security and privacy breaches may expose us to liability and harm our reputation and business. |
|
· |
We may seek to grow our business through acquisitions or investments in new or complementary businesses, products or technologies, through the licensing of products or technologies from third parties. The failure to manage acquisitions, investments, licenses or other strategic alliances, or the failure to integrate them with our existing business, could harm our business. |
|
· |
Our products and operations are subject to extensive government regulation and oversight both in the United States and abroad, and our failure to comply with applicable requirements could harm our business. |
|
· |
We may not receive the necessary regulatory clearances or approvals to market our product for other proposed indications in the future, and failure to timely obtain necessary clearances or approvals for such future indications would adversely affect our ability to grow our business. |
|
· |
Modifications to our Deep TMS systems and treatments may require new 510(k) clearances,
de novo classification or PMA, and may require us to cease marketing or recall the modified products until authorizations are obtained. |
|
· |
Our products must be manufactured in accordance with federal and state regulations, and we could be forced to recall our installed systems or terminate production if we fail to comply with these regulations. |
|
· |
If treatment guidelines for the clinical conditions we are targeting change or the standard of care evolves, we may need to redesign and seek new marketing authorization from the FDA for one or more of our products. |
|
· |
The misuse or off-label use of Deep TMS may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies, particularly if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business. |
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Deep TMS may cause or contribute to adverse medical events that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition, and results of operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us. |
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If we or our distributors do not obtain and maintain international regulatory registrations or approvals for Deep TMS, we will be unable to market and sell our products outside of the United States. |
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We are subject to certain federal, state, and foreign fraud and abuse laws, health information privacy and security laws, and transparency laws, which, if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business. |
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Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system, could harm our cash flows, financial condition, and results of operations. |
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We depend on our intellectual property, and our future success is dependent on our ability to protect our intellectual property and not infringe on the rights of others. |
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The lives of our patents may not be sufficient to effectively protect our products and business. |
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Our right to the essential intellectual property upon which the 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 Deep TMS. |
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Our 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. |
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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. |
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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. |
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Legal proceedings or third-party claims of intellectual property infringement and other challenges may require us to spend substantial time and money and could prevent us from developing or commercializing Deep TMS. |
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The Israeli government grants that we have received require us to meet several conditions and may restrict our ability to manufacture our Deep TMS systems and transfer relevant know-how outside of Israel and require us to pay royalties and satisfy specified conditions, including increased royalties if we manufacture our Deep TMS systems outside of Israel or payment of a redemption fee if we transfer relevant know-how outside of Israel. |
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International patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial sums and management resources. |
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Our manufacturing, assembly and other significant functions are located in Israel and, therefore, our business and operations may be adversely affected by political, economic and military conditions in Israel. |
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Exchange rate fluctuations between the U.S. dollar, the New Israeli Shekel and other foreign currencies may negatively affect our future revenues. |
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The price of the ADSs may be volatile and may fluctuate due to factors beyond our control. |
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The significant share ownership position of our officers, directors, and entities affiliated with certain of our directors may limit your ability to influence corporate matters. |
Risks Related to our Financial Condition and Capital Requirements
We have a history of operating losses.
We expect to incur additional losses in the future and may never be profitable.
We have incurred net
losses since our inception, largely reflecting research and development, general and administrative expenses, and sales and marketing
expenses. We have experienced net losses of $6.5 million and $5.4 million for the years ended December 31, 2021 and 2020, respectively.
As a result of ongoing losses, as of December 31, 2021, we had an accumulated deficit of $83.8 million. While we have sold and
leased Deep TMS systems in various markets over the last few years, primarily for Major Depressive Disorder (MDD) including anxious depression,
and recently also for Obsessive-Compulsive Disorder (OCD) and smoking addiction, we expect to continue to incur significant sales and
marketing, product development, regulatory and other expenses as we continue to expand our commercialization efforts to increase adoption
of Deep TMS and expand existing relationships with our customers, to obtain regulatory clearances or approvals for Deep TMS in additional
countries and for additional indications, and to develop new enhancements or features to our existing Deep TMS systems. The net losses
we incur may fluctuate significantly from period to period. We will need to generate additional revenues to achieve and sustain profitability,
and even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. Our failure
to achieve or maintain profitability could negatively impact the value of the ADSs.
We cannot ensure
that our existing capital will be sufficient to meet our capital requirements.
We believe that our existing
capital, other sources of liquidity will be sufficient to meet our capital requirements. To date we have funded our operations primary
through offerings of our securities, research and development grants from the Israel Innovation Authority and other sources, a loan under
our credit facility which has been repaid, and a Paycheck Protection Program loan through the Unites States Small Business Administration
which has been forgiven. We expect to generate revenues primarily through sales, lease and other potential income generated by the commercial
distribution of Deep TMS systems for approved indications.
The adequacy of our available
funds to meet our operating and capital requirements will depend on many factors, including our ability to achieve revenue growth and
maintain favorable operating margins; our ability to increase the market share of Deep TMS and expand our operations and offerings, including
our sales and marketing efforts; the cost, progress and results of our future research, product development and clinical programs for
additional enhancements to Deep TMS and future indications for the system; the costs and timing of obtaining regulatory approvals for
future indications of Deep TMS; our ability to improve or maintain coverage and reimbursement arrangements with third-party and government
payers; the terms and conditions of commercial agreements for marketing and distribution of Deep TMS; the effect of competing technological
and market developments; 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.
We cannot be certain
that in the future alternative financing sources will be available to us at such times or in the amounts we need or whether we can negotiate
commercially reasonable terms or at all, or that our actual cash requirements will not be greater than anticipated. Any issuance of additional
equity or equity-linked securities could be dilutive to our existing shareholders, and any new equity securities could have rights, preferences,
and privileges superior to those of holders of the Ordinary Shares or ADSs. Additional debt financing, if available, may involve covenants
restricting our operations or our ability to incur additional debt, pay dividends, repurchase our shares, make investments and engage
in merger, consolidation, or asset sale transactions. If we are unable to obtain future financing through the methods we described above
or through other means, our business may be materially impaired and we may be unable to complete our business objectives and may be required
to cease operations, curtail one or more product development or commercialization programs, significantly reduce expenses, sell assets,
seek a merger or joint venture partner, file for protection from creditors, or liquidate all our assets.
Risks Related to our Business and Industry
Our success depends
on Deep TMS as a safe treatment option for patients, as well as market perception and acceptance of TMS generally.
Our business currently
depends entirely on the success of Deep TMS, our proprietary TMS solution. TMS is an emerging treatment option for patients. As a result,
physician and patient awareness of TMS therapy as a treatment option for applicable brain disorders, and experience with TMS therapies,
is limited. Because the market for TMS therapy is still developing and contains a limited number of market participants, sales of Deep
TMS could be negatively impacted by unfavorable market reactions to TMS generally, Deep TMS in particular, and/or negative developments
in the industry. For example, with respect to TMS generally, in June 2018 researchers in medical centers of the U.S. Veterans Affairs
reported research findings that showed that approximately 40% of the 81 patients with treatment-resistant major depression achieved remission
in a randomized trial of a competitor’s TMS device, but the rate was virtually the same with sham treatments versus active stimulation.
As another example, with respect to Deep TMS in particular, in February 2020, we announced that a multicenter study of our Deep TMS system
for Post-Traumatic Stress Disorder (PTSD) was discontinued after interim results showed subjects treated with the H-Coil that was involved
in the study (i.e., the same as that used in our multicenter OCD study) did not demonstrate sufficient efficacy relative to the sham group.
If the use of our Deep TMS system or other TMS therapies results in serious adverse events (e.g., seizures), or such products malfunction
or are misused, patients and physicians may attribute such negative events to TMS and/or
Deep TMS, which may adversely affect market adoption of this form of therapy. For example, a paper entitled “Seizure risk with repetitive TMS: Survey results from over a half-million
treatment sessions” published in 2021 in Brain Stimulation claims that Deep TMS appears to be associated with a higher relative
seizure risk than with generic figure-8 coil TMS. While the authors of the paper themselves cite numerous reasons to view the results
with caution (e.g., including but not limited to sampling bias, inability to verify reported seizures, and the absence of information
on patient-specific risk factors) and while the claims in the paper were based on a small data set obtained from an informal survey which
appear to be inconsistent with other more comprehensive studies, we may nonetheless be unable to successfully educate the public about
these often nuanced and technical deficiencies and thus the overall safety of our technology. In addition, if patients undergoing treatment
with any available TMS solutions perceive the benefits to be inadequate or the administration of TMS to be too burdensome or inconvenient,
and/or if adverse events and/or factors such as discomfort and noise with available TMS solutions are too numerous or severe compared
to the relevant rates of alternative therapies or pharmaceutical options, it will be difficult to demonstrate the value of Deep TMS to
patients and physicians. Additionally, psychiatrists may find it difficult to train existing employees and/or hire additional staff, allocate
sufficient space or operate our device given that psychiatry is a field not traditionally associated with medical equipment treatment
options. As a result of any one or a combination of these reasons, demand for and the use of Deep TMS may decline or may not increase
at the pace or to the levels we expect. These reported findings may have a negative effect on market perception of the effectiveness of
the TMS therapy in general, and by extension Deep TMS.
Even if TMS therapy is
widely accepted by physicians and patients, our success will depend in large part on our ability to educate and train physicians and patients,
and to successfully demonstrate the safety, tolerability, ease of use, efficacy, cost effectiveness and other advantages of Deep TMS.
We have been engaging in an active marketing campaign to raise awareness of Deep TMS and its benefits, but we cannot assure that these
efforts will be successful or that they will not prove to be too costly. Physicians may find patient set up and the subsequent procedures
for future treatment sessions to be difficult or complicated compared to competing treatment methods. Any of these factors could slow
market adoption of Deep TMS.
Our long-term growth
depends on our ability to increase market penetration and further commercialize Deep TMS, as well as develop enhancements and features
to the Deep TMS system through our research and development efforts. If we fail to do so, we may be unable to achieve future growth.
Our strategy depends
on our ability to further commercialize and increase market penetration of Deep TMS for MDD (including reduction of comorbid anxiety symptoms,
commonly referred to as anxious depression), OCD, and smoking addiction, develop and seek regulatory approvals of Deep TMS for new indications
and add new enhancements or features for the Deep TMS system. These goals are also designed to respond to changing customer demands, competitive
pressures, and technologies. Our industry is characterized by intense competition, including from existing treatments (e.g., anti-depressant
medications), a growing number of Traditional TMS competitors, rapid technological changes, new product introductions and enhancements,
price competition, and evolving industry standards. It is important that we anticipate changes in technology and market demand, as well
as physician practices to successfully develop, obtain clearance or approval, if required, and successfully introduce new, enhanced, and
competitive technologies to meet our prospective customers’ needs on a timely and cost-effective basis.
We might be unable to
further commercialize Deep TMS for approved indications or develop or obtain regulatory clearances or approvals to market Deep TMS for
new indications, or to develop and obtain regulatory approvals for enhancements or new features for the Deep TMS system. Additionally,
Deep TMS for MDD (including reduction of comorbid anxiety symptoms, commonly referred to as anxious depression), OCD, smoking addiction,
and any future indications, even if cleared, might not be sufficiently accepted by physicians or the third-party payers who reimburse
for the procedures performed with our products. We may be unable to devise pricing strategies that are attractive to customers. The success
of any new indications, enhancements or features for the Deep TMS system will depend on numerous additional factors, including our ability
to:
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properly identify and anticipate clinician and patient needs; |
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demonstrate the benefits associated with the use of Deep TMS when compared to the products and devices of our competitors; |
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demonstrate the safety and efficacy of new indications, and obtain regulatory approvals of Deep TMS for such indications; |
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adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties; and |
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develop and obtain the necessary regulatory clearances or approvals for enhancements or features for the Deep TMS system. |
If we do not develop
and obtain regulatory clearances or approvals for new indications, enhancements or features in time to meet market demand, or if there
is insufficient demand for these indications, enhancements or features, our results of operations will suffer. Our research and development
efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial viability
of a new indication for Deep TMS, any enhancements to the Deep TMS system or any other innovation. In addition, even if we are able to
develop enhancements or new features for Deep TMS, these enhancements or features may not produce sales in excess of the costs of development
and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying
new technologies or enhancements or features.
Furthermore, we must
carefully manage our introduction of new indications. If potential customers believe such indications will be subject to additional future
enhancements or features or may become available at a more attractive price, they may delay purchases until such indications are available.
We may also have excess or obsolete inventory as we upgrade to newer models of our products and/or transition to new indications, and
we have limited experience in managing product transitions.
Our success also
depends upon patient satisfaction with the effectiveness of Deep TMS.
In order to generate
significant revenues from Deep TMS, patients must be satisfied with the effectiveness of Deep TMS. We train our physician customers to
properly diagnose patient candidates and select the appropriate patient candidates for treatment using the Deep TMS system, explain to
their patients the time-period over which the results from a treatment course can be expected to occur, and measure the success of treatments
using medical guidelines. However, our physician customers may not properly diagnose or select appropriate patient candidates for Deep
TMS treatment and/or may utilize unprescribed protocols, which may produce results that do not meet patients’ expectations. To the
extent physicians do not make the proper measurements for a specific patient, use the same procedures at each treatment session, and/or
use proscribed protocols during treatment, it could result in variability of the treatment efficacy and results for the patient. If patients
are not satisfied with the results of Deep TMS, our reputation, and future results of operations may be adversely affected.
We operate in a
very competitive environment and if we are unable to compete successfully against our existing or potential competitors, our revenues
and operating results may be negatively affected.
Our Deep TMS systems
for MDD (including reduction of comorbid anxiety symptoms, commonly referred to as anxious depression), OCD, smoking addiction, and any
future indications are or will be subject to intense competition. The industry in which we operate is subject to rapid change and is highly
sensitive to the introduction of new products or other market activities of current or new industry participants. Our ability to compete
successfully will depend on our ability to develop and obtain regulatory clearances of Deep TMS for indications that reach the market
in a timely manner, to receive adequate coverage and reimbursement from third-party payers, and to successfully demonstrate to physicians
and patients the merits of Deep TMS compared to the products of our competitors. If we are not successful in convincing others of the
merits of Deep TMS or educating them on the use of the Deep TMS system, they may not use our system or use them effectively and we may
be unable to increase our revenues.
Deep TMS competes with
several existing Traditional TMS competitors, including Neuronetics, Magventure, MAG & More, CloudTMS, Magstim, and Nexstim.
Competing TMS therapy companies have developed or may develop treatments that have improved efficacy when compared to our products or
that require a less significant investment of resources from physicians. Likewise, psychiatrists and other customers may not be able to
easily compare Deep TMS to our focal TMS competitors given limited data from head-to-head studies and marketing campaigns and tactics
employed by competitors which may have access to greater resources than we do.
We also face competition
from pharmaceutical and other companies, many of which have greater resources than we do, that develop competitive products, such as anti-depressant
medications (including but not limited to a nasal spray utilizing the drug esketamine, which was recently approved by the FDA for use
in conjunction with an oral antidepressant) and to a lesser degree, ECT, home-use alternatives such as transcranial direct current stimulation
(TDCS) devices, prescription digital therapeutics (PDTs), and other neuromodulation treatment options. Our commercial opportunity could
be reduced or eliminated if these competitors develop and commercialize anti-depressant medications or other treatments that are safer
or more effective than Deep TMS, or are offered at more competitive prices, are more easily administered to patients or are otherwise
more attractive to our customers and patients. At any time, these and other potential market entrants may develop treatment alternatives
that may make Deep TMS less competitive.
We also note that competition
varies based on the indication, and some of the indications we are advancing may face marketability challenges based on existing treatment
options. For example, there are a variety of smoking cessation products currently available on the market, including nicotine patch treatment.
Electronic cigarettes, or e-cigarettes, are also widely available substitutes for tobacco smoking. Deep TMS for smoking cessation may
not be a marketable alternative to these existing options, particularly to the extent smokers need to pay out-of-pocket given the unavailability
of reimbursement for this indication.
In addition, our competitors
may have more established distribution networks than we do (including but not limited to exclusivity or other arrangements with large
clinic networks), or may be acquired by enterprises that have more established distribution networks than we do. Our competitors may also
develop and patent processes or products earlier than we can or obtain domestic or international regulatory clearances or approvals for
competing products more rapidly than we can, which could impair our ability to develop and commercialize similar products. Furthermore,
our educational efforts to distinguish between Deep TMS and traditional TMS may be limited, and our competitors may thereby succeed in
obtaining regulatory pathways for their products based on our clinical data without having to invest in clinical trials themselves. In
addition, we compete with our competitors to engage the services of independent distributors outside the United States, both those presently
working with us and those with whom we hope to work as we expand.
Furthermore, our competitors
may be seeking predicate FDA approvals in other psychiatric and neurological indications, and TMS products of various companies are frequently
used off-label, and in certain circumstances, are marketed outside of the United States for other indications.
Moreover, the potential
for both TMS competitors or other medical device or pharmaceutical companies to introduce new and disruptive products or forms of therapy
can significantly impact our financial performance and ability to compete.
If we are unable
to adequately train physicians and other treatment providers and operators on the safe and appropriate use of our Deep TMS systems, we
may be unable to achieve our expected growth.
There is a learning process
involved for treatment providers to become proficient in the use of our Deep TMS systems, which requires us to spend considerable time
and resources for training. It is critical to the success of our commercialization efforts to train a sufficient number of physicians
and to provide them with adequate, ongoing instruction and training in the use of our Deep TMS systems. This training process generally
requires physicians to review and study product materials and engage in hands-on training sessions. This training process may also take
longer than expected or be more complicated than the physicians or their personnel are comfortable with and may therefore affect our ability
to increase sales. Convincing physicians to dedicate the time and energy necessary for adequate training is challenging, and we may not
be successful in these efforts.
The use of our Deep TMS
system to treat OCD requires a special procedure to provoke the patient to exhibit symptoms of OCD while the patient is treated with Deep
TMS. This procedure requires special training and may make the treatment more difficult to apply than alternative treatments, as the treatment
must be tailored for the condition of each patient. As a result, this may lead to a variability of the overall results and between patients,
which could discourage use of Deep TMS for OCD. In addition, if the physicians and operators do not apply the treatment of OCD patients
properly or experience difficulties in the use of the system for OCD, this could reduce the level of satisfaction with this system for
OCD, and adversely affect our revenues and our operating results.
We may be unable
to forecast our future growth accurately.
We may be unable to predict
future growth related to Deep TMS for MDD (including reduction of comorbid anxiety symptoms, commonly referred to as anxious depression),
OCD, smoking addiction, and other psychiatric indications because some of these disorders are inherently difficult to diagnose and there
are frequent co-morbidities (overlap) in these disorders that complicate treatment methods. Diagnosis for psychiatric disorders, such
as MDD and OCD, is based on an individual’s reported experiences and mental status examination, and accordingly is subject to significant
error. For example, it is estimated that about half of the individuals in the United States who experience a major depressive episode
annually are not diagnosed correctly. In addition, there is a rising trend in which primary care providers, rather than mental health
professionals, prescribe anti-depressant medications. Primary care providers often prescribe anti-depressants without a psychiatric diagnosis
of disease. In 73% of visits in which a primary care provider prescribed an anti-depressant, patients did not have a psychiatric diagnosis.
Without a psychiatric diagnosis, treatment cannot be tailored to the underlying condition. Accordingly, a significant portion of MDD patients
that are considered treatment-resistant may be unresponsive to first-line treatment as a result of incorrect diagnosis, and any such patients
may not respond to Deep TMS treatment. In addition, the H-Coils for our Deep TMS systems may prove to be interchangeable and clinicians
may be able to treat patients with multiple disorders in the same procedure. With respect to comorbidities, there is a high rate of tobacco
use amongst patients suffering from mental health conditions such as depression and anxiety. Approximately 3 of every 10 cigarettes smoked
by adults in the United States are smoked by persons with mental health conditions. As a result of the foregoing factors, the addressable
market for Deep TMS for MDD (including reduction of comorbid anxiety symptoms, commonly referred to as anxious depression), OCD, and smoking
addiction, may be smaller than we currently anticipate, and predictions for our future growth may prove to be inaccurate. This may have
a materially adverse effect on our future results of operations.
We may be unable
to manage our anticipated growth effectively, which could make it difficult to execute our business strategy.
We have been growing
rapidly and have a relatively short history of operating as a commercial-stage company. We intend to continue to grow our business operations
and may experience periods of rapid growth and expansion. This anticipated growth could create a strain on our organizational, administrative
and operational infrastructure, including our supply chain operations, quality control, technical support and customer service, sales
force management and general and financial administration. These risks increase as we expand into new countries, each requiring varied
and often time-consuming regulatory challenges. We may be unable to maintain the quality, regulatory infrastructure, or delivery timelines,
of our products or customer service or satisfy customer demand if our business grows too rapidly. Our ability to manage our growth properly
will require us to continue to improve our operational, financial and management controls, and our reporting systems and procedures. We
may implement new enterprise software systems in a number of areas affecting a broad range of business processes and functional areas.
The time and resources required to implement these new systems is uncertain and failure to complete this in a timely and efficient manner
could harm our business.
As our commercial operations
and sales volume grow, we will need to continue to increase our workflow capacity for our supply chain, regulatory expansion, customer
service, training and education personnel, billing, accounting reporting and general process improvements and expand our internal quality
assurance program, among other things. Our current work force may not be sufficient to handle our expanding growth and we will be required
to expand and train these personnel as we increase our sales efforts. We may not successfully implement these increases in scale or the
expansion of our personnel, which could harm our business.
If we are unable
to successfully expand our sales and customer support team and adequately address our customers’ needs, it could negatively impact
revenues and market acceptance of Deep TMS and we may never generate sufficient revenues to achieve or sustain profitability.
As of December 31,
2021, we had 118 employees, including 49 employees in sales and marketing. Our operating results are directly dependent upon the sales
and marketing efforts of our sales and customer support team and, to a lesser extent, on our independent third party distributors outside
of the United States. If our employees or our independent distributors fail to adequately promote, market and sell or lease our Deep TMS
systems, our revenues could significantly decrease and/or fail to meet our targets.
In addition, our future
revenues will largely depend on our ability to successfully execute our marketing efforts and adequately address our customers’
needs. We believe it is necessary to expand our sales force, including by hiring additional sales representatives or distributors with
specific technical backgrounds that can support our customers’ needs.
As we develop and seek
regulatory clearances for new indications, enhancements and features and increase our marketing efforts, we will need to expand the reach
of our marketing and sales networks. Our future success will depend largely on our ability to continue to hire, train, retain and motivate
skilled employees, and distributors with significant technical knowledge in various areas. New hires require training and take time to
achieve full productivity. If we fail to train new hires adequately, or if we experience high turnover in our sales force in the future,
new hires may not become as productive as may be necessary to maintain or increase our sales. If we are unable to expand our sales and
marketing capabilities domestically and internationally, we may be unable to effectively commercialize our Deep TMS systems, which could
harm our business.
Failure to secure
or maintain adequate coverage and reimbursement of our Deep TMS system for the currently authorized indications and other indications
for which we obtain FDA authorization in the future, if any, may make physicians reluctant to use or recommend Deep TMS and have a material
adverse effect on our sales, results of operations, and financial condition.
Patients generally rely
on third-party payers to reimburse all or part of the costs associated with outpatient treatment services. Patients may, thus, be unwilling
to undergo, and physicians may be unwilling to prescribe, a given course of treatment in the absence of adequate coverage and reimbursement.
Accordingly, our ability to successfully commercialize our Deep TMS system depends significantly on the extent to which treatment sessions
using Deep TMS are covered and reimbursed by government healthcare programs, such as Medicare and Medicaid (among others), commercial
health insurers, managed care organizations, and other third-party payers.
Third-party payers are
increasingly examining the medical necessity and cost effectiveness of medical products and services, in addition to safety and efficacy.
Significant uncertainty exists as to the reimbursement status of any newly approved (or cleared) products or therapies, such as Deep TMS
for smoking addiction, which represent novel approaches to treatment of a disease, addiction, or condition. Even if a third-party payer
covers a particular treatment that uses Deep TMS, the resulting reimbursement rate may not be adequate to cover a provider’s cost
to purchase or lease the Deep TMS system or ensure such transaction is profitable for the provider. Reimbursement by a third-party payer
may depend upon a number of factors, including the third-party payer’s determination that a treatment is neither experimental nor
investigational, safe, effective, and medically necessary, appropriate for the specific patient, cost-effective, supported by peer-reviewed
medical journals and included in clinical practice guidelines.
In the United States,
there is no uniform policy of coverage and reimbursement among third-party payers, including private insurers. Therefore, coverage and
reimbursement for treatments can differ significantly from payer to payer. However, many third-party payers often rely upon Medicare coverage
policies and payment limitations in setting their own coverage and reimbursement policies and methodologies. Private insurance coverage
for Deep TMS as a treatment for MDD generally requires one to four failures of anti-depressant medications.
Medicare coverage for
Deep TMS as a treatment for MDD generally requires that certain, specified clinical criteria relating to medical necessity are met (and
documented). In particular, subject to variations by payor and locale, under applicable payor policies, Deep TMS may be covered for MDD
if: (i) prescribed by a licensed physician, knowledgeable in the use of TMS (ii) as a treatment for an adult with a confirmed diagnosis
of MDD and no contraindications, (iii) where there is sufficient documentation of failure of between 1 and 4 previous medication trials
(depending on the relevant Medicare Administrative Contractor policy). Other relevant coverage factors considered under these policies
include resistance to treatment with psychopharmacologic agents for depression, history of response to repetitive TMS, and whether the
individual is a candidate for electroconvulsive therapy (ECT) and TMS is less burdensome to the patient.
Reimbursement for
Deep TMS as an MDD treatment is also generally limited to 36 treatment sessions.
In 2021 there has been
emerging reimbursement coverage for Deep TMS for the treatment of OCD. While the criteria for this emerging Deep TMS for OCD coverage
varies with each payer, generally, coverage requires the failure of a combination of between two and four medication trials of two different
classes, for specified periods, and may also require a trial of psychotherapy, before qualifying for reimbursement. Maintaining the reimbursement
coverage obtained during 2021 and obtaining coverage from additional payers may be difficult, and payers may condition coverage subject
to satisfaction of varied criteria.
Obtaining adequate reimbursement
of Deep TMS for smoking addiction, or for any future indications, as applicable, may be difficult. Currently, there is no third-party
coverage of Deep TMS as a treatment for smoking addiction, as payors that have evaluated Deep TMS for smoking addiction coverage have
not yet concluded that it is a reasonable and necessary therapy for smoking addiction. We are working to gather and submit additional
clinical data in order to sufficiently demonstrate the efficacy of Deep TMS for the treatment of smoking addiction. These efforts may
be expensive and time-consuming. Therefore, it may take significant time to obtain sufficient reimbursement coverage of Deep TMS for smoking
addiction. We may be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of reimbursement
compared to existing approved biologics and other therapies. There may be significant delays in obtaining coverage and reimbursement for
newly approved therapies in the United States, and coverage may be more limited than the indications for which the product is approved
by the FDA or similar regulatory authorities outside the United States. Further, there is no guarantee that Deep TMS will ever be adequately
covered or reimbursed for smoking addiction, if at all, or any other future indication for which we obtain authorization, if any. Nonetheless,
the availability of reimbursement coverage in any given indication is not always the exclusive path to commercialization, and we may pursue
and/or develop cash-pay, corporate wellness programs, and/or other alternate models in order to monetize these indications.
In addition, the U.S.
federal government and state legislatures have continued to implement cost containment programs, including price controls and restrictions
on coverage and reimbursement. To contain costs, governmental healthcare programs and third-party payers are increasingly challenging
the price, scrutinizing the medical necessity, and reviewing the cost-effectiveness of medical treatments.
Outside of the United
States, reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern
reimbursement for psychiatric treatments and procedures and certain markets, including Japan, impose additional criteria that must be
met (such as the need for approval by sometimes insular medical societies) before coverage may be practically obtained even on approved
procedures. Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extended
payment periods. If adequate levels of reimbursement from third-party payers outside of the United States, including Japan, are not obtained,
international sales and lease transactions for the Deep TMS system may not materialize or grow significantly.
The marketability of
Deep TMS may suffer if the government and third-party payers fail to provide adequate coverage and reimbursement. Even if favorable coverage
and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented in the future.
We rely on third-party suppliers for
some components used in manufacturing Deep TMS, and we may be unable to immediately transition to alternative parties for these components.
We rely on suppliers
for most of the components used in manufacturing Deep TMS, including the computer controlling the stimulator, the helmet, and the arm
of the helmet, and we may not have sufficient contractual assurances for the long-term supply of these components. We now assemble our
proprietary stimulator in our new-generation Deep TMS systems; however, we remain dependent on a single source third-party supplier for
stimulators used in older versions of our Deep TMS system, and accordingly we must still rely on third-party suppliers for those older
versions. In addition, we rely on the outsourcing company utilized for the manufacture of certain components in our newer systems, including
our proprietary stimulator and various other components. For us to be successful, our suppliers and contract manufacturer must be able
to provide us with components in sufficient quantities, in compliance with quality and regulatory requirements, in accordance with agreed
upon specifications, at acceptable costs and on a timely basis. While these suppliers have generally met our demand requirements on a
timely basis in the past, their ability, and willingness to continue to do so going forward may be limited for several reasons, including
our lack of long-term agreements with those suppliers, our relative importance as a customer of those suppliers, or, as applicable, their
ability to produce the components for or provide assembly services to manufacture our Deep TMS systems. An interruption in our commercial
operations could occur if we encounter delays or difficulties in securing these components, if we cannot obtain an acceptable substitute.
In addition, we have experienced, and may continue to experience, more general supply chain issues, which are in part related to, or exacerbated
by, the COVID-19 pandemic. See “—Our operations could be adversely affected by the global supply chain disruptions.”
Any transition to a new
supplier or contract manufacturer could be time-consuming and expensive, may result in interruptions in our operations and product delivery,
could affect the performance specifications of Deep TMS or could require that we modify its design. If we are required to change our contract
manufacturer, we will be required to verify that the new manufacturer maintains facilities, procedures, and operations that comply with
our quality and applicable regulatory requirements, which could further impede our ability to manufacture Deep TMS systems in a timely
manner. If the change in manufacturer results in a significant change to any product, a new 510(k) clearance from the FDA or similar non-U.S.
regulatory authorization may be necessary before we implement the change, which could cause a substantial delay. We cannot assure you
that we will be able to identify and engage alternative suppliers or contract manufacturers on similar terms or without delay. Furthermore,
our contract manufacturer could require us to move to a different production facility. The occurrence of any of these events could harm
our ability to meet the demand for Deep TMS in a timely and cost-effective manner.
We face risks associated with our international
business.
We currently market and
sell Deep TMS systems outside of the United States in various countries and/or intend to market and expand the commercialization of Deep
TMS in other markets, including Canada, Europe, Australia, and various Middle Eastern, Central/South American, and Asian countries.
We are assessing the
opportunity to expand into other international markets. However, our expansion plans may not be realized, or if realized, may not be successful.
We expect each market to have particular regulatory hurdles to overcome, and future developments in these markets, including the uncertainty
relating to governmental policies and regulations, could harm our business.
The sale, lease, and
shipment of the Deep TMS system across international borders, as well as the purchase of components and products from international sources,
subjects us to extensive U.S. and other foreign governmental trade, import, export, regulatory, and customs regulations and laws. Compliance
with these regulations and laws is costly and exposes us to penalties for non-compliance. We expect our international activities will
be dynamic over the foreseeable future as we continue to pursue opportunities in international markets. Our international business operations
are subject to a variety of risks, including:
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difficulties in staffing and managing foreign and geographically dispersed operations, to the extent we establish non-U.S. operations; |
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differing and multiple payer reimbursement regimes, government payers or patient self-pay systems; |
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difficulties in determining and creating the proper sales pathway in new, international markets; |
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compliance with various U.S. and international laws, including export control laws and the U.S. Foreign Corrupt Practices Act of 1977 (FCPA) and similar international laws, and anti-money laundering laws; |
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differing regulatory requirements for obtaining marketing authorizations for our products in non-U.S. jurisdictions; |
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changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to sell our products, perform services or repatriate profits to the United States; |
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tariffs and trade barriers, export regulations, sanctions, and other regulatory and contractual limitations on our ability to sell our products in certain foreign markets; |
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potential adverse tax consequences, including imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures; |
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imposition of differing labor laws and standards; |
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armed conflicts or economic, political, and/or social instability in foreign countries and regions; |
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fluctuations in foreign currency exchange rates; |
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supply lags, inefficiencies, difficulty managing
expenses in our local currency in the event that its value diverges from that of the currencies of the jurisdictions where we earn income,
and other risks created by any sourcing, manufacture, assembly and/or production of our products/components outside of the U.S., while
commercial activities are largely focused in the U.S.
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an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action; and |
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availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us. |
We rely and in
the future expect to rely on a network of third-party distributors to market and distribute our products internationally, and if we are
unable to maintain and expand this network, we may be unable to generate anticipated revenues.
We rely, and expect to
rely in the future, on a network of third-party distributors to market and distribute our products in international markets. We are assessing
the opportunity to continue expanding into other international markets. We may face significant challenges and risks in managing a geographically
dispersed distribution network. We have limited ability to control any third-party distributors and agents. Our distributors and agents
may be unable to successfully market, lease, and sell our products and may not devote sufficient time and resources to support the marketing,
sales, education, and training efforts that we believe enable the products to develop, achieve or sustain market acceptance. Additionally,
in some international jurisdictions, we rely on our distributors to manage the regulatory process, while complying with all applicable
rules and regulations, and we are dependent on their ability to do so effectively. In addition, if a dispute arises with a distributor
or if a distributor is terminated by us or goes out of business, it may take time to locate an alternative distributor, to seek appropriate
regulatory approvals with the new distributor and to train new personnel to market our products, and our ability to sell those systems
in the region formerly serviced by such terminated distributor could be harmed. Any of these factors could reduce our revenues from affected
markets, increase our costs in those markets or damage our reputation. In addition, if an independent distributor or agent were to depart
and be retained by one of our competitors, we may be unable to prevent that distributor or agent from helping competitors solicit business
from our existing customers, which could further adversely affect our sales. As a result of our reliance on third-party distributors and
agents, we may be subject to disruptions and increased costs due to factors beyond our control, including labor strikes, third-party error,
and other issues. During the COVID-19 global pandemic, our distributors have faced operational challenges, clinic closures due to governmental
quarantine mandates and various other financial and operational difficulties. We believe that these difficulties have limited our ability
to penetrate these markets. If the services of any of these third-party distributors and agents become unsatisfactory, we may experience
delays in meeting our customers’ demands, and we may be unable to find a suitable replacement on a timely basis or on commercially
reasonable terms. Any failure to deliver products in a timely manner may damage our reputation and could cause us to lose potential customers.
Clinical trials
involve a lengthy and expensive process with an uncertain outcome, which may delay or cause us to abandon the development of Deep TMS
for additional indications.
We are currently at various
stages of completed, ongoing or planned clinical trials of Deep TMS for new indications. 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. Clinical
trials for Deep TMS involve certain specific risks, including factors related to trial design and patient enrollment. Additionally, if
we are unable to recruit a sufficient number of patients for our clinical trials, we may be unable to generate sufficient data to support
marketing authorization. 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 indications of Deep TMS 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 authorizations or to enable market
acceptance of certain indications of Deep TMS. 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, version
of, Deep TMS, for any particular indication, including but not limited to:
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delays in securing clinical investigators or trial sites for the clinical trials; |
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delays in obtaining institutional review board and other regulatory approvals to commence a clinical trial; |
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slower than anticipated patient recruitment and enrollment; |
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negative or inconclusive results from clinical trials; |
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unforeseen safety issues; |
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an inability to monitor patients adequately during or after treatment; |
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placement of a clinical trial on hold by the FDA, institutional review boards/ethics committees or other regulatory authorities; |
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changes in governmental regulations or administrative actions, including governmental changes in permissible endpoints or other measures utilized in clinical trials; |
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problems with investigator or patient compliance with the trial protocols; |
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the FDA or other regulators disagreeing as to the design, protocol or implementation of our clinical trials; |
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exceeding budgeted costs due to difficulty in accurately predicting costs associated with clinical trials; |
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the quality of the products falling below acceptable standards; and |
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the inability to manufacture sufficient quantities of our products to commence or complete clinical trials. |
Additionally, the FDA
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 authorization of additional indications for Deep TMS. 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. 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 authorization to
market new indications for Deep TMS. In addition, the results of our past clinical trials of Deep TMS may not be predictive of future
trial results. If later-stage clinical trials involving Deep TMS for new indications do not produce favorable results, our ability to
obtain regulatory authorization for such indications may be adversely impacted, which will have a material adverse effect on our business,
financial condition, and results of operations.
We rely in part
on third parties to conduct our clinical trials. If these third parties fail to perform their duties on time or as expected, we may not
be able to obtain regulatory authorization for additional indications that we may seek for Deep TMS.
Our clinical trials are
managed by our both own staff and personnel as well as certain third-parties, including clinical trial sites, medical institutions, clinical
research organizations, or CROs, and private practices, for, among other things, site monitoring, statistical work, and electronic data
capture in our clinical trials. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance
with applicable protocols, and legal, regulatory, and scientific standards, including current good clinical practices, or cGCPs, which
are set forth in regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for clinical trials. If
we or any such third parties fail to comply with applicable cGCPs, the clinical data generated in such trials may be deemed unreliable
and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before granting a marketing
authorization for any particular indication. In addition, if such third parties do not devote sufficient time and resources to our clinical
trials or otherwise carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the
quality or accuracy of the clinical data they assist in obtaining is compromised due to the failure to adhere to our clinical protocols,
regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain
regulatory authorization for or successfully commercialize Deep TMS for a specified indication.
Our collaboration
arrangements may not be successful, which could adversely affect our ability to develop and commercialize our products.
We are currently involved
in a number of research and development collaborations with third parties relating to the development of new technology and additional
uses of Deep TMS. These and any future collaborations that we enter into may not be successful. The success of our collaboration arrangements
will depend heavily on the efforts and activities of our collaborators. Collaborations are subject to numerous risks, which may include
that:
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collaborators have significant discretion in determining the efforts and resources that they will apply to collaborations; |
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collaborators may not pursue development and commercialization of our products or may elect not to continue or renew development or commercialization programs based on trial or test results or may change their strategic focus due to the acquisition of competitive products, |
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availability of funding or other external factors, such as a business combination that diverts resources or creates competing priorities; |
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collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates; |
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a collaborator with marketing, manufacturing, and distribution rights to one or more products may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities; |
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we could grant exclusive rights to our collaborators that would prevent us from collaborating with others; |
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collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability; |
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disputes may arise between us and a collaborator that causes the delay or termination of the research, development, and/or commercialization of our current or future products or that results in costly litigation or arbitration that diverts management attention and resources; |
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our collaborators may default on their obligations to us and we may be forced to terminate, litigate, and/or renegotiate such arrangements; |
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our collaborators may have claims that we breached our obligations to them which may result in termination, renegotiation, litigation or delays in performance of such arrangements; |
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collaborations may be terminated, and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable current or future products; |
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collaborators may own or co-own intellectual property covering our products that results from our collaborating with them, and in such cases, we would not have the exclusive right to develop or commercialize such intellectual property; and |
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a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings. |
If any of our collaboration
arrangements are not successful, it could have a material adverse effect on our business, financial condition, and results of operations.
If product liability
lawsuits are brought against us, our business may be harmed, and we may be required to pay damages that exceed our insurance coverage.
Our business exposes
us to potential product liability claims that are inherent in the testing, manufacture, and sale of medical devices for the treatment
of MDD (including reduction of comorbid anxiety symptoms, commonly referred to as anxious depression), OCD, smoking addiction, and other
potential indications. Our treatments are designed for patients who suffer from significant psychiatric, neurological disorders, and addictions,
and these patients are more likely to experience significant adverse health outcomes, which could increase the risk of product liability
lawsuits. Furthermore, if physicians and other operators are not sufficiently trained in the use of our Deep TMS systems, they may misuse
or ineffectively use our system, which may result in unsatisfactory patient outcomes. We could become the subject of product liability
lawsuits alleging that component failures, malfunctions, manufacturing flaws, design defects or inadequate disclosure of product-related
risks or product-related information resulted in an unsafe condition or injury to
Regardless of the merit
or eventual outcome, product liability claims may result in:
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decreased demand for Deep TMS; |
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injury to our reputation and brand; |
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significant litigation costs; |
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substantial monetary awards to or costly settlements with patients; |
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material defense costs; |
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the inability to commercialize new indications, enhancements, or features; and |
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diversion of management attention from pursuing our business strategy. |
Our existing product
liability insurance coverage may be inadequate to protect us from any liabilities we might incur. If a product liability claim or series
of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. Any product
liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the
inability to secure coverage in the future. In addition, a recall of some of our products, whether or not related to a product liability
claim, could result in significant costs and loss of customers.
Our insurance policies
protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not carry insurance
for all categories of risk that our business may encounter. Some of the policies we currently maintain include public liability, employer's
liability, property, third party liability, umbrella, workers’ compensation, products and clinical trial liability, and directors’
and officers’ insurance. We do not know, however, if these policies will provide us with adequate levels of coverage. Any significant
uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.
We bear the risk
of warranty claims on our products.
We bear the risk of warranty
claims on the products we supply, often for the entire contract term for systems which are leased, and generally for one year for Deep
TMS systems we sell to customers. There can be no assurance that we will have sufficient funds, devices, components and/or personnel to
cover future warranty claims. We may not be successful in claiming recovery of relevant components from our suppliers or vendors in the
event of a successful warranty claim against us by a customer or that any recovery from such vendor or supplier would be adequate. In
addition, warranty claims brought by our customers related to third-party components may arise after our ability to bring corresponding
warranty claims against such suppliers expires, which could result in costs to us.
We could be negatively
impacted by violations of applicable anti-corruption laws or violations of our internal policies designed to ensure ethical business practices.
We operate in a number
of countries throughout the world, and we may operate in countries that may not have as strong a commitment to anti-corruption and ethical
behavior that is required by U.S. laws or by our corporate policies. We are subject to the risk that we, our U.S. employees or any future
employees or consultants located in other jurisdictions or any third parties such as our distributors that we engage to do work on our
behalf in foreign countries may take action determined to be in violation of anti-corruption laws in any jurisdiction in which we conduct
business, including the FCPA. The FCPA generally prohibits covered entities and their intermediaries from engaging in bribery or making
other prohibited payments, offers or promises to foreign officials for the purpose of obtaining or retaining business or other advantages.
In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates,
which are intended to, among other things, prevent the diversion of corporate funds to the payment of bribes and other improper payments,
and to prevent the establishment of “off books” slush funds from which such improper payments can be made.
We will face significant
risks if we fail to comply with the FCPA and other laws that prohibit improper payments, offers or promises of payment to foreign governments
and their officials and political parties by us and other business entities for the purpose of obtaining or retaining business or other
advantages. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses operating
in such countries engage in business practices that are prohibited by the FCPA or other laws and regulations. We have implemented or are
in the process of implementing company policies relating to compliance with the FCPA and similar laws. However, such policies may not
be effective at preventing all potential FCPA or other violations. Although our agreements with our international distributors state our
expectations for our distributors’ compliance with U.S. laws, including the FCPA, and provide us with various remedies upon any
non-compliance, including the ability to terminate the agreement, our distributors may not comply with U.S. laws, including the FCPA.
Any violation of the
FCPA or any similar anti-corruption law or regulation could result in substantial fines, sanctions, civil and/or criminal penalties and
curtailment of operations in certain jurisdictions, and might harm our business, financial condition, or results of operations.
Our operations
could be affected in the event of further COVID-19 global pandemic outbreaks.
The COVID-19 global pandemic outbreaks
have led governments and authorities around the globe to take various precautionary measures in order to limit the spread of the virus,
including government-imposed quarantines, lockdowns, and other public health safety measures, which have had major effects on the global
markets and its economy, including on the availability and pricing of materials, manufacturing and delivery efforts, sales to existing
and potential customers and leads, collections from accounts, and other aspects of the global economy. In 2021 these effects continued,
albeit to a lesser extent than seen during the initial onset of the pandemic in 2020, in areas impacted by outbreaks of the Delta and
Omicron variants of the virus which resulted in less commercial activity than could have otherwise been achieved. Additionally we continue
to experience supply chain and shipping delays, shortages and challenges forcing us to adapt our production line, forecasting and other
logistical processes to address these challenges. Further outbreaks of the COVID-19 global pandemic could exacerbate disruptions
to production, cause additional delays in the supply and delivery of products used in our operations, further divert the attention and
efforts of the medical community to coping with the pandemic, impact our ability to recruit subjects for ongoing and planned clinical
trials, disrupt the marketplace in which we operate, and may have a material adverse effects on our operations, sales, revenues, collection
from accounts and ability to raise funds. Our third-party suppliers source certain components and materials of our Deep TMS systems from
Asia and other countries, and any continued spreading of the pandemic may adversely impact their development, manufacture, and supply
processes. In addition, treatment sessions conducted with our Deep TMS system, which are generally scheduled or non-emergency procedures,
may be postponed to the extent hospitals and healthcare centers shift resources to patients affected by any further outbreaks of the pandemic.
The extent to which the COVID-19 global pandemic impacts our results will depend on future developments, which are highly uncertain and
cannot be predicted, including further outbreaks of existing or new variant strains, new information which may emerge concerning the nature
and effects of the pandemic, and/or any governmental mandates or other similar actions instituted to contain the virus or treat its impact,
among others. Moreover, the COVID-19 global pandemic has caused substantial adverse effects on general commercial activity and the world
economy, and our business and results of operations could be adversely affected to the extent that this or any other epidemic causes further
harms to the global economy.
Our operations
could be adversely affected by the global supply chain disruptions
We have experienced, and may continue to experience,
disruptions to the transportation channels used in our supply chain and distribution operations, including increased airport and shipping
port congestion, a lack of transportation capacity, increased fuel expenses, import or export controls or delays, and labor disputes or
shortages. Transport operators are exposed to various risks, such as extreme weather conditions, natural disasters, work stoppages, personnel
shortages, and operating hazards, as well as interstate and international transportation requirements. If we experience transportation
problems, or if there are other significant changes in the cost of these services, we may not be able to arrange efficient alternatives
and timely means to obtain raw materials or ship products to our customers. Disruptions in our container shipments may result in increased
costs, including the additional use of air freight to meet demand. Congestion to ports can affect previously negotiated contracts with
shipping companies, resulting in unexpected increases in shipping costs and reduction in our profitability. In particular, the COVID-19
global pandemic has resulted in several disruptions and delays, as well as quantity limits and price increases, in our global transportation
channels.
In the period following the onset of the pandemic,
as part of the global supply chain crisis, we have seen a significant rise in the price of many of the electronic components needed for
our systems. These price increases are largely attributable to supply and demand factors, and, in some cases, shortages relating to these
parts across the globe. On a related point, the lead time for receiving electronic components shipped by suppliers has increased significantly
amid the worldwide supply chain crisis. This has compelled us to significantly increase buffer inventory levels to ensure that future
demand for our systems can be timely met. Within the broader context of electronic component supply issues, the third party we rely on
for the outsourced manufacture of our newer generation systems halted production in 2021 for a period due to the shortage in PC computers
which are needed for these systems. While we were able to adapt our standard manufacturing process to allow for the integration of these
PC components at a later stage of the production line once inventory levels were restocked, this is illustrative of the continuing risks
and challenges posed by the worldwide supply chain crisis. These risks may be further exacerbated in light of geopolitical events, including
the recent outbreak of war in Ukraine in February 2022.
Performance issues,
service interruptions or price increases by our shipping carriers could adversely affect our business and harm our reputation and ability
to provide our services on a timely basis.
Expedited, reliable shipping
is essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of
our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss,
damage or destruction of any systems, it would be costly to replace such systems in a timely manner, and such occurrences may damage our
reputation and lead to decreased demand for our products and increased cost and expense to our business. In addition, any significant
increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather,
natural disasters or other service interruptions affecting delivery services we use would adversely affect our ability to process orders
for our products on a timely basis.
The recent supply chain
backlog has caused a dramatic rise in the cost of delivery of our systems, including sharp increases in air freight cost. The heavy weight
of our systems translates into a significant increase in the amount we spend on shipping our systems to customers, which also requires
additional labor on the part of our logistical staff to obtain multiple competitive shipping quotes from a variety of carriers in the
industry. Any exacerbation or continuation of these shipping cost pressures may cause corresponding pressures on the pricing of our products
which can have an adverse impact on our customers and their ability to purchase our systems.
Our operations are vulnerable to interruption
or loss due to natural or other disasters, power loss, strikes and other events beyond our control.
A major earthquake, fire,
or other disaster, such as a major flood, seasonal storms, military action or terrorist attack affecting our facilities, or those of our
third-party manufacturers or suppliers, could significantly disrupt our or their operations, and delay or prevent product shipment or
installation during the time required to repair, rebuild or replace our third-party manufacturers or suppliers’ damaged manufacturing
facilities. These delays could be lengthy and costly. If any of our manufacturers’, suppliers’ or customers’ facilities
are negatively impacted by a disaster, shipments of our products could be delayed. Additionally, customers may delay purchases of our
products until operations return to normal. Even if we are able to quickly respond to a disaster, the ongoing effects of the disaster
could create some uncertainty in the operations of our business. Any shortages may increase our costs for power and energy supplies or
could result in blackouts, which could disrupt the operations of our affected facilities and harm our business. In addition, concerns
about terrorism, the effects of a terrorist attack, political turmoil or an outbreak of epidemic diseases could have a negative effect
on our operations.
If we experience
significant disruptions in our information technology systems, our business may be adversely affected.
We depend on our information
technology systems for the efficient functioning of our business accounting, data storage, compliance, purchasing, and inventory management.
While we will attempt to mitigate interruptions, we may experience difficulties in implementing upgrades to our information technology
systems, which would impact our business operations, or experience difficulties in operating our business during the upgrade, either of
which could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage
our supply chain, and otherwise adequately service our customers. In the event we experience significant disruptions as a result of the
current implementation of our information technology systems, we may be unable to repair our systems in an efficient and timely manner.
Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our results
of operations and cash flows.
We are increasingly dependent
on sophisticated information technology for our infrastructure. Our information systems require an ongoing commitment of significant resources
to maintain, protect, and enhance existing systems. Failure to maintain or protect our information systems and data integrity effectively
could have a materially adverse effect on our business.
We rely on the
use of technology and may become subject to cyber-terrorism or other compromises and shut-downs.
We rely heavily on our
internal computer and information technology systems. Our information technology systems may be subject to cyber-terrorism or other compromises
and shut-downs, which may result in unauthorized access to our proprietary information, destruction of our data or disability, degradation
or sabotage of our systems, often through the introduction of computer viruses, cyber-attacks, and other means, and could originate from
a variety of sources, including internal or unknown third parties. We cannot predict what effects such cyber-attacks or compromises or
shut-downs may have on our business, and the consequences could be material. Cyber incidents may remain undetected for an extended period,
which could exacerbate these consequences. If our information systems or other technology are compromised, it could have a material adverse
effect on our business.
Security and privacy
breaches may expose us to liability and harm our reputation and business.
As part of our business
we may receive and process information about our customers, partners and, potentially, their patients, including protected health information
(PHI), and we may configure our devices to collect, transmit or store or contract with third parties to collect, transmit or store our
customers’ data, including PHI. PHI, a subset of “individually identifiable information,” is defined under the federal
level by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information and Technology
for Economic and Clinical Health Act of 2009 (HITECH), including applicable implementing regulations. HIPAA, along with various analogous
laws at the state level, governs the protection and confidentiality of PHI, and other sensitive information, as applicable (as more fully
described below). To the extent we, or third parties we contract with, collect, store or transfer PHI, we may be required to safeguard
PHI in accordance with HIPAA. Furthermore, to the extent we qualify as a business associate under HIPAA, we may be directly subject to
HIPAA’s Privacy Rule.
While we implemented
security measures relating to our operations, generally, those measures may not prevent security breaches that could harm our business
or expose us to liability under HIPAA and/or applicable state privacy laws. Advances in computer capabilities, inadequate technology or
facility security measures or other factors may result in a compromise or breach of our systems and any data we store and process. Our
security measures may be breached as a result of actions by third parties or employee error or malfeasance, among many other possibilities.
A party who is able to circumvent our security measures or exploit inadequacies in our security measures, could, among other things, misappropriate
proprietary information, including information about our customers and their patients, cause the loss or disclosure of some or all of
this information, cause interruptions in our or our customers’ operations or expose our customers to computer viruses or other disruptions
or vulnerabilities. Any compromise of our systems or the data we store or process could implicate reporting requirements, civil penalties,
and other enforcement actions under applicable laws, result in a loss of confidence in the security of our software, damage our reputation,
disrupt our business, lead to legal liability, and adversely affect our results of operations. Moreover, a compromise of our systems could
remain undetected for an extended period of time, exacerbating the impact of that compromise. Actual or perceived vulnerabilities may
lead to claims against us by our customers, their patients or other third parties, including the federal and state governments. While
our customer agreements typically contain provisions that seek to limit our liability, there is no assurance these provisions will be
enforceable and effective under applicable law. In addition, the cost and operational consequences of implementing further data protection
measures could be significant.
We may seek to
grow our business through acquisitions or investments in new or complementary businesses, products or technologies, through the licensing
of products or technologies from third parties. The failure to manage acquisitions, investments, licenses or other strategic alliances,
or the failure to integrate them with our existing business, could harm our business.
Our success depends in
part on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures,
technologies, and market pressures. Accordingly, from time to time, we may consider opportunities to acquire, make investments in or license
other technologies, products, and businesses that may enhance our capabilities, complement our current products, or expand the breadth
of our markets or customer base. Potential and completed acquisitions, strategic investments, licenses, and other alliances involve numerous
risks, including:
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difficulty assimilating or integrating acquired or licensed technologies, products or business operations; |
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issues maintaining uniform standards, procedures, controls, and policies; |
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unanticipated costs associated with acquisitions or strategic alliances, including the assumption of unknown or contingent liabilities and the incurrence of debt or future write-offs of intangible assets or goodwill; |
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diversion of management’s attention from our core business and disruption of ongoing operations; |
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adverse effects on existing business relationships with suppliers, distributors, and customers; |
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risks associated with entering new markets in which we have limited or no experience; |
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potential losses related to investments in other companies; |
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potential loss of key employees of the acquired businesses; and |
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increased legal and accounting compliance costs. |
We do not know if we
will be able to identify acquisitions or strategic relationships we deem suitable, whether we will be able to successfully complete any
such transactions on favorable terms or at all or whether we will be able to successfully integrate any acquired business, product or
technology into our business or retain any key personnel, suppliers or distributors.
Foreign acquisitions
involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures,
languages, legal, and regulatory environments, currency risks and the particular economic, political and regulatory risks associated with
specific countries.
To finance any acquisitions,
investments or strategic alliances, we may choose to issue Ordinary Shares, ADSs or other equity-linked securities as consideration, which
could dilute the ownership of our shareholders. Additional funds may not be available on terms that are favorable to us, or at all. If
the price of the Ordinary Shares or ADSs is low or volatile, we may be unable to consummate any acquisitions, investments or strategic
alliances using our shares as consideration.
Risks Related to Employee Matters
If we are not able
to retain our key management, or attract and retain qualified scientific, technical, and business personnel, our ability to implement
our business plan may be adversely affected.
Our success largely depends on the skill, experience,
and effort of our senior management. The loss of the service of any of these persons, including Dr. David Zacut, the chairman of
our board of directors, Christopher R. von Jako, our President and Chief Executive Officer, R. Scott Areglado, our Senior Vice President
and Chief Financial Officer, Hadar Levy, our Senior Vice President and General Manager of North America, and Dr. Yiftach Roth, our
Chief Scientist, would likely result in a significant loss in the knowledge and experience that we possess and could significantly delay
or prevent successful product development and other business objectives. Our ability to achieve our strategic growth plans depends in
part on our ability to recruit and maintain a talented sales and operations team members. New hires are often subject to a time intensive
educational onboarding period before they can successfully identify potential customer leads and close sales. This can lead to delays
before we can ramp up our commercial initiatives and achieve sales targets. It can also divert attention from our existing sales leadership
and personnel who are needed to train these new hires. Additionally, we have experienced certain challenges in hiring and/or maintaining
employees that we believe are related to the "Great Resignation," also known colloquially as the "Big Quit," which
describes an economic trend characterized by employees voluntarily resigning from their jobs en masse, beginning in early 2021, primarily
in the United States. An article published in the Harvard Business Review on September 15, 2021 cited U.S. Bureau of Labor Statistics
finding that 4 million Americans quit their jobs in July 2021. It found differences in turnover rates between companies in different
industries, with 3.6% more health care employees quitting their jobs than in the previous year and, in technology, resignations increased
by 4.5%. As we operate in both the health care and technology fields, we have not been immune to this larger trend, and while our overall
workforce increased over the past year, we also experienced employee turnover, including in our salesforce, thus impacting our ability
to ramp up our sales and marketing force as quickly as would have otherwise been possible. There is intense competition between numerous
medical device, pharmaceutical, and biotechnology companies, universities, governmental entities, and other research institutions, all
of whom are seeking to employ qualified individuals in the technical fields in which we operate, and we may not be able to attract and
retain the qualified personnel necessary for the successful development and commercialization of Deep TMS.
Employment litigation
and unfavorable publicity could negatively affect our future business.
Employees may, from time
to time, bring lawsuits against us regarding injury, creating a hostile work place, discrimination, wage and hour, sexual harassment,
and other employment issues. In recent years there has been an increase in the number of discrimination and harassment claims generally.
Coupled with the expansion of social media platforms and similar devices that allow individuals access to a broad audience, these claims
have had a significant negative impact on some businesses. Companies that have faced employment or harassment related lawsuits have had
to terminate management or other key personnel, and have suffered reputational harm that has negatively impacted their sales. If we were
to face any employment related claims, our business could be negatively affected.
Under applicable
employment laws, we may not be able to enforce covenants not to compete.
Our employment agreements
generally include covenants not to compete. These agreements prohibit our employees, if they cease working for us, from competing directly
with us or working for our competitors for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions
in which our employees work. For example, Israeli courts have required employers seeking to enforce covenants not to compete to demonstrate
that the competitive activities of a former employee will harm one of a limited number of material interests of the employer, such as
the secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we cannot demonstrate
that such an interest will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees
and our competitiveness may be diminished.
Risks Related to Government Regulation
Our products and
operations are subject to extensive government regulation and oversight both in the United States and abroad, and our failure to comply
with applicable requirements could harm our business.
We are subject to extensive
regulation in the United States and elsewhere, including by the FDA, FTC, and their foreign counterparts. The FDA and foreign regulatory
agencies regulate, among other things, with respect to medical devices: design, development, and manufacturing; testing, labeling, content
and language of instructions for use and storage; clinical trials; product safety; marketing, sales and distribution; premarket clearance
and approval; record keeping procedures; advertising and promotion; recalls and field safety corrective actions; post-market surveillance,
including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;
post-market approval studies; and product import and export.
The regulations to which
we are subject are complex and stringently enforced. Regulatory changes could result in restrictions on our ability to carry on or expand
our operations, higher than anticipated costs or lower than anticipated sales. The FDA enforces these regulatory requirements through,
among other means, periodic unannounced inspections. We do not know whether we will pass any future FDA inspections. Failure to comply
with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as: warning letters;
fines; injunctions; civil penalties; termination of distribution; recalls or seizures of products; delays in the introduction of products
into the market; total or partial suspension of production; refusal to grant future clearances or approvals; withdrawals or suspensions
of current clearances or approvals, resulting in prohibitions on sales of our products; and in the most serious cases, criminal penalties.
We may not receive
the necessary regulatory clearances or approvals to market our product for other proposed indications in the future, and failure to timely
obtain necessary clearances or approvals for such future indications would adversely affect our ability to grow our business.
An element of our strategy
is to continue to upgrade our Deep TMS systems, add new enhancements and features, and expand clearance or approval of the Deep TMS System
to include new indications. In the United States, before we can market a new medical device, or claim new or expanded indications for
use or introduce a significant modification to an existing product, we must first receive either clearance under Section 510(k) of
the Federal Food, Drug, and Cosmetic Act, or the FDCA, de novo classification, or premarket approval application (PMA),
from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that
a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device
that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments
device), a device that was originally on the U.S. market pursuant to a PMA and later down-classified, or a 510(k)-exempt device. To be
“substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the
same technological characteristics as the predicate device or have different technological characteristics and not raise different questions
of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the
PMA process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data,
including, but not limited to, technical, pre-clinical, clinical trial, manufacturing, and labeling data. 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. However,
some devices are automatically subject to the PMA pathway regardless of the level of risk they pose because they have not previously been
classified into a lower risk class by the FDA. Manufacturers of these devices may request that FDA review such devices in accordance with
the de novo classification procedure, which allows a manufacturer whose novel device would otherwise require a PMA prior
to marketing to request down-classification of the device on the basis that the device presents low or moderate risk. If the FDA grants
the de novo classification request, the applicant will then receive authorization to market the device. This device type
can then be used as a predicate device for future 510(k) submissions.
We received marketing
authorization of our MDD and smoking addition indications through the 510(k) clearance process and have made various expansions to our
MSS indication (including, in 2021, a clearance for a shortened three-minute depression protocol, and a labeling expansion for anxious
depression) through subsequent 510(k) clearances. We received marketing authorization of our OCD indication through the de novo classification
process but will be permitted to make changes to our system for the OCD indication through subsequent 510(k) clearances. A competitor
has obtained 510(k) clearance for its TMS device for an OCD indication, using our de novo classification as a predicate
device in their submission, and others may follow suit. The process of obtaining regulatory authorization to market a medical device can
be costly and time consuming, and we may not be able to successfully obtain authorizations on a timely basis, if at all.
The FDA can delay, limit
or deny clearance or approval of a device for many reasons, including: we may be unable to demonstrate to the FDA’s satisfaction
that the product or modification is substantially equivalent to the proposed predicate device or is safe and effective for its intended
use; the data from our pre-clinical studies and clinical trials may be insufficient to support authorization, where required; and the
manufacturing process or facilities we use may not meet applicable requirements. The FDA may also, instead of accepting a 510(k) submission,
require us to submit a PMA, which is typically a much more complex, lengthy, and burdensome application than a 510(k) submission. To support
a PMA, the FDA would likely require that we conduct one or more clinical studies to demonstrate that the device is safe and effective.
In some cases, such studies may be requested for a 510(k) as well. We may not be able to meet the requirements to obtain 510(k) clearance
or PMA approval (or a De Novo classification request), in which case the FDA may not grant any necessary clearances or approvals. In addition,
the FDA may place significant limitations upon the intended uses of our products as a condition to a 510(k) clearance or PMA approval.
Product applications can also be denied or withdrawn due to failure to comply with regulatory requirements or the occurrence of unforeseen
problems following clearance or approval. Any delays or failure to obtain FDA clearance or approval of new products we develop, any limitations
imposed by the FDA on new product use or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our
business, financial condition, and results of operations.
Even if granted, a 510(k)
clearance, de novo classification, or PMA imposes substantial restrictions on how our devices may be marketed or sold,
and the FDA continues to place considerable restrictions on our products and operations. For example, the manufacture of medical devices
must comply with the FDA’s Quality System Regulation (QSR). In addition, manufacturers must register their manufacturing facilities,
list the products with the FDA, and comply with requirements relating to labeling, marketing, complaint handling, adverse event and medical
device reporting, reporting of corrections and removals, and import and export restrictions. The FDA monitors compliance with the QSR
and these other requirements through periodic inspections. If our facilities or those of our suppliers are found to be in violation of
applicable laws and regulations, or if we or suppliers fail to take satisfactory corrective action in response to an adverse inspection,
the regulatory authority could take enforcement action, including any of the following sanctions: untitled letters, warning letters, fines,
injunctions, consent decrees, and civil penalties; customer notifications or repair, replacement, refunds, recalls, detention or seizure
of our products; operating restrictions or partial suspension or total shutdown of production; refusing or delaying requests for 510(k)
marketing clearance or PMA approvals of new products or modified products; withdrawing 510(k) marketing clearances or PMA approvals that
have already been granted; refusing to provide Certificates for Foreign Government; refusing to grant export approval for our products;
or pursuing criminal prosecution. Any of these sanctions could impair our ability to produce or commercialize our products in a cost-effective
and timely manner in order to meet our customers’ demands and could have a material adverse effect on our reputation, business,
results of operations, and financial condition. We may also be required to bear other regulatory compliance costs or take other actions
that may have a negative impact on our sales and our ability to generate profits.
In addition, the FDA
may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which
may prevent or delay authorization of our future products under development or impact our ability to modify our currently marketed products
on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain
new 510(k) clearances, increase the costs of compliance or restrict our ability to maintain our current clearances. We also cannot predict
the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action
in the United States, especially with a new administration that may have different policy priorities than the previous one.
In order to sell our
products in member countries of the EEA, or in countries that also rely on the CE Mark outside the EEA, our products must comply with
the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC), and with the Medical Device Regulation (Regulation 2017/745).
Compliance with these requirements is a prerequisite to be able to affix the CE Mark to our products, without which they cannot be sold
or marketed in the EEA. To demonstrate compliance with the essential requirements we must undergo a conformity assessment procedure, which
varies according to the type of medical device and its classification. Except for low-risk medical devices (Class I non-sterile,
non-measuring devices), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity
of its products with the essential requirements of the EU Medical Devices Directive, a conformity assessment procedure requires the intervention
of an organization accredited by a Member State of the EEA to conduct conformity assessments, or a Notified Body. Depending on the relevant
conformity assessment procedure, the Notified Body would typically audit and examine the technical file and the quality system for the
manufacture, design, and final inspection of our devices. The Notified Body issues a certificate of conformity following successful completion
of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential
requirements. This certificate entitles the manufacturer to affix the CE Mark to its medical devices after having prepared and signed
a related EC Declaration of Conformity. If we fail to remain in compliance with applicable European laws and directives, we would be unable
to continue to affix the CE Mark to our device, which would prevent us from selling them within the EEA and may have an impact on our
marketing authorizations in other countries.
We or our distributors
will also need to obtain, or retain, regulatory approval in other foreign jurisdictions in which we plan to or currently do market and
sell our products, and we or they may not obtain such approvals as necessary to commercialize our products in those territories. Regulatory
marketing authorizations in these foreign jurisdictions typically require device testing, conformance to classification requirements,
pre-market requests to authorize commercialization, and in some cases inspections.
Modifications to
our Deep TMS systems and treatments may require new 510(k) clearances, de novo classification or PMA, and may require us to cease marketing
or recall the modified products until authorizations are obtained.
Any modification to a
510(k)-cleared product that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended
use, design or manufacture, requires a new 510(k) clearance or de novo classification, or possibly, a PMA. Modifications
to products that have been approved through the PMA process generally require premarket FDA approval. Similarly, certain modifications
made to products cleared through a 510(k) or authorized through the de novo classification process may require a new
510(k) clearance. Each of the PMA, de novo classification and the 510(k) clearance processes can be expensive, lengthy,
and uncertain. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of
obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even
longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical
trials.
Despite the time, effort
and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory authorizations could
harm our business. Furthermore, even if we are granted regulatory authorizations, they may include significant limitations on the indicated
uses for the device, which may limit the market for the device.
Any modifications to
our existing products may require new 510(k) clearance; however, future modifications may be subject to the substantially more costly,
time-consuming, and uncertain PMA process. If the FDA requires us to go through a lengthier, more rigorous examination for future products
or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which
could cause our sales to decline.
The FDA requires every
manufacturer to make this modification determination in the first instance, but the FDA may review any manufacturer’s decision.
The FDA may not agree with our decisions regarding whether new authorizations are necessary. We have made modifications to our products
in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k)
clearances were not required. We may make modifications or add additional enhancements or features in the future that we believe do not
require a new 510(k) clearance, de novo classification or a PMA. If the FDA disagrees with our determination and requires
us to submit new 510(k) notifications, de novo classifications or PMAs for modifications to our previously authorized
products for which we have concluded that new authorizations are unnecessary, we may be required to cease marketing or to recall the modified
product until we obtain appropriate regulatory authorization, and we may be subject to significant regulatory fines or penalties. In addition,
the FDA may not authorize our products for the indications that are necessary or desirable for successful commercialization or could require
clinical trials to support any modifications. Any delay or failure in obtaining required regulatory authorizations would adversely affect
our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.
Our products must
be manufactured in accordance with federal and state regulations, and we could be forced to recall our installed systems or terminate
production if we fail to comply with these regulations.
The methods used in,
and the facilities used for, the manufacture of our products must comply with the FDA’s QSR, which is a complex regulatory scheme
that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging,
handling, storage, distribution, installation, servicing, and shipping of medical devices. Furthermore, we are required to verify that
our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable regulatory requirements.
Compliance with the QSR is necessary to receive FDA clearance or approval to market new products and is necessary for a manufacturer to
be able to continue to market cleared or approved devices in the United States. The FDA enforces the QSR through periodic announced or
unannounced inspections of medical device manufacturing facilities, which may include the facilities of subcontractors. Our products are
also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing. Foreign regulatory
authorities also impose manufacturing quality requirements, that may differ from the FDA requirements, with which we must comply.
We or our third-party
suppliers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products.
In addition, failure to comply with applicable FDA or foreign jurisdiction requirements or later discovery of previously unknown problems
with our products or manufacturing processes could result in, among other things: warning letters or untitled letters; fines, injunctions
or civil penalties; suspension or withdrawal of approvals or clearances; seizures or recalls of our products; total or partial suspension
of production or distribution; administrative or judicially imposed sanctions; the FDA’s refusal to grant pending or future clearances
or approvals of Deep TMS for additional indications; clinical holds; refusal to permit the import or export of our products; and criminal
prosecution of us or our employees. Any of these actions could significantly and negatively impact supply of our Deep TMS systems. If
any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims, and we could lose customers
and suffer reduced revenues and increased costs.
If treatment guidelines
for the clinical conditions we are targeting change or the standard of care evolves, we may need to redesign and seek new marketing authorization
from the FDA for one or more of our products.
If treatment guidelines
for the clinical conditions we are targeting or the standard of care for such conditions evolves, we may need to redesign our Deep TMS
systems and seek new marketing authorizations from the FDA. Our existing 510(k) and de novo clearances from the FDA are
based on current treatment guidelines. Additionally, if treatment guidelines change so that different treatments become desirable, the
clinical utility of one or more of our indications could be diminished and our business could suffer.
The misuse or off-label
use of Deep TMS may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly
investigations, fines or sanctions by regulatory bodies, particularly if we are deemed to have engaged in the promotion of these uses,
any of which could be costly to our business.
Deep TMS system has been
authorized for marketing by the FDA only for MDD (including reduction of comorbid anxiety symptoms, commonly referred to as anxious depression),
OCD, and smoking addiction indications. We train our commercial organization to not promote our products for uses outside of the FDA-authorized
indications for use, known as “off-label uses.” However, we cannot guarantee that all of our employees, representatives, and
agents will abide by our marketing policies. If the FDA determines that our promotional materials, training or other marketing activities
constitute promotion of an off-label or unapproved use, it could request that we modify our training or promotional materials or subject
us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, a warning letter, injunction, seizure,
civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under
other regulatory authority, such as laws prohibiting false claims for reimbursement.
Moreover, even if we,
and all our employees, contractors, and agents, market our products in compliance with applicable FDA regulations, such regulations do
not apply to the practice of medicine, and we cannot prevent a physician from prescribing and/or using our products off-label when, in
the physician’s independent professional medical judgment, he or she deems it appropriate. Similarly, we cannot prevent patients
from using our products off-label. There may be increased risk of injury to patients if physicians attempt to prescribe, or patients attempt
to use, Deep TMS off-label. Furthermore, the use of Deep TMS for MDD (including reduction of comorbid anxiety symptoms, commonly referred
to as anxious depression), OCD or smoking addiction other than as stated on product labeling, or for indications other than those authorized
by the FDA, may not be effective to treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
There are similar risks if Deep TMS is used off-label with respect to non-U.S. regulatory approvals.
Deep TMS may cause
or contribute to adverse medical events that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions
that could harm our reputation, business, financial condition, and results of operations. The discovery of serious safety issues with
our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have
a negative impact on us.
We are subject to the
FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive
or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or
serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury.
The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event.
We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have
become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that
is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take
action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties,
revocation of our device clearance, seizure of our products or delay in clearance of future products.
The FDA and foreign regulatory
bodies have the authority to require, and in the United States companies are expected to voluntarily, the recall of commercialized products
in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable
risk to health. An FDA recall, whether mandatory or voluntary, may be based on a finding that there is reasonable probability that the
device could cause serious injury or death. A government mandated or voluntary recall by us could occur as a result of an unacceptable
risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies
or failures to comply with applicable regulations. Product defects or other errors may occur in the future. If we initiate a correction
or removal for one of our devices to reduce a risk to health posed by the device, we would be required to submit a publicly available
Correction and Removal report to the FDA and, in many cases, similar reports to other regulatory agencies. This report could be classified
by the FDA as a device recall which could lead to increased scrutiny by the FDA, other international regulatory agencies, and our customers
regarding the quality and safety of our devices. Furthermore, the submission of these reports could be used by competitors against us
in competitive situations and cause customers to delay purchase decisions or cancel orders and would harm our reputation.
Depending on the corrective
action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain
new authorization for the device before we may market or distribute the corrected device. Seeking such authorization may delay our ability
to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we
may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties
or civil or criminal fines.
Companies are required
to maintain certain records of corrective actions, even if they are not reportable to the FDA. We may initiate voluntary corrective actions
for our products in the future that we determine do not require notification to the FDA. If the FDA disagrees with our determinations,
it could require us to report those actions as recalls, and we may be subject to enforcement action. A future recall announcement could
harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales.
Any adverse event involving
Deep TMS systems could result in voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection,
mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as exposing us to private
litigation, would require the dedication of our time and capital, distract management from operating our business, and may harm our reputation
and financial results.
If we or our distributors
do not obtain and maintain international regulatory registrations or approvals for Deep TMS, we will be unable to market and sell our
products outside of the United States.
Sales of our Deep TMS
systems outside of the United States are subject to foreign regulatory requirements that vary widely from country to country. While the
regulations of some countries may not impose barriers to marketing and selling Deep TMS systems or only require notification, others require
that we or our distributors obtain the approval of a specified regulatory body. Complying with foreign regulatory requirements, including
obtaining registrations or approvals, can be expensive and time-consuming, and we or our distributors may not receive regulatory approvals
in each country in which we plan to market Deep TMS or we may be unable to do so on a timely basis. The time required to obtain registrations
or approvals, if required by other countries, may be longer than that required for FDA authorization, and requirements for such registrations,
clearances or approvals may significantly differ from FDA requirements. If we modify our Deep TMS systems, we or our distributors may
need to apply for additional regulatory approvals before we are permitted to sell the modified product. In addition, we may not continue
to meet the quality and safety standards required to maintain the authorizations that we or our distributors have received. If we or our
distributors are unable to maintain our authorizations in a particular country, we will no longer be able to sell the applicable product
in that country.
Regulatory authorization
by the FDA and/or the permission to affix the CE Mark does not ensure clearance or approval by regulatory authorities in other jurisdictions,
and clearance or approval by one or more foreign regulatory authorities does not ensure clearance or approval by the FDA, the EU and/or
the regulatory authorities in other foreign countries. However, a failure or delay in obtaining regulatory clearance or approval in one
country may have a negative effect on the regulatory process in others.
We are subject
to certain federal, state, and foreign fraud and abuse laws, health information privacy and security laws, and transparency laws, which,
if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these
laws could cause adverse publicity and be costly to respond to, and thus could harm our business.
There are numerous U.S.
federal and state, as well as foreign, laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims, and physician
transparency laws. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and
regulations involve substantial costs. Our business practices and relationships with providers and patients are subject to scrutiny under
these laws. We may also be subject to patient information privacy and security regulation by both the federal government and the states
and foreign jurisdictions in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate
include:
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the federal healthcare Anti-Kickback Statute, which prohibits, among other things, persons, and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order, or arrange for or recommend a good or service, for which payment may be made, in whole or in part, under federal healthcare programs, such as Medicare and Medicaid. The term “remuneration” has been broadly interpreted to include anything of value. The government can establish a violation of the Anti-Kickback Statute without proving that a person or entity had actual knowledge of the law or a specific intent to violate. Moreover, the government may assert that a claim including items or services resulting from a violation of the federal healthcare Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Although there are a number of statutory exceptions and regulatory safe harbors to the federal healthcare Anti-Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration to those who prescribe, purchase, or recommend medical device products, including discounts, or engaging individuals as speakers, consultants, or advisors, may be subject to scrutiny if they do not fit squarely within an exception or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors for many common practices, such as reimbursement support programs, educational or research grants, or charitable donations; |
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the federal civil False Claims Act, which prohibits,
among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment
of federal government funds, and knowingly making, using or causing to be made or used a false record or statement material to a false
or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government. Private individuals, commonly
known as “whistleblowers,” can bring civil False Claims Act qui tam actions, on behalf of the government
and such individuals and may share in amounts paid by the entity to the government in recovery or settlement. False Claims Act liability
is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $11,665
to $23,607 per false or fraudulent claim or statement. The government may assert that a claim including items or services resulting from
a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim under the federal civil False Claims Act. Many
pharmaceutical and medical device manufacturers have been investigated and have reached substantial settlements under the federal civil
False Claims Act in connection with alleged off-label promotion of their products and allegedly providing free products to customers with
the expectation that the customers would bill federal health care programs for the product. In addition, manufacturers can be held liable
under the federal civil False Claims Act even when they do not submit claims directly to government payers if they are deemed to “cause”
the submission of false or fraudulent claims. There are also criminal penalties, including imprisonment and criminal fines, for making
or presenting false, fictitious or fraudulent claims to the federal government; |
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HIPAA, which created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program, including private third-party payers, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statements or representations, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of, or payment for, healthcare benefits, items or services. Similar to the federal healthcare Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation; |
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the federal Physician Payments Sunshine Act under PPACA which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, information related to payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and group purchasing organizations, as well as ownership and investment interests held by physicians and their immediate family members. Since January 2022, applicable manufacturers are also required to report information regarding payments and transfers of value provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse-midwives; |
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HIPAA, as amended by HITECH, and their respective implementing regulations, which imposes privacy, security, and breach reporting obligations with respect to PHI, upon entities subject to the law, such as health plans, healthcare clearinghouses and certain healthcare providers, and their respective business associates that perform services on their behalf that involve PHI. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make HIPAA compliance as well as civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions; and |
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analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers or patients; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state and local laws that require the licensure of sales representatives; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and pricing information; data privacy and security laws and regulations in foreign jurisdictions that may be more stringent than those in the United States (such as the EU, which adopted the General Data Protection Regulation, which became effective in May 2018); state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; and state laws related to insurance fraud in the case of claims involving private insurers. |
These laws and regulations,
among other things, constrain our business, marketing, and other promotional activities by limiting the kinds of financial arrangements,
including sales programs, we may have with physicians or other potential purchasers of our products. We have also entered into consulting
agreements with physicians, which are subject to these laws. Further, while we do not submit claims and our customers will make the ultimate
decision on how to submit claims, we may provide reimbursement guidance and support regarding our products. Due to the breadth of these
laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are
subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.
To enforce compliance
with healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between healthcare
companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare
industry. For example, U.S. federal and state regulatory and enforcement agencies continue to actively investigate violations of healthcare
laws and regulations, including pursuing novel theories of liability under these laws. These government agencies recently have increased
regulatory scrutiny and enforcement activity with respect to manufacturer reimbursement support activities and patient support programs,
including bringing criminal charges or civil enforcement actions under the federal healthcare Anti-Kickback statute, federal civil False
Claims Act, the health care fraud statute, and HIPAA privacy provisions. Responding to investigations can be time and resource consuming
and can divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise
have an adverse effect on our business. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity,
and be costly to respond to.
If our operations are
found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to
us, we may be subject to administrative, civil and criminal penalties, damages, fines, disgorgement, substantial monetary penalties, exclusion
from participation in government healthcare programs, such as Medicare and Medicaid, imprisonment, additional reporting obligations, and
oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these
laws, reputational harm, and the curtailment or restructuring of our operations.
Healthcare policy
changes, including recently enacted legislation reforming the U.S. healthcare system, could harm our cash flows, financial condition,
and results of operations.
From time to time, legislation
is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business
and our products. Any new statutes, regulations, revisions, or reinterpretations of existing regulations may impose additional costs,
lengthen review times of any future products, or make it more difficult to manufacture, market or distribute our products. We cannot determine
what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on
our business in the future.
For example, in March
2010, the Patient Protection and Affordable Care Act (PPACA) was enacted in the United States, which made a number of substantial
changes in the way healthcare is financed by both governmental and private insurers. Among other ways in which it may impact our business,
the PPACA:
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establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research; |
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implements 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 healthcare services through bundled payment models; and |
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expands the eligibility criteria for Medicaid programs. |
Some of the provisions
of the PPACA have yet to be implemented, and there have been judicial and Congressional challenges to modify, limit, or repeal certain
aspects of the PPACA since its enactment and have continued to evolve. During his presidency, President Trump has supported the repeal
of all or portions of the PPACA, and in January 2017, he signed Executive Orders designed to delay the implementation of certain provisions
of the PPACA or otherwise circumvent some of the requirements for health insurance mandated by the PPACA to the maximum extent permitted
by law. Due to such efforts, certain elements of the PPACA have been invalidated or suspended, which has, in turn, led to additional
challenges against the law as a whole. For example, the Tax Cuts and Jobs Act of 2017 included a provision repealing, effective January
1, 2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health
coverage for all or part of a year that is commonly referred to as the “individual mandate”. As a result, there is significant
uncertainty regarding future healthcare reform and its impact on our operations. In December 2018, a district court in Texas held that
the individual mandate is unconstitutional and that the rest of the PPACA is, therefore, invalid. On appeal, the Fifth Circuit Court
of Appeals affirmed the holding on the individual mandate but remanded the case back to the lower court to reassess whether and how such
holding affects the validity of the rest of the PPACA. The Fifth Circuit’s decision on the individual mandate was appealed to the
U.S. Supreme Court. On June 17, 2021, the Supreme Court held that the plaintiffs (comprised of the state of Texas, as well as numerous
other states and certain individuals) did not have standing to challenge the constitutionality of the PPACA’s individual mandate
and, accordingly, vacated the Fifth Circuit’s decision and instructed the district court to dismiss the case. As a result, the
PPACA will remain in-effect in its current form for the foreseeable future; however, we cannot predict what additional challenges may
arise in the future, the outcome thereof, or the impact any such actions may have on our business.
The Biden administration
also introduced various measures in 2021 focusing on healthcare and drug pricing, in particular. For example, on January 28, 2021, President
Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through
the PPACA marketplace, which began on February 15, 2021, and remained open through August 15, 2021. The executive order also instructed
certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among
others, reexamining Medicaid demonstration projects and waiver programs that include work requirements and policies that create unnecessary
barriers to obtaining access to health insurance coverage through Medicaid or the PPACA. On the legislative front, the American Rescue
Plan Act of 2021 was signed into law on March 11, 2021, which, in relevant part, eliminates the statutory Medicaid drug rebate cap, currently
set at 100% of a drug’s average manufacturer price, for single source drugs and innovator multiple source drugs, beginning January
1, 2024. And, in July 2021, the Biden administration released an executive order entitled, “Promoting Competition in the American
Economy,” with multiple provisions aimed at prescription drugs. In response, on September 9, 2021, HHS released a “Comprehensive
Plan for Addressing High Drug Prices” that outlines principles for drug pricing reform and sets out a variety of potential legislative
policies that Congress could pursue as well as potential administrative actions HHS can take to advance these principles. And, in November
2021, President Biden announced the “Prescription Drug Pricing Plan” as part of the Build Back Better Act (H.R. 5376) passed
by the House of Representatives on November 19, 2021, which aims to lower prescription drug pricing by, among other things, allowing Medicare
to negotiate prices for certain high-cost prescription drugs covered under Medicare Part D and Part B after the drugs have been on the
market for a certain number of years and imposing tax penalties on drug manufacturers that refuse to negotiate pricing with Medicare or
increase drug prices “faster than inflation.” If enacted, this bill could have a substantial impact on our business.
In the coming years, additional legislative and regulatory changes could be made to governmental health programs that could significantly
impact pharmaceutical companies and the success of our product candidates. At the state level, legislatures have increasingly passed legislation
and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement
constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases,
designed to encourage importation from other countries and bulk purchasing.
There is uncertainty
as to what healthcare programs and regulations may be implemented or changed at the federal and/or state level in the U.S. or the effect
of any future legislation or regulation. Furthermore, we cannot predict what actions the Biden administration will implement in connection
with the PPACA.
However, it is possible
that such initiatives could have an adverse effect on our ability to obtain approval and/or successfully commercialize products in the
United States in the future. For example, any changes that reduce, or impede the ability to obtain, reimbursement for the type of products
we intend to commercialize in the United States (or our products more specifically, if approved) or reduce medical procedure volumes could
adversely affect our business plan to introduce our products in the United States.
Our employees,
consultants, distributors, agents, and other commercial partners may engage in misconduct or other improper activities, including non-compliance
with regulatory standards and requirements.
We are exposed to the
risk that our employees, consultants, distributors, agents, and other commercial partners may engage in inappropriate, fraudulent or illegal
activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate
the regulations of the FDA and other U.S. healthcare regulators, as well as non-U.S. regulators, including by violating laws requiring
the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws
and regulations in the United States and abroad or laws that require the true, complete, and accurate reporting of financial information
or data. In particular, sales, marketing, and business arrangements in the healthcare industry, including the sale of medical devices,
are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices.
These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer
incentive programs, and other business arrangements. It is not always possible to identify and deter misconduct by our employees, distributors,
agents, and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling
unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a
failure to comply with these laws or regulations. Efforts to ensure that the activities of these parties will comply with applicable healthcare
laws and regulations involve substantial costs. These risks may be more pronounced, and we may find that the processes and policies we
have implemented are not effective at preventing misconduct. If any actions are instituted against us and we are not successful in defending
ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the
imposition of civil, criminal and administrative penalties, damages, monetary fines, individual imprisonment, disgorgement, possible exclusion
from participation in government healthcare programs, additional reporting obligations and oversight if we becomes subject to a corporate
integrity agreement or other agreement to resolve allegations of non-compliance with these laws, contractual damages, reputational harm,
diminished profits and future earnings and the curtailment of our operations. Whether or not we are successful in defending against such
actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending
ourselves against any of these claims or investigations.
Risks Related to Our Intellectual Property
We depend on our
intellectual property, and our future success is dependent on our ability to protect our intellectual property and not infringe on the
rights of others.
Our success depends,
in part, on our ability to obtain sufficient patent protection and/or licensing rights for Deep TMS (including, but not limited to, the
various H-Coils utilized in our devices and various product features/capabilities), maintain the confidentiality of our trade secrets
and know how, operate without infringing on the proprietary rights of others, and prevent others from infringing our proprietary rights.
Our success also depends, in part, on the ability of 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, and Yeda Research and Development Company Ltd., or Yeda, the technology transfer
arm of the Weizmann Institute of Science, from whom we license essential intellectual property upon which Deep TMS technology is based,
to obtain sufficient patent protection for such intellectual property, maintain the confidentiality of related trade secrets and know
how, operate without infringing on or violating the proprietary rights of others, and prevent others from infringing or violating the
Company’s owned and/or in-licensed intellectual property.
We and our licensors
try to protect our proprietary position by, among other things, filing U.S., European, and other patent applications related to Deep TMS,
as well as inventions and improvements that may be important to the continuing development of Deep TMS. While we generally apply for patents
in those countries where we intend to make, have made, use, sell, or import patented products, we may not accurately predict all of the
countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country,
we may be precluded from doing so at a later date. In addition, we cannot assure you that:
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any of our future processes or product indications will be patentable or enforceable even if patented; |
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our processes or product indications will not infringe upon the patents of third parties; or |
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we will have the resources to defend against charges of patent infringement or other violation or misappropriation of intellectual property by third parties or to protect our own intellectual property rights against infringement, misappropriation or violation by third parties. |
Because the patent position
of medical device companies involves complex legal and factual questions, we cannot predict the validity and enforceability of patents
with certainty. Changes in either the patent laws or in interpretations of patent laws may diminish the value of our intellectual property.
Accordingly, we cannot predict the breadth of claims that may be allowable or enforceable in our patents (including patents owned by or
licensed to us). Our issued patents may not provide us with any competitive advantages, may be held invalid or unenforceable as a result
of legal challenges by third parties or could be circumvented. Our competitors may also independently develop formulations, processes
and technologies or products similar to ours or design around or otherwise circumvent patents issued to, or licensed by, us. 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 be of sufficient scope to provide us with meaningful protection. The degree of future protection to be afforded by
our proprietary rights is uncertain because legal means afford relatively limited protection, and may not adequately protect our rights
or permit us to gain or keep our competitive advantage.
Patent rights are territorial;
thus, the patent protection we do have exists only in those countries in which we have issued patents. Even so, the laws of certain countries
do not protect our intellectual property rights to the same extent as do the laws of the United States and the European Union. Therefore,
we cannot assure you that the patents issued, if any, as a result of our foreign patent applications will have the same scope of coverage
as our U.S. patents. Competitors may successfully challenge our patents, produce similar products that do not infringe our patents,
or produce products in countries where we have not applied for patent protection or that do not respect our patents. 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.
After the completion
of development and registration of our patents, third parties may still act to manufacture and/or market products that infringe our
patent protected rights, and we may not have adequate resources to enforce our patents. Any such manufacturing and/or marketing of products
that infringe our patent rights may significantly harm our business, results of operations and prospects.
In addition, due to the
extensive time needed to develop, test, and obtain regulatory approval for new indications of Deep TMS, any patents that protect these
indications may expire early during the commercialization process. This may reduce or eliminate any market advantages that such patents
may give us. Following patent expiration, we may face increased competition through the entry of competing products into the market and
a subsequent decline in market share and profits.
However, our business
interests may change, or our licensors may disagree with the scope of our license grants. In such cases, litigation could result impeding
our ability to commercialize the technology, or such licensing arrangements may result in the development, manufacturing, marketing, and
sale by our licensors of products substantially similar to our products, causing us to face increased competition, which could reduce
our market share and significantly harm our business, results of operations and prospects.
The lives of our
patents may not be sufficient to effectively protect our products and business.
Patents have a limited
lifespan. In the United States, the natural expiration of a patent is generally 20 years after its first effective non-provisional
filing date. Although various extensions may be available, the life of a patent, and the protection it affords, is limited. Even if patents
covering our technologies, products, or product candidates are obtained, once the patent life has expired, we may be open to competition.
Patents covering some of our core technology have expired or will expire within the next five years. In particular, the earliest of our
U.S. patents on Deep TMS is set to expire in 2024. See “Business—Intellectual Property.” In addition, although
upon issuance in the United States a patent’s life can be increased based on certain delays caused by the United States Patent
and Trademark Office (USPTO), this increase can be reduced or eliminated based on certain delays caused by the patent applicant during
patent prosecution. If we do not have sufficient patent life to protect our technologies, products, and product candidates, our business,
and results of operations will be adversely affected.
Our right to the
essential intellectual property upon which the 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 Deep TMS.
We have in-licensing
agreements with the PHS and Yeda. 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 or some other failure to meet the terms of agreement, such
as a failure on our part to make certain progress milestone payments set forth in the terms of the licenses or to comply with manufacturing
obligations under these agreements. There is no assurance that we will be able to renew or renegotiate our license agreements on acceptable
terms if and when such agreements terminate. 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 practice such technology and/or to enforce our rights under any in-license would
materially and adversely affect our ability to commercialize our Deep TMS.
Our 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 license
agreements with the PHS and Yeda for our intellectual property rights to Deep TMS technology. Deep TMS was developed by our founders,
among others, prior to our founding over the course of their work for the PHS. The key family of patents and patent applications upon
which the unique coil of Deep TMS technology is based is owned by the DHHS (based on an assignment of the related rights from the PHS)
and is exclusively in-licensed to us under a license agreement with the PHS. In addition, a second family of patent applications covering
additional functions of Deep TMS (including the multichannel stimulator that we are developing for use in a more advanced version of our
system), which is jointly owned by us with the NIH and Yeda, is also licensed to us under the PHS license agreement and our license agreement
with Yeda.
Our license agreement
with Yeda was made within the context of research we commissioned at the Weizmann Institute involving Deep TMS. This agreement provides
for in-licensed rights relating to our second and third families of patent applications, which cover additional characteristics of Deep
TMS (including several Deep TMS coils, multi-channel stimulation, and methods of use), as well as in-licensed rights to rotational field
TMS, which involves the perpendicular placement of two coils over the head operated with a phase lag which causes a rotating induced electric
field that enables stimulation of neurons in various orientations.
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, including
with respect to manufacturing. If we were to receive a notice of non-compliance under any of these agreements, we would need to either
obtain appropriate waivers and/or cure such non-compliance, which may require us to modify our operations.
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, 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 PHS license
agreement, the U.S. government possesses an irrevocable, nonexclusive, nontransferable 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 applicable to the U.S. government at such time. 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 provide assurance that these rights will not be exploited
in a manner that infringes upon our otherwise exclusive license to the PHS-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 PHS-owned patents
are critical to Deep TMS-based technologies and systems, 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 Deep TMS and, hence, 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 to filing
patent applications, we generally try to protect our trade secrets, know-how, technology, and other proprietary information by entering
into confidentiality or non-disclosure agreements with parties that have access to it, such as our development and/or commercialization
partners, employees, contractors, and consultants. We also enter into agreements that require the disclosure and assignment 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, we cannot assure you that these agreements will provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets,
know-how or other proprietary information because 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 secret, know-how or other technology 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, enforcement of our rights can be costly and unpredictable, and a court may
determine that the right belongs to a third party.
Legal proceedings
or third-party claims of intellectual property infringement and other challenges may require us to spend substantial time and money and
could prevent us from developing or commercializing Deep TMS.
The development, manufacture,
use, offer for sale, sale or importation of Deep TMS may infringe on the claims of third-party patents or violate other intellectual property
rights. 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.
Therefore, there is a risk that we could adopt a technology without knowledge of a pending patent application, which technology would
infringe a third-party patent once that patent is issued. The cost to us of any intellectual property litigation or other infringement
proceeding, even if resolved in our favor, could be substantial. Any claims of patent infringement, even those without merit, could be
expensive and time consuming to defend; cause us to cease making, licensing or using products that incorporate the challenged intellectual
property; require us to redesign, reengineer or rebrand Deep TMS, if feasible; cause us to stop from engaging in normal operations and
activities, including developing and new indications for Deep TMS; and divert management’s attention and resources. Some of our
competitors may be able to sustain the costs of such litigation or proceedings more effectively because of their substantially greater
financial resources. Uncertainties resulting from the initiation and continuation or defense of intellectual property litigation or other
proceedings could have a material adverse effect on our ability to compete in the marketplace. Intellectual property litigation and other
proceedings may also absorb significant management time. Consequently, we may not be able to manufacture, use, offer for sale, sell or
import our Deep TMS systems in the event of an infringement action.
Any claims we assert
against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents. In
addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part,
construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our
patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at
risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection
with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during
this type of litigation.
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 nonexclusive, which could potentially limit our competitive advantage. Ultimately,
we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if, as a result of actual
or threatened patent infringement or other claims, we are unable to enter into licenses on acceptable terms. This inability to enter into
licenses could harm our business significantly.
In addition, because
of our developmental stage, claims that Deep TMS infringes on the patent rights of others are more likely to be asserted after commencement
of commercial sales incorporating our technology.
In addition to infringement
claims against us, we may become a party to other patent litigation or proceedings before regulatory agencies, including post-grant review,
inter parties review, interference or re-examination proceedings filed with the U.S. Patent and Trademark Office that challenge our patent
rights or the patent rights of our licensors. The costs of defending our patents or enforcing our proprietary rights in post-issuance
administrative proceedings can be substantial and the outcome can be uncertain. An adverse determination in these proceedings could weaken
or invalidate the patent claims that cover our technology and Deep TMS, which could harm our business significantly and dissuade companies
from collaborating with us or permit third parties to directly compete with the same technology.
We may be subject
to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties
or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
We employ individuals
who were previously employed at universities or other medical device, biotechnology and/or pharmaceutical companies, including our competitors
or potential competitors. Although we try to ensure that our employees, consultants, and independent contractors do not use the proprietary
information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants, or independent
contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information,
of any of our employees’ former employers or other third parties. Litigation may be necessary to defend against these claims.
If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or
personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result
in substantial costs and be a distraction to management and other employees.
International patent
protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial
sums and management resources.
Patent law outside the
United States may be different than in the United States. Further, the laws of some foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United States, if at all. A failure to obtain sufficient intellectual property
protection in any foreign country could materially and adversely affect our business, results of operations, and future prospects. Moreover,
we may participate in opposition proceedings to determine the validity of our foreign patents or our competitors’ foreign patents,
which could result in substantial costs and divert management’s resources and attention. Additionally, due to uncertainty in patent
protection law, we have not filed applications in many countries where significant markets exist.
Risks Related to Our Functions in Israel
Our manufacturing,
assembly and other significant functions are located in Israel and, therefore, our business and operations may be adversely affected by
political, economic and military conditions in Israel.
Aspects of our business
are located in Israel. Accordingly, our business will be directly influenced by the political, economic, and military conditions affecting
Israel at any given time. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel
and its neighboring countries. These conflicts involved missile strikes against civilian targets in various parts of Israel including
most recently, central Israel, and negatively affected business conditions in Israel. In addition, Israel faces threats from more distant
neighbors, in particular, Iran. A change in the security and political situation in Israel and in the economy could impede the raising
of the funds required to finance our research and development plans and to create joint ventures with third parties and could otherwise
have a material adverse effect on our business, operating results, and financial condition.
Our facilities are in
range of rockets that may be fired from Lebanon, Syria or the Gaza Strip into Israel. In the event that our facilities are damaged as
a result of hostile action or hostilities otherwise disrupt the ongoing operation of our facilities, our research and development activities,
and our ability to deliver products to customers could be materially and adversely affected. Our commercial insurance does not cover losses
that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently
committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, there can be no assurance
that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any
losses or damages incurred by us could have a material adverse effect on our business, financial condition, and results of operations.
In addition, popular
uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries. Such instability
may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries. Furthermore,
some countries restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business
with Israel and Israeli companies if hostilities involving Israeli or political instability in the region continue or intensify. Such
restrictions may seriously limit our ability to sell Deep TMS to customers in those countries. These restrictions may materially limit
our ability to sell our products to customers in those countries. In addition, there have been increased efforts by activists to cause
companies and consumers to boycott Israeli products. Such efforts, particularly if they become more widespread, may materially and adversely
impact our ability to sell our products.
Any hostilities involving
Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturns in the economic
or financial condition of could adversely affect our operations and product development, cause our revenues to decrease, and adversely
affect the share price of publicly traded companies having functions in Israel, such as us.
Exchange rate fluctuations
between the U.S. dollar, the New Israeli Shekel and other foreign currencies may negatively affect our future revenues.
While a substantial portion
of our revenues is and will continue to be generated in U.S. dollars, we incur a significant portion of our expenses in currencies
other than U.S. dollars, such as NIS. Likewise, our financial records are maintained in U.S. dollars, while many of our expenses
are incurred in NIS. As a result, our financial results have been and may continue to be affected by fluctuations in the applicable exchange
rates of currencies in the U.S., Israel, and other countries in which our products and services may be sold.
Our operations
may be affected by negative labor conditions in Israel.
Strikes and work-stoppages
occur relatively frequently in Israel. If Israeli trade unions threaten additional strikes or work-stoppages and such strikes or work-stoppages
occur, those may, if prolonged, have a material adverse effect on the Israeli economy and on our business, including our ability to deliver
products to our customers and to receive raw materials from our suppliers in a timely manner.
Our operations
could be disrupted as a result of the obligation of our personnel to perform military service.
Members of our senior
management and key employees reside in Israel, and although most of them are no longer required to perform reserve duty, some may be required
to perform annual military reserve duty, and may be called for active duty under emergency circumstances at any time. Our operations could
be disrupted by the absence for a significant period of time of one or more of these officers or key employees due to military service.
Any such disruption could adversely affect our business, results of operations, and financial condition.
The termination
or reduction of tax and other incentives that the Israeli Government provides to domestic companies may increase the costs involved in
operating a company in Israel.
The Israeli government
currently provides tax and capital investment incentives to domestic companies, as well as grant and loan programs relating to research
and development, and marketing and export activities. In recent years, the Israeli Government has reduced the benefits available under
these programs and the Israeli Governmental authorities have indicated that the government may in the future further reduce or eliminate
the benefits of those programs. We may take advantage of these benefits and programs in the future, however, there is no assurance that
such benefits and programs would continue to be available in the future to us. If such benefits and programs were terminated or further
reduced, it could have an adverse effect on our business, operating results, and financial condition.
The Israeli government
grants that we have received require us to meet several conditions and may restrict our ability to manufacture our Deep TMS systems and
transfer relevant know-how outside of Israel and require us to pay royalties and satisfy specified conditions, including increased royalties
if we manufacture our Deep TMS systems outside of Israel or payment of a redemption fee if we transfer relevant know-how outside of Israel.
We have received royalty-bearing
grants from the government of Israel through the Israel Innovation Authority (IIA) formerly, the Office of the Chief Scientist of the
Ministry of Economy and Industry, for the financing of a portion of our research and development expenditures in Israel. We are required
to pay low single-digit royalties on the sale of those of our products developed with this funding, which payments shall not exceed, in
the aggregate, the amount of the grant received (in U.S. dollars), plus interest at an annual rate based on LIBOR. When know-how
is developed using IIA grants, the Encouragement of Research, Development and Technological Innovation in Industry Law 5744-1984, or the
Innovation Law, the IIA’s rules and guidelines as well as the terms of each of these grants, impose an obligation to pay royalties
from any income deriving from a product developed, in whole or in part, directly or indirectly, in the framework of a research and development
program funded by the IIA, including any derivatives and related services, and restrict our ability to manufacture our products and transfer
know-how developed as a result of the IIA’s funded research and development outside of Israel. In certain cases, transfer of the
IIA funded know-how outside of Israel requires pre-approval by the IIA, which may also impose certain conditions, including payment of
a redemption fee calculated according to the formulas provided in the IIA’s rules and guidelines, or Redemption Fee, which differentiate
between certain situations (while in no event will the Redemption Fee be more than six (6) times the grants received from the IIA
plus interest). In addition, we may need to manufacture our products outside of Israel, in which case prior approval from the IIA is required
(such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate), and we would be required
to pay royalties at an accelerated rate and would be subject to payment of increased royalties, as defined under the IIA’s rules
and regulations (up to, in the aggregate, 300% of the amount of the grant received (dollar linked), plus interest at annual rate based
on LIBOR, depending on the manufacturing volume that is performed outside Israel less royalties already paid to the IIA). Accordingly,
we may be limited in our ability to manufacture outside of Israel, and the manufacture of our products outside of Israel could have a
material adverse effect on our business and results of operations.
The IIA has also published
rules and guidelines with respect to the grant to a foreign entity of the right to use know-how that was developed using the IIA’s
grants, or Funded Know-How, (in a manner that does not entirely prevent the IIA funded company from using the Funded Know-How) which is
subject to receipt of the IIA’s prior approval. This approval is subject to payment to the IIA in accordance with the formulas stipulated
in these rules.
In addition, we may transfer
Funded Know-How to another Israeli company, provided that the acquiring company assumes all of our responsibilities toward the IIA (the
transfer would still require IIA approval, and is subject to the obligation to pay royalties to the IIA from the income of such sale transaction,
but will not be subject to the payment of the Redemption Fee).
The obligation to comply
with the IIA’s rules and guidelines and the Innovation Law (including with respect to the restriction of the transfer of Funded
Know-How and manufacturing rights outside of Israel) remains in effect even after full repayment of the amount of royalties payable pursuant
to the grants. Once a Redemption Fee is paid on a transfer of Funded Know-How outside Israel, all obligations towards the IIA (including
the royalty obligation) cease. We are also subject to reporting obligations towards the IIA including submitting during the R&D approved
program period periodic reports pertaining to the progress of research and development, reports on income derived from products developed
using grants from the IIA and in certain circumstances, reports regarding change in the holding and change in control. Furthermore, in
the event of any change of control or any change in the holding of voting rights or rights to appoint directors or the CEO a result of
which any non-Israeli citizen or non-Israeli resident becomes an “Interested Party” in our company, the non-Israeli citizen
or non-Israeli resident shall comply with all the restrictions imposed on us and our obligations pursuant to Innovation Law and the IIA’s
rules and guidelines. See “Management—Internal Auditor” for definition of Interested Party. In addition, the government
of State of Israel may from time to time audit sales of products which it claims incorporate technology funded via IIA programs, and this
may lead to additional royalties being payable on additional product candidates. In addition, under certain circumstances, further offerings
of our shares to the public in any stock exchange whether in Israel or abroad, is subject to the approval of the IIA.
These restrictions may
impair our ability to enter into agreements for IIA Funded Know-how without the approval of the IIA, and we cannot be certain that it
will be obtained on terms that are acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the
transfer to a non-Israeli entity of know-how developed with IIA funding pursuant to a merger or similar transaction, or in the event we
undertake a transaction involving the licensing of the IIA’s Funded Know-How, the consideration available to our shareholders may
be reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial
obligations. Failure to comply with the requirements under the IIA’s rules and guidelines and the Innovation Law may subject us
to mandatory repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings.
Enforcing a U.S. judgment
against us and our current senior management and directors, or asserting U.S. securities law claims in Israel, may be difficult.
We are incorporated in
Israel. Directors and some members of our management reside in Israel (and most of our assets reside outside of the United States).
Therefore, a judgment obtained against us or any of these persons 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 may also be difficult 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.
Even if an Israeli court
agrees to hear such a claim, it may determine that Israeli, and not U.S., law is applicable to the claim. Under Israeli law, if U.S. law
is found to be applicable to such a claim, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming
and costly process, and certain matters of procedure would be governed by Israeli law. There is little binding case law in Israel addressing
these matters. See “Enforceability of Civil Liabilities” for additional information on your ability to enforce civil claim
against us and our senior management and directors.
Provisions of our
articles of association and Israeli law and tax considerations may delay, prevent or make difficult an acquisition of us, which could
prevent a change of control and negatively affect the price of the ADSs.
Israeli corporate law
regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for certain
transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types
of transactions. These provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change
of control, and therefore would potentially depress the price of the ADSs.
Furthermore, Israeli
tax considerations may make potential transactions unappealing to us or to our shareholders, especially for those shareholders whose country
of residence does not have a tax treaty with Israel which exempts such shareholders from Israeli tax. For example, Israeli tax law does
not recognize tax-free stock 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 a number of conditions, including, in some cases,
a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies
are subject to certain restrictions. 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 disposition of the shares has occurred.
We may become subject
to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely
affect our business.
We have entered into
assignment of invention agreements with our employees who engage in research and development for the company pursuant to which such individuals
agree to assign to us all rights to any inventions created during and as a result of their employment or engagement with us. A significant
portion of our intellectual property has been developed by our employees in the course and as a result of their employment for us. Under
the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee during the scope of his or her employment with
a company and as a result thereof are regarded as “service inventions,” which belong to the employer, absent a specific agreement
between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no agreement
between an employer and an employee with respect to the employee’s right to receive compensation for such “service inventions,”
the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the
employee is entitled to remuneration for his or her service inventions and the scope and conditions for such remuneration. Israeli case
law clarifies that the right to receive consideration for “service inventions” can be waived by the employee and that in certain
circumstances, such waiver does not necessarily have to be explicit. In order to determine the scope and validity of such wavier, the
Committee will examine, on a case-by-case basis, the general contractual framework between the parties, using interpretation rules of
the general Israeli contract laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration
(but rather uses the criteria specified in the Patents Law). As such, and although our employees have agreed to assign to us service invention
rights, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims, we could
be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims,
which could negatively affect our business.
The government
tax benefits that we currently are entitled to receive require us to meet several conditions and may be terminated or reduced in the future.
Some of our operations
in Israel may entitle us to certain tax benefits under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment
Law, once we begin to generate taxable income. If we do not meet the requirements for maintaining these benefits, they may be reduced
or cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which is set at 23% in 2018 and
thereafter. In addition to being subject to the standard corporate tax rate, we could be required to refund any tax benefits that we may
receive in the future, plus interest and penalties thereon. Even if we continue to meet the relevant requirements, the tax benefits that
our current “Technology Enterprise” is entitled to may not be continued in the future at their current levels or at all. If
these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase, as all of our operations would consequently
be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if we increase
our activities outside of Israel, for example, by way of acquisitions, our increased activities may not be eligible for inclusion in Israeli
tax benefits programs. See “Material Tax Considerations—Israeli Tax Considerations and Government Programs—Tax Benefits
Under the 2017 Amendment” for additional information concerning these tax benefits.
Your rights and
responsibilities as a shareholder will be governed by Israeli law, which differs in some material respects from the rights and responsibilities
of shareholders of U.S. companies.
The rights and responsibilities
of our shareholders are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some material
respects from the rights and responsibilities of shareholders in U.S. corporations. For example, 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 towards the company
and other shareholders, and to refrain from abusing its power in the company, including, among other things, voting at a 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 related party transactions requiring shareholder approval. In addition, a shareholder who
is aware 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 has a duty of fairness toward the company. There is limited case law available to assist us in understanding
the nature of these duties or the implications of these provisions. These provisions may be interpreted to impose additional obligations
and liabilities on our shareholders that are not typically imposed on shareholders of U.S. corporations.
Risks Related to our ADSs and Ordinary Shares
The price of the ADSs may be volatile
and may fluctuate due to factors beyond our control.
The share price of publicly
traded medical device companies has been highly volatile and is likely to remain highly volatile in the future. The market price of the
ADSs or Ordinary Shares on either The Nasdaq Global Market, or Nasdaq, or the Tel Aviv Stock Exchange, or TASE, respectively, may fluctuate
significantly due to a variety of factors, including:
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positive or negative results of testing and clinical trials by us, strategic partners, and competitors; |
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delays in entering into strategic relationships with respect to development and/or commercialization of Deep TMS or entry into strategic relationships on terms that are not deemed to be favorable to us; |
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technological innovations or commercial product introductions by us or competitors; |
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changes in government regulations; |
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developments concerning proprietary rights, including patents and litigation matters; |
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public concern relating to the commercial value or safety of Deep TMS; |
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financing or other corporate transactions; |
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publication of research reports or comments by securities or industry analysts; |
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general market conditions in the medical device industry or in the economy as a whole; or |
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other events and factors, many of which are beyond our control. |
These, and other market
and industry factors, may cause the market price and demand for the ADSs to fluctuate substantially, regardless of our actual operating
performance, which may limit or prevent investors from readily selling their ADSs and may otherwise negatively affect the liquidity of
the ADSs. In addition, stock markets in general, and medical device companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.
The significant
share ownership position of our officers, directors, and entities affiliated with certain of our directors may limit your ability to influence
corporate matters.
Our officers, directors, and entities affiliated with certain of our directors
beneficially own or control, directly or indirectly, approximately 19.0% of our outstanding Ordinary Shares as of April 11, 2022. Accordingly,
these persons are able to significantly influence, though not independently determine, the outcome of matters required to be submitted
to our shareholders for approval, including decisions relating to the election of our board of directors, and the outcome of any proposed
merger or consolidation of our company. These interests may not be consistent with those of our other shareholders. In addition, these
persons’ significant interest in us may discourage third parties from seeking to acquire control of us, which may adversely affect
the market price of our Ordinary Shares.
Holders of ADSs
are not treated as holders of our Ordinary Shares.
Holders of ADSs are not
treated as holders of our Ordinary Shares, unless they withdraw the Ordinary Shares underlying their ADSs in accordance with the deposit
agreement and applicable laws and regulations. The depositary is the holder of the Ordinary Shares underlying the ADSs. Holders of ADSs
therefore do not have any rights as holders of our Ordinary Shares, other than the rights that they have pursuant to the deposit agreement.
See “Description of American Depositary Shares.”
Holders of ADSs
may be subject to limitations on the transfer of their ADSs and the withdrawal of the underlying Ordinary Shares.
ADSs are transferable
on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in
connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of ADSs generally
when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because
of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason,
subject to the right of ADS holders to cancel their ADSs and withdraw the underlying Ordinary Shares. Temporary delays in the cancellation
of the ADSs and withdrawal of the underlying Ordinary Shares may arise because the depositary has closed its transfer books or we have
closed our transfer books, the transfer of Ordinary Shares is blocked to permit voting at a shareholders’ meeting or we are paying
a dividend on our Ordinary Shares. In addition, ADS holders may not be able to cancel their ADSs and withdraw the underlying Ordinary
Shares when they owe money for fees, taxes, and similar charges, and when it is necessary to prohibit withdrawals in order to comply with
any laws or governmental regulations that apply to ADSs or to the withdrawal of Ordinary Shares or other deposited securities. See “Description
of American Depositary Shares.”
We and the depositary
are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement, or to terminate
the deposit agreement, without the prior consent of the ADS holders.
We and the depositary
are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement, without the
prior consent of the ADS holders. We and the depositary may agree to amend the deposit agreement in any way we decide is necessary or
advantageous to us or to the depositary. Amendments may reflect, among other things, operational changes in the ADS program, legal developments
affecting ADSs or changes in the terms of our business relationship with the depositary. In the event that the terms of an amendment are
materially disadvantageous to ADS holders, ADS holders will only receive 30 days’ advance notice of the amendment, and no prior
consent of the ADS holders is required under the deposit agreement. Furthermore, we may decide to direct the depositary to terminate the
ADS facility at any time for any reason. For example, terminations may occur when we decide to list our Ordinary Shares on a non-U.S.
securities exchange and determine not to continue to sponsor an ADS facility or when we become the subject of a takeover or a going-private
transaction. If the ADS facility will terminate, ADS holders will receive at least 90 days’ prior notice, but no prior consent
is required from them. Under the circumstances that we decide to make an amendment to the deposit agreement that is disadvantageous to
ADS holders or terminate the deposit agreement, the ADS holders may choose to sell their ADSs or surrender their ADSs and become direct
holders of the underlying Ordinary Shares, but will have no right to any compensation whatsoever.
ADS holders may
not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes
to the plaintiff(s) in any such action.
The deposit agreement
governing the ADSs representing our Ordinary Shares provides that, to the fullest extent permitted by law, holders, and beneficial owners
of ADSs irrevocably waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating
to the ADSs or the deposit agreement.
If this jury trial waiver
provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. If we
or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based
on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability
of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally
adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally
enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the
City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce
a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently, and voluntarily
waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement, and the ADSs. It is advisable
that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.
If you or any other holders
or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement
or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury
trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and / or the depositary.
If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the
applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial
by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action, depending on, among other
things, the nature of the claims, the judge or justice hearing such claims, and the venue of the hearing.
No condition, stipulation
or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary
of compliance with any substantive provision of the U.S. federal securities laws, and the rules and regulations promulgated thereunder.
ADS holders will
not have the same voting rights as the holders of our Ordinary Shares and may not receive voting materials in time to be able to exercise
their right to vote.
Holders of the ADSs will
not be able to exercise voting rights attaching to the Ordinary Shares represented by the ADSs. Under the terms of the deposit agreement,
holders of the ADSs may instruct the depositary to vote the Ordinary Shares underlying their ADSs. Otherwise, holders of ADSs will not
be able to exercise their right to vote unless they withdraw the Ordinary Shares underlying their ADSs to vote them in person or by proxy
in accordance with applicable laws and regulations and our articles of association. Even so, ADS holders may not know about a meeting
far enough in advance to withdraw those Ordinary Shares. If we ask for the instructions of holders of the ADSs, the depositary, upon timely
notice from us, will notify ADS holders of the upcoming vote and arrange to deliver our voting materials to them. Upon our request, the
depositary will mail to holders a shareholder meeting notice that contains, among other things, a statement as to the manner in which
voting instructions may be given. We cannot guarantee that ADS holders will receive the voting materials in time to ensure that they can
instruct the depositary to vote the Ordinary Shares underlying their ADSs. A shareholder is only entitled to participate in, and vote
at, the meeting of shareholders, provided that it holds our Ordinary Shares as of the record date set for such meeting and otherwise complies
with our articles of association. In addition, the depositary’s liability to ADS holders for failing to execute voting instructions
or for the manner of executing voting instructions is limited by the deposit agreement. As a result, holders of ADSs may not be able to
exercise their right to give voting instructions or to vote in person or by proxy, and they may not have any recourse against the depositary
or us if their Ordinary Shares are not voted as they have requested or if their shares cannot be voted.
Our Ordinary Shares
and ADSs are traded on different markets and this may result in price variations.
Our Ordinary Shares have
been traded on the TASE since January 4, 2007, and our ADSs have been traded on The Nasdaq Global Market since April 16, 2019. Trading
in our securities on these markets takes place in different currencies (dollars on the Nasdaq 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 securities on these two markets may differ due to these and other factors. Any decrease in the price of our securities on
one of these markets could cause a decrease in the trading price of our securities on the other market.
We do not have
any current plans to pay dividends in the near term
We do not have any current
plans to pay any cash dividends in the near term. We currently intend to retain all available funds and any future earnings to fund the
development and growth of our business. As a result, capital appreciation, if any, of the ADSs will be the investors’ sole source
of gain for at least the next several years. In addition, Israeli law limits our ability to declare and pay dividends, and may subject
us to certain Israeli taxes. For more information, see “Dividend Policy.”
If equity research
analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade the ADSs, the price
of the ADSs could decline.
The trading market for
the ADSs will rely in part on the research and reports that equity research analysts publish about us and our business. The price of the
ADSs could decline if one or more securities analysts downgrade the ADSs or if those analysts issue other unfavorable commentary or cease
publishing reports about us or our business.
We may be subject
to securities litigation, which is expensive and could divert our management’s attention.
In the past, U.S.-listed
companies that have experienced volatility in the market price of their securities, including many life sciences and biotechnology companies,
have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Regardless of
the merits or the ultimate results of such litigation, securities litigation brought against us could result in substantial costs and
divert our management’s attention from other business concerns, which could have a material adverse effect on our results of operations.
As a foreign private
issuer whose shares are listed on The Nasdaq Global Market, we follow certain home country corporate governance practices instead of certain
Nasdaq requirements.
As a foreign private
issuer whose shares are listed on The Nasdaq Global Market, we are permitted to follow certain home country corporate governance practices
instead of certain requirements of the rules of The Nasdaq Global Market. Pursuant to the “foreign private issuer exemption”:
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we established a quorum requirement such that the quorum for any meeting of shareholders is two or more shareholders holding at least 331/3% of our voting rights, which complies with Nasdaq requirements; however, if the meeting is adjourned for lack of quorum, the quorum for such adjourned meeting will be two or more shareholders, having any percentage of our voting rights; |
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we also follow Israeli corporate governance practice in lieu of Nasdaq Marketplace Rule 5635(c), which requires shareholder approval for certain dilutive events (such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or greater interest in us and certain acquisitions of the shares or assets of another company), and prior to an issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees or consultants. By contrast, under the Israeli Companies Law, shareholder approval is required (subject to certain limited exceptions) for, among other things: (a) transactions with directors concerning the terms of their service (including indemnification, exemption, and insurance for their service or for any other position that they may hold at a company); (b) extraordinary transactions with controlling shareholders of publicly held companies; (c) terms of office and employment or other engagement of a controlling shareholder, if any, or such controlling shareholder’s relative; (d) approval of transactions with the company’s Chief Executive Officer with respect to his or her compensation, whether in accordance with the approved compensation policy of the company or not, or transactions with officers of the company not in accordance with the approved compensation policy; (e) approval of the compensation policy of the company for office holders and (f) certain private placements involving the issuance of 20% or more of our total voting rights, or private placements as a result of which a person will become a controlling shareholder of the company. In addition, under the Israeli Companies Law, a merger requires approval of the shareholders of each of the merging companies; and |
Otherwise, we comply
with the rules generally applicable to U.S. domestic companies listed on The Nasdaq Global Market. However, we may in the future decide
to use the foreign private issuer exemption with respect to some or all of the other Nasdaq corporate governance rules. Following our
home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on The Nasdaq Global
Market may provide less protection than is accorded to investors of domestic issuers. See “Management—Foreign Private Issuer
and Controlled Company Status.”
In addition, as a foreign
private issuer, we are exempt from the rules and regulations under the United States Securities Exchange Act of 1934, as amended, or the
Exchange Act, related to the furnishing and content of proxy statements (including disclosures with respect to executive compensation),
and our officers, directors, and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained
in Section 16 of the Exchange Act. In addition, we are not 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 whose securities are registered under
the Exchange Act.
We may lose our
foreign private issuer status which would then require us to comply with the Exchange Act’s domestic reporting regime and cause
us to incur significant legal, accounting, and other expenses.
We are a foreign private
issuer, and therefore we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange
Act applicable to U.S. domestic issuers. In order to maintain our current status as a foreign private issuer, either (a) a majority
of our Ordinary Shares and ADSs (calculated together) must be either directly or indirectly owned of record by non-residents of the United
States or (b)(i) a majority of our senior management or directors may not be U.S. citizens or residents, (ii) more than 50 percent
of our assets cannot be located in the United States and (iii) our business must be administered principally outside the United States.
If we were to lose this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S.
domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to
make changes in our corporate governance practices in accordance with various SEC and Nasdaq rules. The regulatory and compliance costs
to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may
be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private
issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly.
We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it
more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage
or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract
and retain qualified members of our board of directors.
We may incur increased
costs as a result of operating as a public company in the United States, and our management may be required to devote substantial time
to new compliance initiatives.
As a public company whose
ADSs are listed in the United States, and particularly after we no longer qualify as an emerging growth company and/or lose our foreign
private issuer status, we may incur accounting, legal and other expenses that we did not incur prior to our listing on Nasdaq and registration
with the SEC, including costs associated with our reporting requirements under the Exchange Act. We also anticipate that we may incur
costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley
Act of 2002 (Sarbanes-Oxley Act), as well as rules implemented by the SEC and The Nasdaq Global Market, and provisions of Israeli corporate
law applicable to public companies, and the rules of the TASE. These rules and regulations may increase our legal and financial compliance
costs, introduce new costs such as investor relations, increased insurance premiums and stock exchange listing fees, and may make some
activities more time-consuming and costly. Our board members and other personnel may need to devote a substantial amount of time to these
initiatives. We are constantly evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the
amount of additional costs we may incur or the timing of such costs.
Any future changes in
the laws and regulations affecting public companies in the United States and Israel, including Section 404 and other provisions of
the Sarbanes-Oxley Act, the rules and regulations adopted by the SEC, and the rules of the Nasdaq, will result in increased costs to us
as we respond to such changes.
As an “emerging
growth company,” as defined in the JOBS Act, we take advantage of certain temporary exemptions from various reporting requirements,
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act (and the rules and regulations of the SEC thereunder). When these exemptions cease to apply, we expect to incur additional expenses
and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs
we may incur as a result of becoming a public company or the timing of such costs.
Pursuant to Section 404
of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, starting with the
next annual report that we file with the SEC, our management will be required to report on the effectiveness of our internal control over
financial reporting. In addition, once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the
ability to rely on the exemptions related thereto discussed above and depending on our status as per Rule 12b-2 of the Exchange Act,
our independent registered public accounting firm may also need to attest to the effectiveness of our internal control over financial
reporting under Section 404. We have not yet commenced the process of determining whether our existing internal controls over financial
reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant deficiencies in our
existing internal controls. This process will require the investment of substantial time and resources, including by our chief financial
officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount
of time and effort to complete. In addition, we cannot predict the outcome of this determination and whether we will need to implement
remedial actions in order to implement effective controls over financial reporting. The determination and any remedial actions required
could result in us incurring additional costs that we did not anticipate, including the hiring of outside consultants. Irrespective of
compliance with Section 404 of the Sarbanes-Oxley Act, any failure of our internal controls could have a material adverse effect
on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses,
as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of
the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than
anticipated, it could adversely affect our operations, financial reporting and/or results of operations and could result in an adverse
opinion on internal controls from our independent auditors.
Changes in the laws and
regulations affecting public companies will result in increased costs to us as we respond to their requirements. These laws 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 senior management. We cannot predict or estimate the amount or timing of additional costs we
may incur in order to comply with such requirements.
We are an “emerging
growth company” and the reduced disclosure requirements applicable to emerging growth companies may make the ADSs less attractive
to investors.
We are an “emerging
growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements that are
applicable to other public companies that are not “emerging growth companies.” Most of such requirements relate to disclosures
that we would only be required to make if we also ceased to be a foreign private issuer in the future, for example, the requirement to
hold shareholder advisory votes on executive and severance compensation and executive compensation disclosure requirements for U.S. companies.
However, as a foreign private issuer, we could still be required to comply with the auditor attestation requirements of Section 404
of the Sarbanes-Oxley Act. We are exempt from such requirement for as long as we remain an emerging growth company, which may be up to
five fiscal years after the date of our initial public offering on Nasdaq in April 2019. We will remain an emerging growth company until
the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.07 billion;
(b) December 31, 2024 (the last day of our fiscal year following the fifth anniversary of the closing of our initial public offering
on Nasdaq); (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible
debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We may choose
to take advantage of some or all of the available exemptions. When we are no longer deemed to be an emerging growth company, we will not
be entitled to the exemptions provided in the JOBS Act discussed above. We cannot predict if investors will find the ADSs less attractive
as a result of our reliance on exemptions under the JOBS Act. If some investors find the ADSs less attractive as a result, there may be
a less active trading market for the ADSs, and our share price may be more volatile.
If we fail to maintain
an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent
fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and
the trading price of the ADSs and Ordinary Shares.
Effective internal controls
over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and
procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in
their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection
with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal
deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective
or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls
could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading
price of the ADSs and Ordinary Shares.
Our management will be
required to assess the effectiveness of our internal controls and procedures and disclose changes in these controls on an annual basis.
However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting
firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404.
We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal
controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls
could lead to financial statement restatements and require us to incur the expense of remediation.
Risks Related to Tax Matters
We may be a passive
foreign investment company for U.S. federal income tax purposes, which generally would result in certain adverse U.S. federal income tax
consequences to our U.S. shareholders.
In general, a non-U.S.
corporation is a “passive foreign investment company” (a PFIC) for any taxable year in which (i) 75% or more of its gross
income consists of passive income (the “income test”) or (ii) 50% or more of the average quarterly value of its assets
consists of assets that produce, or are held for the production of, passive income (the “asset test”). Generally, “passive
income” includes interest, dividends, rents, royalties, certain gains, and cash is a passive asset for PFIC purposes. We do not
believe that we are currently a PFIC, and we do not anticipate becoming a PFIC in the foreseeable future. Notwithstanding the foregoing,
the determination of whether we are a PFIC depends on the particular facts and circumstances (such as the valuation of our assets, including
goodwill and other intangible assets), and may also be affected by the application of the PFIC rules, which are subject to differing interpretations.
The fair market value of our assets is expected to depend, in part, upon (i) the market price of the ADSs, which is likely to fluctuate,
and (ii) the composition of our income and assets, which will be affected by how, and how quickly, we spend any cash that is raised
in any financing transaction. If we were a PFIC for any taxable year during which a U.S. shareholder owned the ADSs, such U.S. shareholder
generally will be subject to certain adverse U.S. federal income tax consequences, including increased tax liability on gains from dispositions
of the ADSs and certain distributions and a requirement to file annual reports with the Internal Revenue Service. In light of the foregoing,
no assurance can be provided that we are not currently a PFIC or that we will not become a PFIC in any future taxable year. Prospective
investors should consult their own tax advisers regarding our PFIC status. See “Material Tax Considerations—Certain U.S. Federal
Income Tax Considerations—Passive Foreign Investment Company Considerations.”
ITEM 4. |
INFORMATION ON THE COMPANY |
A. |
History and Development of the Company |
Our legal and commercial name is BrainsWay Ltd.
We are a public 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 in April 2019 we completed the listing of our ADSs on The Nasdaq Global Market. Our Ordinary
Shares are currently listed on the TASE under the symbol “BWAY”, and our ADSs are currently listed on The Nasdaq Global Market
under the symbol “BWAY”. Our Israel-based principal executive offices are located at 19 Hartum Street, Bynet Building, 3rd Floor,
Har HaHotzvim, Jerusalem 9777518, Israel, and our telephone number is +972-2-582-4030. We also have U.S. offices located in Boston and
New Jersey. Our registered agent in the United States is BrainsWay USA, Inc. The address of BrainsWay USA, Inc. is 1 Van de Graaf Drive,
Burlington, MA 01803.
The Securities and Exchange Commission, or SEC,
maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC at http://sec.gov.
Our Ordinary Shares have been traded on the TASE
since January 4, 2007, and our ADSs have been traded on The Nasdaq Global Market since April 16, 2019.
Our web site address is http://www.brainsway.com.
Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report.
Our capital expenditures for the years ended December
31, 2021, 2020, and 2019 were approximately $2.2 million, $2.5 million and $3.3 million respectively. Our current capital expenditures
primarily involve purchase of equipment and system components in both Israel and the United States Our research and development costs
for the years ended December 31, 2021, 2020 and 2019 amounted to $6.3 million, $5.8 million and $7.9 million, respectively.
These research and development costs primarily consisted of expenses incurred in connection with the development of our existing and future
indication pipeline, and the development of our Deep TMS system. We expect our capital expenditures and research and development costs
to remain significant as we continue our research and development efforts and advance our existing and planned clinical pipeline,
in the United States and other strategic markets. We anticipate our capital expenditures and research and development costs in 2022 to
be financed from our existing cash and cash equivalents, including the proceeds from the follow-on underwritten public offering of ADSs
closed on February 25, 2021. For the near future, our investments will mainly remain in the United States and Israel, where our operations
and research and development facilities are currently located.
BrainsWay is a leader in advanced noninvasive
neurostimulation treatments for mental health disorders. The Company is boldly advancing neuroscience with its proprietary Deep Transcranial
Magnetic Stimulation (Deep TMS™) platform technology to improve health and transform lives. We are dedicated to leading through
superior science and building on our substantial body of clinical evidence. We are the first and only TMS company to obtain from the U.S. Food
and Drug Administration (FDA) three cleared indications backed by pivotal studies demonstrating clinically proven efficacy. Current indications
include MDD (including reduction of comorbid anxiety symptoms, commonly referred to as anxious depression), obsessive-compulsive disorder
(OCD), and smoking addiction.
We have also received CE Mark for a variety of
psychiatric and neurological indications. We are focused on increasing global awareness of and broad access to Deep TMS. Deep TMS uses
magnetic pulses to stimulate neurons and consequently modulates the physiological activity of the brain. Our technology can either increase
brain activity in neuronal networks which are hypoactive, or alternatively decrease brain activity in neuronal networks which are hyperactive.
Our proprietary electromagnetic coils, which we refer to as H-Coils, are designed to safely stimulate deep and broad brain regions, which
we believe provides an advantage over other available TMS products, which we refer to collectively as Traditional TMS, that generally
use a “figure 8” design. In the United States, we sell our Deep TMS system for the treatment of MDD (including reduction
of comorbid anxiety symptoms, commonly referred to as anxious depression) and OCD and have recently began marketing our products for the
treatment of smoking addiction in the United States. We believe that our Deep TMS technology has the potential to be safe and effective
for the treatment of a wide range of additional psychiatric, neurological, and addiction disorders. Additional clinical trials of Deep
TMS in various psychiatric, neurological, and addiction disorders are underway or planned.
MDD is a common and debilitating mental disorder
characterized by physiological symptoms, such as sleep disturbance and changes in appetite, emotional symptoms, such as sadness, despair,
emptiness, self-hate, and critique, and cognitive symptoms, such as difficulty concentrating, memory dysfunction, suicidal thinking, and
faulty judgment of reality. According to a 2018 study cited by the World Health Organization (WHO), depression affects approximately 300 million
people worldwide, with the rate of depression increasing in developed countries. The U.S. National Institute of Mental Health (NIMH)
estimates that 21.0 million individuals in the United States suffer from a major depressive episode in 2020. Based on 2006-2007 data
from the Sequenced Treatment Alternatives to Relieve Depression (STAR*D) study, we estimate that approximately 7 million adult MDD
patients in the United States are considered treatment-resistant (i.e., do not achieve remission after four trials of anti-depressant
medication), of which we estimate that approximately 6.3 million or more are currently eligible to receive reimbursement for Deep
TMS from either governmental or private insurers. Assuming a course of treatment per patient of 33 treatment sessions and a price paid
to us per treatment session of $70 (which is our benchmark price per treatment session), we believe our total annual addressable market
opportunity for MDD in the United States is approximately $14.6 billion.
Comorbid anxiety symptoms are common in patients
with major depressive disorder. Between 60-90% of patients with depression have moderate to severe anxiety. In the United States, an estimated
21.0 million adults experienced at least one major depressive episode in 2020. Considering the rate of comorbidity, we estimate that 12.6
to 18.9 million adults experience moderate to severe anxiety in addition to their primary diagnosis of depression. Common anxiety symptoms
include nervousness, feelings of panic, increased heart rate, rapid breathing, sweating, insomnia, trembling, and difficulty focusing
or thinking clearly. The economic burden in the United States for major depressive disorder totaled $326 billion per year between 2010
and 2018.
OCD is a common, chronic, and long-lasting disorder
in which a person has uncontrollable, reoccurring thoughts (obsessions) and behaviors (compulsions) that he or she feels the urge to repeat
over and over in a manner that can interfere with all aspects of life, such as work, school, and personal relationships. Based on data
from the NIMH, we estimate that approximately 3.1 million adults in the United States suffer from OCD annually. We believe that approximately
half of the patients (1.5 million) that have sought help would be considered treatment-resistant (i.e., not having achieved ≥30% improvement
of their symptoms from medications and psychotherapy). Assuming our emerging OCD coverage ultimately reaches a target of 90% of covered
lives (as with MDD), and assuming a course of treatment per patient of 29 treatment sessions and a price paid to us per treatment session
of $70 (which is our benchmark price per treatment session), we believe our total addressable market opportunity for OCD in the United
States is approximately $2.7 billion.
Smoking is one of the leading causes of death
in developed countries. The addiction to nicotine, similar to the addiction to drugs and alcohol, involves modulation of the brain reward
system and causes uncontrollable desire to smoke. 480,000 U.S. adults die from smoking each year. Cigarette smoking has been found to
harm nearly every organ system in the body and is the leading cause of preventable death in the U.S. and of disease burden worldwide
(Rostron, BL, Chang CM, Pechacek TF. Estimation of cigarette smoking-attributable morbidity in the United States, JAMA Intern Med.
2014;174(12):1922-1928). Approximately 34 million U.S. adults smoke cigarettes, of which 68% state they want to quit and 55% actually
attempted to quit in 2018. Of those attempting to quit, 5.4 million made a serious attempt to quit (i.e., using medication). Only 15-20%
of those making serious attempts to quit via medication were successful, leaving approximately between 4.3 and 4.6 million adults who
made serious attempts to quit via medication who were unsuccessful. Reimbursement is not currently available for Deep TMS for smoking
addiction, and it is therefore premature to assess the amount of money our customers might be able to collect from potential payers, and
willing to pay us, for this indication. That said, assuming a course of treatment per patient of 18 treatment sessions, and even assuming
an average price paid to us per treatment session of $50, we believe our total annual addressable market opportunity for smoking addiction
in the United States is approximately between $3.9 and $4.1 billion.
Our first commercial Deep TMS product received
clearance from the FDA in 2013 for the treatment of MDD in adult patients who have failed to achieve satisfactory improvement from anti-depressant
medication in the current episode. Our pivotal trial for MDD demonstrated statistically significant response and remission rates of 38.4%
and 32.6%, respectively, in week five of Deep TMS treatment of 20 minutes per session, compared to 21.4% and 14.6%, respectively, after
sham treatment. Our Deep TMS system for MDD is currently marketed to and installed at psychiatrists’ offices and other facilities
principally in the United States and in certain other countries throughout the world.
Additionally, in April 2021, we received FDA clearance
for a shorter 3-minute “Theta-Burst” protocol for our MDD treatment. In support of our successful application to the FDA for
this protocol, we submitted safety and efficacy data from 146 subjects who had received either the standard Deep TMS protocol or Theta
Burst Deep TMS. Clearance was obtained after it was demonstrated that subjects in both groups experienced a statistically and clinically
meaningful reduction in depression scores, and the results met the equivalence criteria needed for clearance of the shorter treatment.
We believe that certain patients and providers can benefit from these shorter treatment sessions and that this protocol has the potential
to expand access to care by providing patients with added flexibility in selecting courses of treatment that may fit better with their
lifestyle.
We recently received an FDA-cleared expansion
of our exiting MDD clearance to include the noninvasive treatment of anxiety symptoms among subjects with MDD, commonly referred to as
anxious depression. We received this clearance from the FDA in August 2021. In support of our application for this labeling expansion,
we demonstrated statistically significant results from three randomized controlled trials and open label studies which found favorable
outcomes with Deep TMS when compared to sham or medication as a standard of care. The data from the three randomized controlled trials
studies of Deep TMS demonstrated effect sizes ranging from 0.34 (when compared to sham) to 0.90 (when compared to medication), and an
overall weighted, pooled effect size of 0.55.
In addition to our FDA clearance of Deep TMS for
MDD, we were the first medical device company to offer an FDA-authorized noninvasive treatment for OCD, the marketing authorization for
which we received in August 2018 as an adjunct therapy for adult patients suffering from OCD. Our pivotal trial for OCD demonstrated statistically
significant response and partial response rates of 38.1% and 54.8%, respectively, after six weeks of daily active Deep TMS treatment of
19 minutes per session, compared to 11.1% and 26.7%, respectively, after sham treatment.
We are the first and only TMS company to offer
an FDA-cleared treatment for smoking addiction, which also represents the first FDA clearance for any TMS device in the addiction space.
We received this clearance from the FDA in August 2020 for use of our Deep TMS system as an aid in short-term smoking cessation in adults.
Our pivotal trial for smoking addiction demonstrated statistically significant results, with a 28.4% Continuous Quit Rate (CQR) –
defined as abstinence from smoking for any 4-week period during the study – achieved among patients who completed the full course
of therapy, compared with 11.7% of completers undergoing sham treatment.
We believe that Deep TMS represents a platform
technology that provides for an opportunity to develop additional Deep TMS products for a variety of psychiatric, neurological and addiction
disorders. We are planning multicenter trials for other indications, including multiple sclerosis (MS), which would be our first neurological
indication, and potentially various other addiction disorders beyond smoking addiction.
Our current customers are principally doctors,
hospitals, and medical centers in the field of psychiatry. Treatment with Deep TMS is typically performed as an office-based procedure
using our Deep TMS system, which consists of our proprietary H-Coil helmet, as well as several other components, including a stimulator,
cooling system, positioning arm and an operator interface. A course of treatment for MDD typically requires 20 treatment sessions five
times a week over a period of four weeks, and thereafter up to 24 additional maintenance-continuation sessions twice weekly over a period
of up to 12 weeks. The standard Deep TMS treatment protocol for OCD requires 29 treatment sessions over six weeks. A course of treatment
for smoking addiction typically requires 18 treatment sessions, comprised of treatment five times a week over a period of three weeks,
followed by treatment once per week for an additional three weeks. Each standard MDD, OCD or smoking addiction session lasts 20 minutes,
19 minutes, and 18 minutes, respectively. For Deep TMS for MDD, the FDA also cleared a 3 minute “Theta Burst” treatment protocol.
Patients may experience some discomfort during treatment and must use earplugs to reduce exposure to the loud sounds produced by the device.
The treatment requires no anesthesia, hospitalization or sedation, and no systemic side effects are associated with the therapy.
We estimate that over 90% of the total private
insurer adult covered lives in the United States have coverage for reimbursement of MDD treatment with Deep TMS. In addition, our MDD
treatment (including for reduction of anxiety symptoms, commonly referred to as anxious depression) with Deep TMS is eligible for reimbursement
from Medicare. Deep TMS treatment for MDD reimbursement coverage is generally available after between one and four failed (inadequate
response or intolerable) trials of anti-depressant medications. However, there is an increasing trend to reduce the number of prior failed
medication treatments required to qualify for coverage and thus to place Deep TMS for MDD earlier within the continuum of care. We are
actively engaged in efforts to work with payers to facilitate a continuation of this trend.
In 2021, for the first time, several payers issued
policies and coverage determinations allowing for reimbursement coverage applicable to Deep TMS for OCD, with approximately 60 million
covered lives in the U.S. eligible for coverage as of March 2022. Positive coverage decisions for Deep TMS for OCD have been issued by
Centene Corporation (with 26 million covered lives), Health Care Service Corporation (HCSC) (with 17 million covered lives), and TriCare
(with 9.6 million covered lives). Additionally, in mid-2021, Palmetto GBA, one of the seven Medicare Administrative Contractors (MACs)
in the US, issued the first draft Local Coverage Determination (LCD) proposing coverage applicable to Deep TMS for OCD, and subsequently
issued a final LCD approving such coverage effective March 2022. While the criteria for this emerging Deep TMS for OCD coverage varies
with each payer, generally, coverage requires the failure of between two and four medication trials before qualifying for reimbursement.
We are actively engaged in efforts to facilitate increased coverage for OCD treatment by more payers, including both commercial and governmental.
Reimbursement is not yet available for Deep TMS
for smoking addiction; however, we are actively communicating our FDA clearance and evidence outcomes to payors for future coverage consideration
as our evidence and commercialization efforts for that indication progress, based on the novelty of the technology, unmet clinical need,
and the efficacy and safety profile of the treatment.
The United States is our primary and most
strategic market, representing approximately 88%, 88%, and 89% of our revenues for the years ended December 31, 2021, 2020 and
2019, respectively. We operate in the United States through our wholly owned subsidiary, BrainsWay USA Inc, as a direct
marketing and sales channel, where we currently have existing sales, marketing, and support infrastructure. We generate revenue from
various flexible pricing models that are designed to maximize market penetration. For the year ended December 31, 2021, we
generated revenues in the United States of $26.1 million, an increase of 35% as compared to $19.3 million for the year ended
December 31, 2020.
On a consolidated basis, we generated revenue
from leasing, one of our two categories of activity, of $13.5 million, $13.6 million and $13.2 million for the years ended December 31,
2021, 2020 and 2019, respectively. Our revenue from sales, our other category of activity, of $16.2 million, $8.5 million and $9.9 million
for the years ended December 31, 2021, 2020 and 2019, respectively.
Our Deep TMS Platform
Our proprietary Deep TMS technology is intended
for noninvasive treatment of psychiatric, neurological, and addiction disorders. The system includes an H-Coil uniquely designed to transmit
electric current flows at varying rates, creating an electromagnetic field that serves to depolarize cortical neurons and activate neural
networks in certain areas of the brain in accordance with the operating frequency, with the effect of treating the disorder associated
with that area of the brain. Our innovative technology is capable of stimulating deeper and broader regions of the brain than any other
commercially available TMS product.
We have developed a number of H-Coils with differing
configurations, building upon our technology with important changes for each coil. For different regions of the brain which are known
to be associated with specific brain disorders, we offer different H-Coils that are designed to influence the neurological networks of
those regions. For example, we have one H-Coil that is used in our Deep TMS system for MDD (including for reduction of anxiety symptoms,
commonly referred to as anxious depression), another H-Coil for that is used for OCD, and another H-Coil used for smoking addiction. Some
of our H-Coils are also able to potentially treat more than one indication. The H-Coils transmit pulses which are generated by a power
supply, known as a stimulator. We developed our own proprietary stimulator that is more advanced than our previously used third-party
stimulator and improves our approved Deep TMS systems through its user-friendly software interface and other features. We expanded our
FDA clearances in MDD, OCD, and smoking addiction, which had previously applied to our older model systems with third-party stimulators,
to now also include newer systems with our proprietary stimulator. In addition, we are currently developing a next generation multichannel
stimulator allowing for simultaneous modulation of different areas of the brain with independent stimulation parameters, thus potentially
enabling more flexible and effective treatment of various brain disorders, which we believe would make our Deep TMS systems even more
attractive to clinicians, researchers and patients. This innovation is potentially well-positioned for use in neurology indications.
Our Deep TMS system is comprised of the various
key components, as illustrated below. Each system can accommodate two helmets, and a third helmet can be incorporated using a separate
auxiliary stand (not pictured).
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Helmet, including proprietary H-Coil |
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Stimulator, which provides the power supply and source of the Deep TMS electromagnetic field |
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Graphic User Interface (GUI) |
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One or More Arm(s)/Positioning Device(s) |
We believe our Deep TMS platform has many advantages
relative to other TMS . Our H-Coil is a flexible device encased in a helmet that fits securely around the patient’s head. This,
together with the proprietary structure of our H-Coil, means that a much larger surface area of the head is in contact with the H-Coil.
Furthermore, if the patient moves his or her head, the helmet—and thus the H-Coil—moves along with it, eliminating the need
for features which prevent the patient from moving his or her head during therapy. In contrast, all other currently available TMS products
utilize what we refer to as Traditional TMS, which generally utilizes a variation of the figure 8 coil that is placed adjacent to
the scalp of the patient and needs to be specifically positioned and attached to the head in order to deliver focal stimulation of the
desired area of the brain. Whereas some figure 8 coils are handheld by the operator, others are attached to an apparatus designed
to minimize the ability of the patient to move the head away from the relevant portion of the coil during therapy, and thus failing to
achieve the required stimulation. These features either alert the operator in the event of a shift of the patient’s head away from
the coil, or actually fasten the coil next to the patient’s head. In either case, only a small surface area on the patient’s
head comes into contact with the figure 8 coil. Traditional TMS is limited to the relatively narrower and shallower areas of the
brain which are stimulated, and the manual placing of the figure 8 coil in Traditional TMS may cause inaccuracies in the region treated.
Studies suggest that the figure 8 coil misses the target in 33% of patients.
A course of treatment for MDD typically requires
20 treatment sessions five times a week over a period of four weeks, and thereafter up to 24 additional maintenance-continuation sessions
twice weekly over a period of up to 12 weeks. The standard Deep TMS treatment protocol for OCD requires 29 treatment sessions over
six weeks. The clearance for this indication is categorized as an adjunct therapy, which means that it should be administered in conjunction
with other first-line therapies and/or medications, as determined in the independent medical judgment of the treating healthcare professional
on a case-by-case basis. A course of treatment for smoking addiction typically requires 18 treatment sessions, comprised of treatment
five times a week over a period of three weeks, followed by treatment once per week for an additional three weeks. A standard MDD, OCD
or smoking addiction session lasts 20, 19 and 18 minutes, respectively. For Deep TMS for MDD, the FDA also recently cleared a 3 minute
“Theta Burst” treatment protocol. The protocols for OCD and smoking addiction also require a short provocation procedure (i.e., triggering
of OCD or smoking symptoms, as relevant), to ensure that Deep TMS is calibrated to treat the particular needs of the patient, which is
then followed by a Deep TMS session. The treatments are typically office-based procedures performed in private clinics, hospitals, universities,
and other medical centers. As with Traditional TMS, Deep TMS is contraindicated for patients with metallic objects or implanted stimulator
devices in or near the head, including cochlear implants, deep brain stimulators, other implanted electrodes or stimulators, aneurysm
clips or coils, stents, bullet fragments, jewelry, and hair barrettes. During treatment, the patient must use earplugs to reduce exposure
to the loud sounds produced by the device.
We believe that Deep TMS has additional advantages
over Traditional TMS because it is capable of stimulating deeper and broader areas of the brain. Studies have shown that while Traditional
TMS devices create an electromagnetic field estimated to penetrate the cortical surface of the brain up to depths in the range of 0.7
centimeters to 1.1 centimeters, Deep TMS creates a magnetic field with a slower and more gradual deterioration that reaches depths from
the cortical surface of approximately 1.8 centimeters for BrainsWay’s MDD coil, approximately 3.5 centimeters for BrainsWay’s
OCD coil and approximately 1.5 centimeters for BrainsWay’s smoking addiction coil. Studies have also shown that BrainsWay’s
MDD coil has the capacity for total stimulated brain volume of 17 cm3 compared to 3 cm3 for the figure 8 coil
used in Traditional TMS. We believe this deeper and broader penetration of Deep TMS provides an advantage over Traditional TMS because
of its potential to address a wider variety of brain disorders, and for a given disorder, to stimulate more relevant brain structures.
The training for operation of a Deep TMS system
is relatively simple and generally requires a day of training which includes classroom lectures as well as a number of hours of practice
providing treatment. The OCD and smoking training protocols, respectively, also include tailored provocation procedures tailored to provoke
the specific obsessions, compulsions, or addictions, as relevant, of the subject.
Competitive Strengths
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Deep TMS technology has advantages over Traditional TMS. |
We believe that Deep TMS, with our proprietary
H-Coil design, allows for deeper and broader penetration of regions of the brain compared to Traditional TMS, permitting Deep TMS to address
a wider variety of psychiatric, neurological, and addiction disorders. We believe that this deeper and broader penetration provides us
with the opportunity to address more indications with potentially greater clinical efficiency because Deep TMS stimulates a larger portion
of the brain and is less sensitive to coil orientation and position during treatment. In addition, Deep TMS is administered at stimulation
levels that we believe are as safe and tolerable as Traditional TMS.
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We have obtained FDA marketing authorizations of Deep TMS for MDD, OCD, and smoking addiction. |
We are the only manufacturer of a TMS
device to have been FDA-cleared for three indications based on clinically proven efficacy which was demonstrated in pivotal studies conducted
on the device: MDD, which was FDA-cleared in 2013 (expanded in August 2021 to include reduction of comorbid anxiety symptoms, or anxious
depression), OCD, which was classified by FDA as a Class II device in a de novo classification in August 2018, and smoking
addiction, which was cleared for short term treatment in August 2020. For MDD, we are one of only two TMS companies that have performed
clinical studies supporting the FDA clearance. For OCD, we are one of only two TMS companies to have devices which are FDA-cleared for
this indication, but we are the only company to have received such clearance based on clinical data from a pivotal study on the device.
For smoking addiction, we are the first and only TMS company to have received FDA clearance for the treatment of any addiction.
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Our clinical data supports the efficacy and safety of Deep TMS. |
We believe that our clinical data supports
the efficacy and safety of Deep TMS that will accelerate its market acceptance by clinicians. Our pivotal trial for MDD demonstrated statistically
significant response and remission rates of 38.4% and 32.6%, respectively, in week five of Deep TMS treatment of 20 minutes per session,
compared to 21.4% and 14.6%, respectively, after sham treatment. Our pivotal trial for OCD demonstrated statistically significant response
and partial response rates of 38.1% and 54.8%, respectively, after six weeks of daily active Deep TMS treatment of 19 minutes per session,
compared to 11.1% and 26.7%, respectively, after sham treatment. Post-marketing data on Deep TMS for OCD published in 2021 found that
58.4% of those who completed 29 sessions achieved response, and 73% of patients, including those who did and did not complete the full
course of therapy, demonstrated response at least once prior to the conclusion of treatment. Our pivotal trial for smoking addiction demonstrated
a statistically significant difference in reaching the Continuous Quit Rate (CQR), defined as 4-weeks of continuous abstinence from smoking
at any point during the study. Among the 168 participants in the study who completed three weeks of Deep TMS or sham treatment, plus the
mandatory additional three weeks of follow-up (reaching the six-week endpoint), the CQR was 28.4% in the treatment group, compared to
11.7% in the sham group (p=0.007). Overall, Deep TMS treatment was safe and well-tolerated by patients in these trials.
With respect to our MDD labeling expansion
which now includes anxious depression, data from 573 patients who had undergone Deep TMS treatment in 11 studies, including both randomized
controlled trials (RCT) and open-label studies, which was submitted by us in support of our application to the FDA, demonstrated a treatment
effect that was consistent, robust, and clinically meaningful for decreasing anxiety symptoms in adult patients suffering from major depressive
disorder. An analysis of our data found favorable outcomes with Deep TMS when compared to sham or medication as standard of care. For
example, using the Cohen’s d statistical method, data from the 3 RCT studies of Deep TMS demonstrated effect sizes ranging from
0.34 (when compared to sham) to 0.90 (when compared to medication), and an overall weighted, pooled effect size of 0.55. As a reference,
published articles from approximately 16,000 subjects in over 70 studies of drug-based anxiety treatments – including studies of
standard-of-care medications frequently prescribed for patients suffering from anxious depression and general anxiety disorder –
report effect sizes ranging from 0.2 – 0.37.
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We have a commercial track record for MDD and OCD, and recently began marketing our products for smoking addiction |
We have an established commercial footprint
in the United States for Deep TMS for MDD, including our own sales, marketing, and support employees. We estimate that over 90% of total
private insurer covered lives in the United States have coverage for reimbursement of MDD treatment with Deep TMS. In addition, our MDD
treatment with Deep TMS may be eligible for reimbursement from Medicare. We are also currently selling Deep TMS for MDD in Canada, Europe,
Asia, India, the United Arab Emirates, Australia, and certain other countries. We are also increasing our commercialization efforts for
Deep TMS for OCD. Our installed base of Deep TMS systems for MDD facilitates faster expansion into OCD because clinicians who already
have a Deep TMS system only need to lease or purchase an add-on arm and helmet to the existing system. In 2021, for the first time, several
payers issued policies and coverage determinations allowing for reimbursement coverage applicable to Deep TMS for OCD, with over 60 million
covered lives in the U.S. eligible for coverage. Additionally, in mid-2021, Palmetto GBA, one of the seven Medicare Administrative Contractors
(MACs) in the U.S., issued a draft Local Coverage Determination (LCD) providing coverage applicable to Deep TMS for OCD, and subsequently
issued a final LCD approving such coverage effective March 2022. We are actively engaged in efforts to facilitate increased coverage for
OCD treatment by more payers, including both commercial and governmental. We recently began marketing our products for smoking addiction.
Specifically, we completed controlled and limited market releases of our system for this indication, and are currently embarking on a
full commercial launch.
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Our flexible pricing models are designed to achieve market penetration. |
We operate commercially utilizing two
basic pricing models for our products: (i) a fixed-fee lease model enabling unlimited use; and (ii) a sales or purchase model. We also
have a pay per use leasing model with some of our existing customers. Warranty and support are either included (in varying degrees and
for varying periods) or may be purchased as part of all pricing models. Additional potential revenues may be derived from extended warranty
fees paid for the system for service coverage beyond the standard included warranty period, and from variable or usage fees based on the
number of treatments performed with the system. We are also able to leverage our platform technology, which includes the ability to treat
multiple indications using different H-coil helmets, to facilitate transactions utilizing combined pricing models often involving a single
system with one or more add-on helmets. We believe that our different pricing models offer flexibility and allow for increased market
acceptance among clinics and psychiatric professionals. Based on our commercial data, and depending on insurer reimbursement rates, we
believe our psychiatrist customers for MDD systems can generate up to approximately $10,000 of gross revenues per patient, and in some
cases more, for a course of treatment using our system. While OCD coverage is still emerging, we believe that our customers can generate
up to approximately $8,800 of gross revenues per OCD patient.
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Deep TMS has potential applicability to a range of psychiatric, neurological, and addiction disorders. |
Deep TMS has the potential to serve
as a platform technology that can address a potentially wide variety of other psychiatric, neurological, and addiction disorders by using
the appropriate H-Coil structure for the targeted brain region. We are the first and only TMS company to obtain from the U.S. Food
and Drug Administration (FDA) three cleared indications backed by pivotal studies demonstrating clinically proven efficacy. Current indications
include MDD (including reduction of comorbid anxiety symptoms, commonly referred to as anxious depression), obsessive-compulsive disorder
(OCD), and smoking addiction. Moreover, in August 2021, we received 510(k) clearance from the FDA expanding our MDD indication to also
include treatment of depressed patients for the reduction of comorbid anxiety symptoms (commonly referred to as anxious depression), making
us the only TMS company to have labeling which specifically addresses anxiety.
Beyond our existing indications, we
are also planning further clinical trials in other areas, including for fatigue in MS, pain, and various other addictions.
Our Strategy
We are currently focused on expanding the commercialization
of Deep TMS with respect to MDD and OCD. We have also recently begun marketing our products for smoking addiction in adults, and have
already completed our controlled and limited market releases for this indication. We received in September 2021 a 510(k) clearance from
the FDA for expansion of our Deep TMS MDD treatment also to include treatment for reduction of anxiety symptoms, commonly referred to
as anxious depression. In addition, we are actively engaged in research for other potential applications for Deep TMS for patients suffering
from neurological conditions and addictions. For each potential indication, we assess and evaluate our technology’s efficacy, safety,
patent status, market potential, and development and regulatory pathways. Our systematic approach to evaluating and developing applications
for Deep TMS allows us to continually build upon our clinical pipeline, and advance those applications with the greatest clinical effect
and revenue potential. We also plan to advance other technological innovations in the neuromodulation space for the improvement of our
products. For example, we are currently developing a multichannel stimulator allowing for simultaneous modulation of different areas of
the brain, as well as pursuing personalized treatment solutions allowing for providers to customize ideal treatment approaches for each
patient.
Specific elements of our strategy include the following:
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Increase the full-scale commercialization of Deep TMS for MDD, and of Deep TMS for OCD and accelerate commercialization of Deep TMS for smoking addiction. |
We are continuing to scale up our commercialization
of Deep TMS for MDD as we seek to further penetrate the MDD market, including since September 2021 FDA-cleared treatment to anxious depression.
We continue to focus our principal commercial activity on the U.S. market in light of the market size and wide range of insurance coverage.
In addition, we continue our full-scale commercialization of Deep TMS for OCD, which is first noninvasive medical device FDA-authorized
for the treatment of OCD, with reimbursement coverage for this indication obtained during 2021 and 2022 from payers covering approximately
60 million covered lives in the U.S., including by a Medicare Administrative Contractor (MAC) which recently issued a final Local Coverage
Determination (LCD) approving coverage applicable to our Deep TMS for OCD. In addition, we are operating a controlled market release
of Deep TMS for smoking addiction, which is currently the only noninvasive medical device FDA-authorized for the treatment of smoking
addiction.
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Pursue additional indications and technological innovations for Deep TMS. |
We are working to expand the application to other areas as well including
addictions, such as alcohol use disorder and cocaine and/or opioid addictions, as well as neurological indications such as multiple sclerosis
(“MS”). We intend to progress these plans ourselves and through our relationships with third-party researchers and clinical
institutions in conducting clinical trials for additional psychiatric, neurological, and addiction disorders. With this approach, we address
psychiatric, neurological, and addiction disorders that we believe present some of the most promising market opportunities for Deep TMS.
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Expand reimbursement coverage for Deep TMS for OCD, smoking addiction and other approved indications in the future. |
A key prerequisite to the successful
market acceptance of Deep TMS is securing sufficient insurance/third-party payer coverage. The scope and level of coverage are also key
factors in our ability to penetrate the market and to expand further use of our Deep TMS system by healthcare providers and facilities
for the benefit of the larger patient population. Our MDD treatment with Deep TMS is widely eligible for reimbursement, including from
Medicare, subject to the satisfaction of certain clinical criteria. We aim to achieve similar levels of reimbursement for Deep TMS for
OCD (which is already underway) and smoking addiction, and we are also working to obtain reimbursement in other jurisdictions.
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Develop innovative enhancements and features for our Deep TMS systems. |
We continue to develop innovative enhancements
and features for our Deep TMS systems to expand the applicability of Deep TMS to additional indications and improve the capabilities of
the systems for approved indications. For example, in December 2021 we displayed a future version of the platform that will serve as the
basis for our next generation Deep TMS system, which incorporated a novel multichannel stimulator designed to target multiple brain regions
simultaneously with independent stimulation parameters, thus enabling more flexible and effective treatment of various brain disorders.
These developments include the novel technology of rotational field TMS which involves the operation of two orthogonal coils to induce
a rotating field in the brain. This method can stimulate neurons in various orientations, and we believe may potentially increase the
efficacy of our technology in various applications. We further believe these enhancements hold the potential to make Deep TMS even more
efficient for clinicians, researchers, and patients, and may serve to better position its use in neurology.
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Increase our international commercial footprint. |
We are working to expand our existing
commercial footprint in Europe, Asia, Latin America, Australia, and Israel, and pursue commercialization in additional markets. We currently
have exclusive distribution agreements in various territories, including, notably, Japan, South Korea, Taiwan, Thailand, the Philippines,
and the United Arab Emirates. In Israel, we directly provide operations for our customers.
We obtained regulatory approval with
the Pharmaceuticals and Medical Devices Agency (PMDA) in Japan, which is a precondition to receiving reimbursement coverage under the
Japanese National Health Insurance Plan. We are working through our Japanese distributor with the relevant bodies in Japan to update
the local society guidelines to include Deep TMS in order to obtain such coverage.
Deep TMS for MDD
Disease Overview
MDD is a common and debilitating mental disorder
characterized by physiological symptoms, such as sleep disturbance and changes in appetite, emotional symptoms, such as sadness, despair,
emptiness, self-hate and critique, and cognitive symptoms, such as difficulty concentrating, memory dysfunction, suicidal thinking, and
faulty judgment of reality. MDD is expressed differently, and in different intensities, among patients, and significantly impacts the
functioning in all aspects of life. Patients are often not diagnosed due to low levels of awareness of the disease and its symptoms by
the patient and the family doctor involved, or due to prejudice related to psychotherapy. In order to be diagnosed with MDD, a patient
must display symptoms that are present most of the day, nearly every day, for at least two weeks. A diagnosis of MDD is established by
clinical interview, and an assessment of whether a patient reports a collection of the relevant symptoms.
MDD is a recurrent disease and follows a fluctuating
course over an individual’s lifetime, with periods of remission and relapse. If an initial episode of MDD is resolved, the return
of depressive symptoms during the first nine months thereafter is referred to as a relapse of the illness and is generally considered
to be part of the same depressive episode. When depressive symptoms return more than 12 months after the initial episode of MDD is
resolved, it is considered to be a recurrence of the illness and is deemed a new and distinct episode. A response to treatment is commonly
measured as a clinically significant decrease in symptoms on a standardized rating scale from baseline scores. When a patient shows no
or nearly no symptoms, the patient is referred to as being in remission. Experiencing one episode of MDD places an individual at an estimated
50% risk of experiencing an additional episode of MDD. Approximately 80% of those individuals who have experienced two episodes of MDD
will experience an additional episode.
In people with MDD, the complex system of neuronal
communication does not function properly. One of the most important discoveries in neuroscience has been the recognition that improper
regulation of one or more of the three major neurotransmitters, serotonin, norepinephrine, and dopamine, plays a key role in a patient’s
depression. This understanding has guided psychiatric drug development and the treatment of depression for more than three decades by
placing a major focus on targeting chemically-based mechanisms. The relatively recent introduction of TMS as a targeted, circuit-based
treatment option has reintroduced the importance of electrical mechanisms in restoring proper function to neuronal pathways to treat depression.
Market Information
According to the WHO, an estimated 280 million
people worldwide including 21.0 million individuals in the United States develop a major depressive episode within a given year.
We estimate that there are 69 million depression patients in India, 71 million in China, 37 million in Europe, and 6 million
in Japan. MDD is one of the most prevalent mental illnesses across all demographics. According to the Clinical Psychology Review, MDD
follows a chronic course of repeated bouts of remission and recurrence in about 50% of people affected. The chronic nature of MDD makes
it the leading cause of years lost to disability in the world, and MDD patients are more likely to commit suicide. According to the American
Journal of Psychiatry, roughly 2% of MDD patients treated as outpatients, and 4% of those hospitalized because of their condition, commit
suicide. In addition, studies suggest that some patients exhibit a higher mortality rate even after controlling for suicide. Due
to the prevalence and severity of MDD, the treatment of the disorder is a pressing concern for mental health professionals.
We focus on the population segment for whom conventional
treatment (medicinal and/or psychotherapy) of MDD has not provided the required clinical response, as patients who are treatment-resistant
and are entitled to reimbursement for Deep TMS treatment. It is customary to assess that approximately half of the sufferers from the
illness do not respond to the first medicinal treatment, and that one-third do not find conventional solutions to their suffering at all.
In addition, even among patients who receive medicinal treatment that is found effective, many suffer from severe side effects that cause
them to abandon the treatment and be left with their depressive condition. We aim to meet the enormous need of these groups of treatment-resistant
patients and provide effective, non-medicinal treatment which is not accompanied by the systemic side effects of the medication on the
one hand and the electroconvulsive therapy (ECT) treatments on the other hand (such as damage to memory).
Treatment Options for MDD
Treatment for patients diagnosed with MDD varies
by disease severity. For patients with mild to moderate depression, first line treatment is usually psychotherapy (the treatment of mental
disorders by psychological means), especially if the patient is able to identify particular stressors or sources of depressive symptoms.
For some of these patients, pharmacotherapy (anti-depressant medication) may be used to supplement psychotherapy. For patients with moderate
depression, pharmacotherapy with or without psychotherapy is the recommended initial treatment. TMS is a second line therapy for the treatment
of a patient who has failed to achieve satisfactory improvement from prior pharmacotherapy. For patients with severe depression and later
stage treatment, somatic treatments such as ECT may be an option.
The central group of anti-depressant medicines
is the selective serotonin reuptake inhibitors (SSRI) and selective serotonin and norepinephrine reuptake (SNR). Drug side effects play
a decisive role in treatment selection and modification, as each class of drugs is associated with a host of side effects, some more severe
or more common than others. The most common side effects include gastrointestinal symptoms, sedation, insomnia, weight changes, sexual
dysfunction, nervousness, sleep disruption, nausea, headaches, and cardiovascular or neurological effects. Side effects may also cause
patients not to adhere to the treatment or to abandon it. On initiation of anti-depressant pharmacotherapy, close monitoring for response
to treatment and development of side effects is essential.
The limitations of anti-depressant medications
in MDD treatment were demonstrated in the STAR*D study, a large clinical trial funded by the NIMH that enrolled more than 4,000 adult
MDD patients at 41 clinical sites to examine the outcomes to a sequenced series of anti-depressant medication attempts that mimicked best
practices. In the study, only 36.8% and 30.6% of patients achieved remission in their first and second medication attempts, respectively.
In addition, 30-40% of MDD patients did not experience a meaningful response to anti-depressant medication. An analysis conducted in 2020
which was based on the STAR*D study further reinforced the limitations of anti-depressant medications in MDD treatment, finding that only
21% of patients achieve remission with medication and that 58% achieved no meaningful benefit with a second step switch to a monoaminergic
antidepressant. This means that there is still a significant number of patients who could benefit from an alternative treatment such as
Deep TMS.
Side effects are one of the most commonly cited
reasons for patients terminating the use of anti-depressants. The most troubling side effects resulting from long-term antidepressant
use are insomnia, weight gain, gastrointestinal issues, and sexual dysfunction. In addition, correlation was discovered between consumption
of SSRI medications and actualization of suicidal thoughts in youth, and some SSRI group medicines require strict diets and medical supervision.
TMS has been used as an antidepressant therapy
since 2008. Currently, TMS for MDD is generally recommended for treatment-resistant MDD patients. Until recently payers typically required
that patients fail three or more antidepressant medications prior to receiving TMS; however, there has been a recent trend to reduce the
number of required failures before qualifying for TMS. Based on research showing that TMS is effective in treating depressive symptoms
in patients earlier within the continuum of care, many payors have now reduced the number of prior failed medication trials needed to
qualify for Deep TMS for MDD. Specifically, about 90 million covered lives in the US with commercial coverage now qualify for Deep TMS
for MDD after two to three failed medication trials, and approximately 42 million lives in the US with Medicare reimbursement coverage
qualify after just one to two failed medication trials. For many patients, the side effects associated with pharmacological treatments
for depression are a primary reason underlying low compliance and, subsequently, low efficacy of treatment. For TMS, however, no significant
side effects have been observed, other than mild headaches for a short period of up to a few hours after the treatment, and rare instances
of short seizures. The few side effects associated with TMS treatment is considered one of its main advantages. The most common side effect
of Deep TMS treatment is short-lasting mild pain or discomfort around the site of coil application. This side effect usually only lasts
during the first week of treatment. Other adverse reaction reactions such as jaw and face pain, muscle pain, spasm or twitching, and neck
pain were reported as mild or moderate and were also resolved shortly after treatment, as well as seizures in certain patients. The less
severe side effects associated with Deep TMS make it an attractive option for patients.
Alternatives to pharmacological and TMS-based
treatments include ECT, vagal nerve stimulation (VNS), and deep brain stimulation (DBS). ECT, the main psychotherapy alternative to TMS,
is a therapy in which patients are administered brief electric currents through the brain. ECT is a noninvasive treatment carried out
by a doctor under full anesthesia and muscle relaxant medicines, and patients often undergo partial hospitalization with recovery time
lasting from hours to even days. While fewer treatment sessions are required (6-12 sessions) compared to TMS (20-30 sessions), each session
lasts approximately an hour compared to the Deep TMS sessions that are typically about 20 minutes each. While ECT has high proven efficacy
(70-75%) for patients with MDD, ECT’s potential for serious side effects, as well as negative stereotypes surrounding the treatment,
often cause patients to be reluctant to undergo ECT. ECT affects the entire brain, including parts which do not need treatment, and may
cause permanent cognitive damage, including memory loss. ECT may have significant and relatively severe side effects, the most common
of which are cognitive and memory loss, changes in blood pressure, muscle pains, nausea, changes in mood, headaches, and pain or discomfort.
ECT is currently approved for treatment-resistant depression, severe mania, schizophrenia, bipolar disorder, aggression or agitation in
patients with dementia, and catatonia. It is provided usually in cases of severe MDD, where medicinal treatment is ineffective or impossible
and in instances where the depression constitutes a risk to the life of the patient.
VNS and DBS are invasive therapies that can have
serious side effects. Both involve implanted devices, which require surgery. In DBS, two electrodes are surgically implanted in the brain
and a pulse generator is implanted into the patient’s chest. The electrodes produce electrical impulses that can regulate the electrical
activity of the brain. In VNS, a pulse generator is implanted on the upper left side of the chest to stimulate the vagus nerve. VNS and
DBS include surgical related risks, such as infection or local damage to the recurrent laryngeal nerve, which may lead to permanent voice
alteration.
Prescription Digital Therapeutics, or PDTs, are
a new therapeutic class of products designed to directly treat diseases with software. Certain PDTs are prescribed by healthcare providers
after evaluation by the FDA for safety and efficacy testing via randomized clinical trials. Digital therapeutic companies, such as Pear
Therapeutics, Inc., offer and/or are exploring products across a variety of therapeutic areas including substance abuse, insomnia, and
depression. These products can also include cognitive behavioral therapy (CBT) techniques designed to improve disease outcomes.
Deep TMS for MDD—Our Clinical Trials
Phase III Trial Measuring Efficacy and Safety of Deep TMS
We completed a Phase III trial at 20 different
sites in the United States, Canada, Israel, and Germany to test the efficacy and safety of using Deep TMS to treat MDD between 2009 and
2013. The therapeutic effect was clinically meaningful in both patients who failed one to two medications and patients who failed three
or more medications, indicating that Deep TMS is effective in an even more treatment-resistant population.
Based on these results, we filed a 510(k) application
to the FDA for Deep TMS using BrainsWay’s MDD coil. In 2013, the FDA cleared Deep TMS for the treatment of MDD in adult patients
who have failed to achieve satisfactory improvement from previous anti-depressant medication treatment in the current episode.
This randomized, double-blind, placebo-controlled,
multicenter trial investigated the efficacy and safety of Deep TMS in 212 treatment-resistant adult MDD patients. Enrolled subjects were
randomized in a 1:1 ratio to undergo either monotherapy with active Deep TMS or with a sham. For active Deep TMS treatment, BrainsWay’s
MDD coil was used at 120% stimulation intensity and a frequency of 18 Hz.
The trial was designed with three phases. The
first phase was a wash-out phase in which patients slowly stopped any anti-depressants, mood stabilizers, or antipsychotics that they
were previously taking. This phase lasted one to two weeks. The second phase was a four-week acute treatment phase in which patients received
daily treatment with Deep TMS or a sham. The treatments were administered in a five-day sequence each week during the second phase. Measurements
in respect of this phase were taken in week five. The final phase was a 12-week maintenance-continuation phase in which patients received
two treatments per week of Deep TMS or a sham. Measurements in respect of the final phase were taken in week 16.
The primary efficacy endpoint was a change in
the 21-question Hamilton Depression Rating Scale (HDRS) at week five (following the end of the acute treatment phase). The secondary efficacy
endpoints were response and remission rates at week five. Response was defined as a reduction of at least 50% from baseline HDRS score.
Remission was defined as a total HDRS score of less than 10. Tertiary efficacy endpoints included a change in HDRS score from baseline
to week 16 and the response and remission rates at week 16. Safety was assessed at every treatment and additional safety evaluations included
auditory threshold tests and cognitive evaluations.
Inclusion and exclusion criteria required patients
to meet the following criteria:
|
● |
Antidepressant medication-free (following washout period) |
|
● |
Failure to respond to one to four antidepressant trials or not tolerant of at least two antidepressant treatments in the current episode |
|
● |
Diagnosed with MDD with a single or recurrent episode |
|
● |
Duration of current episode must be at least one month but less than seven years |
|
● |
Score of at least four on the Clinical Global Impression Severity of Illness (CGI-S) |
|
● |
Score of at least 20 on the HDRS |
|
● |
No current (or within past year) diagnosis of other Diagnostic and Statistical Manual of Mental Disorders (DSM-IV) Axis I disorders (e.g., PTSD, OCD, other mood disorders, eating disorders, psychotic disorders, or dissociative disorders) |
|
● |
No history or increased risk of seizures |
During analysis, the study results were analyzed
in two separate groups: the intention-to-treat (ITT) and per-protocol (PP) analysis sets. The ITT group included all subjects who met
the eligibility criteria and received at least one Deep TMS treatment. Some of these patients, however, were not administered the treatment
at the specified stimulation intensity of 120%. The PP patients included all subjects from the ITT group who received the protocol-specified
treatment and stimulation intensity. Baseline demographic, clinical and safety assessments were performed on the ITT analysis set. Primary
efficacy analysis was performed only on the PP group.
The primary efficacy endpoint was a change in
the HDRS total score from baseline through week five. The change was measured as the slope of a graph of time point versus HDRS score.
The estimated slope for the Deep TMS treatment group was −6.39 while the estimated slope for the sham treatment group was −3.28.
The difference between groups was statistically significant (p = 0.008) for the PP group.
The secondary efficacy endpoints were response
and remission rates through week five. As shown in Figure 1, response rates were 38.4% at week five for the Deep TMS group and 21.4%
at the same time point for the sham group. Remission rates were 32.6% for the Deep TMS group and 14.6% for the sham group. The difference
between groups was statistically significant for both response and remission rates (p = 0.0138 and p = 0.0051, respectively).
The tertiary efficacy endpoints were changes in
HDRS scores, response, and remission rates at week 16 compared to baseline (see Figure 1 below). The difference in slope between
Deep TMS and sham groups was 2.47, which was statistically significant (p = 0.0259). Additionally, the response rates at week 16
were 44.3% for the Deep TMS group and 25.6% for the sham group, which demonstrated a statistically significant difference between the
groups (p = 0.0086). Remission rates at week 16 were 31.8% for the Deep TMS group and 22.2% for the sham group, which was a nonsignificant
difference between groups (p = 0.1492).
Figure 1. Response and Remission Rates
for Deep TMS and Sham Groups at Week 5 and Week 16
Source: Levkovitz et al., 2015
For the group of patients who failed one to two
medications, remission rates were 36.6% in the Deep TMS group and 16.7% in the sham group. This was a statistically significant difference
(p = 0.032). For the group of patients who failed three or more medications, remission rates were 28.9% for the Deep TMS group
and 12.2% for the sham group. This difference was just outside of significance (p = 0.057). The data suggest that Deep TMS treatment
can achieve high rates of remission even in patients who have been more resistant to medications.
Figure 2. HDRS Score Change (Slope) and
Remission Rates for Deep TMS and Sham Groups in Subpopulations of Patients Who Failed 1 to 2 Medications versus Patients Who Failed 3+
Medications
Source: Levkovitz et al., 2015
Overall, Deep TMS treatment was safe and well-tolerated
by patients. The most common reported side effects within the Deep TMS group are as follows: 26.7% of patients experienced headaches,
5.0% experienced application site pain, and 3.0% experienced application site discomfort. The most common reported side effects within
the sham group are as follows: 18.9% of patients experienced headaches, 3.6% experienced insomnia, and 2.7% of patients experienced back
pain. One subject experienced a seizure, following excessive consumption of alcohol on the night before treatment that was not reported
to the treating physician or operator at the time of treatment. This was considered device-related, albeit with the caveat that withdrawal
from alcohol may have led to a reduction of seizure threshold and consequently to this seizure during Deep TMS.
Longer-Term Remission and Response
As demonstrated by our pivotal multicenter study
for MDD (as described above), and in another third-party study (Harel et al. (2014)), MDD patients who achieved remission or response
after an acute course of Deep TMS treatment of 20 sessions over four weeks were able to sustain the therapeutic effect by continuing to
undergo Deep TMS treatment beyond the treatment course. Additionally, our trial and the Harel study showed that among MDD patients who
did not achieve a response after an acute course of Deep TMS treatment, the longer such patients continued to undergo Deep TMS therapy,
the more likely they were to achieve remission or response. This result was also demonstrated in another study examining the results of
our multicenter trial (Yip et al. (2017)), which found that 72.7% of the patients who did not achieve response after an acute course of
treatment achieved a response within the next 12 weeks (which involved twice weekly Deep TMS treatment), of which 60.6% achieved response
within the first four weeks. These studies suggest that Deep TMS may continue to be effective beyond the standard acute treatment course,
potentially broadening its clinical applicability.
Deep TMS for OCD
Disease Overview
OCD is a common, chronic, and long-lasting disorder
in which a person has uncontrollable, reoccurring thoughts (obsessions) and behaviors (compulsions) that he or she feels the urge to repeat
over and over in a manner that can interfere with all aspects of life, such as work, school, and personal relationships.
Individuals with OCD exhibit obsessions, compulsions,
or both. Obsessions are reoccurring ideas, thoughts, or impulses that cause anxiety that individuals experience excessively and without
cause. Compulsions are defined as repetitive behaviors or thoughts that are performed on a strict schedule and appear to have a purpose
to the patient exhibiting the behavior or thought. Even if an individual is aware that the thoughts are inappropriate or irrelevant, he
or she still might not be able to suppress the thought or the corresponding action. Obsessions tend to be related to contamination, cleanliness,
or orderliness, and so compulsions frequently involve cleaning, washing, counting, arranging things in a particular way, or repeatedly
checking on things. These symptoms can interfere with all aspects of life, such as work, school, and personal relationships. While a wide
spectrum of individuals may exhibit OCD-like symptoms, in order to be diagnosed with OCD, he or she must exhibit symptoms that cause severe
distress or disrupt a person’s functioning for more than one hour per day.
OCD can severely disrupt an individual’s
daily functioning, and many individuals suffering from OCD have a lower quality of life and significantly more mental distress compared
to unaffected individuals. A survey of OCD patients found that 73% of patients have weakened family relationships, 62% have weakened friendships,
and 40% are chronically underemployed or unemployed. Patients with both OCD and MDD, a frequent combination of disorders, experience the
most severely impacted quality-of-life. Additionally, individuals with OCD may feel embarrassment or shame regarding their obsessions
and compulsions, contributing to the low treatment-seeking rate of approximately 36%.
Market Information
Despite variances in estimates of the incidence
of the disorder, we believe that a majority of research reports that 2% of the global population suffer from OCD sometime during their
lifetime. According to the National Institute of Mental Health,approximately 1.2% of the adult population in the United States suffers
from OCD over their lifetime. Based on these data, we estimate that approximately 3.1 million adults in the United States suffer
from OCD annually, and approximately half (i.e., 1.5 million) are treatment resistant. Of the total OCD population, 50.6% of cases are
characterized as having severe impairment. Another 34.8% of adults with OCD had moderate impairment, and 14.6% had mild impairment. The
average age of onset is 19 years old.
There is a significant overlap of patients experiencing
MDD and those experiencing OCD. Researchers found that MDD was 10 times more prevalent in OCD patients compared to the general population.
Additionally, roughly 30% of OCD patients have concurrent OCD and MDD at the time of evaluation, and 60 to 80% of OCD patients experience
a depressive episode over the course of their lifetime. Frequently, depressive symptoms follow OCD, which suggests that the depressive
symptoms occur as a response to the distress caused by OCD.
Treatment Options for OCD
OCD is generally considered to be one of the most
difficult psychiatric diseases to treat. The wide variability in the expression of the disease and the frequent co-morbidity (simultaneous
presence) with MDD and other anxiety disorders has complicated the development of an effective, targeted treatment for OCD. The accepted
treatment for OCD is medicinal treatment, psychotherapy or a combination of both. However, up to 40% of patients do not respond to these
treatments sufficiently.
While 60-70% of patients respond or partially
respond to treatment with antidepressant medications such as SRIs or SSRIs, there is a high relapse rate of approximately 60% when medications
are stopped. The high relapse rate suggests that pharmacological treatments should be continued over an extended period of time in order
to have continued effect. In addition, when testing a new pharmacological treatment on a patient, it takes 10 to 12 weeks to determine
if the medication is bringing about clinically significant improvements in symptoms. Over half of patients experience a 25% to 35% decrease
in symptoms within 10 to 12 weeks, but symptoms rarely disappear entirely. In addition, 40-60% of OCD patients do not experience
a meaningful response to pharmacological treatment.
Deterrents to treatment include the often-severe
side effects of medications. Tricyclic antidepressant medication, generally considered to be an effective first-line OCD treatment, is
known for its particularly strong side effect profile. The medication can cause heightened risk of seizures, weight gain, sleepiness,
tremor, dry mouth, nausea, constipation, visual changes, sweating, and sexual dysfunction. All other OCD medications may cause similar
side effects, which make it challenging for patients to retain a high quality of life while also working toward disease remission. Upon
initiation of pharmacological treatment for OCD, it is critical to closely monitor for development of any adverse effects.
Psychotherapy can be an effective treatment for
adults and children with OCD. The treatment may involve controlled exposure to the source of the obsession and practice of refraining
from performance of the compulsion. Research shows that certain types of psychotherapy, including cognitive behavior therapy (CBT) and
other related therapies (e.g., habit reversal training) can be as effective as medication for many individuals. Research also shows
that a type of CBT called Exposure and Response Prevention (EX/RP) is effective in reducing compulsive behaviors in OCD, even in people
who did not respond well to antidepressant medication. For many patients EX/RP is the add-on treatment of choice when antidepressant medication
does not effectively treat OCD symptoms.
Deep TMS presents a novel, FDA-authorized treatment
for OCD. In August 2018, the FDA classified and provided marketing authorization for Deep TMS for OCD as an adjunct treatment (i.e., to
be used in conjunction with first-line treatment, such as antidepressant medication or CBT) for adult patients suffering from OCD. Deep
TMS has the unique ability to simultaneously influence a network of specific regions in the brain related to OCD. In addition, it offers
a direct effect over deep regions in the brain associated with the disorder. The effects of the treatment begin within a relatively short
time period and the duration of the entire treatment plan is shorter compared to a medicinal treatment. Deep TMS therapy for OCD has not
demonstrated any systemic side effects, and we believe that Deep TMS presents an attractive alternative to existing treatment options
for OCD because antidepressant medications, due to their side effects, often lead to cessation of treatment by the patient and as a result,
relapse of OCD symptoms.
Positive data published in February 2022 in the
Journal of Psychiatric Research demonstrated the relative cost-effectiveness of Deep TMS for refractory OCD patients when compared with
other treatments within the treatment continuum, which includes outpatient medication, CBT, as well as more intensive, facility-based
approaches. The data suggest that Deep TMS is a cost-effective alternative, and particularly indicate that it may serve as an incremental
strategy to employ when higher intensity strategies, such as facility-based approaches, are either unavailable, not financially feasible,
or have extended waits for admission.
In 2021, for the first time, several payers issued
policies and coverage determinations allowing for reimbursement coverage applicable to Deep TMS for OCD. While the criteria for this emerging
Deep TMS coverage varies with each payer, generally, coverage requires the failure of between two and four medication trials before qualifying
for reimbursement.
The NIMH is supporting research into new treatment
approaches for people whose OCD does not respond well to the usual therapies. These new approaches include combination and add-on (augmentation)
treatments, as well as novel techniques such as deep brain stimulation (DBS).
Deep TMS for OCD — Our Clinical Trials
Phase III Trial Measuring Efficacy and Safety
We completed a Phase III trial at 11 sites
in the United States, Israel, and Canada to test the efficacy and safety of Deep TMS as a treatment for OCD, which was conducted from
2014 through 2017. In this trial, Deep TMS met its safety and efficacy endpoints and based on these results, we filed a de novo
application to the FDA for the Deep TMS (using BrainsWay OCD) in this indication. In August 2018, the FDA classified and granted marketing
authorization for Deep TMS as an adjunct treatment for adult patients with OCD to be used together with other first-line therapies.
This double blind, placebo-controlled trial tested
the efficacy and safety of Deep TMS in the treatment of 94 treatment-resistant OCD patients. Enrolled subjects were randomized to either
treatment with active Deep TMS or a sham. Deep TMS for OCD was used for all treatment sessions, each of which lasted 18.3 minutes. BrainsWay
OCD is specifically used in OCD treatment because it targets the anterior cingulate cortex, a region believed to be affected by OCD.
The trial consisted of three phases. The first
phase, lasting one to two weeks, was the screening phase, during which antidepressant medications other than SSRIs were tapered down and
washed out (i.e., to make sure that patients take during the trial only medications that were approved by the protocol (such as SSRIs),
and that they remained stable on these medications). Following the screening phase, patients entered into a six-week treatment phase.
During the first five weeks of the treatment phase, patients received five consecutive sessions per week, followed by one week with four
sessions (29 total treatment sessions). The third phase was the follow-up, in which patients were assessed in week six after their
final treatment.
The primary endpoint measure was the Yale-Brown
Obsessive Compulsive Scale (YBOCS), which is a score ranging from 0 to 40, with higher scores indicating greater severity of OCD symptoms.
The secondary efficacy endpoint measures were response rate at weeks 6 and 10, partial response rate at weeks 6 and 10, and remission
rates at week 6. Secondary safety endpoint measures included the number of adverse events, physical and cognitive evaluations, and vital
signs.
Inclusion and exclusion criteria required patients
to be diagnosed with OCD, have a YBOCS score of greater than 20, and not be diagnosed with any severe personality disorders.
After six weeks of treatment, the Deep TMS treatment
group had statistically significant improvement in YBOCS score compared to the sham treatment group. The adjusted mean YBOCS score decreased
by 6.04 points in the Deep TMS group and by 3.27 points in the sham control group. The difference between the slopes of 2.78 points across
six weeks between the treatment arms was statistically significant (p-value: 0.0127), and the effect size at week six assessment was 0.69.
As shown in Figure 3, 38.1% of the Deep TMS treatment group achieved a response compared to 11.1% of the sham treatment group. Furthermore,
54.8% of the Deep TMS treatment group achieved a partial response, compared to 26.7% of the sham treatment group. The differences between
groups were statistically significant for both response rate (p = 0.0033) and partial response rate (p = 0.0076).
Figure 3. Response and Partial Response
Rates for Deep TMS and Sham Treatment Groups
One month after the end of treatment (10 weeks
after baseline), patients retained clinical improvement of symptoms, and these measures (YBOCS change and response rate) were significantly
better in the Deep TMS group compared to the sham group (p=0.03 for YBOCS change and p=0.0057 for response rate).
Figure 4 highlights the continued decrease in unadjusted mean
YBOCS score from baseline over the ten-week period.
Figure 4. Total YBOCS Score Change from
Baseline over 10-Weeks for Deep TMS and Sham Treatment Groups
Real world data further demonstrates the benefits
of Deep TMS for OCD: In a post-marketing study, published as a peer-reviewed paper, the overall first and sustained response rates were
72.6% and 52.4%, respectively. The response rate was 57.9% in patients who had YBOCS scores after the FDA-cleared protocol of 29 Deep
TMS sessions. First response was achieved in average after 18.5 sessions (SD = 9.4) or 31.6 days (SD = 25.2). Onset of sustained one-month
response was achieved in average after 20 sessions (SD = 9.8) or 32.1 days (SD = 20.5). Average YBOCS scores demonstrated continuous reduction
with increasing numbers of sessions. The results indicate that in real-world clinical practice, the majority of OCD patients benefitted
from our therapy, and the onset of improvement usually occurs within 20 sessions. Extending the treatment course beyond 29 sessions resulted
in continued reduction of OCD symptoms, raising the prospect of value for extended treatment protocols in non-responders.
A study published in November 2021 in the Brain
Stimulation journal demonstrates the durability of Deep TMS for OCD and the significant reduction in functional disability experienced
by those who have undergone our therapy for this disorder. To evaluate durability, clinical sites from our pivotal trial, as well as other
clinical sites contributing post-marketing data, conducted follow up assessments with patients that had met response criteria following
treatment with our OCD coil. Durability was defined as the elapsed time from the end of the Deep TMS treatment course until there was
a change in ongoing treatment. Data revealed that of the 60 subjects evaluated from seven clinical sites, 52 demonstrated durability of
one year or more (86.7%), 26 of which showed two or more years of durability. The data also showed that patients exhibited a significant
reduction in disability, with self-reported unproductive days per week dropping from 5.5 days (±0.4) to 1.8 days (±0.4),
and self-reported lost days per week dropping from 1.9 (±0.6) to 0.3 days (±0.2).
Figure 5. OCD Durability and Reduction in Unproductivity
Deep TMS for Smoking Addiction
Disease Overview
Smoking is one of the leading causes of death
in developed countries. The addiction to nicotine, similar to the addiction to drugs and alcohol, activates the limbic system and causes
uncontrollable desire to smoke. According to the World Health Organization (WHO), 1.3 billion people globally use tobacco, primarily cigarette
smoking. Globally, more than 8 million people die from smoking each year: 7 million from direct us and 1.2 million from second-hand smoke.
Approximately 34 million U.S. adults smoke cigarettes, and 480,000 die from smoking each year. Repeated nicotine use leads to tobacco
use disorder (TUD), characterized by craving and withdrawal, compulsive use despite negative consequences, repeated relapses, and is associated
with multiple health problems and failed attempts to cease. Smoking causes about 90% of all lung cancer deaths.
Market Information
The global nicotine replacement therapy (NRT)
market was estimated at $2.6 billion in 2019, and this market value is anticipated to increase as a result of the increasing incidence
of chronic, smoking-related diseases. Chantix (Varenicline), the leading smoking cessation pharmaceutical from Pfizer, had sales of $1.1
billion worldwide in 2019, $899 million from the United States. Considering the U.S. market, there are 34 million cigarette smokers. Each
year, 55% attempt to quit smoking (81% of which are motivated to quit.). Only 29% of adult smokers that attempt to quit report using medication
(e.g. NRT, Varenicline, Buproprion), and less than 10% of smokers quit within a given year with varied long-term success.
Treatment Options for Smoking Addiction
One of the most common smoking addiction options
is nicotine replacement therapy (NRT), which is the affixing of patches to the body or the chewing of gum which secrete decreasing concentrations
of nicotine in a manner which may assist physical withdrawal. However, this method does not treat the psychological-behavioral component
of the addiction, and therefore there is a high probability that the patient will return to smoking if nicotine patch treatment is discontinued.
A study found that 93% of over-the-counter NRT users relapse and return to smoking within six months.
First line treatment options include antidepressants
such as Zyban (bupropion) and Chantix (varenicline). Studies have found advantageous abstinence rates compared to placebo. Yet, recent
studies using objective measures found very low quit rates. A recent meta-analysis found that 20% of smokers treated with medications
remained abstinent for one year, compared to 12% with placebo. The medications may frequently be associated with undesirable adverse events.
There are studies that indicate that combination
of psychological support with pharmacotherapy may increase the chances to quit smoking.
Deep TMS for Smoking Addiction – Our Clinical Trials
Deep TMS presents a novel, FDA-authorized treatment
for smoking addiction. In August 2020, the FDA classified and provided marketing authorization for the use of Deep TMS as an aid in short-term
smoking cessation in adults. Deep TMS has the unique ability to simultaneously influence a network of specific regions in the brain associated
with reward and craving. The effects of the treatment begin within a relatively short time period and the duration of the entire treatment
plan is shorter compared to a medicinal treatment. Deep TMS therapy for smoking cessation has not demonstrated any systemic side effects,
and we believe that Deep TMS presents an attractive alternative to existing treatment options for smoking cessation because antidepressant
medications, due to their side effects, often lead to cessation of treatment by the patient and as a result, relapse to smoking.
We concluded with positive results a pivotal multicenter
trial assessing the safety and efficacy of Deep TMS as an aid in smoking cessation in adults suffering from chronic smoking addiction.
The trial was a randomized, double-blind, multicenter
study designed to evaluate the safety and efficacy of Deep TMS treatment as an aid in reducing cigarette smoking in individuals suffering
from chronic smoking addiction. It was conducted at 14 sites, primarily in the U.S., and enrolled 262 eligible subjects randomized into
two groups: an active treatment group treated with our proprietary H4 coil targeting addiction-related brain circuits, and a sham (placebo)
control group. The primary endpoint of the study was a comparison between the two groups of the four-week continuous quit rate (CQR),
representing abstinence during a consecutive four-week period. Weekly abstinence was defined as a subject’s self-report (in a diary)
of no smoking, confirmed by urine tests indicating abstinence from smoking. The participants in the study were highly addicted to smoking,
with a history of smoking on average for over 26 years and multiple failed attempts to quit. All of the subjects in the study had at least
one prior unsuccessful attempt to quit smoking before being enrolled in the trial. Over 68% of the subjects had undertaken at least three
prior unsuccessful attempts, and over 25% had undertaken at least five prior unsuccessful attempts.
Participants received three weeks of daily Deep
TMS (or sham) treatment followed by one session per week for three more weeks (for a total of 18 treatments over six weeks). Assessment
visits, including questionnaires and the collection of urine samples, were performed weekly from week two until week six. In addition,
subjects were asked to keep a record of their smoking behavior on a diary card. Patients reporting abstinence at 6 weeks were invited
for a long follow-up (L-UP) visit at 4 months.
Of the 169 participants in the study who actually
completed three weeks of Deep TMS or sham treatment, plus the mandatory additional three weeks of follow-up (reaching the six-week endpoint),
the CQR was 28.0% in the treatment group compared to 11.7% in the sham group (p=0.007). The primary endpoint was defined based on
the CQR among those subjects who received at least one Deep TMS (or sham) treatment session and had at least one post-baseline assessment,
even if not completing the treatment period. Within this cohort (ITT-E- which consisted of 234 participants and included dropouts)
the CQR was 19.4% in the treatment group and 8.7% in the sham group (p= 0.0174).
The Overall 4-week continuous quit rate (CQR)
is shown in the figure below for the active dTMS and sham groups, within the ITT-E and completers (CO) cohorts.
Figure 6. Overall 4-week Continuous Quit
Rates for Deep TMS and Sham Treatment Groups
An important secondary endpoint
was the reduction in the number of cigarettes smoked. At baseline, the average number of cigarettes smoked per week was 123 for the active
group and 139 for the sham group. After 3 weeks of treatment, the average number of cigarettes smoked per week was reduced to 38 in the
active group and 57 in the sham group (p= 0.0018, active vs. sham). By the sixth week of the study, the average number of cigarettes smoked
per week declined to 31 for the active group and 48 for the sham group (p=0.0125, active vs. sham).
The numbers of cigarettes per week, from baseline
to the 6-week time-point, are shown in the figure below for the two groups. As can be seen, the difference between the dTMS and sham group
is significant starting from week 2.
Figure 7. Number of Cigarettes Smoked for
Deep TMS and Sham Treatment Groups
Sales and Marketing
United States
The United States is our primary and most strategic
market, representing approximately 88% of our revenues for the year ended December 31, 2021. We operate in the United States through
our wholly owned subsidiary, BrainsWay USA Inc., as a direct marketing and sales channel, engaging in the marketing, sales, support,
and logistics independently in the United States. As of December 31, 2021, we had 52 U.S. employees, including 45 sales, marketing
and service/operations employees, 4 general and administrative employees, and 3 medical affairs employees.
In the United States, we sell or lease Deep TMS
systems by one of the following two methods: (i) a fixed-fee lease model in which the Deep TMS system is leased to a customer for
a fixed annual fee, generally with a term of between 48 to 60 months, for unlimited use; and (ii) a sales or purchase model in which
the Deep TMS system is sold to the customer for a fixed purchase price. Additional potential revenues may be derived from extended warranty
fees paid for the system for service coverage beyond the standard included warranty period, and from variable or usage fees based on the
number of treatments performed with the system. We are also able to leverage our platform technology, which includes the ability to treat
multiple indications using different H-Coil helmets, to facilitate transactions utilizing combined pricing models often involving a single
system with one or more add-on helmets. These flexible offerings are designed to facilitate market penetration by addressing the differing
clinical needs and risk tolerance among our customer base.
As of December 31, 2021, approximately 43%
of our global Deep TMS systems installed base for MDD utilized the fixed-fee lease model, and approximately 47% utilized the sales model.
We generally commercialize Deep TMS for OCD utilizing a leasing or purchase model, and often as part of a combined offering with our MDD
system.
We recently began marketing our products for smoking addiction. Specifically,
we completed controlled and limited market releases of our system for this indication, and are currently embarking on a full commercial
launch.
The training for operation of our Deep TMS system
is not complex and requires about a day of training which includes theoretical learning and a number of practical hours of practice of
placing the helmet on the head of the patient and providing treatment. Deep TMS for OCD requires additional training on triggering the
patient’s OCD symptoms prior to administration of the treatment. Similarly, Deep TMS for smoking addiction involves a provocation
procedure which triggers each individual smoker's craving for his or her preferred cigarette brand prior to the administration of therapy.
After installation of our system, we offer high
quality service, technical support, and repair to customers. Customers leasing the device generally receive support including maintenance
and warranty for repairs and replacements during the full term of the lease. In contrast, customers purchasing the device receive this
support for the first year following purchase. Thereafter, the warranty and support can be extended on a yearly basis by paying a set
fee.
Our marketing activities include, amongst other
things, corporate presence in major commercial and professional conferences, press releases, advertising, participation in open house
and other similar events, social media, Search Engine Optimization (SEO), and other internet-based promotional campaigns, and release
of both direct and online marketing materials, which are all designed to increase the use of our systems for the authorized indications.
Outside of the United States
Approximately 12%, 13% and 12% of our revenues
for the fiscal years ended December 31, 2021, 2020 and 2019, respectively, were generated outside of the United States. A significant
part of our sales outside the United States are made indirectly with local distributors and agents. Most of our sales outside the United
States are made only via the purchase model, although we lease some of our Deep TMS systems in France and Israel. Our primary focus is
on selling to hospitals, medical centers and clinics dealing with the treatment of psychiatric neurological and addiction illnesses and
disorders.
Our non-U.S. sales are managed both by our internal
team in Israel and by local agents in various countries. In Israel, we do not use a distributor and our sales team distributes directly
to our customers. We have exclusive distribution agreements in various territories, including, notably, in Japan, South Korea, Thailand,
Taiwan, the Philippines, and the United Arab Emirates, and are seeking new distribution partners for other strategic markets. Under our
distribution agreements, the distributor typically receives an exclusive right to commercialize the Deep TMS in the relevant territory.
The exclusivity is contingent upon fulfillment of certain quotas, or pre-defined minimum orders of a number of systems per period. We
have the right to cancel the exclusivity of the distributor if the distributor fails to fulfill the set targets. The distributor is required
to pay us for each Deep TMS system installed in the territory.
The duration of these agreements varies between
distributors and ranges between three and ten years. In territories in which we use a local distributor, the distributor is generally
responsible for obtaining and maintaining the regulatory approvals required for marketing of Deep TMS systems in the territory and for
the installation, training, and maintenance of the systems in the relevant territory. In Japan, we have obtained PMDA regulatory approval
for our Deep TMS system, which is a precondition to receiving reimbursement coverage under the Japanese National Health Insurance Plan.
We are working through our Japanese distributor with the relevant bodies in Japan in an effort to update the local society guidelines
to include Deep TMS in order to obtain such coverage.
We aim to increase our marketing and sales outside
the United States by means of cultivating and supporting our existing distributors, and by considering other strategic opportunities in
various markets. Success of penetration in each country is contingent on a variety of factors, including, among others, the strength and
capabilities of the distribution partner, the existence of regulatory approvals, the availability of reimbursement, the support of key
opinion leaders, and the ability of customers to adopt our technology.
Our Clinical Pipeline
Set forth below is a table presenting the status
of our currently planned clinical pipeline:
Additional Potential Deep TMS Applications
Our primary focus for additional potential applications
for Deep TMS are fatigue in multiple sclerosis (MS), addictions (for example, cocaine, opioid and/or alcohol addiction), and potentially
additional indications in neurology. The U.S. patient population for MS is approximately 1 million. We recently announced pilot study
results from a randomized, placebo-controlled, double-blind study on the safety and efficacy of Deep TMS in reducing alcohol consumption
and craving in adults with Alcohol Use Disorder (AUD). Analyzing data from 46 subjects, the study demonstrated that subjects in the active
group had an average of 2.9% heavy drinking days (defined as a day on which four or more drinks were consumed for women, or five or more
drinks for men) compared to 10.6% heavy drinking days in the sham group.
We have conducted clinical trials evaluating Deep
TMS for a variety of neurological and psychiatric conditions and believe further investigation could pave the way for marketing authorizations
in new indications in the United States and expand the potential for treatment to a wider range of patients. Factors that contribute to
how we prioritize the pursuit of certain clinical studies include, but are not limited to, the strength of our feasibility clinical data,
market potential, required budget, and ease of conduct of the trial. However, there is no guarantee that we will ultimately be successful
in obtaining marketing clearance for the indications prioritized for further study.
Competition
The industry for the treatment of mental health
diseases, disorders, and other conditions is intensely competitive. Our currently marketed Deep TMS System is, and any future indications
we develop and commercialize will be, subject to intense competition. Our Deep TMS system for MDD competes with existing antidepressant
drugs, other TMS therapies and to a lesser degree, more invasive treatments such as ECT, VNS, and DBS. Our Deep TMS system for OCD also
competes with existing medications and other available treatments, although faces less direct competition as we are one of only two FDA-cleared
TMS products for this indication. The industry in which we operate is subject to rapid change and is highly sensitive to the introduction
of new products or other market activities of current or new industry participants. Certain competitors may be larger and have greater
resources than us, and may develop treatment options that receive faster regulatory approvals and/or are more rapidly adopted by clinicians
and patients. Our competitors compete with us on the basis of efficacy and safety, regulatory approvals, price and availability of reimbursement
from third-party payers, ease of use/administration of the treatment option, reputation, and market trends. Key competitive factors affecting
the commercial success Deep TMS System are likely to be efficacy, safety and tolerability, reliability, convenience and time frame of
administration, market acceptance of our products relative to alternative treatments, and reimbursement.
Competitors that sell other forms of TMS therapy
for MDD include Neuronetics, MagVenture, Magstim, MAG & More, Cloud TMS, and Nexstim, that compete directly with us. Their systems
are typically based on traditional TMS utilizing a figure-8 coil and are generally FDA-cleared for MDD only, although MagVenture has a
non-clinical trials-based FDA clearance for OCD. By contrast, our unique Deep TMS H-Coils are designed to address a number of different
brain disorders. Other than MagVenture, none of our competitors in the MDD market is currently FDA-cleared for an OCD indication, and
BrainsWay is the only company currently with marketing authorizations for MDD, OCD, and the treatment of smoking addiction.
We also face competition
from pharmaceutical and other companies that develop competitive products, such as antidepressant medications (including but not limited
to a nasal spray utilizing the drug esketamine which was recently approved by the FDA for use in conjunction with an oral antidepressant),
with certain competitive advantages such as widespread market acceptance, ease of patient use and well-established reimbursement. In addition,
we may face competition from ketamine, which is used as an anesthetic to treat a variety of brain disorders. Currently in clinical trials,
there are a number of psychedelics including lysergic acid diethyamide (LSD), psilosybin, DMT, and methylendioxymethamphetatmine (MDMA)
showing early promise in the treatment of mental health conditions like depression and PTSD. Our
commercial opportunity could be reduced or eliminated if these competitors develop and commercialize antidepressant medications or other
treatments that are safer or more effective than Deep TMS. At any time, these and other potential market entrants may develop treatment
alternatives that may render our products uncompetitive or less competitive.
We are also subject to competition from invasive
neuromodulation therapies such as ECT, VNS, and DBS. Major players in this space include Abbott, Boston Scientific Corporation, LivaNova,
and Medtronic. For example, the VNS system developed by Cyberonics (now LivaNova) is FDA-approved for MDD.
For smoking addiction, there are a wide range
of prescription and over-the-counter (OTC) short term aids in smoking cessation. Two prescription medications that are synonymous
with the market are Chantix® (varenicline) and Zyban (buproprion). OTC nicotine replacement therapies continue to play a major
role in a multi-modal approach to smoking cessation, with common forms ranging from chewing gums, to lozenges, to transdermal patches.
Digital therapeutics, including prescription digital
therapeutics (PDTs), are also gaining popularity in the space of mental health treatments given the availability and affordability of
smart phones. For all of the conditions we address in the United States, there are numerous popular phone applications to help reinforce
the multi-modal treatment algorithms.
In addition, we may face competition in the future
from other noninvasive treatments for MDD (including anxious depression), OCD, and smoking addiction. Examples of noninvasive treatment
options in early development include low-intensity and low-frequency ultrasound (LIFU), transcranial laser therapy, and infrared therapy.
We cannot predict whether any of these or any other treatment options will succeed in clinical trials or be commercially marketable in
the future.
Intellectual Property
See “Item 5. Operating and Financial Review and Prospects –
C. Research and Development, Patents and Licenses.”
Government Grants
As of December 31, 2021, we have received
grants from the IIA in an aggregate amount of approximately $13.3 million. We are currently required to pay 3% royalties of
sales of our Deep TMS products, which payment obligations do not currently exceed the amount of the grant received (in U.S. dollars),
plus interest at an annual rate equal to the LIBOR rate. As of December 31, 2021, we have paid royalties to the IIA in an aggregate
amount of approximately $3.4 million (including amounts in respect of accrued interest), with remaining outstanding royalties of up to
$12.4 million.
In addition, we received from MAGNET approvals
for grants in an aggregate amount of NIS 8.2 million (approximately $2.65 million based on the NIS to USD exchange rate
as of December 31, 2021). There is no requirement to repay the grants or pay royalties thereon.
Manufacturing and Supply
We manage all aspects of product supply through
our Jerusalem and/or U.S.-based operations teams. We manufacture our proprietary H-Coils and outsource the manufacture of certain components,
including the stimulator, the computer controlling the stimulator, cooling system, the helmet, and the arm of the helmet, which are produced
and tested to our specifications. We assemble Deep TMS systems at our headquarters in Jerusalem, US warehouses and/or installation sites.
In some cases, we rely on third-party providers to provide components used in existing products and we expect to continue to do so for
future products. Our production activities also include manually assembling certain components of our devices for all required clinical
and commercial quantities, and the integration of all components into a functioning Deep TMS system.
We rely on suppliers for most of the components
used in manufacturing Deep TMS, including the computer controlling the stimulator, the helmet, and the arm of the helmet. In addition,
we rely on the outsourcing company utilized for the manufacture of our newer systems, including our proprietary stimulator and various
other components. We manage our arrangements with our third-party manufacturers and suppliers to adjust delivery schedules and quantities
of components to match our changing manufacturing requirements. We forecast our component needs based on historical trends, current utilization
patterns, and sales forecasts of future demand. We establish our relationships with our third-party manufacturers and suppliers through
supplier contracts and purchase orders. In most cases, these supplier relationships may be terminated by either party upon short notice.
The prices that we pay for sourced components vary depending on various factors, including the cost of the raw materials required for
those components, our required delivery times, and shipping costs. Magstim (UK) has historically supplied us with stimulators, and it
is anticipated that they will continue to be used a source for older generation systems which do not include our newer FDA-cleared stimulator
until such older generation systems remain in usage or are commercially available.
In order to mitigate the risks related to a single-source
of supply, we qualify alternative suppliers when possible, maximize the use of commercial, off the shelf components and materials, minimize
specialized or proprietary manufacturing processes, and develop contingency plans for responding to disruptions, including maintaining
adequate inventory of any critical components. For further discussion of the risks in this regard posed by the supply chain crisis see
“Risk Factors – Our operations could be adversely affected by the global supply chain disruptions”. To date, the supply
of finished products to our customers and clinicians has not been materially adversely affected as a result of component supply issues.
We are subject to extensive governmental regulation
in connection with the manufacture of our devices. We must ensure that all of the processes, methods, and equipment are compliant with
the current Quality System Regulations (QSR) for devices on an ongoing basis, mandated by the FDA and other regulatory authorities, and
must conduct extensive audits of vendors, contract laboratories and suppliers. We comply with such regulatory requirements. Certain of
our foreign marketing authorizations requires compliance of said manufacturing process with the ISO 13485 standard, with which we
are compliant.
Reimbursement
We estimate that over 90% of the total private
insurer adult covered lives in the United States have coverage for reimbursement of MDD treatment with Deep TMS, available after one to
four failed (inadequate response or intolerable) trials of antidepressant medications. In addition, our MDD treatment with Deep TMS is
eligible for reimbursement from Medicare, and is expected to be available after one to four failed trials of psychopharmacologic agents
(such as antidepressant medications) and subject to the satisfaction of other clinical criteria. Typically, payors (including Medicare)
will provide reimbursement for up to 36 treatment sessions of Deep TMS for MDD, although the maximum number of covered sessions varies
by insurer and/or location.
Over the past year there has been
emerging reimbursement coverage for Deep TMS for the treatment of OCD, with approximately 60 million covered lives eligible for coverage
as of March 2022. In early 2021, Centene Corporation, the largest Medicaid managed care organization in the country with over 26 million
members issued a positive coverage policy applicable to our Deep TMS therapy for OCD. In June 2021, Health Care Service Corporation (HCSC),
an independent licensee of Blue Cross Blue Shield Association, covering approximately 17 million members issued a positive coverage policy,
applicable to our Deep TMS therapy for OCD. In 2021, Tricare, which covers 9.6 million military family members across the US, also approved
coverage of Deep TMS for OCD. Additionally, in mid 2021, Palmetto GBA, one of the seven Medicare Administrative Contractors (MACs) in
the US, issued the first draft Local Coverage Determination (LCD) proposing coverage applicable to Deep TMS for OCD, and subsequently
issued a final LCD approving such coverage effective March 2022. In addition, there is currently an out-of-pocket market for our Deep
TMS systems for OCD, and we are working to broaden the scope of reimbursement coverage for Deep TMS for OCD treatment, both commercial
and governmental, based on a demonstration of the reasonableness and necessity of the treatment through clinical data. Deep TMS for smoking
addiction is not currently eligible for reimbursement. We plan to seek to obtain coverage as we progress in our commercialization for
this indication.
The sale or lease of a medical device utilized
for in-office medical treatments depend, in part, on the extent to which such treatments using that device will be covered by third-party
payers, such as government health care programs (e.g., Medicare), private insurance, and managed healthcare organizations. Even if
a third-party payer covers a particular treatment, the resulting reimbursement payment rates may not be adequate to cover a provider’s
cost to purchase such medical device or ensure that purchase or lease will be profitable for the provider. Additionally, patients who
are treated in-office for a medical condition generally rely on third-party payers to reimburse all or part of the costs associated with
the treatment and may be unwilling to undergo such treatment in the absence of coverage and adequate reimbursement.
Reimbursement by a third-party payer may depend
upon a number of factors, including the third-party payer’s determination that a treatment is: neither experimental nor investigational;
safe, effective, and medically necessary; appropriate for the specific patient; cost-effective; supported by high quality evidence published
in peer reviewed medical journals; included in clinical practice guidelines; and supported by medical community acceptance and demand.
Physician reimbursement under Medicare generally
is based on a defined fee schedule, or the Physician Fee Schedule, through which payment amounts are determined by the relative values
of the service rendered in a physician office setting or by a physician in a facility setting. Medicare coverage for TMS also has specific
patient history requirements. Medicare coverage for Deep TMS generally requires one to four failed (inadequate response or intolerable)
trials of psychopharmacologic agents (such as antidepressant medications).
In the United States, there is no uniform policy
of coverage and reimbursement among private third-party payers. Reimbursement rates from private payers vary depending on the procedure
performed, the commercial payer, contract terms, and other factors. Private third-party payers often rely upon Medicare coverage policy
and payment limitations in setting their own reimbursement policies, but also have their own methods and approval process apart from Medicare
coverage and reimbursement determinations. Private insurance coverage for Deep TMS has traditionally required three to four failures of
antidepressant medications. However, many payors have now reduced the number of prior failed medication trials needed to qualify for Deep
TMS for MDD. Specifically, about 90 million covered lives in the US with commercial coverage now qualify for Deep TMS for MDD after two
to three failed medication trials, and approximately 42 million lives in the US with Medicare reimbursement coverage qualify after just
one to two failed medication trials.
Coverage and reimbursement for treatments can
differ significantly from payer to payer. Decisions regarding the extent of coverage and amount of reimbursement to be provided for an
in-office treatment are made on a plan-by-plan basis. One payer’s determination to provide coverage for a specific treatment does
not assure that other payers will also provide coverage and adequate reimbursement.
In addition, the U.S. federal government and state
legislatures have continued to implement cost containment programs, including price controls and restrictions on coverage and reimbursement.
Governmental and private insurers are increasingly challenging the price, examining the medical necessity, and reviewing the cost-efficacy
of medical services. Adoption of price controls and cost containment measures by any such payers, and adoption of more restrictive policies
in jurisdictions with existing controls and measures, could limit our market opportunity and reduce our revenues.
Private insurers currently cover treatments using
our Deep TMS system for MDD, and there is now emerging coverage from various payers for Deep TMS therapy for OCD. We are actively engaged
in efforts to facilitate increased coverage for OCD treatment by more payers, including both commercial and governmental. Reimbursement
is not yet available for Deep TMS for smoking addiction or for therapies currently under development for other indications. However, we
are engaged in efforts to obtain coverage for Deep TMS for smoking addiction as our commercialization efforts for that indication progress,
based on the novelty of the technology, unmet clinical need and the efficacy and safety profile of the treatment.
Nonetheless, we can provide no assurances that
we will be able to obtain a wide range reimbursement coverage for OCD nor any reimbursement coverage for smoking addiction, and even if
obtained, we can provide no assurance that the coverage will be at the same levels as we have for MDD.
We are also working to include Deep TMS in additional
insurance coverages in the United States and in other jurisdictions in which we operate. In regions where we have appointed a local distributor,
where reasonable, it is typically required under our agreements that the distributor utilize efforts to obtain reimbursement coverage
for Deep TMS in the relevant territory on our behalf.
Government Regulation
United States
Our products and our operations are subject to
extensive regulation by the FDA and other federal and state authorities in the United States, as well as comparable authorities in foreign
jurisdictions. Our products are subject to regulation as medical devices under the U.S. Federal Food, Drug and Cosmetic Act (FDCA), as
implemented and enforced by the FDA. The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety,
efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, import, export, adverse
event reporting, advertising, promotion, marketing and distribution, and import and export of medical devices to ensure that medical devices
distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.
In addition to U.S. regulations, we are subject
to a variety of regulations in other jurisdictions governing clinical trials and commercial sales and distribution of our products. Whether
or not we obtain FDA clearance or approval for a product, we must obtain authorization before commencing clinical trials or obtain marketing
authorization or approval of our products under the comparable regulatory authorities of countries outside of the United States. The marketing
authorization process varies from country to country and the time may be longer or shorter than that required for FDA clearance or approval.
FDA Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device
commercially distributed in the United States requires either FDA clearance of a 510(k) premarket notification or premarket approval,
or PMA. Under the FDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending
on the degree of risk associated with each medical device and the extent of manufacturer and regulatory control needed to ensure its safety
and efficacy. Class I includes devices with the lowest risk to the patient and are those for which safety and efficacy can be assured
by adherence to the FDA’s general controls for medical devices, which include compliance with the applicable portions of the QSR
facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising,
and promotional materials. Class II devices are subject to the FDA’s general controls, and special controls as deemed necessary
by the FDA to ensure the safety and efficacy of the device. These special controls can include performance standards, post-market surveillance,
patient registries, special labeling requirements, premarket data requirements and FDA guidance documents. While most Class I devices
are exempt from the 510(k) premarket notification requirement, manufacturers of most Class II devices are required to submit to the
FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. The FDA’s
permission to commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k) clearance. Devices
deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or some implantable devices, or devices that have
a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in
Class III, requiring approval of a PMA.
Our Deep TMS system is classified as a Class II
medical device. For MDD, smoking addiction, and subsequently granted applications relating to MDD (including a 3-minute Theta Burst protocol
and a labeling expansion to include reduction of comorbid anxiety symptoms among depressed patients), we obtained FDA marketing authorization
through the 510(k) clearance process. For OCD, we obtained FDA marketing authorization through the de novo classification process.
Subsequent changes made to our Deep TMS system will be made through one or more of the various existing FDA review pathways.
510(k) Marketing Clearance Pathway
To obtain 510(k) clearance, we must submit to
the FDA a premarket notification submission demonstrating that the proposed device is “substantially equivalent” to a predicate
device already on the market. A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a
device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that
has been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k)
process. The FDA’s 510(k) clearance process usually takes nine to 12 months, but may take significantly longer. The FDA may require
additional information, including clinical data, to make a determination regarding substantial equivalence. If the FDA agrees that the
device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market
the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device
is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request
a risk-based classification determination for the device in accordance with the de novo classification process, which is a route
to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device.
Premarket Approval Process
A PMA application must be submitted if the medical
device is in Class III (although the FDA has the discretion to continue to allow certain pre-amendment Class III devices to
use the 510(k) process) or cannot be cleared through the 510(k) process. A PMA application must be supported by, among other things, extensive
technical, pre-clinical, clinical trials, manufacturing, and labeling data to demonstrate to the FDA’s satisfaction the safety and
effectiveness of the device.
After a PMA application is submitted and filed,
the FDA begins an in-depth review of the submitted information, which typically takes between one and three years, but may take significantly
longer. During this review period, the FDA may request additional information or clarification of information already provided. Also,
during the review period, an advisory panel of experts from outside the FDA will usually be convened to review and evaluate the application
and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection
of the manufacturing facility to ensure compliance with the QSR, which imposes extensive design development, testing, control, documentation
and other quality assurance procedures in the design and manufacturing process. The FDA may approve a PMA application with post-approval
conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion,
sale, distribution, and collection of long-term follow-up data from patients in the clinical study that supported approval. Failure to
comply with the conditions of approval can result in materially adverse enforcement action, including the loss or withdrawal of the approval.
New PMA applications or supplements are required for significant modifications to the manufacturing process, labeling of the product and
design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information
as an original PMA application, except that the supplement is limited to information needed to support any changes from the device covered
by the original PMA application, and may not require as extensive clinical data or the convening of an advisory panel.
De novo Classification Process
Medical device types that the FDA has not previously
classified as Class I, II, or III are automatically classified as Class III regardless of the level of risk they pose. The Food
and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are
automatically placed into Class III due to the absence of a substantially equivalent predicate device, called the “Request
for Evaluation of Automatic Class III Designation,” or the de novo classification process. This process allows a manufacturer
whose novel device is automatically classified as Class III to request down-classification of its medical device into Class I
or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA
application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act, or FDASIA, in July 2012, a medical
device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and
received a determination from the FDA that the device was not substantially equivalent to a predicate device. FDASIA streamlined the de
novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting
a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. We obtained marketing authorization
for the OCD indication for our system using the direct de novo request classification process. We have used the 510(k) clearance
process to obtain authorization from the FDA for changes to our marketed Deep TMS system, including applications extending our clearances
to our proprietary stimulator, and expansions to our MDD indication which now allow us to market a shorter 3 minute depression protocol
as well the ability to market our MDD therapy for the reduction of comorbid anxiety symptoms among depressed patients.
Clinical Trials
A clinical trial is typically required to support
a PMA application or de novo classification, and is sometimes required for a 510(k) premarket notification. Clinical trials for
significant risk devices generally require submission of an application for an Investigational Device Exemption, or IDE, to the FDA. The
IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test
the device in humans and that the investigational protocol is scientifically sound. The IDE application must be approved in advance by
the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated
IDE requirements. Clinical trials for a significant risk device may begin once the IDE application is approved by the FDA as well as the
appropriate institutional review boards (IRBs), at the clinical trial sites, and the informed consent of the patients participating in
the clinical trial is obtained. After a trial begins, the FDA may place it on hold or terminate it if, among other reasons, it concludes
that the clinical subjects are exposed to an unacceptable health risk. Any trials we conduct must be conducted in accordance with FDA
regulations as well as other federal regulations and state laws concerning human subject protection and privacy. Moreover, the results
of a clinical trial may not be sufficient to obtain clearance or approval of the product.
Changes to Marketed Devices
After a device receives 510(k) marketing clearance,
or de novo classification, any modification that could significantly affect its safety or efficacy, or that would constitute a
major change or modification in its intended use, will require a new 510(k) marketing clearance or, depending on the modification, a de
novo classification or PMA. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k)
or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. Many
minor modifications today are accomplished by a manufacturer documenting the change in an internal letter-to-file. The letter-to-file
is in lieu of submitting a new 510(k) to obtain clearance for every change. The FDA can always review these letters to file in an inspection.
If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request
the recall of the modified device until 510(k) marketing clearance or PMA is obtained. Also, in these circumstances, the manufacturer
may be subject to significant regulatory fines or penalties.
Post-market Regulation
After a device is cleared or approved for marketing,
numerous and extensive regulatory requirements continue to apply. These include:
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establishment registration and device listing with the FDA; |
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QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation, and other quality assurance procedures during all aspects of the design, manufacturing, and distribution process; |
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labeling and marketing regulations, which require that promotion is truthful, not misleading, fairly balanced, and provide adequate directions for use and that all claims are substantiated, and also prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; |
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FDA guidance on off-label dissemination of information and responding to unsolicited requests for information; |
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clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices; |
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medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury or serious adverse events, if the malfunction were to recur; |
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correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health; |
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complying with regulations requiring Unique Device Identifiers (UDI) on devices and also requiring the submission of certain information about each device to the FDA’s Global Unique Device Identification Database (GUDID); |
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the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and |
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post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and efficacy data for the device. |
We may be subject to similar foreign laws that
may include applicable post-marketing requirements such as safety surveillance and risk-benefit analysis. Our manufacturing processes
are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design,
manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation, and servicing
of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history
file, and complaint files. As a manufacturer, we are subject to periodic scheduled or unscheduled inspections by the FDA. Our failure
to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, our manufacturing operations, and
the recall or seizure of our products. The discovery of previously unknown problems with any of our products, including unanticipated
adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of
its clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal
of the product from the market or voluntary or mandatory device recalls.
The FDA has broad regulatory compliance and enforcement
powers. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or
enforcement actions, which may result in any of the following sanctions:
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warning letters, untitled letters, fines, injunctions, consent decrees, and civil penalties; |
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recalls, withdrawals, or administrative detention or seizure of our products; |
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operating restrictions or partial suspension or total shutdown of production; |
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refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products; |
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withdrawing 510(k) clearances or PMA approvals that have already been granted; |
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refusal to grant export or import approvals for our products; or |
U.S. and Foreign Healthcare Laws and Compliance
Requirements
Healthcare providers, physicians, and third-party
payers play a primary role in the recommendation, prescription, and payment for medical treatments. A medical device manufacturer’s
arrangements with third-party payers, providers, and patients may expose it to broadly applicable fraud and abuse and other healthcare
laws and regulations that may affect its business or the financial arrangements and relationships through which it markets, sells and
distributes its products. Even if a medical device manufacturer does not control referrals of healthcare services or bill directly to
Medicare, Medicaid or other third-party payers, federal, and state healthcare laws and regulations are applicable to its business. In
addition, portions of our business may be subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA). To the extent
we provide any covered entity customers with services that involve the use or disclosure of protected health information (PHI) we may
be required to enter into business associate agreements. Business associates are also directly liable for compliance with HIPAA. The laws
that may affect a medical device manufacturer’s ability to operate include, but are not limited to:
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the federal healthcare Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or providing remuneration (broadly interpreted to include anything of value), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order, or arrange for or recommend a good or service for which payment may be made, in whole or in part, under a federal healthcare program, such as Medicare and Medicaid. The government can establish a violation of the Anti-Kickback Statute without proving that a person or entity had actual knowledge of the law or a specific intent to violate. Moreover, the government may assert that a claim for reimbursement that includes items resulting from a violation of the federal healthcare Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Although there are a number of statutory exceptions and regulatory safe harbors to the federal healthcare Anti-Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration to those who prescribe, purchase, or recommend medical device products, including discounts, or engaging individuals as speakers, consultants, or advisors, may be subject to scrutiny if they do not fit squarely within an exception or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors for many common practices, such as reimbursement support programs, educational or research grants, or charitable donations; |
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the federal civil False Claims Act (FCA), which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment of federal government funds, and knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government. Private individuals, commonly known as “whistleblowers,” can bring FCA qui tam actions, on behalf of the government and themselves, and may share in amounts paid by the entity to the government in recovery or settlement. False Claims Act liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $11,181 to $22,363 per false or fraudulent claim or statement. Many pharmaceutical and medical device manufacturers have been investigated and have reached substantial settlements under the FCA in connection with alleged off label promotion of their products and allegedly providing free products to customers with the expectation that the customers would bill federal health care programs for the product. In addition, a claim including items or services resulting from a violation of the federal healthcare Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. In addition, manufacturers can be held liable under the FCA even when they do not submit claims directly to government payers if they are deemed to “cause” the submission of false or fraudulent claims. There are also criminal penalties, including imprisonment and criminal fines, for making or presenting false, fictitious or fraudulent claims to the federal government; |
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HIPAA, which prohibits and imposes criminal liability for, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program, including private third party payers, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal healthcare Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation; |
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), and their implementing regulations, which imposes privacy, security, transmission, and breach reporting obligations with respect to individually identifiable health information upon entities subject to the law, including health plans, healthcare clearinghouses, and certain healthcare providers and their respective business associates that perform services on their behalf that involve individually identifiable health information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions; |
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the federal Physician Payments Sunshine Act, created under the PPACA, which requires certain manufacturers of drugs, devices, biologics and medical supplies reimbursed under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually to the United States Department of Health and Human Services information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report information regarding payments and transfers of value provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse-midwives; and |
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foreign and state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, that may impose similar or more prohibitive restrictions, and may apply to items or services reimbursed by any non-governmental third-party payers, including private insurers; state laws that require device manufacturers to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and pricing information; and other federal and state laws that govern the privacy and security of health information or personally identifiable information in certain circumstances, including state health information privacy and data breach notification laws which govern the collection, use, disclosure, and protection of health-related and other personal information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus requiring additional compliance efforts and data privacy and security laws and regulations in foreign jurisdictions that may be more stringent than those in the United States (such as the European Union, which adopted the General Data Protection Regulation, which became effective in May 2018). |
Because of the breadth of these laws and the narrowness
of their statutory exceptions and regulatory safe harbors, it is possible that some of a medical device manufacturer’s business
activities could be subject to challenge under one or more of these laws. The scope and enforcement of each of these laws is uncertain
and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and
regulations on some issues. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare
companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare
industry.
Ensuring that business arrangements with third
parties comply with applicable healthcare laws and regulations is costly and time consuming. If a medical device manufacturer’s
operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to it, it
may be subject to civil, criminal and administrative penalties, damages, fines, disgorgement, substantial monetary penalties, individual
imprisonment, exclusion from governmental funded healthcare programs, such as Medicare and Medicaid, additional reporting obligations
and oversight if it becomes subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with
these laws, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of operations, any of which
could adversely affect the ability of a medical device manufacturer to operate its business and the results of its operations.
United States Healthcare Reform
In the United States, a number of legislative
and regulatory proposals have been considered or enacted to change the healthcare system in ways that could affect a medical device manufacturer’s
business. Among policy makers and governmental and private insurers in the United States, there is significant interest in promoting changes
in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. For example, in 2010,
the PPACA was enacted, which includes measures to significantly change the way health care is financed by both governmental and private
insurers, and significantly impacts the medical device industry. Among other ways in which it may impact a medical device manufacturer’s
business, the PPACA:
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establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical efficacy research in an effort to coordinate and develop such research; |
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implements 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 healthcare services through bundled payment models; and |
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expands the eligibility criteria for Medicaid programs. |
Some of the provisions of the PPACA have yet to
be implemented, and there have been judicial and Congressional challenges to modify, limit, or repeal certain aspects of the PPACA since
its enactment and have continued to evolve. During his presidency, President Trump has supported the repeal of all or portions of the
PPACA, and in January 2017, he signed Executive Orders designed to delay the implementation of certain provisions of the PPACA or otherwise
circumvent some of the requirements for health insurance mandated by the PPACA to the maximum extent permitted by law. Due to such efforts,
certain elements of the PPACA have been invalidated or suspended, which has, in turn, led to additional challenges against the law as
a whole. For example, the Tax Cuts and Jobs Act of 2017 included a provision repealing, effective January 1, 2019, the tax-based shared
responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of
a year that is commonly referred to as the “individual mandate”. As a result, there is significant uncertainty regarding future
healthcare reform and its impact on our operations. In December 2018, a district court in Texas held that the individual mandate is unconstitutional
and that the rest of the PPACA is, therefore, invalid. On appeal, the Fifth Circuit Court of Appeals affirmed the holding on the individual
mandate but remanded the case back to the lower court to reassess whether and how such holding affects the validity of the rest of the
PPACA. The Fifth Circuit’s decision on the individual mandate was appealed to the U.S. Supreme Court. On June 17, 2021, the Supreme
Court held that the plaintiffs (comprised of the state of Texas, as well as numerous other states and certain individuals) did not have
standing to challenge the constitutionality of the PPACA’s individual mandate and, accordingly, vacated the Fifth Circuit’s
decision and instructed the district court to dismiss the case. As a result, the PPACA will remain in-effect in its current form for the
foreseeable future; however, we cannot predict what additional challenges may arise in the future, the outcome thereof, or the impact
any such actions may have on our business.
The Biden administration
also introduced various measures in 2021 focusing on healthcare and drug pricing, in particular. For example, on January 28, 2021, President
Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through
the PPACA marketplace, which began on February 15, 2021, and remained open through August 15, 2021. The executive order also instructed
certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among
others, reexamining Medicaid demonstration projects and waiver programs that include work requirements and policies that create unnecessary
barriers to obtaining access to health insurance coverage through Medicaid or the PPACA. On the legislative front, the American Rescue
Plan Act of 2021 was signed into law on March 11, 2021, which, in relevant part, eliminates the statutory Medicaid drug rebate cap, currently
set at 100% of a drug’s average manufacturer price, for single source drugs and innovator multiple source drugs, beginning January
1, 2024. And, in July 2021, the Biden administration released an executive order entitled, “Promoting Competition in the American
Economy,” with multiple provisions aimed at prescription drugs. In response, on September 9, 2021, HHS released a “Comprehensive
Plan for Addressing High Drug Prices” that outlines principles for drug pricing reform and sets out a variety of potential legislative
policies that Congress could pursue as well as potential administrative actions HHS can take to advance these principles. And, in November
2021, President Biden announced the “Prescription Drug Pricing Plan” as part of the Build Back Better Act (H.R. 5376) passed
by the House of Representatives on November 19, 2021, which aims to lower prescription drug pricing by, among other things, allowing Medicare
to negotiate prices for certain high-cost prescription drugs covered under Medicare Part D and Part B after the drugs have been on the
market for a certain number of years and imposing tax penalties on drug manufacturers that refuse to negotiate pricing with Medicare or
increase drug prices “faster than inflation.” If enacted, this bill could have a substantial impact on our business.
In the coming years, additional legislative and regulatory changes could be made to governmental health programs that could significantly
impact pharmaceutical companies and the success of our product candidates. At the state level, legislatures have increasingly passed legislation
and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement
constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases,
designed to encourage importation from other countries and bulk purchasing.
There is uncertainty as to what healthcare programs
and regulations may be implemented or changed at the federal and/or state level in the U.S. or the effect of any future legislation or
regulation. Furthermore, we cannot predict what actions the Biden administration will implement in connection with the PPACA.
However, it is possible that such initiatives
could have an adverse effect on our ability to obtain approval and/or successfully commercialize products in the United States in the
future. For example, any changes that reduce, or impede the ability to obtain, reimbursement for the type of products we intend to commercialize
in the United States (or our products more specifically, if approved) or reduce medical procedure volumes could adversely affect our business
plan to introduce our products in the United States.
Outside of the United States
We also have received European Conformity (CE) marking in the European
Economic Area (EEA) and in Israel for MDD, OCD, and smoking addiction, and 11 other indications in psychiatry, addiction treatment, and
neurology. Additional regulatory approvals have also been obtained for Deep TMS in various other existing and potential territories, including,
for example, in Canada and India. Sales and marketing of medical devices outside of the United States are subject to foreign regulatory
requirements that vary widely from country to country. The time required to obtain appropriate marketing authorizations from other foreign
authorities may be longer or shorter than that required for FDA approval. Whether or not we have obtained FDA approval, our Deep TMS systems
may be subject to different regulatory requirements in other jurisdictions. The foreign regulatory approval process includes all the risks
associated with FDA regulation, as well as country-specific regulations.
Employees
Our employees include professionals with extensive
experience in medical device development and applications, neurology and psychopathology, pre-clinical experimentation, clinical development,
and business development. As of December 31, 2021, we had 118 employees, of which 52 were based in the United States and 66 were
based outside of the United States (in Israel). Our U.S. employee base includes 45 employees in sales, marketing, and service/operations,
3 employees in medical affairs, and 4 general and administrative employees. Our Israeli employee base includes 49 employees in clinical
trials, research and development, production, and service/operations, 4 employees in sales and marketing, and 13 general and administrative
employees.
While none of our employees are party to any collective
bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in
Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our
employees by order of the Israel Ministry of Labor. Such orders are part of the employment related laws and regulations which apply to
our employees and set certain mandatory terms of employment. Such mandatory terms of employment primarily concern the length of the workday,
minimum daily wages, pension plan benefits for all employees, insurance for work-related accidents, procedures for dismissal of employees,
severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required
minimums.
We have never experienced an employment-related
work stoppage and we believe our relationship with our employees is good.
Environmental Matters
We are subject to various environmental, health
and safety laws and regulations, including those governing noise emissions. We believe that our business, operations, and facilities are
being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations. Based
on information currently available to us, we do not expect environmental costs and contingencies to have a material adverse effect on
us. Significant expenditures could be required in the future, however, if we are required to comply with new or more stringent environmental
or health and safety laws, regulations or requirements.
Legal Proceedings
We are not involved in any material legal proceedings.
C. |
Organizational Structure |
Our three subsidiaries, all of which wholly-owned
are: BrainsWay, Inc., incorporated in Delaware on March 31, 2003, Brain Research and Development Services Ltd., incorporated
in Israel on August 13, 2003, and BrainsWay USA Inc., incorporated in Delaware on November 24, 2014.
D. |
Property, Plants and Equipment |
BrainsWay has offices in the United States and
Israel.
In Israel, the Company has leased offices in Jerusalem,
Israel, since November 2007, pursuant to a lease agreement that expires in September 2022. The facility contains approximately 1,505 square
meters of space, and lease payments and management fees are approximately $30,000 plus value added tax, or VAT, per month, in the aggregate,
and are paid in NIS. This facility houses various administrative functions, as well as research operations and our central laboratory.
Substantially all of our Israeli-based employees are based in this facility. We also lease a warehouse and storage area within the same
building as our Jerusalem offices pursuant to a lease addendum subject to a term (also expiring in September 2022) comprised of approximately
280 square meters, and subject to monthly fees in the amount of approximately $2,500 plus VAT in the aggregate, paid in NIS.
In the United States, the Company's corporate
headquarters is located in Boston, MA, in a space comprised of 3,976 square feet leased at a rate of $8,118 per month, with a contractual
lease term that expires in November 2024. We have also had corporate offices located in New Jersey since April 2016. Our Cresskill, NJ
offices occupy a space comprised of approximately 2,326 square feet leased at a rate of $4,815 per month, pursuant to a lease with a current
term expiring (unless extended) in June 2023.
ITEM 4A. |
UNRESOLVED STAFF COMMENTS |
Not applicable.
ITEM 5. |
OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
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 Annual Report. 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 Annual Report, particularly those in “Item 3. Key Information
– D. Risk Factors.”
Company Overview
BrainsWay is a leader in advanced noninvasive
neurostimulation treatments for mental health disorders. The Company is boldly advancing neuroscience with its proprietary Deep Transcranial
Magnetic Stimulation (Deep TMS™) platform technology to improve health and transform lives. We are dedicated to leading through
superior science and building on our substantial body of clinical evidence. We are the first and only TMS company to obtain from the
U.S. Food and Drug Administration (FDA) three cleared indications backed by pivotal studies demonstrating clinically proven efficacy.
Current indications include major depressive disorder (MDD), including reduction of comorbid anxiety symptoms, commonly referred to as
anxious depression, obsessive-compulsive disorder (OCD), and smoking addiction. We have also received CE Mark for a variety of psychiatric
and neurological indications. We are focused on increasing global awareness of and broad access to Deep TMS. Deep TMS uses magnetic pulses
to stimulate neurons and consequently modulates the physiological activity of the brain. Our technology can either increase brain activity
in neuronal networks which are hypoactive, or alternatively decrease brain activity in neuronal networks which are hyperactive. Our proprietary
electromagnetic coils, which we refer to as H-Coils, are designed to safely stimulate deep and broad brain regions, which we believe
provides an advantage over other available TMS products, which we refer to collectively as Traditional TMS, that generally use a “figure 8”
design. In the United States, we sell our Deep TMS system for the treatment of MDD (including reduction of comorbid anxiety symptoms,
commonly referred to as anxious depression) and OCD and have recently began marketing our products for the treatment of smoking addiction
in the United States. We believe that our Deep TMS technology has the potential to be safe and effective for the treatment of a wide
range of additional psychiatric, neurological, and addiction disorders. Additional clinical trials of Deep TMS in various psychiatric,
neurological, and addiction disorders are underway or planned.
Our first commercial Deep TMS product received
clearance from the FDA in 2013 for the treatment of MDD in adult patients who have failed to achieve satisfactory improvement from anti-depressant
medication in the current episode. Our Deep TMS system for MDD is currently marketed to and installed at psychiatrists’ offices
and other facilities principally in the United States and in certain other countries throughout the world. In addition, our second Deep
TMS system received FDA marketing authorization in August 2018 as an adjunct therapy for adult patients suffering from OCD, and we are
currently market and sell that indication. In addition, our third Deep TMS system received FDA marketing authorization in August 2020
as a short-term therapy for smoking addiction. Moreover, in August 2021, we received 510(k) clearance from the FDA for our Deep TMS for
its use for the reduction of comorbid anxiety symptoms in adult patients with depression. Our sales and marketing efforts are currently
focused in the United States, where we generated approximately 88 % of our revenues in the year ended December 31, 2021.
We believe that Deep TMS represents a platform technology that provides
for an opportunity to develop additional Deep TMS products for a variety of psychiatric, neurological, and addiction disorders. We are
planning multicenter trials for other indications, including multiple sclerosis (MS), which would be our first neurological indication,
and potentially various other addiction disorders beyond smoking addiction.
Our current customers are principally doctors, hospitals, and medical centers
in the field of psychiatry. Treatment with Deep TMS is typically performed as an office-based procedure using our Deep TMS system, which
consists of our proprietary H-Coil helmet, as well as several other components, including a stimulator, cooling system, positioning arm
and an operator interface. A course of treatment for MDD typically requires 20 treatment sessions five times a week over a period of four
weeks, and thereafter up to 24 additional maintenance-continuation sessions twice weekly over a period of up to 12 weeks. The standard
Deep TMS treatment protocol for OCD requires 29 treatment sessions over six weeks. A course of treatment for smoking addiction typically
requires 18 treatment sessions, comprised of treatment five times a week over a period of three weeks, followed by treatment once per
week for an additional three weeks. Each standard MDD, OCD or smoking addiction session lasts 20 minutes, 19 minutes, and 18 minutes,
respectively. For Deep TMS for MDD, the FDA also cleared a 3 minute “Theta Burst” treatment protocol. Patients may experience
some discomfort during treatment and must use earplugs to reduce exposure to the loud sounds produced by the device. The treatment requires
no anesthesia, hospitalization or sedation and no systemic side effects are associated with this therapy.
In the United States, we sell or lease Deep TMS
systems by one of the following two methods: (i) a fixed-fee lease model in which the Deep TMS system is leased to a customer for
a fixed annual fee, generally with a term of between 48 and 60 months, for unlimited use; and (ii) a sales or purchase model in which
the Deep TMS system is sold to the customer for a fixed purchase price. Additional potential revenues may be derived from extended warranty
fees paid for the system for service coverage beyond the standard included warranty period, and from variable or usage fees based on the
number of treatments performed with the system. We are also able to leverage our platform technology, which includes the ability to treat
multiple indications using different H-Coil helmets, to facilitate transactions utilizing combined pricing models often involving a single
system with one or more add-on helmets. These flexible offerings are designed to facilitate market penetration by addressing the differing
clinical needs and risk tolerance among our customer base. We commercialize Deep TMS for OCD based generally on either the sale model,
or as part of a fixed-fee lease model together with our MDD system. We recently completed a controlled market release, and then a limited
market release of Deep TMS for smoking addiction and are currently preparing for a full market launch of our Deep TMS system for this
indication.
As of December 31, 2021, we had an installed
base of approximately 754 Deep TMS systems, whereby 396 systems were leased from us, and an additional 358 systems were sold by us prior
to December 31, 2021. Our installed base increased by 125 systems during 2021. In addition, as of December 31, 2021, we had
shipped 302 OCD coils as additional coils attached to certain of our new and existing systems following our receipt in August 2018
of marketing approval from the FDA for our OCD system.
For the year ended December 31, 2021, our
revenues were $29.7 million compared to $22.1 million for the year ended December 31, 2020, representing an increase of 34%
over the revenues generated in 2020. We incurred net losses of $6.4 million for the year ended December 31, 2021.
As of December 31, 2021, we had an accumulated
deficit of $83.8 million. Our primary sources of capital to date have been from public offerings in Israel and in the United States,
and private placements of our securities, grants from the Israel Innovation Authority (IIA), borrowings under our credit facilities, and
the lease and sale of our products.
We expect our research, development, and clinical
trials expenses to increase in connection with our ongoing activities, particularly as we continue to develop next generation technology
(including in the areas of multichannel and rotational field TMS), rollout additional features on our current platform (including beta
testing of additional remote capabilities), pursue future confirmatory trials and data collection efforts for existing indications, and
seek FDA clearance for new indications such as fatigue in MS, addictions (including alcohol, cocaine and/or opioid addiction), and pain.
In addition, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing, and distribution.
On February 25, 2021 we closed a follow-on underwritten public offering of ADSs with gross proceeds of approximately $45.2 million before
deducting underwriting discount and commissions and offering expenses. We believe that our existing cash resources will be sufficient
to enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months.
Components of Our Results of Operations
Revenues
We derive our revenues from the lease and sale
of our Deep TMS systems. We offer the following pricing models:
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Fixed-fee Lease Model: The customer leases the Deep TMS system and pays a fixed annual or monthly fee for the term of the lease (generally between 48 and 60 months). |
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Sale Model: The Deep TMS system is sold to the customer for a fixed purchase price. |
Additional potential revenues may be derived from
extended warranty fees paid for the system for service coverage beyond the standard included warranty period, which is generally for one
year, and from variable or usage fees based on the number of treatments performed with the system.
We are also able to leverage our platform technology,
which includes the ability to treat multiple indications using different H-Coil helmets, to facilitate transactions utilizing combined
pricing models often involving a single system with one or more add-on helmets.
Our revenues from the operating leases of our
Deep TMS systems are recognized on a straight-line method over the term of the lease. Usage based fees, if applicable, are recognized
as revenue when we are entitled to receive such revenue. Our revenues from sales are recognized when control of the system is transferred
to the customer, generally upon delivery of the system.
Cost of revenues and gross margin
Our cost of revenues includes a significant component
of depreciation of the Deep TMS systems, due to the fact that we maintain ownership of those systems placed under our fixed-fee lease
model, in which we lease the system for use by our customers, rather than sell it outright. We expect to continue to own those of our
Deep TMS systems which have been placed under our fixed-fee lease model for the foreseeable future, which allows us to maintain our relatively
low cost of revenues for those systems.
In the case of the Deep TMS systems that we sell
under our sales model, the entire cost of the Deep TMS system is recognized upon such sale. The cost of revenues for systems that we sell
primarily consists of the costs of raw materials, including components purchased from our third-party contract manufacturers and manufacturing
and assembly of the components that we perform ourselves. While we have previously used a third-party stimulator for our Deep TMS systems,
we developed and have received FDA clearance for our own proprietary stimulator for MDD (in May 2018), OCD (in March 2019),
and smoking addiction (in April 2021).
The cost of revenues for systems that we lease
or sell also include costs related to personnel, royalties to PHS and Yeda, shipping, and our operations department. We expect our cost
of revenues to increase in absolute dollars to the extent our revenues increase.
Selling and marketing expenses
Selling and marketing expenses consist of marketing
and commercial activities related to the sale and lease of our Deep TMS systems, as well as personnel expenses, including salaries and
related benefits, sales commissions, share-based compensation for employees, and facility costs. Other significant sales and marketing
costs include conferences, trade shows, and promotional and marketing activities, including direct and online marketing, SEO, earned media,
practice support programs, media campaigns and travel expenses.
We anticipate an increase in the headcount of
our commercial organization as we continue to expand our business in the United States and internationally, and as we receive the relevant
regulatory clearances for additional indications for our system. As a result, we expect our sales and marketing expenses to continue to
increase.
Research and development expenses, net
Research and development expenses, net, consist
primarily of personnel expenses, including salaries and related benefits, share-based compensation for employees, facility costs, laboratory
materials, regulatory costs, patents, and travel expenses, as well as expenses associated with outsourced professional scientific development
services, and the costs of multi-center and other clinical trials.
We expect to continue to incur research and development
expenses for the near future as we advance the development of our Deep TMS technology for the treatment of new indications, which may
include fatigue in MS, and other potential psychiatric, neurological, and addiction indications, as well as for various hardware and software
development projects related to the Deep TMS system. As a result, we expect our research and development expenses to continue to increase.
A portion of our investment in research and development
is funded by participation of the IIA through grants which are presented net of research and development expenses.
General and administrative expenses
General and administrative expenses consist primarily
of personnel expenses, including salaries and related benefits, share-based compensation, and travel expenses for employees in executive,
finance, information technology, legal, and human resource functions. General and administrative expenses also include the cost of insurance,
professional services, including legal and accounting fees as well as administrative costs, including corporate facility costs.
We anticipate that our general and administrative
expenses will increase due to planned expansion of our activities. We anticipate higher corporate infrastructure costs including, but
not limited to, accounting, legal, human resources, consulting, investor relations, listing fees on The Nasdaq Global Market, costs associated
with reporting and compliance in the United States, as well as increased director and officer insurance premiums, as a result of becoming
a public company in the United States.
Finance expenses, net
Our finance expenses, net, consist primarily of
expenses related to bank charges, and the amortization of deferred financing costs related to our finance expense with respect to the
fair value re-measurement related to our outstanding liability to the IIA on account of grants received for financing our research and
development activity, as well as interest income earned on our bank deposits and foreign currency exchange transactions.
Income taxes expense
Our income taxes expense is derived primarily
from income generated from the sales and lease of our Deep TMS systems from our U.S. subsidiary. During the year ended December 31, 2021,
the Company recorded deferred tax assets in respect of temporary differences in the U.S. subsidiary.
Critical Accounting Policies and Estimates
The preparation of financial statements, in conformity
with IFRS, requires companies to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities at and as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. These estimates and judgments are subject to an inherent degree of uncertainty,
and actual results may differ. Our significant accounting policies are more fully described in Note 2 to our financial statements
included elsewhere in this report. Critical accounting estimates and judgments are continually evaluated and are based on historical experience
and other factors, including expectations of future events that are believed to be reasonable under the circumstances, and are particularly
important to the portrayal of our financial position and results of operations. Our estimates are primarily guided by observing the following
critical accounting policies:
Revenue Recognition
We generate revenues from the sale and lease of
our systems. We sell products mainly directly to end users, third party financing companies with arrangements with end users, and to a
lesser extent, to third-party distributors outside of the United States which typically do not include return rights. We typically have
post-sale obligations of training and installation of our systems and may provide an annual service warranty for the Deep TMS system after
the expiration of the standard warranty. Revenues for such services are deemed distinct performance obligations and are recognized when
the services are performed.
Revenue from sale of systems are recognized at
the point in time when control of the system is transferred to the customer, generally upon delivery of the system to the customer.
We generate lease revenue from a fixed-fee lease
model in which the Deep TMS system is leased to a customer for a fixed annual fee, generally for a term of between 48 to 60 months, allowing
for unlimited use during the lease period. Leases in which substantially all the risks and rewards incidental to ownership of the leased
asset are not transferred to the lessee are classified as operating leases. Revenues from operating leases are recognized on a straight-line
basis over the lease term. Usage based fees are recognized as revenue when the Company is entitled to receive such revenue.
Allowance for doubtful accounts based on expected credit
losses on trade receivables
We apply a simplified approach and measure the
loss allowance in respect of our short -term financial assets, trade receivables, in an amount equal to the lifetime expected credit losses.
The Company records an allowance for doubtful
accounts based on expected credit losses for trade receivables. The allowance rates are based on days past due for its various customers.
The allowance is initially based on the Company’s historical observed default rates as well as forward-looking information. At each
reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed. The amount
of the allowance is sensitive to changes in circumstances and forecasted economic conditions.
Royalty Bearing Governmental Grants
Government grants are recognized when there is
reasonable assurance that the grants will be received, and the Company will comply with all attached conditions. Government grants received
from the IIA and repayable to the IIA through royalty-bearing sales are recognized upon receipt as a liability if future economic benefits
are expected to be derived through estimated future cash flows from the research project, resulting in royalty bearing sales due to the
IIA.
A liability for the grant is first measured at
fair value using a discount rate that reflects a market rate of interest. The difference between the amount of the grant received and
the fair value of the liability is accounted for as a government grant and recognized as a reduction of research and development expenses.
After initial recognition, the liability is measured at amortized cost using the effective interest method. Royalty payments are recorded
as a reduction of the liability.
If no economic benefits are expected from the
research activity, the grants received are recognized as a reduction of the related research and development expenses. In that event,
the royalty obligation is treated as a contingent liability.
On each reporting date, the Company evaluates
whether there is reasonable assurance that the liability recognized, in whole or in part, will not be repaid based on the best estimate
of future sales and using the original effective interest method and, if so, the appropriate amount of the liability is derecognized against
a corresponding reduction in research and development expenses.
Grants received from the IIA prior to January 1,
2009, which are recognized as a liability, are accounted for as forgivable loans in accordance with IAS 20, based on the original
terms of the loan.
Share-based compensation
Share-based compensation reflects the compensation
expense of our stock option, and more recently, restricted share unit (RSU) programs granted to employee and other service providers,
in which the compensation expense is measured at the grant date fair value of the award. The grant date fair value of share-based compensation
is recognized as an expense over the requisite service period, net of estimated forfeitures. We recognize compensation expense for awards
conditioned only on continued service that have a graded vesting schedule using the accelerated method and classify these amounts in our
statement of comprehensive loss based on the department to which the related employee/service provider reports.
Traditionally, the preferred form of equity compensation
to our employees, consultants and directors was in the form of options. On May 4, 2021, we commenced a tender offer to exchange eligible
options (“Eligible Options”) to purchase Ordinary Shares, par value NIS 0.04 per Ordinary Share, for replacement options to
purchase Ordinary Shares (“New Options”), with modified terms pursuant to the Offer to Exchange Eligible Options for New Options,
dated May 4, 2021 (the “Exchange Offer”). Following the Exchange Offer, to better align with the interests of prospective
grantees, among other factors, we principally shifted toward equity grants in the form of RSUs.
Share-Based Compensation Valuation
We selected the Binomial Lattice option-pricing
model as the most appropriate method for determining the estimated fair value of options compensation. For the purpose of the evaluation
of the fair value, and the manner of the recognition of options compensation, our management is required to estimate, among others, various
subjective parameters that are included in the calculation of the fair value of the options compensation, as well as our results and the
amount of options that will vest. These parameters include the expected volatility of our share price over the expected term of the grant,
the risk-free interest rate assumption, forfeitures behaviors and expected dividends.
In 2021, we generally shifted from incentive equity
grants in the form of options to grants in the form of restricted share units (RSUs). We evaluate the fair value of RSUs based on the
price of our ordinary shares at the time of grant and the quantity of RSUs granted.
Fair value of Ordinary Shares. Since our
Ordinary Shares have traded on the TASE since 2007, and our ADSs have traded on The Nasdaq Global Market since 2019, we have a market
price per share of our Ordinary Shares and ADSs. Traditionally, the exercise price for options granted by the Company was determined based
on the average price per share over a calendar period of trading days preceding the grant date. Under the new compensation policy
approved by the Company’s shareholders on December 22, 2021, the exercise price for any newer options grants are to be based on
the closing price of our ADSs on the day prior to the grant. On June 2, 2021, we completed the Exchange Offer and the
exercise price per Ordinary Share of the new options granted pursuant to the exchange offer is $4.675 per Ordinary Share. See “Item
7. Major Shareholders and Related Party Transactions – Related Party Transactions.”
Volatility. The expected volatility of
the price of our Ordinary Shares reflects the assumption that the historical volatility of the share prices on the TASE is reasonably
indicative of expected future trends.
Risk-free interest rate. The risk-free
interest rate is based on observed interest rates appropriate for the expected term of the options granted in dollar terms.
Expected term. The expected term of options
granted is derived from the output of the option valuation model and represents the period of time the options are expected to be outstanding.
Expected dividend yield. We have never
declared or paid any cash dividends and we do not have current plans to pay cash dividends in the near term.
Recent Accounting Pronouncements
The recent accounting pronouncements are set forth
in Note 2 to our audited consolidated financial statements beginning on page F-1 of this Annual Report.
Quarterly Results of Operations
The following tables show our unaudited quarterly
statements of operations for the periods indicated. We have prepared this quarterly information on a basis consistent with our audited
financial statements.
Three Months Ended
| |
March 31 | |
June 30 | |
Sep. 30 | |
Dec. 31 | |
March 31 | |
June 30 | |
Sep. 30 | |
Dec. 31 | |
March 31 | |
June 30 | |
Sep. 30 | |
Dec. 31 |
| |
2021 | |
2020 | |
2019 |
Statements of operations | |
U.S. dollars in thousands |
Revenues | |
| 6,121 | | |
| 7,005 | | |
| 8,061 | | |
| 8,470 | | |
| 4,157 | | |
| 4,820 | | |
| 6,014 | | |
| 7,066 | | |
| 5,182 | | |
| 5,695 | | |
| 5,932 | | |
| 6,292 | |
Cost of revenues | |
| 1,463 | | |
| 1,300 | | |
| 1,930 | | |
| 1,906 | | |
| 1,015 | | |
| 992 | | |
| 1,485 | | |
| 1,566 | | |
| 1,158 | | |
| 1,376 | | |
| 1,153 | | |
| 1,442 | |
Gross profit | |
| 4,658 | | |
| 5,705 | | |
| 6,131 | | |
| 6,564 | | |
| 3,142 | | |
| 3,828 | | |
| 4,529 | | |
| 5,500 | | |
| 4,024 | | |
| 4,319 | | |
| 4,779 | | |
| 4,850 | |
Research and development expenses, net | |
| 925 | | |
| 1,650 | | |
| 1,786 | | |
| 2,032 | | |
| 1,795 | | |
| 1,041 | | |
| 1,411 | | |
| 1,576 | | |
| 1,792 | | |
| 2,362 | | |
| 1,913 | | |
| 1,809 | |
Selling and marketing expenses | |
| 3,129 | | |
| 4,191 | | |
| 4,042 | | |
| 4,518 | | |
| 3,713 | | |
| 2,178 | | |
| 2,393 | | |
| 2,999 | | |
| 2,838 | | |
| 3,278 | | |
| 3,549 | | |
| 3,604 | |
General and administrative expenses | |
| 1,405 | | |
| 1,377 | | |
| 1,536 | | |
| 1,466 | | |
| 1,255 | | |
| 824 | | |
| 1,311 | | |
| 1,332 | | |
| 1,003 | | |
| 1,380 | | |
| 1,492 | | |
| 1,428 | |
Total operating expenses | |
| 5,459 | | |
| 7,218 | | |
| 7,364 | | |
| 8,016 | | |
| 6,763 | | |
| 4,043 | | |
| 5,115 | | |
| 5,907 | | |
| 5,633 | | |
| 7,020 | | |
| 6,954 | | |
| 6,841 | |
Total operating loss | |
| 801 | | |
| 1,513 | | |
| 1,233 | | |
| 1,452 | | |
| 3,621 | | |
| 215 | | |
| 586 | | |
| 407 | | |
| 1,609 | | |
| 2,701 | | |
| 2,175 | | |
| 1,991 | |
Finance expenses, net | |
| 412 | | |
| 269 | | |
| 360 | | |
| 379 | | |
| (309 | ) | |
| 179 | | |
| 210 | | |
| 239 | | |
| 236 | | |
| 672 | | |
| 344 | | |
| 178 | |
Loss before income taxes | |
| 1,213 | | |
| 1,782 | | |
| 1,593 | | |
| 1,831 | | |
| 3,312 | | |
| 394 | | |
| 796 | | |
| 646 | | |
| 1,845 | | |
| 3,373 | | |
| 2,519 | | |
| 2,169 | |
Income taxes (tax benefit) | |
| 160 | | |
| 156 | | |
| 211 | | |
| (484 | ) | |
| 130 | | |
| 177 | | |
| 170 | | |
| (240 | | |
| 62 | | |
| 100 | | |
| 113 | | |
| 147 | |
Net loss and comprehensive loss | |
| 1,373 | | |
| 1,938 | | |
| 1,804 | | |
| 1,347 | | |
| 3,442 | | |
| 571 | | |
| 966 | | |
| 406 | | |
| 1,907 | | |
| 3,473 | | |
| 2,632 | | |
| 2,316 | |
Our quarterly revenues and operating results have
varied in the past and are expected to vary in the future due to numerous factors. We believe that period-to-period comparisons of our
operating results are not necessarily meaningful and should not be relied upon as indications of future performance.
Year ended December 31, 2021 compared to year ended
December 31, 2020
Revenues
Our total revenues increased by $7.6 million,
or 34%, from $22.1 million for the year ended December 31, 2020 to $29.7 million for the year ended December 31, 2021.
The increase in revenues was attributed mainly to increase in sales of our Deep TMS systems to customers. Revenues from leases were 45%
of the revenues for the year ended December 31, 2021, compared to 62% of the revenues for the year ended December 31, 2020.
Cost of revenues and gross margin
Our cost of revenues was $6.6 million for
the year ended December 31, 2021 compared to $5.1 million for the year ended December 31, 2020. The increase is primarily
attributed to increase in sales volumes. There has been no material change in our gross margin as a percentage of revenue for the last
three years.
Research and development expenses, net
Our research and development expenses, net, were
$6.4 million for the year ended December 31, 2021 compared to $5.8 million for the year ended December 31, 2020. The
increase of $0.6 million, or 10%, was mainly attributed to lower expenses in the corresponding period last year, in light of the effect
of the COVID-19 pandemic, as well as expenses incurred during the current year in connection with the options repricing program.
Selling and marketing expenses
Our selling and marketing expenses were $15.9
million for the year ended December 31, 2021 compared to $11.3 million for the year ended December 31, 2020. The increase
of $4.6 million, or 41%, was mainly attributed to the continued growth in our U.S. marketing activity, including recruitment of sales,
marketing and support personnel in the United States, as well as to lower operational expenses during the corresponding period last year,
in light of the effect of the COVID-19 pandemic.
General and administrative expenses
Our general and administrative expenses were $5.8
million for the year ended December 31, 2021 compared to $4.7 million for the year ended December 31, 2020. The increase
of $1.1 million, or 23% is attributed mainly to the Company’s continued growth, expenses relating to the completion of a follow-on
underwritten public offering in the first quarter of 2021 and expenses incurred in connection with the options repricing program.
Finance expenses, net
Our finance expenses, net, were $1.4 million
for the year ended December 31, 2021 compared to $0.3 million for the year ended December 31, 2020. The increase of $1.1 million
was mainly attributed to exchange rate differences.
For information on the impact of currency fluctuations
on the company, please see Item 11 “Quantitative and Qualitative Disclosures About Market Risk” below.
Year ended December 31, 2020 compared to year ended
December 31, 2019
For comparison of fiscal year 2020 to fiscal year
2019 please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Year ended December 31,
2020 compared to year ended December 31, 2019” section in our annual report on form 20-F filed with the SEC on April 19, 2021.
B. |
Liquidity and Capital Resources |
Overview
As of December 31, 2021, we had cash, cash
equivalents and short-term deposits of $57.3 million and an accumulated deficit of $83.7 million, compared to cash equivalents and
short-term deposits of $17.2 million, and an accumulated deficit of $77.3 million as of December 31, 2020. We incurred
positive cash flows from operating activities of $0.9 million and negative cash flows from operating activities of $1.4 million for
the years ended December 31, 2021 and 2020, respectively. We have incurred operating losses since our inception, and we anticipate
that our operating losses will continue in the near term as we seek to expand our sales and marketing initiatives to support our growth
in existing and new markets, and invest funds in additional research and development activities. Our primary sources of capital to date
have been from public offerings in the U.S. and Israel and private placements of our securities, grants from the IIA, and leases and sales
of our Deep TMS systems. From inception through December 31, 2021, we raised $129 million from placements of our Ordinary Shares
and exercise of options.
The Company’s primary contractual obligations
consist of liabilities in respect of research and development grants, as well as lease liabilities in respect of corporate facilities
and vehicles. For information about the Company's contractual obligations, see Note 11 to our Audited Financial Statements.
We expect our revenues and expenses to increase
in connection with our ongoing activities, particularly as we expand the marketing of our Deep TMS system for MDD, OCD, and smoking addiction,
and for other indications for which we may receive regulatory authorizations in the future. Based on our current business plan, we believe
that our cash and cash equivalents as of December 31, 2021 and the anticipated revenues from sales of our products will be sufficient
to fund our operating expenses and capital expenditure requirements through at least the next 24 months. However, if these sources
are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities, seek to enter into a new credit
facility, or seek financing from third party collaborators. If we raise additional funds by issuing equity securities, our shareholders
would experience dilution. Additional debt financing, if available, may involve covenants restricting our operations or our ability to
incur additional debt. We can provide no assurance that additional equity or debt financing will be available on terms favorable to us,
or at all. If we raise additional funds through collaborations with third parties, we may be required to relinquish valuable rights to
our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable
to us. If we are unable to obtain adequate funds on reasonable terms, we will need to curtail operations significantly, including possibly
postponing anticipated clinical trials or entering into financing agreements with unfavorable terms.
Cash flows
The table below summarizes our cash flow activities
for the indicated periods:
| |
Year Ended December 31, |
(in thousands) | |
2021 | |
2020 |
Net cash provided by (used in) operating activities | |
$ | 884 | | |
$ | (1,436 | ) |
Net cash used in investing activities | |
| (42,216 | ) | |
| (2,465 | ) |
Net cash provided by (used in) financing activities | |
| 41,516 | | |
| (1,030 | ) |
Exchange rate differences on cash and cash equivalents | |
| (224 | ) | |
| 218 | |
Increase (decrease) in cash and cash equivalents | |
$ | (40 | ) | |
$ | (4,713 | ) |
Operating Activities
Net cash provided by operating activities was
$0.9 million during the year ended December 31, 2021, compared to $1.4 million used during the year ended December 31,
2020. The increase of $2.3 million was due primarily to changes in working capital as well as a decrease in cash used from operations.
Investing Activities
Net cash used in investing activities was $42.2
million during the year ended December 31, 2021, compared to $2.5 million during the year ended December 31, 2020. The increase of
$39.7 million was mainly attributed to the investment of funds raised during the year in long-term deposits.
Financing Activities
Net cash provided by financing activities was
$41.5 million during the year ended December 31, 2021, compared to $1.0 million used in financing activities during the
year ended December 31, 2020. The change was due to the completion of a follow-on underwritten public offering of ADSs during the
year.
Government Grants
As of December 31, 2021, our wholly owned
subsidiary, Brain Research and Development Services, Ltd., has received grants from the IIA in an aggregate amount of approximately $13.3
million. Brain Research and Development Services, Ltd. is currently required to pay 3% royalties of sales of our Deep TMS products, which
payment obligations do not currently exceed the amount of the grant received (in U.S. dollars), plus interest at an annual rate equal
to the LIBOR rate. As of December 31, 2021, Brain Research and Development Services, Ltd. has paid royalties to the IIA in an aggregate
amount of approximately $3.4 million (including amounts in respect of accrued interest), with remaining outstanding royalties of
up to $12.4 million.
Research and development grants received from
the IIA are recognized upon receipt as a liability if future economic benefits are expected from the project that will result in royalty-bearing
sales. The amount of the liability for the loan is first measured at fair value using a discount rate that reflects a market rate of interest
that reflects, in turn, the appropriate degree of risks inherent in our business. If no economic benefits are expected from the research
activity, the grant receipts are recognized as a reduction of the related research and development expenses. In that event, the royalty
obligation is treated as a contingent liability in accordance with IAS 37, “Provisions, Contingent Liabilities, and Contingent
Asset.”
At the end of each reporting period, we evaluate
whether there is a reasonable assurance that the received grants will not be repaid based on our best estimate of future sales and, if
so, no liability is recognized, and the grants are recorded against a corresponding reduction in research and development expenses.
Research and development grants received from
the European Union are recorded against a corresponding reduction in research and development expenses.
Additionally, in 2013, the MAGNET committee of
the IIA (MAGNET) approved the activities of the consortium for the development plan of a brain stimulator and monitor tool, which we refer
to as the Consortium, of which we are one of the participants. As part of the Consortium, Brain Research and Development Services, Ltd.
received from MAGNET approvals for grants in an aggregate amount of NIS 8.2 million (approximately $2.65 million based on the
NIS to USD exchange rate as of December 31, 2021). There is no requirement to repay the grants or pay royalties thereon. Such non-royalty-bearing
grants from MAGNET program for funding approved research and development projects are recognized when there is reasonable assurance that
the grants will be received and we will comply with all attached conditions, on the basis of the costs incurred, and are presented as
a deduction from research and development expenses. In the event of failure of a project that was partly financed by the IIA, we would
not be obligated to pay any royalties or repay the amounts received.
C. |
Research and Development, Patents, and Licenses |
For descriptions of the company’s research
and development policies for the years 2020 and 2019, please see the “Item 5.C Research and Development, Patents, and Licenses”
sections in our annual reports on Form 20-F filed with the SEC on April 19, 2021 and March 23, 2020, respectively.
Intellectual Property
The core technology of our Deep TMS based on H-Coils
is covered by our patents.
Our intellectual property portfolio consists principally
of patents and pending patent applications related to our Deep TMS technology that are either exclusively licensed to us for commercialization
on a worldwide basis from (1) agencies of the U.S. Public Health Service (PHS) within the U.S. Department of Health and Human
Services (DHHS), and (2) Yeda Research and Development Company Limited, or Yeda, the commercialization arm of the Weizmann Institute
for Science (Weizmann Institute) or are owned by us. These include a total of 33 issued U.S. patents, 3 pending U.S. patent applications,
46 issued patents in other jurisdictions (treating Europe as one jurisdiction), and 20 pending patent applications in other jurisdictions.
Our strategy is to seek to protect our proprietary
position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions, and improvements
that are important to the development of our business. Our intellectual property rights outside of the United States are principally in
Europe (France, Italy, Sweden, UK, and Germany), Canada, Australia, Japan, Hong Kong, and Israel. Patents related to our Deep TMS technology
may provide future competitive advantages with claims related to aspects of the structure of our coils and methods of administration of
treatment for applications of such technology. We also rely on our trade secrets, know-how and continuing technological innovation to
develop and maintain our proprietary position. We look to defend our Deep TMS technology by asserting our intellectual property rights,
where it is determined to be necessary, to preserve our rights and gain the benefit of our technological investments. We seek to obtain
patents in connection with the technology that we have developed as part of our strategy for protection of our intellectual property,
including technology covered under our license agreements with the PHS and Yeda.
The claiming strategy in each of our patent applications
is based on the advice of our patent counsel and our business model and our business needs are taken into consideration. We file patent
applications containing claims seeking protection of our proprietary technologies and products, as well as all new applications and/or
uses we discover or develop for existing technologies and products, assuming these are strategically valuable. We continuously assess
the number and types of patent applications, as well as the pending and issued patent claims, to ensure that appropriate coverage and
value are obtained for our systems and methods, given the governing law and the corresponding patent office rules and regulations. In
addition, claims may be modified during patent prosecution or additional claims added to meet our intellectual property and business needs.
Patents and Patent Applications
Our first group of patents (Patent Family A) relates
to the H-Coil technology in general: This includes coverage for the H-Coil for MDD, the H-Coil for OCD, the H-Coil for smoking addiction,
and for future products we are developing. This group of patents has been exclusively licensed to us from the PHS, and includes two issued
U.S. patents and seven issued patents in other jurisdictions. The issued patents are set to expire in 2024 in the U.S. and expire in 2021
outside the U.S. These coils are also covered by additional patents which extend until later dates as detailed further in this section.
Our second group of patents (Patent Family B) relates
to additional design features of BrainsWay’s H-Coil for MDD, H-Coil for smoking addiction coil, and also covers some future
products we are developing. This group of patents has been licensed to us from the PHS and from Yeda, and includes six issued U.S. patents,
nine issued patents in other jurisdictions, and two pending patent applications in other jurisdictions. The issued patents in this group
are set to expire in 2025 in the U.S. and in 2026 in other countries, not taking into account any potential patent term adjustment or
extension that may be available in the future. These coils are also covered by additional patents which extend until later dates as detailed
further in this section.
Our third group of patents (Patent Family C) relates
to a family of central base coils including BrainsWay’s H-Coil for OCD, and also some future products that we are developing. This
group of patents is owned by us, and includes three issued U.S. patents, eight issued patents in other jurisdictions, and three pending
patent applications in other jurisdictions. The issued patents are set to expire in 2033 in the U.S., and in 2034 in other countries,
not taking into account any potential patent term adjustment or extension that may be available in the future.
Our fourth group of patents (Patent Family D) relates
to a family of unilateral coils including some future products we are developing. Patent Family D is owned by us, and includes one
issued U.S. patent, and five issued patents in other jurisdictions. The issued patents are set to expire in 2033 in the U.S., and in 2034
in other countries, not taking into account any potential patent term adjustment or extension that may be available in the future.
Our fifth group of patents (Patent Family E) consists
of utility model patent applications which provide coverage of several H-Coils, including those used in BrainsWay’s MDD and OCD
systems. This group of patents (Patent Family E) is owned by us, and includes two issued Chinese Utility Model patent applications:
one for BrainsWay’s MDD coil, and another one for BrainsWay’s OCD coil, one issued patent application in the U.S. and five
pending patent applications in other jurisdictions incorporating both BrainsWay’s MDD and OCD systems. The issued patent is set
to expire in 2039.
Our sixth group of patents (Patent Family F) relates
to a family of circular coils including BrainsWay’s H-Coils for MDD and smoking, as well as some other future products we are developing.
This group of patents (Patent Family F) is owned by us, and includes two issued U.S. patents, six issued patents in other jurisdictions
and one pending patent applications in other jurisdictions. The issued patents are set to expire in 2033 in the U.S. and in 2034 in other
countries, not taking into account any potential patent term adjustment or extension that may be available in the future.
Our seventh group of patents (Patent Family G)
relates to real-time closed-loop brain stimulation and includes one pending patent application in the U.S. and three pending patent applications
in other jurisdictions.
Our eighth group of patents (additional families
of issued patents and pending patent applications) relates to a multichannel stimulator we are developing as an enhancement to our Deep
TMS system, which we see as the next generation of our products, several H-Coil designs which may be future products, capabilities to
address additional medical conditions such as the need to open the blood brain barrier, and biomarker research using Deep TMS with an
EEG that we are currently conducting. These include six issued U.S. patents, one pending U.S. patent application, nine issued patents
in other jurisdictions, and six pending patent applications in other jurisdictions. Patent applications in these families, if issued,
are set to expire in 2029, 2031, 2033, and between 2037 and 2039, not taking into account any potential patent term adjustment or extension
that may be available in the future.
In addition to the list of patents noted above,
an additional group of patents relates to multichannel stimulation and was acquired from TMS Innovations, LLC. We believe these patents
will enable us to broaden the scope of capabilities in the multichannel stimulator we are developing.. The issued patents are set to expire
between 2026 and 2035 in the U.S, not taking into account any potential patent term adjustment or extension that may be available in the
future.
In addition to the list of patents noted above,
in January 2020 we exercised our option to exclusively license the rights to certain patents relating to rotational field TMS from Yeda.
This group of patents includes two issued U.S. patents and four issued patents in other jurisdictions. The issued patents are set to expire
in 2032 in the U.S. and in 2030 in other countries, not taking into account any potential patent term adjustment or extension that may
be available in the future.
The patent positions of companies like ours are
generally uncertain and involve complex legal and factual questions that may vary from one jurisdiction to another. Our ability to maintain
and solidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those
claims once granted. We can provide no assurance that our patent applications or those patent applications that we in-license will result
in the issuance of any corresponding patents (other than any allowed patent applications, which normally result in the issuance of a patent
after the applicant has paid the required issue fee). The inability of any such patent applications to be allowed may harm our ability
to protect our intellectual property, our ability to compete in the neuromodulation market, and our results of operations. Our issued
patents and those that may be issued in the future, or those licensed to us, may be challenged, narrowed, circumvented or found to be
invalid or unenforceable, which could limit our ability to stop competitors from marketing related products. Neither we nor our licensors
can be certain that we were the first to invent or first to file for the inventions claimed in our owned or licensed patents or patent
applications which may also affect our ability to assert the patents against others. In addition, our competitors may design around our
patents or any technology developed by us, and the rights granted under any issued patents may not provide us with any meaningful competitive
advantages against these competitors. Furthermore, because of the extensive time required for development, testing and regulatory review
of a potential product, it is possible that, before our future product can be commercialized, any related patent may expire or remain
in force for only a short period following commercialization, thereby reducing any advantage of the patent. See “Risk Factors—Risk
Relating to Intellectual Property”.
License Agreements
The core technology for Deep TMS is exclusively
licensed to us for commercialization on a worldwide basis from the PHS and Yeda.
PHS License Agreement
The initial discoveries of the Deep TMS technology
and the feasibility studies for implementation of the technology were carried out in the framework of research performed at NIH by the
scientific founders of our Company prior to its formation. The rights for such discoveries are owned by the DHHS and are now licensed
to us by the PHS, an agency within the DHHS. Subsequent to these discoveries, applications were filed for registration of Patent Family A
and Patent Family B (described under “—Patents” above) covering the H-Coils developed in the course of this research.
In 2003, we entered into a license agreement with
the PHS, pursuant to which we were granted (i) an exclusive license to develop, manufacture, use, import and sell any product or
treatment which is created or based on the patents and which deals with TMS and (ii) the right to enter into sublicense agreements,
subject to approval of the PHS. The U.S. government was granted an irrevocable, nonexclusive, nontransferable royalty-free license for
use of any invention in connection with the patents, throughout the world, for the benefit of the U.S. government, a foreign government
and other international organization under the provisions of a treaty or agreement applicable to the U.S. government at such time. In
addition, the PHS is entitled to grant academic or commercial bodies a nonexclusive license for use of the patents for advancement of
basic research only, subject to our consent.
We are required to pay royalties consisting of
2% of our net sales or payments received from sales or leases of our Deep TMS systems and/or portions thereof using the licensed technology.
In addition, we are required to pay a royalty of 8% from the net cash proceeds we receive from any sublicenses, so long as the underlying
intellectual property is valid and enforceable in the relevant territory.
The PHS is responsible for registration and defense
of Patent Family A, subject to indemnification by us for registration expenses. We are responsible for registration and defense of
the Patent Family B and are required to bear all related expenses.
The PHS license agreement is valid up until the
expiration of the last to expire of the licensed patent rights under the agreement. The PHS may cancel the agreement in the event of,
among others, (i) a fundamental breach by us, (ii) we enter into involuntary liquidation proceedings or shall become insolvent,
(iii) we have not achieved our milestones under the agreement (all of which have been achieved as of the date hereof), (iv) we
have maliciously made a false statement or has omitted a material fact in an application for a license or in any other report required
under the agreement, (v) we do not make the product based upon the patents accessible to the public after commencement of the commercial
marketing of the product, (vi) we are unable to bring the product to a level of safety which it must reach in order to license the
product or (vii) we do not manufacture the licensed products substantially in the United States without reasonable justification,
in each case, subject to a 90-day cure period (other than in respect of clause (ii) above). We may cancel the agreement at any time
with 60 days’ notice, subject to payment of any outstanding royalties.
If the PHS license agreement is terminated as
a result of the expiration of the first registered patent under the agreement (as described above), we may continue to market and sell
the products and processes in any country in which the patent is expired, without an obligation to pay royalties or any other payment
whatsoever to the PHS.
Yeda License Agreement
In 2005, we entered into a research and licensing
agreement with Yeda, which, as amended from time to time, we refer to as the Yeda license agreement, pursuant to which we licensed certain
technologies developed at the Weizmann Institute in studies conducted by Prof. Avraham Zangen, the scientific founder and neurobiological
advisor of the Company, in the field of treatment of depression using TMS technology. Under the Yeda license agreement, all of the rights,
including the rights to registration of patents, rights and inventions, information and/or other results which shall arise from the research,
referred to as the “licensed technology”, remain exclusively owned by Yeda. The Yeda license agreement grants us an exclusive
license to use the licensed technology, throughout the world, for performance of research and development, manufacture, commercialization,
and sale of systems for medical treatment in the field of TMS treatment. The license is valid with regard to every product up to the expiration
or revocation date of the latest patent registered under the agreement in a particular country, provided that the date of expiry of the
license shall be extended to a period of 15 years commencing on the date of first commercial sale of the product in such country.
Yeda reserves the right to make use of the information which shall be developed for academic and research purposes only, including its
publication, subject to various restrictions set forth in the agreement. We have agreed to lend to Yeda, without consideration, one Deep
TMS system, which it shall use for academic research purposes only. We have the right to grant sublicenses subject to the fulfillment
of conditions specified in the agreement.
In January 2020, we exercised our right to add
the additional rotational field TMS innovation. To the extent products based on this technology are commercialized we will have to pay
Yeda royalties, either at increased rates ranging from an additional 1.6%-2% for “combined products” (which also include innovations
covered by previous agreements), or at a fixed rate of 5% for products based exclusively on the rotational field TMS.
In addition to customary termination rights of
a party due to material breach by the other party, Yeda has the right to terminate the agreement in the event that Yeda receives notice
or a claim from the PHS that performance of the research constitutes breach of a patent of the PHS. We have agreed to indemnify Yeda in
respect of any such claim or demand from the PHS. To the best of our knowledge, the Yeda agreement and performance of the research thereunder
do not breach the terms of our license agreement with the PHS.
In any event of termination of the Yeda agreement,
all of the rights in the licensed technology will be returned to Yeda, and we are required to grant Yeda a nonexclusive license, without
consideration, in perpetuity, throughout the world for all information developed by it or which shall arise from the development of the
products under the agreement, including any license or application for license submitted by us in connection with the products. Following
the expiry of the latest patent in such country with regard to such product, we would be entitled to continue to manufacture and sell
such product in such country without payment of royalties to Yeda.
Trade Secrets and Know-How
We may rely, in some circumstances, on trade secrets
and know-how to protect our technology. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology
and processes, in part, through confidentiality agreements and assignment of inventions agreements with our employees, consultants, scientific
advisors, and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical
security of our premises and physical and electronic security of our information technology systems. While we have confidence in these
individuals, organizations and systems, such agreements or security measures may be breached, and we may not have adequate remedies for
any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors.
Trend information is included throughout the other
sections of this Item 5. In addition, the COVID-19 global pandemic has led governments and authorities around the globe, to take various
precautionary measures in order to limit the spread of the COVID-19 global pandemic, including government-imposed quarantines, lockdowns,
and other public health safety measures, which have had and continues to have an adverse effect on the global markets and its economy,
including on the availability and pricing of materials, manufacturing and delivery efforts, sales to existing and potential customers
and leads, collections from accounts, and other aspects of the global economy. Therefore, the COVID-19 global pandemic could continue
to disrupt production and cause delays in the supply and delivery of products used in our operations, may further divert the attention
and efforts of the medical community to coping with the COVID-19 global pandemic, impact our ability to recruit subjects for ongoing and
planned clinical trials and disrupt the marketplace in which we operate and may have material adverse effects on our operations, sales,
revenues, collection from accounts and ability to raise funds. In particular, certain of our third-party suppliers may currently source
certain components and materials of our Deep TMS systems from Asia and other affected countries, and the continued outbreak and spreading
of the COVID-19 global pandemic may adversely impact our third-party suppliers’ development, manufacture, and supply of our Deep
TMS systems. In addition, treatment sessions conducted with our Deep TMS system, which are generally scheduled or non-emergency procedures,
may be postponed as hospitals and healthcare centers shift resources to patients affected by the COVID-19 global pandemic. The extent
to which the COVID-19 global pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be
predicted, including new information which may emerge concerning the severity of the COVID-19 global pandemic and the actions to contain
the COVID-19 global pandemic or treat its impact, among others. Moreover, the COVID-19 global pandemic has begun to have indeterminable
adverse effects on general commercial activity and the world economy, and our business and results of operations could be adversely affected
to the extent that this COVID-19 global pandemic or any other epidemic harms the global economy generally.
In the period following the onset of the pandemic,
as part of the global supply chain crisis, we have seen a significant rise in the price of many of the electronic components needed for
our systems. These price increases are largely attributable to supply and demand factors, and in some cases, shortages, relating to these
parts across the globe. On a related point, the lead time for receiving electronic components shipped by suppliers has increased significantly
amid the worldwide supply chain crisis. This has compelled us to significantly increase inventory levels to ensure that future demand
for our systems can be timely met. Within the broader context of electronic component supply issues, the third party we rely on for the
outsourced manufacture of our newer generation systems halted production in 2021 for a period due to the shortage in PC computers which
are needed for these systems. While we were able to adapt our standard manufacturing process to allow for the integration of these PC
components at a later stage of the production line once inventory levels were restocked, this is illustrative of the continuing need to
adapt to the realities and challenges posed by the worldwide supply chain crisis.
The global shipping crisis and supply
chain backlog have also caused a dramatic rise in the cost of delivery of our systems, including sharp increases in air freight cost.
The heavy weight of our systems translates into a significant increase in the amount we spend on shipping our systems to customers, which
also requires additional labor on the part of our logistical staff to obtain multiple competitive shipping quotes from a variety of carriers
in the industry.
Another trend affecting us is the so called "Great
Resignation," also known as the "Big Quit," an economic trend in which employees voluntarily resigned from their jobs
en masse, beginning in early 2021, primarily in the United States. An article published in the Harvard Business Review on September
15, 2021 cited U.S. Bureau of Labor Statistics finding that 4 million Americans quit their jobs in July 2021. It found differences
in turnover rates between companies in different industries, with 3.6% more health care employees quitting their jobs than in the previous
year, and in technology, resignations increased by 4.5%. As we operate in both the health care and technology fields, we have not been
immune to this larger trend, and while our overall workforce increased over the past year, we also experienced employee turnover, including
in our salesforce, thus impacting our ability to ramp up our sales and marketing force as quickly as would have otherwise been possible
and generally leading to increased base salaries for new hires.
Another trend relating to our business
is the expansion and reliance on reimbursement by major insurers and government plans. Over the past year we have experienced emerging
reimbursement coverage for Deep TMS for the treatment of OCD, with approximately 60 million covered lives eligible for coverage as of
March 2022. In early 2021, Centene Corporation, the largest Medicaid managed care organization in the country with over 26 million members,
issued a positive coverage policy applicable to our Deep TMS therapy for OCD. In June 2021, Health Care Service Corporation (HCSC), an
independent licensee of Blue Cross Blue Shield Association, covering approximately 17 million members issued a positive coverage policy,
applicable to our Deep TMS therapy for OCD. In 2021, TriCare, which covers 9.6 million military family members across the US, also approved
coverage of Deep TMS for OCD. Additionally, in mid-2021, Palmetto GBA, one of the seven Medicare Administrative Contractors (MACs) in
the US, issued the first draft Local Coverage Determination (LCD) proposing coverage applicable to Deep TMS for OCD, and subsequently
issued a final LCD approving such coverage effective March 2022. If this trend continues, we anticipate that it can have a positive impact
on our industry in general, and the demand for our Deep TMS therapy in particular. This, in turn, could have a positive effect on our
revenues, income from continuing operations, and profitability.
E. |
Critical Accounting Estimates |
Not applicable.
ITEM 6. |
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. |
Directors and Senior Management |
The following table sets forth the name, age and
position of each of our executive officers and directors as of the date of this Annual Report.
Name |
|
Age |
|
Position |
Senior Management: |
|
|
|
|
Christopher R. von Jako |
|
53 |
|
President and Chief Executive Officer |
R. Scott Areglado |
|
58 |
|
Senior Vice President and Chief Financial Officer |
Hadar Levy |
|
48 |
|
Senior Vice President and General Manager of North America |
Dr. Yiftach Roth |
|
52 |
|
Chief Scientist |
Directors: |
|
|
|
|
Dr. David Zacut(3) |
|
70 |
|
Chairman of the Board |
Avner Hagai(2) |
|
66 |
|
Vice Chairman of the Board |
Eti Mitrany(1)(2) |
|
52 |
|
Director |
Karen Sarid(1)(2)(3) |
|
71 |
|
Director |
Prof. Abraham Zangen |
|
52 |
|
Director |
Yossi Ben Shalom(3) |
|
65 |
|
Director |
Avner Lushi(1) |
|
55 |
|
Director |
(1) |
Member of our audit committee that also serves on our financial statements committee. |
(2) |
Member of our compensation committee. |
(3) |
Member of our executive committee. |
Nasdaq’s Board Diversity Rule, which was
approved by the SEC on August 6, 2021, is a disclosure standard designed to encourage a minimum board diversity objective for companies
and provide stakeholders with consistent, comparable disclosures concerning a company’s current board composition. This rule requires
companies listed on the Nasdaq exchange to: (1) publicly disclose board-level diversity statistics using a standardized template; and
(2) have or explain why they do not have at least two diverse directors. The rule also provides flexibility for Smaller Reporting Companies
and Foreign Issuers, which can meet the diversity objective by including two female directors. The rule establishes a transition period
by which the diversity requirements must be met; for example, for companies listed on Nasdaq prior to August 6, 2021, a board must include
at least one diverse director by August 7, 2023, and at least two diverse directors by either August 6, 2025 (if listed as a “Nasdaq
Global Select or Global Markets” company) or August 6, 2026 (if listed as a “Nasdaq Capital Market” company). The required
annual disclosure is made in the form of the “Board Diversity Matrix” established by the Rule.
Our current board composition is reflected in
the following matrix:
Board Diversity Matrix (As of April 12 2022) |
Country of Principal Executive Offices: |
Israel |
Foreign Private Issuer |
Yes |
Disclosure Prohibited under Home Country Law |
No |
Total Number of Directors |
7 |
|
Female |
Male |
Non-binary |
Did Not Disclose Gender |
Part I: Gender Identity |
|
Directors |
2 |
5 |
0 |
0 |
Part II: Demographic Background |
|
Underrepresented Individual in Home Country Jurisdiction |
0 |
LGBTQ |
0 |
Did Not Disclose Demographic Background |
0 |
Directors who are Jewish People |
7 |
Directors with Disabilities |
0 |
As a Foreign Issuer subject to the added flexibility
provided under Nasdaq’s Board Diversity Rule, we currently meet the diversity objectives promulgated under this rule by having two
female directors, as reflected in the above matrix.
Executive officers
Christopher R. von Jako, PhD serves as
our president and chief executive officer since January 1, 2020. Most recently, Dr. von Jako served as CEO of Dynatronics Corporation,
a publicly-traded medical device company focusing on high-quality restorative products. Prior to Dynatronics, he served as President and
CEO of other companies including NinePoint Medical, Inc. and NeuroTherm, Inc. Earlier in his career, he held increasingly senior roles
with other leading medical device companies, including Integra LifeSciences, Covidien, Medtronic, and Radionics. Dr. von Jako holds a
Ph.D. in Biomedical Sciences from the University of Pécs, a M.S. degree in Radiological Sciences and technology from the department
of Nuclear Engineering at the Massachusetts Institute of Technology, and a double B.S. Degree in Physics and Mathematics from Bates College.
He resides in Lynnfield, Massachusetts and continues to serve as an independent director on the board nView medical Inc
R. Scott Areglado has served as our Senior
Vice President and Chief Financial Officer since May 2021. Prior to his service at the Company, Mr. Areglado served as Chief Financial
Officer of iCAD, Inc., a publicly traded global medical technologies provider of advanced image analysis, from May 2018, and previously
served as its Vice President and Corporate Controller (from 2011 to 2018). From 2005 to 2010, Mr. Areglado served as Vice President and
Controller at AMICAS, Inc., a Nasdaq-listed image and information management solutions company serving the healthcare industry. From 1991
to 2004, he held various accounting and financial roles of increasing responsibility in the software, communications, and transportation
and logistics industries. He holds a Bachelor of Business Administration degree in Accounting from the University of Massachusetts, Amherst,
and a Master of Business Administration in Entrepreneurship from the Franklin W. Olin Graduate School of Business at Babson College.
Hadar Levy has served as our Senior Vice
President and General Manager North America since May 2020. Prior to this, Mr. Levy served as our Chief Financial Officer from September
2014 to May 2020. Prior to his service at the Company, from August 2011 to September 2014 Mr. Levy served as Chief Financial Officer
of the Latin American Division at Amdocs; and from 2008 to 2011, served as Chief Financial Officer & Vice President of Business Development
of Notalvision. Prior to this position, he served as Controller of GE Healthcare Israel. Mr. Levy holds a BA in Economics and
Accounting from Ruppin and an LLM from Bar Ilan University. Mr. Levy is a Certified Public Accountant.
Dr. Yiftach Roth is one of our scientific
founders and key inventors of the Deep TMS technology. Dr. Roth has served as our Research and Development Manager since May 2006.
In 2010, Dr. Roth became our Chief Scientist. From 2003 through 2006, Dr. Roth worked in the Advanced Technology Center of the
Chaim Sheba Medical Center at Tel Hashomer as a researcher in the field of Magnetic Resonance Imaging (MRI). Dr. Roth holds B.Sc.
and M.Sc. degrees in Physics and a Ph.D. in Medical Physics from Tel Aviv University. Dr. Roth is the brother-in-law of Professor Zangen,
a director and scientific consultant for the Company.
Directors
Dr. David Zacut has served as our
Chairman of the Board of Directors since our inception, is a member of our executive committee, and has been providing consulting services
to Brain Research and Development Services since May 2001. Since 1983, Dr. Zacut has been working as a senior practicing physician
at Hadassah Hospital, and from 1994 through 2003, he served as a managing director of several large medical centers. In addition, Dr. Zacut
serves as a director of several private companies, including Brain Research and Development Services. Dr. Zacut holds an M.D. degree
from the Hebrew University of Jerusalem.
Avner Hagai has served as our Vice Chairman
of the Board of Directors since November 2006 and currently serves as a member of our compensation committee. He serves as a director
at several companies, including at Prisma F.S. Ltd., a building management company, where he has served since 2002. Mr. Hagai
established A.A. Glass Ltd., an automotive glass and services company, where he has served as a director since 1984.
Mr. Avner Lushi has served as our Director
since January 2020 and currently serves as a member of our audit committee. He co-founded the Guangzhou Sino-Israel Bio-industry Investment
Fund (GIBF) which focuses on introducing Israeli and western life sciences companies to the Chinese market (and related investments),
where he also serves as a Managing Partner & CEO. Between 2004 and 2015 Mr. Lushi served as a Partner and Managing Director of Israel
Healthcare Ventures (IHCV), a life sciences venture capital fund. From 2001 to 2005, he co-founded and served as CEO of Life Sciences
Transaction Support Ltd. (LTS), a PwC subsidiary dealing with life sciences investment banking. Since 2005, Mr. Lushi has served as an
independent board member at nine public companies, the two last active ones being Ram-On Investments and Holdings (1999) Ltd and Allmed
Solutions Ltd. In addition, he serves as a board member of several private companies as part of his role at GIBF. From 1997 to 2001, prior
to turning to the private sector, he held increasingly senior roles within the Israeli Prime Minister’s Chamber and the Israeli
Supreme Court. Mr. Lushi holds an LLM in Law from the Hebrew University of Jerusalem, LLB in Law and a BA in Economics from the Haifa
University.
Prof. Avraham Zangen has served as our
Director since June 2019. Prof. Zangen is the Head of the Brain Stimulation and Behavior Lab and the Chair of the PsychoBiology Brain
Program at Ben-Gurion University in Israel. His research is directed at identifying and understanding altered neuroplasticity in psychiatric
disorders, primarily depression, addiction and ADHD, utilizing brain stimulation, and imaging techniques to explore mechanisms and potential
clinical applications. He co-developed, along with Dr. Yiftach Roth, the Deep TMS coil which serves as BrainsWay’s platform technology.
Professor Zangen has published over 150 peer reviewed articles, reviews, and book chapters. He has been awarded numerous prizes for his
scientific achievements, including the Medical Futures Innovation Award in London, the Sieratzki Prize for Advances in Neuroscience, and
the Juludan Prize at the Technion. He has also received several distinguished research grants, including from the National Institutes
of Health, H2020 and the Israel Science Foundation. Professor Zangen is the brother-in-law of Dr. Yiftach Roth, who serves as our Chief
Scientific Officer and a co-developer of our Deep TMS technology.
Eti Mitrany has served as our Director
since June 2016, and currently serves as chairperson of our compensation committee and a member of our audit committee. Ms. Mitrany
Ms. Mitrany is an executive with over 25 years of global experience in the life sciences industry and since April 2021 serves as CFO and
Head of Corporate Strategy at CytoReason, a life sciences AI company developing a computational model of the human body. From 2012 until
January 2020, she served as Senior Vice President, Head of the Corporate Economic Department at Teva Pharmaceuticals, with global responsibility
for Teva’s business planning and analysis. Prior to that, Ms. Mitrany held various positions at Teva, including serving as
CFO of its global specialty business (commercial, R&D, and new ventures), head of Financial Planning & Analysis of the global
branded business, and global CFO of Copaxone (a multiple sclerosis treatment) and various other specialty products. Ms. Mitrany received
her BA in Economics and an MBA in Finance, both from Tel-Aviv University.
Karen Sarid has served as our Director
since December 2017, currently serves as chairperson of our audit committee, and is a member of our compensation committee and our executive
committee. Between March 2014 and July 2017, Ms. Sarid served as VP Beauty and Dental and as Chairman of China activities at Syneron
Medical Ltd. Between January 2012 and August 2013 Ms. Sarid served as President of Alma Lasers Ltd. Ms. Sarid currently
serves as a director of Eva Visual Ltd. She holds a BA in Economics and Accounting from the University of Haifa.
Yossi Ben Shalom has served as our Director
since December 2018 and is a member of our executive committee. Mr. Ben Shalom is a co-founder of D.B.S.I, a private investment company
specializing in investments in mature companies that are positioned globally for high growth or built for vast expansion through M&As.
As such, Mr. Ben Shalom serves as the Chairman of Pointer Telocation Ltd. (Nasdaq: PNTR), Rada (Nasdaq: RADA) and Shagrir Group
Car Services Ltd. (TASE: SHGR). He also serves as a director at Taldor Computer Systems (1986) Ltd. (TASE: TALD), Eldan Cargo Ltd.,
The 8 Note Production & Distribution Ltd., Car 2 Go Ltd., Matzman Et Merutz Milenum Ltd. and Kafrit Industries
(1993) Ltd. Mr. Ben Shalom was Executive Vice President and Chief Financial Officer of Koor Industries Ltd. from 1998 through
to 2000. Before that, Mr. Ben-Shalom served as Chief Financial Officer of Tadiran Ltd. between 1994 and 1998. Mr. Ben Shalom
holds a BA in Economics and an MA in Business Administration both from Tel Aviv University.
The aggregate compensation paid, and benefits-in-kind
granted to or accrued on behalf of all of our directors and executive officers for their services, in all capacities, to us during the
year ended December 31, 2021, was approximately $3.7 million. Out of that amount, $2 million was paid as salary, $1.4 million was attributed
to the value of the equity-based awards granted to senior management during 2021, approximately $0.2 million was attributed to retirement
plans and approximately $0.1 million was attributed to all other compensation. No additional amounts have been set aside or accrued by
us to provide pension, retirement or similar benefits.
The compensation terms for our directors and officers
are derived from their employment agreements, and comply with our Amended and Restated Compensation Policy for Executive Officers and
Directors recently approved by our shareholders on December 22, 2021 (the “Compensation Policy”).
The table and summary below outline the compensation
granted to our five highest compensated directors and officers during the year ended December 31, 2021. The compensation detailed
in the table below refers to actual compensation granted or paid to the director or officer during the year 2021.
Name and position of director or officer | |
Base Salary or Other Payments(1) | |
Value of Social benefits(2) | |
Value of Equity Based Compensation Granted(3) | |
All Other Compensation(4) | |
Total |
| |
|
Christopher von Jako, President and CEO | |
| 640,000 | | |
| 51,964 | | |
| 445,150 | | |
| — | | |
| 1,136,844 | |
Hadar Levy, SVP and General Manager North America | |
| 442,500 | | |
| 42,699 | | |
| 338,365 | | |
| — | | |
| 823,564 | |
Amit Ginou, VP, and Israel Site Manager | |
| 178,043 | | |
| 46,434 | | |
| 96,692 | | |
| 13,188 | | |
| 334,358 | |
Christopher Boyer, VP Global Marketing | |
| 245,667 | | |
| 37,310 | | |
| 43,962 | | |
| — | | |
| 326,940 | |
R. Scott Areglado, Senior Vice President and Chief Financial Officer(5) | |
| 194,208 | | |
| 33,593 | | |
| 77,706 | | |
| — | | |
| 305,508 | |
(1) |
“Base Salary or Other Payments” means the aggregate yearly gross monthly salaries or other payments with respect to our senior management and members of the board of directors which was actually paid during the year ended December 31, 2021. |
(2) |
“Social Benefits” include payments to the National Insurance Institute, advanced education funds, managers’ insurance and pension funds; vacation pay; and recuperation pay as mandated by Israeli law. |
(3) |
Consists of the fair value of the equity-based compensation granted during the year ended December 31, 2021 in exchange for the directors' and officers' services recognized as an expense in profit or loss and is carried to the accumulated deficit under equity. The total amount is recognized as an expense over the vesting period of the options. |
(4) |
“All Other Compensation” includes, among other things, bonuses, car-related expenses (including tax gross-up) and communication expenses. |
(5) |
Mr. Areglado’s tenure with the Company commenced on May 5, 2021, and accordingly the table reflect compensation for the period from the commencement date to the end of 2021. |
In addition, all of our directors and executive
officers are covered under our directors’ and executive officers’ liability insurance policies and were granted letters of
indemnification by us.
Employment Agreements
We have entered into written employment or service
agreements with each member of our senior management. All of these agreements contain customary provisions regarding noncompetition, confidentiality
of information, and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under
applicable laws.
For information on exemption and indemnification
letters granted to our directors and officers, please see “Item 6C. – Board Practices – Exemption, Insurance and Indemnification
of Directors and Officers.”
Director Compensation
As of the date of the filing of this annual report,
we pay our non-executive directors (i.e., all directors other than Dr. Zacut and Prof. Zangen) an annual cash fee of NIS 133,000 (approximately
$41,612) Additionally, as of the date of the filing of this annual report, we pay a cash fee of NIS 2,480 (approximately $776) per
meeting of the Board and any committee thereof, which is increased to (i) NIS 4,020 (approximately $1,258) in the case of a committee
chairperson; or (ii) NIS 4,390 (approximately $1,374) in the case of a director determined to be an expert.
According to the consultancy agreement between
Dr. Zacut and the Company, as of May 30, 2016, Dr. Zacut is entitled to a monthly consulting fee of NIS 30,000, set based on a 40% capacity
position. For more information, please see the proxy statement filed on December 9, 2019 and resulting resolution approved by the shareholders
on January 13, 2020. We also have a consultancy agreement with Prof. Zangen, a director and scientific founder of the Company. For more
information, please see “Item 7B. Related Party Transactions.”
Compensation Policy
In general, under the Israeli Companies Law, a
public company must have a compensation policy approved by the board of directors after receiving and considering the recommendations
of the compensation committee. In addition, the compensation policy requires the approval of the general meeting of the shareholders.
In public companies such as our Company, shareholder approval requires one of the following: (i) the majority of shareholder votes
counted at a general meeting including the majority of all of the votes of those shareholders who are non-controlling shareholders and
do not have a personal interest in the approval of the compensation policy, who vote at the meeting (excluding abstentions) or (ii) the
total number of votes against the proposal among the shareholders mentioned in paragraph (i) does exceed two percent (2%) of the
voting rights in the company. Under special circumstances, the board of directors may approve the compensation policy despite the objection
of the shareholders on the condition that the compensation committee and then the board of directors decide, on the basis of detailed
arguments and after discussing again the compensation policy, that approval of the compensation policy, despite the objection of the meeting
of shareholders, is for the benefit of the company.
The compensation policy must be based on certain
considerations, must include certain provisions, and needs to reference certain matters as set forth in the Israeli Companies Law.
The compensation policy must serve as the basis
for decisions concerning the financial terms of employment or engagement of office holders, including exculpation, insurance, indemnification
or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain
factors, including advancement of the company’s objectives, business plan, long-term strategy, and creation of appropriate incentives
for office holders. It must also consider, among other things, the company’s risk management, size, and the nature of its operations.
The compensation policy must furthermore consider the following additional factors:
|
● |
the education, skills, experience, expertise, and accomplishments of the relevant office holder; |
|
● |
the office holder’s position, responsibilities, and prior compensation agreements with him or her; |
|
● |
the ratio between the cost of the terms of employment of an office holder and the cost of the employment of other employees of the company, including employees employed through contractors who provide services to the company, in particular the ratio between such cost, the average, and median salary of the employees of the company, as well as the impact of such disparities on the work relationships in the company; |
|
● |
if the terms of employment include variable components—the possibility of reducing variable components at the discretion of the board of directors and the possibility of setting a limit on the value of variable equity-based components not settled in cash; and |
|
● |
if the terms of employment include severance compensation—the term of employment or office of the office holder, the terms of his or her compensation during such period, the company’s performance during such period, his or her individual contribution to the achievement of the company goals and the maximization of its profits and the circumstances under which he or she is leaving the company. |
The compensation policy must also include, among
others:
|
● |
with regards to variable components in the terms of office and employment: |
|
● |
with the exception of office holders who report directly to the chief executive officer, determining the variable components on long-term performance basis and on measurable criteria; however, the company may determine that an immaterial part of the variable components of the compensation package of an office holder’s shall be awarded based on non-measurable criteria, if such amount is not higher than three monthly salaries per annum, while taking into account such office holder contribution to the company; |
|
● |
the ratio between variable and fixed components, as well as the limit of the values of variable components at the time of their payment. However, with respect to variable equity-based components that are not settled in cash, the limit of their value at the time of grant. |
|
● |
a condition under which the office holder will return to the company, according to conditions to be set forth in the compensation policy, any amounts paid as part of his or her terms of employment, if such amounts were paid based on information later to be discovered to be wrong, and such information was restated in the company’s financial statements; |
|
● |
the minimum holding or vesting period of variable equity-based components to be set in the terms of office or employment, as applicable, while taking into consideration long-term incentives; and |
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a limit to retirement grants. |
Our compensation policy is designed to promote
retention and motivation of directors and senior management, incentivize superior individual excellence, align the interests of our directors
and senior management with our long-term performance and provide a risk management tool. To that end, a portion of an executive officer
compensation package is targeted to reflect our short and long-term goals, as well as the executive officer’s individual performance.
On the other hand, our compensation policy includes measures designed to reduce the executive officer’s incentives to take excessive
risks that may harm us in the long-term, such as limitations on the value of cash bonuses and equity-based compensation to a maximum number
of monthly salaries, limitations on the ratio between the variable and the total compensation of an executive officer and minimum vesting
periods for equity-based compensation.
Our compensation policy also addresses our executive
officer’s individual characteristics (such as his or her respective position, education, scope of responsibilities and contribution
to the attainment of our goals) as the basis for compensation variation among our senior management, and considers the internal ratios
between compensation of our senior management and directors and other employees. Pursuant to our compensation policy, the compensation
that may be granted to an executive officer may include: base salary, exemption indemnification and insurance, annual bonuses and other
cash bonuses (such as a signing bonus and special bonuses with respect to any special achievements, such as outstanding personal achievement,
outstanding personal effort or outstanding company performance), equity-based compensation, social benefits, retirement, and termination
of service arrangements. All cash bonuses to executive officers (“Annual Target Bonus”, “Overachievement Bonus and “Special
Bonus”) are limited to a maximum amount linked to the executive officer’s base salary. In addition, the total equity-based
compensation components may not exceed 200% of each executive officer’s base salary with respect to any given calendar year.
An annual cash bonus may be awarded to senior
management upon the attainment of pre-set periodic objectives and individual targets. The annual cash bonus that may be granted to our
senior management will be based on performance objectives and a discretionary evaluation of the executive officer’s overall performance
by our compensation committee and board of directors and subject to minimum thresholds. The annual cash bonus that may be granted to senior
management may be based in a rate of up to 25% on a discretionary evaluation. Furthermore, our chief executive officer will be entitled
to recommend performance objectives, and such performance objectives will be approved by our compensation committee (and, if required
by law, by our board of directors).
The equity-based compensation under our compensation
policy for our officers and directors is designed in a manner consistent with the underlying objectives in determining the base salary
and the annual cash bonus, with its main objectives being to enhance the alignment between the officers’ and directors’ interests
with our long-term interests and those of our shareholders, and to strengthen the retention and the motivation of senior management in
the long term. Our compensation policy provides for officers and directors compensation in the form of share options or other equity-based
awards, such as restricted shares and restricted share units (RSUs), in accordance with our Share Incentive Plan then in place. All equity-based
incentives granted to officers and directors shall be subject to vesting periods in order to promote long-term retention of the awarded
officer or director. The equity-based compensation shall be granted from time to time and be individually determined and awarded according
to the performance, educational background, prior business experience, qualifications, role, and the personal responsibilities of the
officer or director.
In addition, our compensation policy contains
compensation recovery provisions which allows us under certain conditions to recover bonuses paid in excess, enables our chief executive
officer to approve an immaterial change in the terms of employment of an executive officer (provided that the changes of the terms of
employment are in accordance with our compensation policy) and allows us to exculpate, indemnify, and insure our senior management and
directors subject to certain limitations set forth thereto.
Our compensation policy also provides for compensation
to the members of our board of directors (except for directors that are employed by, or provides services, directly or through companies
in their control, to the Company in another role) either (i) for external directors, if any, in accordance with the amounts provided
in the Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director) of 2000, as amended by the Companies
Regulations (Relief for Public Companies Traded in Stock Exchange Outside of Israel) of 2000, as such regulations may be amended from
time to time, or (ii) for all other directors, in accordance with the amounts determined in our compensation policy.
Our amended and restated compensation policy was
last approved by our shareholders on December 22, 2021 and is valid for a period of three years according to the Israeli Companies Law.
Appointment of Directors and Terms of Officers
Our board of directors consists of seven (7) directors,
including five (5) directors who qualify as “independent” under applicable U.S. securities laws and Nasdaq listing rules:
Avner Hagai, Karen Sarid, Eti Mitrany, Yossi Ben Shalom, and Avner Lushi. The term of office of each director shall be until the next
general meeting of our shareholders.
Under our articles of association, the number
of directors on our board of directors will be not less than four (4) but no more than nine (9) directors, not including any
external directors to the extent required to be appointed by the Israeli Companies Law, and not including up to two (2) additional
directors who may be appointed by our board of directors whose term of office would expire as of the first annual meeting of shareholders
after their appointment, at which they may be re-elected by such general meeting subject to the total number of directors not exceeding
nine (9).
Under our articles of association, our board of
directors may elect new directors if the number of directors is below the maximum provided in the articles of association, and the term
of office of such elected directors shall be until the next general meeting of our shareholders.
Under Israeli law, the chief executive officer
of a public company may not serve as the chairman of the board of directors of the company unless approved by a special majority of our
shareholders as required under the Israeli Companies Law.
In addition, under the Israeli Companies Law,
our board of directors must determine the minimum number of directors who are required to have financial and accounting expertise. Under
applicable regulations, a director with financial and accounting expertise is a director who, by reason of his or her education, professional
experience, and skills, has a high level of proficiency in and understanding of business accounting matters and financial statements.
He or she must be able to thoroughly comprehend the financial statements of the company and initiate debate regarding the manner in which
financial information is presented. In determining the number of directors required to have such expertise, the board of directors must
consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors
has determined that we should have at least two directors with the requisite financial and accounting expertise.
There are no arrangements or understandings between
us, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service
as directors of our Company.
Independent and External Directors - Israeli Companies
Law Requirements
Under the Israeli Companies Law, we would be required
to include on our board of directors at least two members, each of whom qualifies as an external director, and as to whom special qualifications,
voting requirements and other provisions would be applicable. We would also be required to include one such external director on each
of our board committees.
Under regulations promulgated under the Israeli
Companies Law, Israeli companies whose shares are traded on stock exchanges such as the Nasdaq that do not have a controlling shareholder
(as defined therein) and which comply with the requirements of the jurisdiction where the company’s shares are traded with respect
to the appointment of independent directors and the composition of an audit committee and compensation committee, may elect not to follow
the Israeli Companies Law requirements with respect to the composition of its audit committee and compensation committee and the appointment
of external directors. As we do not have a controlling shareholder, and as we comply with the requirements of the Nasdaq with respect
to the composition of our board and such committees, therefore we are exempt from the Israeli Companies Law requirements with respect
thereto, including the appointment of external directors.
Committees
Israeli Companies Law Requirements
Our board of directors has established four standing
committees, the audit committee (which serves also as our financial statements committee), the compensation committee, the nomination
committee, and the executive committee.
Audit Committee
Israeli Companies Law Requirements
Under the Israeli Companies Law, the board of
directors of any public company must also appoint an audit committee comprised of at least three directors, including all of the external
directors (if any). The audit committee may not include:
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the chairman of the board of directors; |
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a controlling shareholder or a relative of a controlling shareholder; |
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any director employed by us or by one of our controlling shareholders or by an entity controlled by our controlling shareholders (other than as a member of the board of directors); or |
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any director who regularly provides services to us, to one of our controlling shareholders or to an entity controlled by our controlling shareholders. |
According to the Israeli Companies Law, the majority
of the members of the audit committee, as well as the majority of members present at audit committee meetings, will be required to be
“independent” (as defined below), and the chairperson of the audit committee will be required to be an external director.
Any persons disqualified from serving as a member of the audit committee may not be present at the audit committee meetings, unless the
chairperson of the audit committee has determined that such person is required to be present at the meeting or if such person qualifies
under one of the exemptions of the Israeli Companies Law.
The term “independent director” is
defined under the Israeli Companies Law as an external director or a director who meets the following conditions, and who is appointed
or classified as such according to the Israeli Companies Law: (1) the conditions for his or her appointment as an external director
(as described above) are satisfied, and the audit committee approves the director having met such conditions, and (2) he or she has
not served as a director of the company for over nine consecutive years with any interruption of up to two years of his or her service
not being deemed a disruption to the continuity of his or her service.
Pursuant to regulations promulgated under the
Israeli Companies Law, we comply with the requirements of Nasdaq with respect to the composition of our audit committee and compensation
committee, and do not follow the Israeli Companies Law requirements with respect to the composition of such committees, such as those
described above. See “Management—Our Board of Directors.”
Nasdaq Listing Requirements
Under the Nasdaq corporate governance rules, we
are required to maintain an audit committee consisting of at least three independent directors, all of whom are financially literate and
one of whom has accounting or related financial management expertise.
Our audit committee consists of Karen Sarid, Eti
Mitrany, and Avner Lushi. Karen Sarid serves as Chairperson of the committee. All members of our audit committee meet the requirements
for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq corporate governance rules. Our board of directors
has determined that each of Karen Sarid, Eti Mitrany, and Avner Lushi is an audit committee financial expert as defined by SEC rules,
and has the requisite financial experience as defined by the Nasdaq listing rules.
Each of the members of the audit committee is
“independent” as such term is defined in Rule 10A-3(b)(1) under the Exchange Act.
Approval of Transactions with Related Parties
The approval of the audit committee is required
to effect specified actions and transactions with office holders and controlling shareholders and their relatives, or in which they have
a personal interest. See “Management—Fiduciary Duties and Approval of Specified Related Party Transactions and Compensation
under Israeli Law.” The audit committee may not approve an action or a transaction with a controlling shareholder or with an office
holder unless at the time of approval the audit committee meets the composition requirements under the Israeli Companies Law.
Audit Committee Charter
Our board of directors adopted an audit committee
charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and the Nasdaq corporate governance
rules, which include:
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retaining and terminating our independent auditors, subject to board of directors and shareholder ratification; |
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overseeing the independence, compensation, and performance of our independent auditors; |
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the appointment, compensation, retention, and oversight of any accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit services; |
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pre-approval of audit and non-audit services to be provided by the independent auditors; |
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reviewing with management and our independent directors our financial statements prior to their submission to the SEC; and |
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approval of certain transactions with office holders and controlling shareholders, as described below, and other related party transactions. |
Additionally, under the Israeli Companies Law,
the role of the audit committee includes the identification of irregularities in our business management, among other things, by consulting
with the internal auditor or our independent auditors and suggesting an appropriate course of action to the board of directors. In addition,
the audit committee or the board of directors, as set forth in the articles of association of the company, is required to approve the
yearly or periodic work plan proposed by the internal auditor. The audit committee is required to assess the company’s internal
audit system and the performance of its internal auditor. The Israeli Companies Law also requires that the audit committee assess the
scope of the work and compensation of the company’s external auditor. In addition, the audit committee is required to determine
whether certain related party actions and transactions are “material” or “extraordinary” for the purpose of the
requisite approval procedures under the Israeli Companies Law and whether certain transactions with a controlling shareholder will be
subject to a competitive procedure. The audit committee charter states that in fulfilling its role the committee is empowered to conduct
or authorize investigations into any matters within its scope of responsibilities. A company whose audit committee’s composition
also meets the requirements set for the composition of a compensation committee (as further detailed below) may have one committee acting
as both audit and compensation committees.
Compensation Committee
Israeli Companies Law Requirements
Under the Israeli Companies Law, public companies
are required to appoint a compensation committee in accordance with the guidelines set forth thereunder.
The compensation committee must consist of at
least three members. All of the external directors, if any, must serve on the committee and constitute a majority of its members. The
chairperson of the compensation committee must be an external director, if any. All external directors, if any, must be members of the
compensation committee, and the remaining members must be directors whose compensation is in accordance with the regulations for compensation
of external directors under the Israeli Companies Law. In addition, members of the compensation committee may not include directors who
are disqualified from serving as members of the audit committee (as described above).
The compensation committee, which consists of
Eti Mitrany, Avner Hagai, and Karen Sarid, assists the board of directors in determining compensation for our directors and officers.
Eti Mitrany serves as Chairperson of the committee. Under SEC and Nasdaq rules, there are heightened independence standards for members
of the compensation committee, including a prohibition against the receipt of any compensation from us other than standard supervisory
board member fees. Although foreign private issuers are not required to meet this heightened standard, our board of directors has determined
that all of our expected compensation committee members meet this heightened standard.
In accordance with the Israeli Companies Law,
the roles of the compensation committee are, among others, as follows:
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to recommend to the board of directors the compensation policy for directors and officers, and to recommend to the board of directors once every three years whether the compensation policy that had been approved should be extended for a period of more than three years; |
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to recommend to the board of directors updates to the compensation policy, from time to time, and examine its implementation; |
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to decide whether to approve the terms of office, and employment of directors and officers that require approval of the compensation committee; and |
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to decide whether the compensation terms of the chief executive officer, which were determined pursuant to the compensation policy, will be exempted from approval by the shareholders because such approval would harm the ability to engage the chief executive officer. |
In addition to the roles mentioned above our compensation
committee also makes recommendations to our board of directors regarding the awarding of employee equity grants.
In addition to the above, our compensation committee
is entitled to agree to prior notice periods for resignation or dismissal within the context of certain acceleration events, and to agree
to up to 12 months full payment of the compensation package and fringe benefits, upon termination by us of an engagement with an officer
or an employee.
Pursuant to regulations promulgated under the
Israeli Companies Law, we comply with the requirements of the Nasdaq with respect to the composition of our audit committee and compensation
committee, and do not follow the Israeli Companies Law requirements with respect to the composition of such committees, such as those
described above. See “Management—Our Board of Directors.”
Nasdaq Listing Requirements
Under the Nasdaq Listing Rules, we are required
to maintain an audit committee consisting of at least three members, all of whom are independent and are financially literate and one
of whom has accounting or related financial management expertise.
The independence requirements of Rule 10A-3 of
the Exchange Act implement two basic criteria for determining independence:
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audit committee members are barred from accepting directly or indirectly any consulting, advisory or other compensatory fee from the issuer or an affiliate of the issuer, other than in the member’s capacity as a member of the board of directors and any board committee; and |
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audit committee members may not be an “affiliated person” of the issuer or any subsidiary of the issuer apart from her or his capacity as a member of the board of directors and any board committee. |
The SEC has defined “affiliate” for
non-investment companies as “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled
by, or is under common control with, the person specified.” The term “control” is intended to be consistent with the
other definitions of this term under the Exchange Act, as “the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”
A safe harbor has been adopted by the SEC, under which a person who is not an executive officer or 10% shareholder of the issuer would
be deemed not to have control of the issuer.
In accordance with the Sarbanes-Oxley Act of 2002
and the Nasdaq Listing Rules, the audit committee is directly responsible for the appointment, compensation, and performance of our independent
auditors. In addition, the audit committee is responsible for assisting the board of directors in reviewing our annual financial statements,
the adequacy of our internal control and our compliance with legal and regulatory requirements. The audit committee also oversees our
major financial risk exposures and policies for managing such potential risks, discusses with management and our independent auditor significant
risks or exposure and assesses the steps management has taken to minimize such risk.
As noted above, the members of our audit committee
include Karen Sarid, Eti Mitrany, and Avner Lushi, with Karen Sarid serving as chairperson. All members of our audit committee meet the
requirements for financial literacy under the Nasdaq Listing Rules. Our board of directors has determined that each of Karen Sarid, Eti
Mitrany, and Avner Lushi is an audit committee financial expert as defined by the SEC rules and all members of the audit committee have
the requisite financial experience as defined by the Nasdaq Listing Rules. Each of the members of the audit committee is “independent”
as such term is defined in Rule 10A-3(b)(1) under the Exchange Act.
Compensation Committee Charter
Our board of directors adopted a compensation
committee charter setting forth the responsibilities of the compensation committee consistent with the rules of the SEC and the Nasdaq
corporate governance rules, which include:
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recommending to the Board of Directors for its approval (i) a compensation policy for officers and directors, (ii) once every three years, whether to extend the compensation policy, subject to receipt of the required corporate approvals approval (either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years); and (iii) periodic updates to the compensation policy. In addition, the compensation committee is required to periodically review the implementation of the compensation policy; |
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approving transactions relating to the terms of office and employment of office holders (within the meaning of the Companies Law), which require the approval of the compensation committee pursuant to the Companies Law; |
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reviewing and approving the granting of options and other incentive
awards to the extent such authority is delegated by our board of directors; and |
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reviewing, evaluating and making recommendations regarding the compensation
and benefits for our non-employee directors. |
Nomination Committee
In March
2022, our Board of Directors appointed a nomination committee, comprised of Avner Lushi, Avner Hagai and Yossi Ben Shalom.
Our Nomination
Committee assuming the responsibility for recommending to the Board nominees for election (including re-election) to the Company’s
Board of Directors, in lieu of the recommendation by our independent directors.
Consistent
with the requirements of the Nasdaq Rules, our Nomination Committee is responsible for:
| · | identifying
potential new candidates for service on the Company’s Board of Directors, taking into
account, inter alia, the candidate’s applicable experience, expertise and/or
familiarity with the Company’s field of business, as well as the candidate’s
ethical character, independent judgment and industry reputation; |
| · | conducting
appropriate inquiries into the backgrounds and qualifications of potential candidates for
service as directors; and |
| · | reviewing
and resolving whether or not to approve arrangements with respect to such candidates. |
Nasdaq Requirements
The Nasdaq
Rules require that director nominees be selected or recommended for the board’s selection either by a nomination committee composed
solely of independent directors or by a majority of independent directors, in a vote in which only independent directors participate,
subject to certain exceptions.
Executive Committee
In 2021,
our Board of Directors appointed an executive committee, comprised of Dr. David Zacut, Karen Sarid and Yossi Ben Shalom.
The roles
of the executive committee are
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oversee the implementation of the business strategy of our company, and |
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exercise such other duties as the board may resolve from time to time. |
Corporate Governance Practices
Internal Auditor
Under the Israeli Companies Law, the board of
directors of a public company must appoint an internal auditor based on the recommendation of the audit committee. The role of the internal
auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure.
Under the Israeli Companies Law, the internal auditor may not be an interested party or an office holder or a relative of an interested
party or of an office holder, nor may the internal auditor be the company’s independent auditor or the representative of the same.
An “interested party” is defined in
the Israeli Companies Law as (i) a holder of 5% or more of the issued share capital or voting power in a company, (ii) any person
or entity who has the right to designate one or more directors or to designate the chief executive officer of the company, or (iii) any
person who serves as a director or as a chief executive officer of the company.
Mr. Yisrael Gewirtz of Fahn Kanne Control
Management Ltd. (Grant Thornton Israel) serves as our internal auditor.
Duties of Directors and Officers and Approval
of Specified Related Party Transactions under the Israeli Companies Law
Fiduciary Duties and Duty of Care of Office
Holders
The Israeli Companies Law imposes a duty of care
and a fiduciary duty on all office holders of a company. The duty of care of an office holder is based on the duty of care set forth in
connection with the tort of negligence under the Israeli Torts Ordinance (New Version) 5728-1968. This duty of care requires an office
holder to act with the degree of proficiency with which a reasonable office holder in the same position would have acted under the same
circumstances. The duty of care includes, among other things, a duty to use reasonable means, in light of the circumstances, to obtain:
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information on the business advisability of a given action brought for his or her approval or performed by virtue of his or her position; and |
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all other important information pertaining to such action. |
The fiduciary duty incumbent on an office holder
requires him or her to act in good faith and for the benefit of the company, and includes, among other things, the duty to:
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refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs; |
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refrain from any activity that is competitive with the business of the company; |
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refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or others; and |
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disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder. |
We may approve an act specified above which would
otherwise constitute a breach of the office holder’s fiduciary duty, provided that the office holder acted in good faith, the act
or its approval does not harm the company, and the office holder discloses his or her personal interest, including any material fact or
document, a reasonable time before consideration of the approval of such act. Any such approval is subject to the terms of the Israeli
Companies Law, setting forth, among other things, the appropriate bodies of the company entitled to provide such approval, and the methods
of obtaining such approval.
Disclosure of Personal Interest of an Office
Holder and Approval of Transactions
The Israeli Companies Law requires that an office
holder disclose to the company without delay any personal interest that he or she may have and all related material information or documents
relating to any existing or proposed transaction by the company. An interested office holder’s disclosure must be made without delay
and in any event no later than the first meeting of the board of directors at which the transaction is considered. An office holder is
not obliged to disclose such information if the personal interest of the office holder derives solely from the personal interest of his
or her relative in a transaction that is not considered an extraordinary transaction.
Under the Israeli Companies Law, once an office
holder has complied with the above disclosure requirement, a company may approve a transaction between the company and the office holder
or a third party in which the office holder has a personal interest. However, a company may not approve a transaction or action that is
not to the company’s benefit.
Under the Israeli Companies Law, unless the articles
of association of a company provide otherwise, a transaction with an office holder or with a third party in which the office holder has
a personal interest, which is not an extraordinary transaction, requires approval by the board of directors. If the transaction considered
is an extraordinary transaction with an office holder or third party in which the office holder has a personal interest, then audit committee
approval is required prior to approval by the board of directors. For the approval of compensation arrangements with directors and senior
management, see “Management—Disclosure of Compensation of Directors and Senior Management.”
Any persons who have a personal interest in the
approval of a transaction that is brought before a meeting of the board of directors or the audit committee, except for a transaction
with an office holder or with a third party in which the office holder has a personal interest, which is not an extraordinary transaction,
may not be present at the meeting or vote on the matter. However, if the chairman of the board of directors or the chairman of the audit
committee has determined that the presence of an office holder with a personal interest is required, such office holder may be present
at the meeting for the purpose of presenting the matter. Notwithstanding the foregoing, a director who has a personal interest may be
present at the meeting, and vote on the matter if a majority of the directors or members of the audit committee have a personal interest
in the approval of such transaction. If a majority of the directors at a board of directors meeting have a personal interest in the transaction,
such transaction also requires approval of the shareholders of the company.
A “personal interest” is defined under
the Israeli Companies Law as the personal interest of a person in an action or in a transaction of the company, including the personal
interest of such person’s relative or the interest of any other corporate body in which the person and/or such person’s relative
is a director or general manager, a 5% shareholder or holds 5% or more of the voting rights, or has the right to appoint at least one
director or the general manager, but excluding a personal interest stemming solely from the fact of holding shares in the company. A personal
interest also includes (1) a personal interest of a person who votes according to a proxy of another person, including in the event
that the other person has no personal interest, and (2) a personal interest of a person who gave a proxy to another person to vote
on his or her behalf regardless of whether or not the discretion of how to vote lies with the person voting.
An “extraordinary transaction” is
defined under the Israeli Companies Law as any of the following:
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a transaction other than in the ordinary course of business; |
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a transaction that is not on market terms; or |
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a transaction that may have a material impact on the company’s profitability, assets or liabilities. |
Disclosure of a Personal Interest of a Controlling
Shareholder and Approval of Transactions
The Israeli Companies Law also requires that a
controlling shareholder disclose to the company without delay any personal interest that he or she may have and all related material information
or documents relating to any existing or proposed transaction by the company. A controlling shareholder’s disclosure must be made
without delay and in any event no later than the first meeting of the board of directors at which the transaction is considered. Extraordinary
transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement
in which a controlling shareholder has a personal interest, and the terms of engagement of the company, directly or indirectly, with a
controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder),
regarding the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office
holder or employee of the company, regarding his or her terms of employment, require the approval of each of (i) the audit committee
or the compensation committee with respect to the terms of the engagement of the company, (ii) the board of directors, and (iii) the
shareholders, in that order. In addition, the shareholder approval must fulfill one of the following requirements:
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a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or |
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the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than two percent (2%) of the voting rights in the company. |
In addition, an extraordinary transaction with
a controlling shareholder or in which a controlling shareholder has a personal interest, and an engagement of the company, directly or
indirectly, with a controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled by
a controlling shareholder), regarding the company’s receipt of services from the controlling shareholder, and if such controlling
shareholder is also an office holder or employee of the company, regarding his or her terms of employment, in each case with a term of
more than three years requires the abovementioned approval every three years; however, transactions not involving the receipt of services
or compensation can be approved for a longer term, provided that the audit committee determines that such longer term is reasonable under
the circumstances. In addition, transactions with a controlling shareholder or a controlling shareholder’s relative who serves as
an officer in a company, directly or indirectly (including through a corporation under his control), involving the receipt of services
by a company or their compensation can have a term of five years from the company’s initial public offering under certain circumstances.
The Israeli Companies Law requires that every
shareholder that participates, in person, by proxy or by voting instrument, in a vote regarding a transaction with a controlling shareholder,
must indicate in advance or in the proxy card whether or not that shareholder has a personal interest in the vote in question. Failure
to so indicate will result in the invalidation of that shareholder’s vote.
Duties of Shareholders
Under the Israeli Companies Law, a shareholder
has a duty to act in good faith and in an acceptable manner in exercising its rights and performing its obligations towards the company,
and other shareholders and to refrain from abusing its power in the company, including, among other things, when voting at meetings of
shareholders on the following matters:
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an amendment to the articles of association; |
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an increase in the company’s authorized share capital; |
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the approval of related party transactions and acts of office holders that require shareholder approval. |
A shareholder also has a general duty to refrain
from discriminating against other shareholders.
The remedies generally available upon a breach
of contract will also apply to a breach of the shareholder duties mentioned above, and in the event of discrimination against other shareholders,
additional remedies may be available to the injured shareholder.
In addition, any controlling shareholder, any
shareholder that knows that its vote can determine the outcome of a shareholder vote (including in a class meeting), and any shareholder
that, under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or any
other power with respect to a company, is under a duty to act with fairness towards the company. The Israeli Companies Law does not describe
the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event
of a breach of the duty to act with fairness, taking the shareholder’s position in the company into account.
Approval of Private Placements
Under the Israeli Companies Law and the regulations
promulgated thereunder, a private placement of securities does not require approval at a general meeting of the shareholders of a company;
provided however, that in special circumstances, such as a private placement which is intended to obviate the need to conduct a special
tender offer (see “Description of Share Capital—Acquisitions under Israeli Law”) or a private placement which qualifies
as a related party transaction (see “Management—Fiduciary Duties and Approval of Specified Related Party Transactions and
Compensation under Israeli Law”), approval at a general meeting of the shareholders of a company is required.
Exculpation, Insurance and Indemnification of Directors
and Officers
Under the Israeli Companies Law, a company may
not exculpate an office holder from liability for a breach of the fiduciary duty. An Israeli company may exculpate an office holder in
advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of the office holder’s
duty of care but only if a provision authorizing such exculpation is included in its articles of association. Our articles of association
include such a provision. A company may not exculpate in advance a director from liability arising due to the breach of his or her duty
of care in connection with dividend or distribution to shareholders.
Under the Israeli Companies Law and the Israeli
Securities Law, 5728-1968 (the “Israeli Securities Law”) a company may indemnify an office holder in respect of the following
liabilities, payments, and expenses incurred for acts performed by him or her as an office holder, either in advance of an event or following
an event, provided its articles of association include a provision authorizing such indemnification:
|
● |
a monetary liability incurred by or imposed on the office holder in favor of another person pursuant to a court judgment, including pursuant to a settlement confirmed as judgment or arbitrator’s decision approved by a competent court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria; |
|
● |
reasonable litigation expenses, including reasonable attorneys’ fees, which were incurred by the office holder as a result of an investigation or proceeding filed against the office holder by an authority authorized to conduct such investigation or proceeding, provided that such investigation or proceeding was either (i) concluded without the filing of an indictment against such office holder and without the imposition on him of any monetary obligation in lieu of a criminal proceeding; (ii) concluded without the filing of an indictment against the office holder but with the imposition of a monetary obligation on the office holder in lieu of criminal proceedings for an offense that does not require proof of criminal intent; or (iii) in connection with a monetary sanction; |
|
● |
a monetary liability imposed on the office holder in favor of a payment for a breach offended at an Administrative Procedure (as defined below) as set forth in Section 52(54)(a)(1)(a) to the Israeli Securities Law; |
|
● |
expenses expended by the office holder with respect to an Administrative Procedure under the Israeli Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees; |
|
● |
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on the office holder by a court (i) in a proceeding instituted against him or her by the company, on its behalf, or by a third party, (ii) in connection with criminal indictment of which the office holder was acquitted, or (iii) in a criminal indictment which the office holder was convicted of an offense that does not require proof of criminal intent; and |
|
● |
any other obligation or expense in respect of which it is permitted or will be permitted under applicable law to indemnify an office holder, including, without limitation, matters referenced in Section 56H(b)(1) of the Israeli Securities Law. |
An “Administrative Procedure” is defined
as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement Procedures
of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions)
to the Israeli Securities Law.
Under the Israeli Companies Law and the Israeli
Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an
office holder if and to the extent provided in the company’s articles of association:
|
● |
a breach of the fiduciary duty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company; |
|
● |
a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder; |
|
● |
a monetary liability imposed on the office holder in favor of a third party; |
|
● |
a monetary liability imposed on the office holder in favor of an injured party at an Administrative Procedure pursuant to Section 52(54)(a)(1)(a) of the Israeli Securities Law; and |
|
● |
expenses incurred by an office holder in connection with an Administrative Procedure, including reasonable litigation expenses and reasonable attorneys’ fees. |
Under the Israeli Companies Law, a company may
not indemnify, exculpate or insure an office holder against any of the following:
|
● |
a breach of the fiduciary duty, except for indemnification and insurance for a breach of the fiduciary duty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
|
● |
a breach of duty of care committed intentionally or recklessly, excluding a breach solely arising out of the negligent conduct of the office holder; |
|
● |
an act or omission committed with intent to derive illegal personal benefit; or |
|
● |
a fine, civil fine, financial sanction or forfeit levied against the office holder. |
Under the Israeli Companies Law, exculpation,
indemnification, and insurance of office holders must be approved by the compensation committee and the board of directors, and, with
respect to directors or controlling shareholders, their relatives and third parties in which controlling shareholders have a personal
interest, also by the shareholders.
Our articles of association permit us to exculpate,
indemnify, and insure our office holders to the fullest extent permitted or to be permitted by law. Our office holders are currently covered
by a directors’ and officers’ liability insurance policy. As of the date of this report, no claims for directors’ and
officers’ liability insurance have been filed under this policy, and we are not aware of any pending or threatened litigation or
proceeding involving any of our office holders, including our directors, in which indemnification is sought.
Our employees include professionals with extensive
experience in medical device development and applications, neurology and psychopathology, pre-clinical experimentation, clinical development,
and business development.
As of December 31, 2021, we had 118 employees,
of which 52 are based in the United States and 66 are based outside of the United States (in Israel). This includes 30 employees in sales
and marketing, and 35 employees in clinical trials and research and development.
| |
As of December 31, |
| |
2021 | |
2020 | |
2019 |
| |
Company | |
Company | |
Company |
| |
Employees | |
Employees | |
Employees |
Management, administration, and operations | |
| 53 | | |
| 48 | | |
| 49 | |
Research and development | |
| 35 | | |
| 26 | | |
| 30 | |
Sales and Marketing | |
| 30 | | |
| 26 | | |
| 28 | |
While none of our employees are party to any collective
bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in
Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’
Associations) are applicable to our employees by order of the Israel Ministry of Labor. Such orders are part of the employment
related laws and regulations which apply to our employees and set certain mandatory terms of employment. Such mandatory terms of employment
primarily concern the length of the workday, minimum daily wages, pension plan benefits for all employees, insurance for work-related
accidents, procedures for dismissal of employees, severance pay and other conditions of employment. We generally provide our employees
with benefits and working conditions beyond the required minimums.
We have never experienced any employment-related
work stoppages and believe our relationship with our employees is good.
For information regarding
the share ownership of our directors and executive officers, please see “Item 7.A. Major Shareholders.”
Award Plans
On May 29, 2014, we adopted the Share Incentive
Plan, as amended from time to time, or the Plan. The Plan is intended to afford an incentive to our and any of our affiliate’s employees,
directors, officers, consultants, advisors, and any other person or entity who provides services to the Company, its subsidiaries and
affiliates, to continue as service providers, to increase their efforts on our and our affiliates behalf and to promote our success, by
providing such persons with opportunities to acquire a proprietary interest in us.
On September 26, 2019 we adopted the BrainsWay
Ltd. Amended and Restated 2019 Share Incentive Plan, which was approved by our shareholders on January 13, 2020. The Plan provides for
the granting of Ordinary Shares, ADSs, stock options under various tax regimes in Israel and the U.S., restricted shares, restricted share
units (RSUs), and other share-based awards to employees, officers, directors, and/or other service providers, including advisors of the
Company, and/or of its subsidiaries, and/or affiliated companies of the Company. The same number of our Ordinary Shares are available
for issuance as awards under the 2019 as were available under the 2014 plan as of the effective date of the 2019 plan, and the 2014 plan
continues to govern the terms of awards issued thereunder prior to the effective date of the 2019 plan.
Under the Plan, as amended and restated, we may
issue options to purchase up to 3,626,200 of our Ordinary Shares. As of December 31, 2021, options to purchase 1,460,983 Ordinary
Shares, at a weighted average exercise price of $4.62 per share, and 559,530 unvested restricted share units (RSUs) were outstanding.
The equity pool under the Plan is subject to adjustment if particular capital changes affect our share capital or such other number as
our board of directors may determine from time to time. Ordinary shares subject to outstanding awards under the Plan that subsequently
expire, are cancelled, forfeited, repurchased or terminated for any reason before being exercised will be automatically, and without any
further action, returned to the “pool” of reserved shares and will again be available for grant under the Plan.
The equity pool under the Plan is subject to adjustment
if particular capital changes affect our share capital or such other number as our board of directors may determine from time to time.
Ordinary shares subject to outstanding awards under the Plan that subsequently expire, are cancelled, forfeited, repurchased or terminated
for any reason before being exercised will be automatically, and without any further action, returned to the “pool” of reserved
shares and will again be available for grant under the Plan.
A stock option is the right to purchase a specified
number of Ordinary Shares in the future at a specified exercise price and subject to the other terms and conditions specified in the option
agreement and the Plan. The exercise price of each stock option granted under the Plan will be determined in accordance with the limitations
set forth under the Plan. The exercise price of any stock options granted under the Plan may be paid in cash, through “cashless
exercise” mechanism or any other method that may be approved by our compensation committee, which may include procedures for cashless
exercise.
Our compensation committee may also grant, or
recommend that our board of directors' grant, other forms of equity incentive awards under the Plan, such as restricted shares, restricted
share units (RSUs), and other forms of share-based compensation.
Israeli participants in the Plan may be granted
options subject to Section 102 of the Israeli Income Tax Ordinance (New Version), 1961, or the Israeli Tax Ordinance. Section 102
of the Israeli Tax Ordinance allows employees, directors and officers who are not controlling shareholders (as defined for those purposes
under the Israeli Tax Ordinance) and are considered Israeli residents (and in certain cases also non-Israeli residents for the time they
worked in Israel) to receive favorable tax treatment for compensation in the form of shares or options. Our non-employee service providers
and controlling shareholders may only be granted options under another section of the Israeli Tax Ordinance, which does not provide for
similar tax benefits. Section 102 includes two alternatives for tax treatment involving the issuance of options or shares to a trustee
for the benefit of the grantees and also includes an additional alternative for the issuance of options or shares directly to the grantee.
Commonly, the most favorable tax treatment for the grantees is under Section 102(b)(2) of the Israeli Tax Ordinance, the issuance
to a trustee under the “capital gain track.” However, under this track we are not allowed to deduct an expense with respect
to the issuance of the options or shares. Any options granted under the Plan to participants in the United States will be either “incentive
stock options,” which may be eligible for special tax treatment under the Internal Revenue Code of 1986, or options other than incentive
stock options (referred to as “nonqualified stock options”), as determined by our compensation committee or our board of directors
and stated in the option agreement.
Our compensation committee administers the Plan,
or if determined otherwise by our board of directors, the Plan will be administered by our board of directors or other designated committee
on its behalf. Even if the compensation committee or any other committee was appointed by our board of directors in order to administrate
the Plan, our board of directors may, subject to any legal limitations, exercise any powers or duties of the compensation committee or
any other committee concerning the Plan. The compensation committee will, among others, select which eligible persons will receive options
or other awards under the Plan and will determine, or recommend to our board of directors, the number of Ordinary Shares covered by those
options or other awards, the terms under which such options or other awards may be exercised (however, vested options generally may not
be exercised later than ten years from the grant date of an option and a lesser period if the grantee ceased to be employed by, or provide
services to, the company) or may be settled or paid, and the other terms and conditions of such options and other awards under the Plan.
All awards granted under the Plan shall not be transferable other than by will or by the laws of descent and distribution, unless otherwise
determined by our compensation committee.
To the extent permitted under applicable law,
our compensation committee will have the authority to accelerate the vesting of any outstanding awards at such time and under such circumstances
as it, in its sole discretion, deems appropriate. In the event of a change of control, as defined in the Plan, any award then outstanding
shall be assumed or an equivalent award shall be substituted by the successor corporation of the merger or sale or any parent or affiliate
thereof as determined by our board of directors. In the event that the awards are not assumed or substituted, our compensation committee
may, in its discretion, accelerate the vesting, exercisability of the outstanding award, or provide for the cancellation of such award
and payment of cash, as determined to be fair in the circumstances.
Subject to particular limitations specified in
the Plan and under applicable law, our board of directors may amend or terminate the Plan, and the compensation committee may amend awards
outstanding under the Plan. In addition, an amendment to the Plan that requires shareholder approval under applicable law will not be
effective unless approved by the requisite vote of shareholders. In addition, in general, no suspension, termination, modification or
amendment of the Plan may adversely affect any award previously granted without the written consent of grantees holding a majority in
interest of the awards so affected. The Plan will continue in effect until all Ordinary Shares available under the Plan are delivered
and all restrictions on those shares have lapsed, unless the Plan is terminated earlier by our board of directors. No awards may be granted
under the Plan on or after the tenth anniversary of the date of adoption of the plan unless our board of directors chooses to extend the
term.
Any equity award to an office holder, director
or controlling shareholder, whether under the Plan or otherwise, may be subject to further approvals in addition to the approval of the
compensation committee as described above. See “Management—Fiduciary Duties and Approval of Specified Related Party Transactions
and Compensation under Israeli Law.”
ITEM 7. |
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
The following table sets forth information with respect to the beneficial
ownership of our Ordinary Shares as of April 11, 2022 by:
|
● |
each person or entity known by us to own beneficially 5% or more of our outstanding Ordinary Shares; |
|
● |
our directors and members of senior management who are among our five highest compensated directors and officers, or our Named Directors and Officers; and |
|
● |
all of our directors and members of senior management as a group. |
The beneficial ownership
of our Ordinary Shares is determined in accordance with the rules of the SEC. Under these rules, a person is deemed to be a beneficial
owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the security,
or investment power, which includes the power to dispose of or to direct the disposition of the security. For purposes of the table below,
we deem Ordinary Shares issuable pursuant to options that are currently exercisable or exercisable within 60 days of April 12, 2022,
if any, to be outstanding and to be beneficially owned by the person holding the options for the purposes of computing the percentage
ownership of that person, but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person.
The percentage of Ordinary Shares beneficially owned is based on 32,959,884 Ordinary Shares outstanding as of April 12, 2022.
Except where otherwise
indicated, we believe, based on information furnished to us by such owners, that the beneficial owners of the ordinary shares listed below
have sole investment and voting power with respect to such shares.
None of our shareholders
have different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a
change of control of our Company.
As of April 11, 2022,
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 our shareholders who hold Ordinary Shares that are traded on the TASE are recorded
in the name of our Israeli share registrar, Registration Co. of United Mizrahi Bank Ltd. As of April 9, 2022, there were 74
U.S. persons that were holders of record of our ADSs, representing approximately 50.73% of our outstanding Ordinary Shares. The number
of record holders is not representative of the number of beneficial holders of our ADSs, as the ADSs of all our shareholders who hold
ADSs that are traded on NASDAQ are recorded in the name of their respective brokers.
Unless otherwise noted below, the address for
each beneficial owner is c/o BrainsWay Ltd., 19 Hartum Street, Bynet Building 3rd Floor, Har HaHotzvim, Jerusalem,
9777518, Israel.
| |
Shares Beneficially Owned |
| |
Number | |
Percentage |
Name of Beneficial Owner | |
| |
|
5% or Greater Shareholders | |
| | | |
| | |
The Phoenix Provident Funds(1) | |
| 4,291,726 | | |
| 13.04 | % |
RTW Funds(2) | |
| 3,204,762 | | |
| 9.7 | % |
Cowen Financial Products, LLC(3) | |
| 1,658,418 | | |
| 5.03 | % |
Dr. David Zacut (4) | |
| 1,786,357 | | |
| 5.4 | % |
Masters Capital Management, LLC(5) | |
| 1,782,710 | | |
| 5.4 | % |
Avner Hagai(4) | |
| 1,741,378 | | |
| 5.3 | % |
| |
| | | |
| | |
| |
| | | |
| | |
Named Directors and Officers | |
| | | |
| | |
Dr. Yiftach Roth | |
| 1,083,390 | | |
| 3.3 | % |
Prof. Avraham Zangen(6) | |
| 937,143 | | |
| 2.8 | % |
Christopher von Jako(7) | |
| 125,000 | | |
| * | |
R. Scott Areglado(8) | |
| 28,750 | | |
| * | |
Hadar Levy(9) | |
| 372,877 | | |
| 1.1 | % |
Christopher Boyer(10) | |
| 30,000 | | |
| * | |
Amit Ginou(11) | |
| 99,667 | | |
| * | |
Karen Sarid(12) | |
| 27,500 | | |
| * | |
Yossi Ben Shalom(13) | |
| 22,917 | | |
| * | |
Avner Lushi(14) | |
| 13,750 | | |
| * | |
Eti Mitrany(15) | |
| 13,750 | | |
| * | |
All directors and members of senior management as a group | |
| 6,282,479 | | |
| 19.0 | % |
(1) |
The shares are beneficially owned by various direct or indirect, majority or wholly-owned subsidiaries of the Phoenix Holding Ltd. (the “Phoenix Provident Funds”). The Phoenix Provident Funds manage their own funds and/or the funds of others, including for holders of exchange-traded notes or various insurance policies, members of pension or provident funds, unit holders of mutual funds, and portfolio management clients. Each of the Phoenix Provident Funds operates under independent management and makes its own independent voting and investment decisions. The Phoenix Holding Ltd. is a controlled subsidiary of Delek Group Ltd. The majority of Delek Group Ltd.’s outstanding share capital and voting rights are owned, directly and indirectly, by Itshak Sharon (Tshuva) through private companies wholly-owned by him, and the remainder is held by the public. The address of the Phoenix Provident Funds is HaShalom Road 53 Giv’atayim, 5345433, Israel. |
(2) |
The shares are held by RTW Master Fund, Ltd., one or more private funds (together the “Funds”) managed by RTW Investments, LP (the “Adviser”), and Roderick Wong. The Adviser, in its capacity as the investment manager of the Funds, has the power to vote and the power to direct the disposition of all Shares held by the Funds. Roderick Wong is the Managing Partner of the Adviser. The address of RTW Master Fund, Ltd. is 412 West 15th Street Floor 9, New York, New York 10011. |
(3) |
The address of Cowen Financial Products, LLC is 599 Lexington Ave. 21st fl, New York, NY 10022 |
(4) |
A director of the Company. This consists of shares held directly by the named beneficial owner as well as shares held by family members or affiliates of the named beneficial owner. |
(5) |
The shares are held by Masters Capital Management, LLC and Michael Masters has beneficial ownership by virtue of his role as a control person of Masters Capital Management, LLC. The address of Masters Capital Management, LLC is 3060 Peachtree Road, Suite 1425, Atlanta, Georgia 30305, United States of America. |
(6) |
The address of Prof. Avraham Zangen is Mish’ol HaHadas 23, Jerusalem, Israel. |
(7) |
Consists of 125,000 Ordinary Shares. |
(8) |
Consists of 28,750 Ordinary Shares. |
(9) |
Consists of 21,210 Ordinary Shares and options to purchase 351,667 Ordinary Shares currently exercisable or exercisable within 60 days. The exercise price of the options is $4.65, as 220,000 expires on December 8, 2025, 106,667 expires on November 12, 2026 and the remainder expires on October 1, 2027. |
(10) |
Consists of options to purchase 30,000 Ordinary Shares currently exercisable or exercisable within 60 days. The exercise price of the options is $4.65. The options expire on June 1, 2028. |
(11) |
Consists of options to purchase 99,667 Ordinary Shares currently exercisable or exercisable within 60 days. The exercise price of the options is NIS 15.26, as 8,000 expires on June 30, 2023, 50,000 expires on December 8, 2025 and the remainder expires on November 12, 2026. |
(12) |
Consists of options to purchase 27,500 Ordinary Shares currently exercisable or exercisable within 60 days. The exercise price of the options is NIS 15.26. The options expire on December 3, 2027. |
(13) |
Consists of options to purchase 22,917 Ordinary Shares currently exercisable or exercisable within 60 days. The exercise price of the options is NIS 15.26. The options expire on November 12, 2026. |
(14) |
Consists of options to purchase 13,750 Ordinary Shares currently exercisable or exercisable within 60 days. The exercise price of the options is NIS 15.26. The options expire on January 13, 2028. |
(15) |
Consists of options to purchase 13,750 Ordinary Shares currently exercisable or exercisable within 60 days. The exercise price of the options is NIS 15.26. The options expire on January 13, 2028. |
The voting rights of our major shareholders do
not differ from the voting rights of holders of our Ordinary Shares who are not major shareholders. Each of the above listed securities
entitles the holder to one vote at our Company’s shareholder meetings.
Changes in Percentage Ownership by Major Shareholders
Since January 1, 2020, there have been no significant changes in the percentage
ownership held by any of our 5% or greater shareholders other than The Phoenix Provident Funds which increased holdings from 9.7% to 13.4%,
RTW Funds which increased holdings from 9.4% to 9.7%. Additionally, Cowen Financial Products, LLC and Masters Capital Management, LLC,
which now hold 5.03% and 5.4% respectively, were not previously listed as major shareholders.
Control by Another Corporation, Foreign Government
or Other Persons
To the best of our knowledge, the Company is not
directly or indirectly owned or controlled by another corporation(s), by any foreign government or by any other natural or legal person(s)
severally or jointly.
B. |
Related Party Transactions |
Employment Agreements
We have entered into written employment agreements
with each member of our senior management. These agreements provide for notice periods of varying duration for termination of the agreement
by us or by the relevant executive officer, during which time the executive officer will continue to receive base salary and benefits.
These agreements also contain customary provisions regarding noncompetition, confidentiality of information, and assignment of inventions.
However, the enforceability of the noncompetition provisions may be limited under applicable law. See “Risk Factors—Risks
Related to Employee Matters—Under applicable employment laws, we may not be able to enforce covenants not to compete.”
Consulting Agreement with Prof. Avraham Zangen
In April 2009, we entered into a consulting agreement,
which was last amended in May 2014, with Prof. Avraham Zangen, our scientific founder and a member of our Board, under which Prof. Zangen
provides advisory services to us in the field of neurobiology. Prof. Zangen’s monthly consulting fee is NIS 19,375. This agreement
provides for a notice period of 180 days for termination of the agreement by Prof. Zangen and 30 days for termination of the
agreement by us.
Sponsorship of an Obesity Study at BGU
In 2021, the Company entered into an addendum
to a July 2012 agreement with Ben Gurion Negev Technology and Applications Ltd. which operates a lab associated with Prof. Zangen, a director
of the Company. Under the terms of the addendum, we agreed to sponsor a 40-patient obesity study involving Deep TMS.
Option Grants
Each of our directors and members of senior management
are participants in our Share Incentive Plan, pursuant to which they receive from time to time grants of options to purchase our Ordinary
Shares. For more information, see “Directors, Senior Management and Employees—Share Ownership—Award Plans.”
Since January 1, 2019, we granted options
to purchase 470,000 Ordinary Shares to employees and directors, with a weighted average exercise price, following the completion of the
Exchange Offer, of approximately $4.5 per share, or approximately NIS 14 per share (based on the exchange rate reported by the Bank
of Israel on December 31, 2021), and 609,730 restricted share units (RSUs).
Option Exchange
On May 4, 2021, we commenced
the Exchange Offer, which expired on June 2, 2021.Pursuant to the Exchange Offer, the Company accepted for cancellation Eligible Options
to purchase an aggregate of 1,371,500 Ordinary Shares, representing approximately 93.06% of the total Ordinary Shares underlying
the Eligible Options. On June 2, 2021, following the expiration of the Exchange Offer, the Company granted New Options to purchase
1,371,500 Ordinary Shares, pursuant to the terms of the Exchange Offer and the Company’s 2014 Share Incentive Plan,
as amended by our Amended and Restated 2019 Share Incentive Plan (together, the “Plan”). The exercise price per Ordinary Share
of the New Options granted pursuant to the Exchange Offer is $4.675 (NIS15.26 based on January 25, 2021 US$/NIS exchange rate of 1/3.265) (being
the closing price per ADS of the Company, as reported on Nasdaq on January 25, 2021, the last day of trading prior to the approval of
the Exchange Offer by our Board of Directors, divided by 2 to reflect the exercise price per Ordinary Share). Each New Option has the
same expiration date, vesting schedule and other terms (other than exercise price) as the Eligible Option exchanged therefor.
Directors and Officers Insurance Policy and
Indemnification Agreements
Our articles of association permit us to exculpate,
indemnify, and insure each of our directors and officers to the fullest extent permitted by the Israeli Companies Law. We have obtained
directors and officers insurance for each of our senior management and directors.
We have provided an undertaking to our directors
and senior management to exculpate to the fullest extent permitted by law and to indemnify them for certain liabilities, subject to limited
exceptions, to the extent that these liabilities are not covered by insurance. This indemnification is limited, with respect to any monetary
liability imposed in favor of a third party, to events determined as foreseeable by the board of directors based on our activities. The
maximum aggregate amount of indemnification that we may pay to our directors and senior management based on such indemnification undertaking
is the greater of (i) 25% of our shareholders’ equity pursuant to our most recent audited financial statements at the time
the indemnification is actually paid, and (2) $20 million. Such indemnification amounts are in addition to any insurance amounts.
C. |
Interests of Experts and Counsel |
Not applicable.
ITEM 8. |
FINANCIAL INFORMATION |
A. |
Financial Statements and Other Financial Information |
The financial statements required by this item
are found at the end of this Annual Report, beginning on page F-1.
Legal Proceedings
From time to time, we may become a party to legal
proceedings and claims in the ordinary course of business. We are not currently a party to any significant legal proceedings.
Export Sales
For geographical breakdown of the Company’s sales, see Note 17
to the financial statements.
Dividend Policy
We have never declared or paid cash dividends
to our shareholders. We do not have current plans to pay cash dividends in the near term. We currently intend to reinvest any future earnings,
if any, 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, if any, our financial condition, operating results,
contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our board of directors may
deem relevant.
Except as otherwise disclosed in this Annual Report,
no significant change has occurred since December 31, 2021.
ITEM 9. |
THE OFFER AND LISTING |
A. |
Offer and Listing Details |
Our Ordinary Shares have been trading on the TASE
under the symbol “BWAY” since January 2007. Our ADSs have been trading on The NASDAQ Capital Market under the symbol “BWAY”
since April 16, 2019.
Not applicable.
Our Ordinary Shares are listed and traded on the
TASE, and our ADSs, each representing two Ordinary Share and evidenced by an American depositary receipt, or ADR, are traded on The Nasdaq
Global Market under the symbol “BWAY.” The ADRs were issued pursuant to a Depositary Agreement entered into with The Bank
of New York.
Not applicable.
Not applicable.
Not applicable.
ITEM 10. |
ADDITIONAL INFORMATION |
Not applicable.
B. |
Memorandum and Articles of Association |
For a description of provisions of our articles
of association relating to the power of directors; rights, preferences and restrictions attaching to each class of the shares; changes
in control of the company; and other information required under Item 10.B, please see Exhibit 2.3 “Description of Share
Capital,” which is incorporated herein by reference.
For a description of our material agreements,
please see Item 5.C Research and Development, Patents, and Licenses.
Israeli law and regulations do not impose any
material foreign exchange restrictions on non-Israeli holders of our Ordinary Shares or on the Company with respect to the import or export
of capital. Dividends, if any, paid to holders of our Ordinary Shares, and any amounts payable upon our dissolution, liquidation or winding
up, as well as the proceeds of any sale in Israel of our Ordinary Shares to an Israeli resident, may be paid in non-Israeli currency or,
if paid in Israeli currency, may be converted into U.S. dollars at the rate of exchange prevailing at the time of conversion.
Israeli Tax Considerations
General
The following is a summary of the material tax
consequences under Israeli law concerning the purchase, ownership, and disposition of our Ordinary Shares or ADSs (Shares).
This discussion does not purport to constitute
a complete analysis of all potential tax consequences applicable to investors upon purchasing, owning or disposing of our Shares. In particular,
this discussion does not take into account the specific circumstances of any particular investor (such as tax-exempt entities, financial
institutions, certain financial companies, broker-dealers, investors that own, directly or indirectly, 10% or more of our outstanding
voting rights, all of whom are subject to special tax regimes not covered under this discussion). To the extent that issues discussed
herein are based on legislation which has yet to be subject to judicial or administrative interpretation, there can be no assurance that
the views expressed herein will accord with any such interpretation in the future.
Potential investors are urged to consult their
own tax advisors as to the Israeli or other tax consequences of the purchase, ownership, and disposition of the Shares, including, in
particular, the effect of any foreign, state or local taxes.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate
tax on their taxable income at the rate of 23% for the 2022 tax year.
Taxation of Shareholders
Capital Gains
Capital gains tax is imposed on the disposition
of capital assets by an Israeli resident, and on the disposition of such assets by a non-Israeli resident if those assets are either (i)
located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly,
rights to assets located in Israel, unless an exemption is available or unless an applicable double tax treaty between Israel and the
seller’s country of residence provides otherwise. The Israeli Income Tax Ordinance distinguishes between “Real Gain”
and the “Inflationary Surplus.” Real Gain is the excess of the total capital gain over Inflationary Surplus generally computed
on the basis of the increase in the Israeli Consumer Price Index between the date of purchase and the date of disposition. Inflationary
Surplus is not subject to tax.
Real Gain accrued by individuals on the sale of
the Shares will be taxed at the rate of 25%. However, if the individual shareholder is a “Controlling Shareholder” (i.e.,
a person who holds, directly or indirectly, alone or together with another, 10% or more of one of the Israeli resident company’s
means of control) at the time of sale or at any time during the preceding 12-month period, such gain will be taxed at the rate of 30%.
Corporate and individual shareholders dealing
in securities in Israel are taxed at the tax rates applicable to business income (23% in 2022), and a marginal tax rate of up to 50% in
2022 for individuals, including an excess tax (as discussed below).
Notwithstanding the foregoing, capital gains generated
from the sale of our Shares by a non-Israeli shareholder may be exempt from Israeli tax under the Israeli Income Tax Ordinance provided
that the following cumulative conditions are met: (i) the Shares were purchased upon or after the registration of the Shares on the stock
exchange (this condition will not apply to shares purchased on or after January 1, 2009), and (ii) the seller does not have a permanent
establishment in Israel to which the generated capital gain is attributed. However, non-Israeli resident corporations will not be entitled
to the foregoing exemption if Israeli residents: (i) have a 25% or more interest in such non-Israeli corporation or (ii) are
the beneficiaries of, or are entitled to, 25% or more of the income or profits of such non-Israeli corporation, whether directly or indirectly.
In addition, such exemption would not be available to a person whose gains from selling or otherwise disposing of the securities are deemed
to be business income.
In addition, the sale of the Shares may be exempt
from Israeli capital gains tax under the provisions of an applicable double tax treaty. For example, the Convention between the Government
of the U.S. and the Government of the State of Israel with respect to Taxes on Income (U.S.-Israel Double Tax Treaty) exempts a U.S. resident
(for purposes of the treaty) from Israeli capital gain tax in connection with the sale of the Shares, provided that: (i) the U.S. resident
owned, directly or indirectly, less than 10% of the voting power of the company at any time within the 12-month period preceding such
sale; (ii) the U.S. resident, being an individual, is present in Israel for a period or periods of less than 183 days during the taxable
year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident in Israel; however,
under the U.S-Israel Double Tax Treaty, the taxpayer would be permitted to claim a credit for such taxes against the U.S. federal income
tax imposed with respect to such sale, exchange or disposition, subject to the limitations under U.S. law applicable to foreign tax credits.
The U.S-Israel Double Tax Treaty does not relate to U.S. state or local taxes.
Payers of consideration for the Shares, including
the purchaser, the Israeli stockbroker or the financial institution through which the Shares are held, are obligated, subject to certain
exemptions, to withhold tax upon the sale of Shares at a rate of 25% of the consideration for individuals and corporations.
Upon the sale of traded securities, a detailed
return, including a computation of the tax due, must be filed and an advanced payment must be paid to the Israeli Tax Authority on January
31 and July 31 of every tax year in respect of sales of traded securities made within the previous six months. However, if all tax due
was withheld at source according to applicable provisions of the Israeli Income Tax Ordinance and regulations promulgated thereunder,
such return need not be filed, and no advance payment must be paid. Capital gains are also reportable on annual income tax returns.
Dividends
Dividends distributed by a company to a shareholder
who is an Israeli resident individual will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply if
the dividend recipient is a Controlling Shareholder, as defined above, at the time of distribution or at any time during the preceding
12-month period. If the recipient of the dividend is an Israeli resident corporation, such dividend will generally be exempt from Israeli
income tax provided that the income from which such dividend is distributed, derived or accrued within Israel.
Dividends distributed by an Israeli resident company
to a non-Israeli resident (either an individual or a corporation) are generally subject to Israeli withholding tax on the receipt of such
dividends at the rate of 25% (30% if the dividend recipient is a Controlling Shareholder at the time of distribution or at any time during
the preceding 12-month period). These rates may be reduced under the provisions of an applicable double tax treaty. For example, under
the U.S.-Israel Double Tax Treaty, the following tax rates will apply in respect of dividends distributed by an Israeli resident company
to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date
of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting
stock of the Israeli resident paying corporation, and not more than 25% of the gross income of the Israeli resident paying corporation
for such prior taxable year (if any) consists of certain types of interest or dividends the tax rate is 12.5%; (ii) if both the conditions
mentioned in clause (i) above are met and the dividend is paid from an Israeli resident company’s income which was entitled to a
reduced tax rate under The Law for the Encouragement of Capital Investments, 1959, the tax rate is 15%; and (iii) in all other cases,
the tax rate is 25%. The aforementioned rates under the U.S.-Israel Double Tax Treaty will not apply if the dividend income is attributed
to a permanent establishment of the U.S. resident in Israel.
Excess Tax
Individual holders who are subject to tax in Israel
(whether any such individual is an Israeli resident or non-Israeli resident), and who have taxable income that exceeds a certain threshold
in a tax year (NIS 663,240 for 2022, linked to the Israeli Consumer Price Index) will be subject to an additional tax at the rate of 3%
on his or her taxable income for such tax year that is in excess of such amount. For this purpose, taxable income includes taxable capital
gains from the sale of securities and taxable income from interest and dividends, subject to the provisions of an applicable double tax
treaty.
Estate and Gift Tax
Israel does not currently impose estate or gift
taxes.
Foreign Exchange Regulations
Non-residents of Israel who hold our Shares are
able to receive any dividends, and any amounts payable upon the dissolution, liquidation, and winding up of our affairs, repayable in
non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally required to
have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchange control
has not been eliminated and may be restored at any time by administrative action.
U.S. Federal Income Tax Considerations
The following is a summary of the material U.S.
federal income tax consequences relating to the ownership and disposition of our Ordinary Shares and ADSs by U.S. Holders, as defined
below. This summary addresses solely U.S. Holders who hold Ordinary Shares or ADSs, as applicable, as capital assets for tax purposes.
This summary is based on current provisions of the Internal Revenue Code of 1986, as amended (Code), current and proposed Treasury regulations
promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly
on a retroactive basis. In addition, this section is based in part upon representations of the depositary and the assumption that each
obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. This summary does not address
all U.S. federal income tax matters that may be relevant to a particular holder or all tax considerations that may be relevant with respect
to an investment in our Ordinary Shares or ADSs.
This summary does not address tax considerations
applicable to a holder of our Ordinary Shares or ADSs that may be subject to special tax rules including, without limitation, the following:
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dealers or traders in securities, currencies or notional principal contracts; |
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financial institutions; |
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real estate investment trusts; |
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persons subject to the alternative minimum tax; |
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tax-exempt organizations; |
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traders that have elected mark-to-market accounting; |
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investors that hold Ordinary Shares or ADSs as part of a “straddle”, “hedge”, or “conversion transaction” with other investments; |
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regulated investment companies; |
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persons that actually or constructively own 10 percent or more of our voting shares; |
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persons that are treated as partnerships or other pass-through entities for U.S. federal income purposes and persons who hold the Shares through partnerships or other pass-through entities; and |
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persons whose functional currency is not the U.S. dollars. |
This summary does not address the effect of any
U.S. federal taxation other than U.S. federal income taxation. In addition, this summary does not include any discussion of state, local,
or foreign tax consequences to a holder of our Ordinary Shares or ADSs.
You are urged to consult your own tax advisor
regarding the foreign and U.S. federal, state, local, and other tax consequences of an investment in Ordinary Shares or ADSs.
For purposes of this summary, a “U.S. Holder”
means a beneficial owner of an Ordinary Share or ADS that is for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the U.S.; |
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the U.S. or under the laws of the U.S. or any political subdivision thereof; |
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an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
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a trust (1) if (a) a court within the U.S. is able to exercise primary supervision over the administration of the trust and (b) one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
If an entity that is classified as a partnership
for U.S. federal tax purposes holds Ordinary Shares or ADSs, the U.S. federal tax treatment of its partners will generally depend upon
the status of the partners and the activities of the partnership. Entities that are classified as partnerships for U.S. federal tax purposes
and persons holding Ordinary Shares or ADSs through such entities should consult their own tax advisors.
In general, if you hold ADSs, you will be treated
as the holder of the underlying Ordinary Shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, gain or loss
generally will not be recognized if you exchange ADSs for the underlying Ordinary Shares represented by those ADSs.
Distributions
Subject to the discussion under “Item 10.
Additional Information – E. Taxation – U.S. Federal Income Tax Considerations – Passive Foreign Investment Companies”
below, the gross amount of any distribution, including the amount of any Israeli taxes withheld from such distribution, see “Item
10. Additional Information – E. Taxation – Israeli Tax Considerations”, actually or constructively received by a U.S.
Holder with respect to our Ordinary Shares (or, in the case of ADSs, received by the depositary) will be taxable to the U.S. Holder as
foreign source dividend income to the extent of our current and accumulated earnings and profits as determined under U.S. federal income
tax principles. The U.S. Holder will not be eligible for any dividends received deduction in respect of the dividends paid by us. Distributions
in excess of earnings and profits will be non-taxable to the U.S. Holder to the extent of the U.S. Holder’s adjusted tax basis in
its Ordinary Shares or ADSs. Distributions in excess of such adjusted tax basis will generally be taxable to the U.S. Holder as capital
gain from the sale or exchange of property as described below under “Sale or Other Disposition of Ordinary Shares or ADSs.”
If we do not report to a U.S. Holder the portion of a distribution that exceeds earnings and profits, then the distribution will generally
be taxable as a dividend. The amount of any distribution of property other than cash will be the fair market value of that property on
the date of distribution.
Under the Code, certain dividends received by
non-corporate U.S. Holders will be subject to a maximum federal income tax rate of 20%. This reduced income tax rate is only applicable
to dividends paid by a “qualified foreign corporation” that is not a PFIC for the year in which the dividend is paid or for
the preceding taxable year, and only with respect to Ordinary Shares or ADSs held by a qualified U.S. Holder (i.e., a non-corporate holder)
for a minimum holding period (generally 61 days during the 121-day period beginning 60 days before the ex-dividend date). As discussed
below, however, we believe we may be a “passive foreign investment company” (see “Item 10. Additional Information –
E. Taxation – U.S. Federal Income Tax Considerations – Passive Foreign Investment Companies” below) for our current
taxable year and future taxable years. Accordingly, dividends paid by us to individual U.S. Holders may not be eligible for the reduced
income tax rate applicable to qualified dividends. You should consult your own tax advisor regarding the availability of this preferential
tax rate under your particular circumstances.
The amount of any distribution paid in a currency
other than U.S. dollars (a “foreign currency”), including the amount of any withholding tax thereon, will be included in the
gross income of a U.S. Holder in an amount equal to the U.S. dollar value of the foreign currency calculated by reference to the exchange
rate in effect on the date of the U.S. Holder’s (or, in the case of ADSs, the depositary’s) receipt of the dividend, regardless
of whether the foreign currency is converted into U.S. dollars. If the foreign currency is converted into U.S. dollars on the date of
receipt, a U.S. Holder generally should not be required to recognize a foreign currency gain or loss in respect of the dividend. If the
foreign currency received in the distribution is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis
in the foreign currency equal to its U.S. dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other disposition
of the foreign currency will be treated as U.S. source ordinary income or loss.
Subject to certain conditions and limitations,
any Israeli taxes withheld on dividends may be creditable against a U.S. Holder’s U.S. federal income tax liability, subject to
generally applicable limitations. The rules relating to foreign tax credits and the timing thereof are complex. U.S. Holders should consult
their own tax advisors regarding the availability of a foreign tax credit in their particular situation.
Sale or Other Disposition of Ordinary Shares
or ADSs
Subject to the discussion under “Item 10.
Additional Information – Taxation — U.S. Federal Income Tax Considerations – Passive Foreign Investment Companies”
below, if a U.S. Holder sells or otherwise disposes of its Ordinary Shares or ADSs, gain or loss will be recognized for U.S. federal income
tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and such holder’s
adjusted basis in the Ordinary Shares or ADSs. Such gain or loss generally will be a capital gain or loss, and will be a long-term capital
gain or loss if the holder had held the Ordinary Shares or ADSs for more than one year at the time of the sale or other disposition. Long-term
capital gains realized by non-corporate U.S. Holders are generally subject to a preferential U.S. federal income tax rate. In general,
gain or loss recognized by a U.S. Holder on the sale or other disposition or our Ordinary Shares or ADSs will be U.S. source gain or loss
for purposes of the foreign tax credit limitation. As discussed below in “Item 10. Additional Information – Taxation —
U.S. Federal Income Tax Considerations – Passive Foreign Investment Companies,” however, we may be a PFIC for our current
taxable year and future taxable years. If we are a PFIC, any such gain will be subject to the PFIC rules, as discussed below, rather than
being taxed as a capital gain.
If a U.S. Holder receives foreign currency upon
a sale or exchange of Ordinary Shares or ADSs, gain or loss will be recognized in the manner described above under “Distributions.”
However, if such foreign currency is converted into U.S. dollars on the date received by the U.S. Holder, the U.S. Holder generally should
not be required to recognize any foreign currency gain or loss on such conversion.
As discussed above under the heading “Item
10. Additional Information – E. Taxation – Israeli Tax Considerations – Taxation of Shareholders,” a U.S. Holder
who holds Ordinary Shares or ADSs through an Israeli broker or other Israeli intermediary may be subject to Israeli withholding tax on
any capital gains recognized on a sale or other disposition of the Ordinary Shares or ADSs if the U.S. Holder does not obtain approval
of an exemption from the Israeli Tax Authorities or claim any allowable refunds or reductions. U.S. Holders are advised that any Israeli
tax paid under circumstances in which an exemption from (or a refund of or a reduction in) such tax was available will not be creditable
for U.S. federal income tax purposes. U.S. Holders are advised to consult their Israeli broker or intermediary regarding the procedures
for obtaining an exemption or reduction.
Medicare Tax on Unearned Income
Certain U.S. Holders that are individuals, estates
or trusts are required to pay an additional 3.8% tax on their net investment income, which would include dividends paid on the Ordinary
Shares or ADSs and capital gains from the sale or other disposition of the Ordinary Shares or ADSs.
Passive Foreign Investment Companies
Although we do not believe that we are currently
a PFIC and do not anticipate becoming a PFIC in the foreseeable future, it is possible that we may be treated as a PFIC for U.S. federal
income tax purposes for our current taxable year and future taxable years. A non-U.S. corporation is considered a PFIC for any taxable
year if either:
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at least 75% of its gross income for such taxable year is passive income; or |
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at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. |
For purposes of the above calculations, if a non-U.S.
corporation owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, it will be
treated as if it (a) held a proportionate share of the assets of such other corporation, and (b) received a proportionate share
of the income of such other corporation directly. Passive income generally includes dividends, interest, rents, royalties, and capital
gains, but generally excludes rents and royalties which are derived in the active conduct of a trade or business, and which are received
from a person other than a related person.
A separate determination must be made each taxable
year as to whether we are a PFIC (after the close of each such taxable year). Because the value of our assets for purposes of the asset
test will generally be determined by reference to the market price of the ADSs, our PFIC status will depend in large part on the market
price of the ADSs, which may fluctuate significantly. Based on our retention of a significant amount of cash and cash equivalents, and
depending on the market price of the ADSs, we may be a PFIC for the current taxable year and future taxable years.
If we are a PFIC for any year during which you
hold the ADSs, we generally will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold the
ADSs, unless we cease to be a PFIC and you make a “deemed sale” election with respect to the ADSs you hold. If such election
is made, you will be deemed to have sold the ADSs you hold at their fair market value on the last day of the last taxable year in which
we qualified as a PFIC, and any gain from such deemed sale would be subject to the consequences described below. After the deemed sale
election, the ADSs with respect to which the deemed sale election was made will not be treated as shares in a PFIC unless we subsequently
become a PFIC.
For each taxable year we are treated as a PFIC
with respect to you, you will be subject to special tax rules with respect to any “excess distribution” you receive and any
gain you realize from a sale or other disposition (including a pledge) of the ADSs, unless you make a “mark-to-market” election
as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received
during the shorter of the three preceding taxable years or your holding period for the ADSs will be treated as an excess distribution.
Under these special tax rules, if you receive any excess distribution or realize any gain from a sale or other disposition of the ADSs:
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the excess distribution or gain will be allocated ratably over your holding period for the ADSs; |
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the amount of excess distribution or gain allocated to the current taxable year, and any taxable year before the first taxable year in which we were a PFIC, must be included in gross income (as ordinary income) for the current tax year; and |
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the amount allocated to each other year will be subject to the highest tax rate in effect for that year, and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to. |
The tax liability for amounts allocated to years
before the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains
(but not losses) realized on the sale of the ADSs cannot be treated as capital, even if you hold the ADSs as capital assets.
If we are treated as a PFIC with respect to you
for any taxable year, to the extent any of our subsidiaries are also PFICs, you will be deemed to own your proportionate share of any
such lower-tier PFIC, and you may be subject to the rules described in the preceding two paragraphs with respect to the shares of such
lower-tier PFICs you would be deemed to own. As a result, you may incur liability for any “excess distribution” described
above if we receive a distribution from such lower-tier PFICs or if any shares in such lower-tier PFICs are disposed of (or deemed disposed
of). You should consult your own tax advisor regarding the application of the PFIC rules to any of our subsidiaries.
Alternatively, a U.S. Holder of “marketable
stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the general tax treatment
for PFICs discussed above. If you make a mark-to-market election for the ADSs, you will include in income for each year we are a PFIC
an amount equal to the excess, if any, of the fair market value of the ADSs as of the close of your taxable year over your adjusted basis
in such Ordinary Shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the ADSs over their fair market
value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the
ADSs included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain
on the actual sale or other disposition of the ADSs, are treated as ordinary income. Ordinary loss treatment also applies to the deductible
portion of any mark-to-market loss on the ADSs, as well as to any loss realized on the actual sale or disposition of the ADSs to the extent
the amount of such loss does not exceed the net mark-to-market gains previously included for the ADSs. Your basis in the ADSs will be
adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions
by corporations which are not PFICs would apply to distributions by us, except the lower applicable tax rate for qualified dividend income
would not apply. If we cease to be a PFIC when you have a mark-to-market election in effect, gain or loss realized by you on the sale
of the ADSs will be a capital gain or loss and taxed in the manner described above under “Sale or Other Disposition of Ordinary
Shares or ADSs.”
The mark-to-market election is available only
for “marketable stock,” which is a stock that is traded in other than de minimis quantities on at least 15 days during each
calendar quarter, or regularly traded, on a qualified exchange or another market, as defined in applicable U.S. Treasury regulations.
Any trades that have as their principal purpose meeting this requirement will be disregarded. The ADSs are listed on the Nasdaq Global
Market and, accordingly, provided the ADSs are regularly traded, if you are a holder of ADSs, the mark-to-market election would be available
to you if we are a PFIC. Once made, the election cannot be revoked without the consent of the IRS unless the ADSs cease to be marketable
stock. If we are a PFIC for any year in which the U.S. Holder owns ADSs but before a mark-to-market election is made, the interest charge
rules described above will apply to any mark-to-market gain recognized in the year the election is made. If any of our subsidiaries are
or become PFICs, the mark-to-market election will not be available with respect to the shares of such subsidiaries that are treated as
owned by you. Consequently, you could be subject to the PFIC rules with respect to income of the lower-tier PFICs the value of which already
had been taken into account indirectly via mark-to-market adjustments. A U.S. Holder should consult its own tax advisors as to the availability
and desirability of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.
In certain circumstances, a U.S. Holder of stock
in a PFIC can make a “qualified electing fund election” to mitigate some of the adverse tax consequences of holding stock
in a PFIC by including in income its share of the corporation’s income on a current basis. However, we do not currently intend to
prepare or provide the information that would enable you to make a qualified electing fund election.
Unless otherwise provided by the U.S. Treasury,
each U.S. shareholder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. A U.S.
Holder’s failure to file the annual report will cause the statute of limitations for such U.S. Holder’s U.S. federal income
tax return to remain open with regard to the items required to be included in such report until three years after the U.S. Holder files
the annual report, and, unless such failure is due to reasonable cause and not willful neglect, the statute of limitations for the U.S.
Holder’s entire U.S. federal income tax return will remain open during such period. U.S. Holders should consult their own tax advisors
regarding the requirements of filing such information returns under these rules, taking into account the uncertainty as to whether we
are currently treated as or may become a PFIC.
YOU ARE STRONGLY URGED TO CONSULT YOUR OWN
TAX ADVISOR REGARDING THE IMPACT OF OUR POTENTIAL PFIC STATUS ON YOUR INVESTMENT IN THE ADSs AS WELL AS THE APPLICATION OF THE PFIC RULES
TO YOUR INVESTMENT IN THE ADSs.
Backup Withholding and Information Reporting
Payments of dividends with respect to Ordinary
Shares or ADSs and the proceeds from the sale, retirement, or other disposition of Ordinary Shares or ADSs made by a U.S. paying agent
or other U.S. intermediary will be reported to the IRS and to the U.S. Holder as may be required under applicable U.S. Treasury regulations.
We, or an agent, a broker, or any paying agent, as the case may be, may be required to withhold tax (backup withholding), currently at
the rate of 24%, if a non-corporate U.S. Holder that is not otherwise exempt fails to provide an accurate taxpayer identification number
and comply with other IRS requirements concerning information reporting. Certain U.S. Holders (including, among others, corporations and
tax-exempt organizations) are not subject to backup withholding. Any amount of backup withholding withheld may be used as a credit against
your U.S. federal income tax liability provided that the required information is furnished to the IRS. U.S. Holders should consult their
own tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining an exemption.
U.S. Holders may be required to file certain U.S.
information reporting returns with the IRS with respect to an investment in our Ordinary Shares or ADSs, including, among others, IRS
Form 8938 (Statement of Specified Foreign Financial Assets). As described above under “Item 10. Additional Information – Taxation
— U.S. Federal Income Tax Considerations – Passive Foreign Investment Companies,” each U.S. Holder who is a shareholder
of a PFIC must file an annual report containing certain information. Substantial penalties may be imposed upon a U.S. Holder that fails
to comply with the required information reporting.
U.S. Holders should consult their own tax advisors
regarding the backup withholding tax and information reporting rules.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT
ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF AN INVESTMENT IN OUR ORDINARY SHARES OR ADSs IN LIGHT OF SUCH INVESTOR’S PARTICULAR
CIRCUMSTANCES.
F. |
Dividends and Paying Agents |
Not applicable.
Not applicable.
We are subject to the information reporting requirements
of the Exchange Act, applicable to foreign private issuers, and under those requirements, we file reports with the SEC. Those other reports
or other information are available to the public through the SEC’s website at http://www.sec.gov.
As a foreign private issuer, we are exempt from
the rules under the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors, and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In
addition, we are not required under the Exchange Act, to file annual, quarterly, and current reports and financial statements with the
SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we are required to
comply with the informational requirements of the Exchange Act, and, accordingly, file current reports on Form 6-K, annual reports on
Form 20-F and other information with the SEC.
In addition, since our Ordinary Shares are traded
on the TASE, we have filed Hebrew language periodic, and immediate reports with, and furnish information to, the TASE and the Israeli
Securities Authority, as required under Chapter Six of the Israel Securities Law, 1968. Copies of our filings with the Israeli Securities
Authority can be retrieved electronically through the MAGNA distribution site of the Israeli Securities Authority (www.magna.isa.gov.il)
and the TASE website (www.maya.tase.co.il).
We maintain a corporate website at www.brainsway.com.
Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report.
I. |
Subsidiary Information |
Not applicable.
ITEM 11. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk is the risk of loss related to changes
in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely impact our financial
position, results of operations or cash flows. Our overall risk management program focuses on the unpredictability of financial markets
and seeks to minimize potential adverse effects on our financial performance.
Risk of Interest Rate Fluctuation and Credit
Exposure Risk
At present, our credit and interest risk arise
from cash and cash equivalents, deposits with banks as well as accounts receivable. A substantial portion of our liquid instruments is
invested in short-term deposits.
We estimate that because the liquid instruments
are invested mainly for the short-term, the credit, and interest risk associated with these balances is low. The primary objective of
our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing
risk and loss. Our investments are exposed to market risk due to fluctuations in interest rates, which may affect our interest income
and the fair market value of our investments. We manage this exposure by performing ongoing evaluations of our investments.
Foreign Currency Exchange Risk
The U.S. dollar is our functional and reporting currency. Although a substantial
portion of our expenses (mainly salaries and related costs) are denominated in NIS, accounting for approximately 37% of our expenses in
the year ended December 31, 2021, all of our financing has been in U.S. dollars, and the substantial majority of our liquid
assets are held in U.S. dollars. Furthermore, while we anticipate that a portion of our expenses, principally salaries and related
personnel expenses in Israel will continue to be denominated in NIS, we expect to incur an increasing amount of expenses in U.S. dollars
as we increase our marketing and sales personnel, and enhance our clinical studies. Changes of 5% in the U.S. dollar/NIS exchange
rate would have increased/decreased operating expenses by approximately $679/$614 thousand during the year ended December 31, 2021.
We also have expenses, although to a much lesser extent, in other non-U.S. dollar currencies, in particular the Euro.
Moreover, for the next few years we expect that
the substantial majority of our revenues from the sale or lease of our systems in the United States, if any, will be denominated in U.S. dollars.
Since a portion of our expenses is denominated in NIS and other non-U.S. currencies, we are exposed to risk associated with exchange rate
fluctuations vis-à-vis the non-U.S. currencies.
We do not hedge our foreign currency exchange
risk. In the future, we may enter into formal currency hedging transactions to decrease the risk of financial exposure from fluctuations
in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect us from the material
adverse effects of such fluctuations.
ITEM 12. |
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not applicable.
Not applicable.
Not applicable.
D. |
American Depositary Shares |
Each of the American Depositary Shares, or ADSs,
represents 2 Ordinary Shares. The ADSs trade on The Nasdaq Global Market.
The form of the deposit agreement for the ADSs
and the form of American Depositary Receipt (ADR) that represents an ADS have been incorporated by reference as exhibits to this Annual
Report on Form 20-F. Copies of the deposit agreement are available for inspection at the principal office of The Bank of New York Mellon,
located at 101 Barclay Street, New York, New York 10286, and at the principal office of our custodians in Israel, Bank Leumi Le-Israel,
34 Yehuda Halevi St., Tel Aviv 65546, Israel.
Fees and Expenses
Persons depositing or withdrawing shares or
American Depositary Shareholders must pay: |
|
For: |
$5.00 (or less) per 100 American Depositary Shares (or portion of 100 American Depositary Shares) |
|
● |
Issuance of American Depositary Shares, including issuances resulting from a distribution of shares or rights or other property |
|
|
● |
Cancellation of American Depositary Shares for the purpose of withdrawal, including if the deposit agreement terminates |
$.05 (or less) per American Depositary Share |
|
● |
Any cash distribution to American Depositary Shareholders |
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of American Depositary Shares |
|
● |
Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to American Depositary Shareholders |
$.05 (or less) per American Depositary Shares per calendar year |
|
● |
Depositary services |
Registration or transfer fees |
|
● |
Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares |
Expenses of the depositary |
|
● |
Cable, telex, and facsimile transmissions (when expressly provided in the deposit agreement) |
|
|
● |
Converting foreign currency to U.S. dollars |
Taxes and other governmental charges the depositary or the custodian have to pay on any American Depositary Share or share underlying an American Depositary Share, for example, stock transfer taxes, stamp duty or withholding taxes |
|
● |
As necessary |
Any charges incurred by the depositary or its agents for servicing the deposited securities |
|
● |
As necessary |
The depositary collects its fees for delivery
and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries
acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed
or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by
deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting
for them. The depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a portion of securities
or other property distributable) to ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting
services until its fees for those services are paid.
From time to time, the depositary may make payments
to us to reimburse us for costs and expenses generally arising out of establishment and maintenance of the ADS program, waive fees and
expenses for services provided to us by the depositary or share revenue from the fees collected from ADS holders. In performing its duties
under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers or other service providers that are owned
by or affiliated with the depositary and that may earn or share fees, spreads or commissions.
The depositary may convert currency itself or
through any of its affiliates and, in those cases, acts as principal for its own account and not as agent, advisor, broker or fiduciary
on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will retain for its own account.
The revenue is based on, among other things, the difference between the exchange rate assigned to the currency conversion made under the
deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign currency for its own account.
The depositary makes no representation that the exchange rate used or obtained in any currency conversion under the deposit agreement
will be the most favorable rate that could be obtained at the time or that the method by which that rate will be determined will be the
most favorable to ADS holders, subject to the depositary’s obligations under the deposit agreement. The methodology used to determine
exchange rates used in currency conversions is available upon request.