NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
NOTE
1 – ORGANIZATION AND NATURE OF OPERATIONS
Brain
Scientific Inc. (the “Company”), was incorporated under the laws of the state of Nevada on November 18, 2013 under
the name All Soft Gels Inc. The Company on September 21, 2018 acquired MemoryMD, Inc. (“MemoryMD”), a privately held
Delaware corporation formed in February 2015. Upon completion of the acquisition, MemoryMD is treated as the surviving entity
and accounting acquirer although the Company was the legal acquirer. Accordingly, the Company’s historical financial statements
are those of MemoryMD, the surviving entity and accounting acquirer. MemoryMD is a cloud computing, data analytics and medical
device technology company in the NeuroTech and brain monitoring industries seeking to commercialize its EEG devices and caps.
The Company is headquartered in New York, New York.
Reverse Merger and Corporate Restructure
On
September 21, 2018, the Company entered into a merger agreement (the “Merger Agreement”) with MemoryMD and AFGG Acquisition
Corp. to acquire MemoryMD (the “Acquisition”). The transactions contemplated by the Merger Agreement were consummated
on September 21, 2018 and, pursuant to the terms of the Merger Agreement, all outstanding shares of MemoryMD were exchanged for
shares of the Company’s common stock. Accordingly, the Company acquired 100% of MemoryMD in exchange for the issuance of
shares of the Company’s common stock and MemoryMD became the Company’s wholly owned subsidiary. The Company issued
an additional 4,083,252 shares of its common stock upon the automatic conversion at the closing of an aggregate of $1,507,000
principal amount plus accrued interest of outstanding convertible promissory notes issued by MemoryMD, and it further issued an
additional 1,604,378 shares of its common stock upon the automatic conversion immediately subsequent to the closing of an
aggregate of $640,000 principal amount plus accrued interest of outstanding convertible promissory notes issued by MemoryMD. Furthermore,
as of the closing, Mr. Amer Samad, the sole director and executive officer until the consummation of the Acquisition, committed
to tender for cancellation 6,495,000 shares of the Company’s common stock as part of the conditions to closing, of which
6,375,000 have been cancelled at December 31, 2018 and 120,000 are expected to be cancelled as soon as practicable. Total shares
issued as a result of the Acquisition was 13,421,752.
The
Acquisition has been accounted for as a reverse recapitalization of Brain Scientific by MemoryMD, but in substance as a capital
transaction, rather than a business combination since Brain Scientific had nominal or no operations and assets prior to and as
of the closing of the Acquisition. The transaction is deemed a reverse recapitalization and the accounting is similar to that
resulting from a reverse acquisition, except that no goodwill or other intangible assets should be recorded. For accounting purposes,
MemoryMD is treated as the surviving entity and accounting acquirer although Brain Scientific was the legal acquirer. Accordingly,
the Company’s historical financial statements are those of MemoryMD.
All
references to common stock, share and per share amounts have been retroactively restated to reflect the reverse recapitalization
as if the transaction had taken place as of the beginning of the earliest period presented.
Assignment
and Assumption Agreement
As
of immediately prior to the closing of the Acquisition, the Company entered into an Assignment and Assumption Agreement with Chromium
24 LLC, pursuant to which Chromium 24 LLC assumed all of the Company’s remaining assets and liabilities through the closing
of the Acquisition. Accordingly, as of the closing of the Acquisition, Brain Scientific had no assets or liabilities other than
the shares of MemoryMD acquired in the Acquisition.
Name
Change and Increase in Authorized Shares
On
September 18, 2018, the Company filed an amendment to its certificate of incorporation with the Nevada Secretary of State to change
its name to Brain Scientific Inc. On September 18, 2018, FINRA approved of the name change as well as a ticker symbol change,
which was effective as of September 19, 2018. In addition, the Company increased its authorized shares of common stock from 50,000,000
to 200,000,000 and created and authorized 10,000,000 shares of undesignated preferred stock.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
Unaudited
Interim Financial Information
The
Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements
are unaudited and, in the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals
necessary for a fair presentation of its balance sheets, operating results, and cash flows for the periods presented. Operating
results for the periods presented are not necessarily indicative of the results that may be expected for 2020. Certain information
and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of
the SEC. These consolidated financial statements should be read in conjunction with the audited financial statements and accompanying
notes.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with GAAP.
Principles
of Consolidation
The
Company evaluates the need to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”).
The
consolidated financial statements include the accounts of the Company and its subsidiaries, MemoryMD and MemoryMD - Russia. The
operations of the newly formed 100% wholly owned subsidiary, MemoryMD – Russia, are included beginning April 1, 2019. All
significant consolidated transactions and balances have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates include the useful life of property and equipment and assumptions used in the valuation of options
and warrants.
Cash
and Cash Equivalents
The
Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.
At March 31, 2020 and December 31, 2019, the Company had no cash equivalents.
The
Company’s cash is held with financial institutions, and the account balances may, at times, exceed the Federal Deposit Insurance
Corporation (FDIC) insurance limit. Accounts are insured by the FDIC up to $250,000 per financial institution. The Company has
not experienced any losses in such accounts with these financial institutions. As of March 31, 2020 and December 31, 2019, the
Company had $0 and $11,436, respectively, in excess over the FDIC insurance limit.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
Inventory
Inventory
consists of finished goods that are valued at lower of cost or market using the weighted average method. As of March 31,
2020 and December 31, 2019, the Company had inventory totaling $371 and $0, respectively.
Property,
Equipment and Depreciation
Property
and equipment are recorded at cost, less depreciation. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Expenditures for repair and maintenance are charged to operations as incurred. Property and equipment
consisted of computer equipment, with an estimated useful life of three years. Depreciation expense was $341 and $299 for the
three months ended March 31, 2020 and 2019, respectively.
Convertible
Notes Payable
The
Company has issued convertible notes, which contain variable conversion features, whereby the outstanding principal and accrued
interest automatically convert into common shares at a fixed price which may be at a discount to the common stock at the time
of conversion. The conversion features of these notes are contingent upon future events, whereby, the holder agreed not to convert
until the contingent future event has occurred.
Revenue
Recognition
On
January 1, 2018, the Company adopted ASC Topic 606 Revenue from Contracts with Customers. This guidance requires an entity to
recognize revenue by applying the following steps: (1) identify the contract with a customer; (2) identify the performance
obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation
in the contract; and (5) recognize revenue when each performance obligation is satisfied. Once the steps are met, revenue is recognized,
generally upon receiving a letter of acceptance from the customer. There has been no material effect on the Company’s financial
statements as a result of adopting Topic 606.
The
Company recognizes revenue from the sale of NeuroCaps, Universal as well as revenue from the sale of goods purchased through manufacturers
of medical devices. All revenue for the three months ended March 31, 2020 is from the sale of medical devices purchased from Neurotech,
a related party.
Research
and Development Costs
The
Company expenses all research and development costs as they are incurred. Research and development includes expenditures in connection
with in-house research and development salaries and staff costs, application and filing for regulatory approval of proposed products,
regulatory and scientific consulting fees, as well as contract research, data collection, and monitoring, related to the research
and development of the cloud infrastructure, data imaging, and proprietary products and technology. Research and development costs
recognized in the statement of operations for the three months ended March 31, 2020 and 2019 were $96,390 and $22,290, respectively.
Sales
and Marketing
Advertising and marketing costs are expensed
as incurred. Advertising and marketing costs recognized in the statement of operations for the three months ended March 31, 2020
and 2019 were $40,584 and $47,792, respectively.
Stock-based
Compensation
The
Company measures and recognizes compensation expense for all stock-based payments at fair value over the requisite service period.
The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options and warrants.
Equity-based compensation expense is recorded in administrative expenses based on the classification of the employee or vendor.
The determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by
our stock price as well as by assumptions regarding a number of subjective variables. These variables include, but are not limited
to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
Basic
and Diluted Net Loss Per Common Share
Basic
net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the
period. Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares
outstanding for the period and, if dilutive, potential common shares outstanding during the period. Potentially dilutive securities
consist of the incremental common shares issuable upon exercise of common stock equivalents such as stock options, warrants and
convertible debt instruments. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
As a result, the basic and diluted per share amounts for all periods presented are identical. In the three months ended March
31, 2020 2,302,250 anti-dilutive securities were excluded from the computation.
Fair
Value of Financial Instruments
The
Company’s financial instruments are measured and recorded at fair value based on inputs and assumptions that market participants
would use in pricing an asset or a liability. Fair value is defined as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
fair value, management considers the principal or most advantageous market in which the Company would transact, and also considers
assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions,
and risk of nonperformance.
Fair
value is determined for assets and liabilities using a three-tiered value hierarchy into which these assets and liabilities are
grouped based upon significant inputs as follows:
|
●
|
Level
1 - Quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 - Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities,
quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable
or can be corroborated by observable market data.
|
|
●
|
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that
use significant unobservable inputs. When a determination is made to classify a financial instrument within Level 3, the determination
is based upon the lack of significance of the observable parameters to the overall fair value measurement. However, the fair
value determination for Level 3 financial instruments may consider some observable market inputs.
|
The
lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The carrying
values of cash, prepaid expenses and other current assets, convertible notes, accounts payable, loans payable and due to others
approximate fair value due to the short-term nature of these items.
The
Company did not have any other Level 1, Level 2 or Level 3 assets or liabilities as of March 31, 2020 and December 31, 2019.
Income
Taxes
The
Company accounts for income taxes using the asset-and-liability method in accordance with ASC Topic 740, “Income Taxes”.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets
and liabilities of a change in tax rate is recognized in the period that includes the enactment date. A valuation allowance is
recorded if it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized in future periods.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
The
Company follows the guidance in ASC Topic 740-10 in assessing uncertain tax positions. The standard applies to all tax positions
and clarifies the recognition of tax benefits in the financial statements by providing for a two-step approach of recognition
and measurement. The first step involves assessing whether the tax position is more-likely-than-not to be sustained upon examination
based upon its technical merits. The second step involves measurement of the amount to be recognized. Tax positions that meet
the more-likely-than-not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate finalization with the taxing authority. The Company recognizes the impact of an uncertain income tax position
in the financial statements if it believes that the position is more likely than not to be sustained by the relevant taxing authority.
The Company will recognize interest and penalties related to tax positions in income tax expense. As of March 31, 2020 and December
31, 2019, the Company had no unrecognized uncertain income tax positions.
On
December 22, 2017, the passage of legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”) was enacted
and significantly revised the U.S. income tax law. The TCJA includes changes, which reduce the corporate income tax rate from
34% to 21% for years beginning after December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”)
was issued and allows a company to recognize provisional amounts when it does not have the necessary information available, prepared
or analyzed, including computations, in reasonable detail to complete its accounting for the change in tax law. SAB 118 provides
for a measurement of up to one year from the date of enactment.
Recent
Issued Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board (“FASB”) or other
standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company does
not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s
financial position or results of operations upon adoption.
In
June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
2016-13, “Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected
credit losses at the point a loss is probable to occur, rather than expected to occur, which will generally result in earlier
recognition of allowances for credit losses. The new guidance is effective for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 in the first quarter of 2020 and the
adoption did not have a material impact on its condensed consolidated financial statements.
NOTE
3 – GOING CONCERN
The accompanying financial statements have
been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern for a period of one
year from the issuance of these financial statements. For the three months ended March 31, 2020, the Company had $133,845 in revenues,
a net loss of $539,116 and had net cash used in operations of $252,319. Additionally, as of March 31, 2020, the Company had working
capital deficit, stockholders’ deficit and accumulated deficit of $1,421,118, $1,419,785 and $4,211,193 respectively. It
is management’s opinion that these conditions raise substantial doubt about the Company’s ability to continue as a
going concern for a period of twelve months from the date of the issuance of these financial statements.
The
financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification
of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
Successful
completion of the Company’s development program and, ultimately, the attainment of profitable operations are dependent upon
future events, including obtaining adequate financing to fulfill its development activities, acceptance of the Company’s
patent applications and ultimately achieving a level of sales adequate to support the Company’s cost structure. However,
there can be no assurances that the Company will be able to secure additional equity investments or achieve an adequate sales
level.
NOTE
4 – CONVERTIBLE NOTES PAYABLE
In
January 2019, the Company commenced an offering of up to $500,000 pursuant to which the Company will issue convertible notes to
investors. On January 18, 2019, February 5, 2019 and July 23, 2019, the Company issued three such convertible notes payable to
three investors for $100,000, $130,000 and $150,000, respectively. The notes bear interest at a fixed rate of 10% per annum, computed
based on a 360-day year and mature on the earlier of one year from the date of issuance or the consummation of an equity or equity-linked
round of financing of the Company in excess of $1,000,000 (“Qualified Financing”) or other event pursuant to which
conversion shares are to be issued pursuant to the terms of the note. On February 28, 2020, the Company and the holder of the
January 18, 2019 convertible note agreed to extend the maturity date of the January 18, 2019 convertible note to January 18, 2021.
Also on February 28, 2020, the Company and the holder of the February 5, 2019 convertible note agreed to extend the maturity date
of the February 5, 2019 convertible note to February 5, 2021.
The
notes are convertible into common stock of the Company following events on the following terms: with no action on the part of
the note holder upon the consummation of a Qualified Financing, the debt will be converted to new round stock based on the product
of the outstanding principal and accrued interest multiplied by 1.35, then divided by the accrual per share price of the new round
common stock. If a change of control occurs or if the Company completes a firmly underwritten public offering of its common stock
prior to the Qualified Financing the notes would, at the election of the holders of a majority of the outstanding principal of
the notes, be either payable on demand as of the closing of such change of control or Initial Public Offering (‘IPO”)
or convertible into shares of common stock immediately prior to such change of control transaction or IPO transaction at a price
per share equal to the lesser of the per share value of the common stock as determined by the Company’s Board of Directors
or the per share consideration to be received by the holders of the common stock in such change of control or IPO transaction.
Based on the terms of the conversion, the holders may receive a discount, and the notes are considered to have a contingent beneficial
conversion feature. If conversion of the debt occurs, the Company will recognize an expense related to the intrinsic value. The
Company recorded $37,541of accrued interest and has a total outstanding principal balance of $380,000 as of March 31, 2020.
In
the event that the Company consummates a financing prior to the Maturity Date, other than a Qualified Financing, and the economic
terms thereof are more favorable to the investors in such financing than the terms of the note, the note shall automatically be
amended to reflect such more favorable economic terms.
December
31, 2019 Securities Purchase Agreement
On
December 31, 2019, the Company entered into a Securities Purchase Agreement and issued and sold to a third party (the
“Investor”) a Convertible Note in the original principal amount of $275,000 (the “Note”), and a
warrant to purchase 100,000 shares of the Company’s common stock (the “Warrant”). The aggregate purchase
price received by the Company was $250,000 after an original issue discount of $25,000. A one-time interest charge of 8% was
applied on December 31, 2019 and will be payable, along with the Principal, on July 31, 2020 (the “Maturity
Date”), as may be extended at the option of the Investor.
The
unpaid outstanding principal amount and accrued and unpaid interest under the Note shall be convertible into shares of the Company’s
common stock at any time at the option of the Investor. The conversion price shall be equal to 80% multiplied by the price per
share paid by the investors in the next capital raising transaction consummated by the Company in the amount of $1,000,000 or
more (the “Qualified Financing”), subject to adjustments as provided in the Note. In the event the Investor elects
to convert the Note prior to a Qualified Financing, the conversion price shall be the effective exercise price per share from
time to time pursuant to the Warrant. At any time prior to the Maturity Date, upon 10 business days’ notice to the Investor,
the Company shall have the right to pre-pay the entire remaining principal amount of the Note subject to the pre-payment terms
contained in the Note. The note is valued at face value and not considered a derivative since the Qualified Financing is at the
control of the Company. The Company recorded $9,429 of accrued interest and has a total outstanding principal balance of $275,000
as of March 31, 2020.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
The
Note contains a price-based anti-dilution provision, pursuant to which the conversion price of the Note shall be reduced upon
the occurrence of certain dilutive issuances of Company securities as set forth in the Note. The conversion of the Note is also
subject to a beneficial ownership limitation of 4.99% of the number of shares of common stock outstanding immediately after giving
effect to such conversion. In the event the Company, prior to the Maturity Date, issues any Security (as defined in the Note)
with any term more favorable to the holder of such Security or with a term in favor of the holder of such Security that was not
similarly provided to the Investor, then at the Investor’s option such term shall become a part of the Note. The Company
also agreed to provide piggy-back registration rights to the Investor pursuant to which the Company shall include all shares issuable
upon conversion of the Note on the next registration statement the Company files with the Securities and Exchange Commission.
The Note contains events of default which,
among other things, entitle the Investor to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid
interest on, the Note. Upon the occurrence of any event of default, the outstanding balance shall immediately and automatically
increase to 130% of the outstanding balance immediately prior to the event of default, and the conversion price of the Note shall
be redefined to equal 65% of the lowest trade accruing during the 10 consecutive Trading Days (as defined in the Note) immediately
preceding the applicable Conversion Date (as defined in the Note). Nickolay Kukekov, a director of the Company, and a third party,
each has personally guaranteed the repayment of the Note.
The
Warrant has an exercise price of $1.25 per share (the “Exercise Price”), subject to adjustments as provided in the
Warrant, and has a term of five years. The Warrant contains a price-based anti-dilution provision, pursuant to which the exercise
price of the Warrant shall be reduced upon the occurrence of certain dilutive issuances of securities as set forth in the Warrant,
with a corresponding increase in the number of shares underlying the Warrant if the dilutive event occurs during the first three
years of the Warrant, and a cashless exercise provision. The exercise of the Warrant is subject to a beneficial ownership limitation
of 9.99% of the number of shares of common stock outstanding immediately after giving effect to such exercise. The Company calculated
the Warrants at fair value of $130,768 using the Monte Carlo model, which was recognized as a discount to the Note and is being
amortized as interest expense over the remaining term of the notes.
In
the year ended December 31, 2019, the Company recorded a total debt discount of $155,768 related to the above convertible notes.
Amortization of the debt discount is recorded as interest expense and a total of $66,549 was amortized during the three months
ended March 31, 2020.
NOTE
5 – PROMISSORY NOTES
October
23, 2019 Note
On
October 23, 2019, an investor of the Company subscribed for a promissory note (the “October Note”) and loaned to
the Company $50,000.
The October Note bears interest at a fixed
rate of 14% per annum, computed based on a 360-day year of twelve 30-day months, which interest will be payable quarterly until
the maturity date. The principal amount and any accrued and unpaid interest due under the October Note is payable on October 21,
2020. The Company recorded $1,359 of accrued interest and has a total outstanding principal balance of $50,000 as of March 31,
2020.
The October Note contains customary events
of default, which, if uncured, entitle the lender to accelerate the due date of the unpaid principal amount of, and all accrued
and unpaid interest on, the October Note.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
February
21, 2020 Note
On February 21, 2020, a third party loaned
the Company $20,000, evidenced by a non-convertible promissory note (the “February Note”).The February Note bears interest
at a fixed rate of 12% per annum, computed based on a 360-day year of twelve 30-day months, which interest will be payable quarterly
until the maturity date. The principal amount and any accrued and unpaid interest due under the February Note is payable on July
1, 2020. The Company recorded $260 of accrued interest and has a total outstanding principal balance of $20,000 as of March 31,
2020.
The February Note contains customary events
of default, which, if uncured, entitle the lender to accelerate the due date of the unpaid principal amount of, and all accrued
and unpaid interest on, the February Note.
NOTE
6 – OTHER LIABILITIES
In
2016, the Company recorded a liability in connection with the sale of two Electroencephalograms (“EEG”) machines as
it provided a guarantee to the customer’s financing company (See Note 2). In June 2017, the customer defaulted on its payments
and an additional $19,107 was booked as a liability and recognized as a loss on the sale of the assets for interest and some taxes
related to the transaction. As of March 31, 2020 and December 31, 2019, total liability to the financing company reflected in
Other Liabilities is $4,595 and $6,377, respectively.
Future
minimum commitments related to the EEG liability consisted of the following at March 31, 2020:
Years ended December 31,
|
|
Amount (USD)
|
|
Remainder 2020
|
|
|
4,595
|
|
Total
|
|
$
|
4,595
|
|
NOTE
7 – RELATED PARTY TRANSACTIONS
During
the year ended December 31, 2018, an entity controlled by Mr. Vadim Sakharov, former CEO of the Company and current director and
executive officer, provided a $50,000 non-interest-bearing, no-term loan to the Company. An additional $5,530 of non-interest
bearing no-term proceeds were loaned to the Company during the year ended December 31, 2019. As of March 31, 2020, and December
31, 2019, the balance was $55,530 and $55,530, respectively.
During
the three months ended March 31, 2020 and 2019, the Company had expenses related to research and development costs of $10,200
and $0, respectively, to an entity controlled by Mr. Sakharov.
During
the year ended December 31, 2019, an affiliate of Boris Goldstein, the Company’s Chairman of the Board, provided an aggregate
total of $50,000, in non-interest-bearing, no-term loans to the Company. As of March 31, 2020 and December 31, 2019, the balance
was $50,000 and $50,000, respectively.
On
September 1, 2018, the Company entered into a sublease agreement with a company controlled by the Company’s Chairman, whereby
the Company makes payments to the related party for shared office space. This lease was terminated on March 31, 2019. For the
three months ended March 31, 2020 and 2019, the Company has made approximately $0 and $4,900, respectively, in rent payments to
the related party.
During
the year ended December 31, 2019, an affiliate of Nickolay Kukekov, a director of the Company, provided an aggregate total of
$217,000 in non-interest-bearing, no-term loans to the Company. As of March 31, 2020 and December 31, 2019, the balance was $217,000
and $217,000, respectively.
During
the three months ended March 31, 2020 and 2019, the Company purchased an aggregate of $101,613 and $0 of medical devices
for resale and distribution from Neurotech, a company that Mr. Sakharov is a shareholder and executive manager.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
NOTE
8 – STOCKHOLDERS’ DEFICIT
Preferred
Stock
The
Company has authorized 10,000,000 shares of undesignated preferred stock with a $0.001 par value. As of March 31, 2020, no preferred
shares have been issued and these shares are considered blank check preferred shares with no terms, limitations, or rights associated
with them.
Common
Stock
The
Company has authorized 200,000,000 shares of common stock with a $0.001 par value per share. The holders of common stock are entitled
to one vote for each share of common stock held at the time of vote. As of March 31, 2020, the Company had 19,383,794 shares outstanding
or deemed outstanding.
Shares
Issued for Services
On August 8, 2018, the Company entered into
a one-year agreement with an advisor for consulting services, as extended for an additional one-year period. The Company extended
this agreement through August 9, 2020. Pursuant to the agreement, as amended, the Company has the right to pay $5,000 or issue
the advisor a maximum of 6,667 shares of common stock on a quarterly basis. The Company elected to issue 1,667 shares for the services
provided during the three months ended March 31, 2020 at a value of $3.00 per share or $5,001.
On August 28, 2018, the Company entered into
a one-year agreement with an advisor for consulting services, as extended for an additional one-year period. The Company has extended
this agreement through August 28, 2020. Pursuant to the agreement, as amended, the Company has the right to pay $5,000 or issue
the advisor a maximum of 6,667 shares of common stock on a quarterly basis. The Company elected to issue 1,667 shares for the services
provided during the three months ended March 31, 2020 at a value of $3.00 per share or $5,001.
Warrants
The
following table summarized the warrant activity for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Warrants
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Balance Outstanding, December 31, 2019
|
|
|
502,250
|
|
|
$
|
0.57
|
|
|
|
3.98
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, March 31, 2020
|
|
|
502,250
|
|
|
$
|
0.57
|
|
|
|
3.73
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2020
|
|
|
502,250
|
|
|
$
|
0.57
|
|
|
|
3.73
|
|
|
$
|
-
|
|
Options
On
January 14, 2019, the Board of Directors approved the issuance of options to purchase an aggregate of 800,000 and 200,000 shares
of common stock to Boris Goldstein and Vadim Sakharov, respectively. The options have an exercise price of $0.75 per share which
will vest over a 24-month period as follows: 25% (or 200,000 and 50,000, respectively) shall vest six months after the grant date
with the remaining options will vest on a monthly basis at a rate of 1/24th per month. The options will expire on January
14, 2029. The aggregate fair value of $17,111 was calculated using the Black-Scholes pricing model with the following assumptions:
(i) expected life 10 years, (ii) volatility of 77%, (iii) risk free rate of 2.71% (iv) dividend rate of zero, (v) stock price
of $0.042, and (vi) exercise price of $0.75. The expense will be amortized over the vesting period and a total of $10,432 was
recorded during the year ended December 31, 2019. A total of $1,595 was recorded during the three months ended March 31, 2020.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
On
January 30, 2020, the Board of Directors approved the issuance of options to purchase an aggregate of 800,000 of common stock
to Boris Goldstein. The options have an exercise price of $0.75 per share which will vest over a 24-month period on a monthly
basis at a rate of 1/24th per month. The options will expire on January 30, 2030. The aggregate fair value of $51,757
was calculated using the Black-Scholes pricing model with the following assumptions: (i) expected life 10 years, (ii) volatility
of 76%, (iii) risk free rate of 1.57% (iv) dividend rate of zero, (v) stock price of $0.12, and (vi) exercise price of $0.75.
The expense will be amortized over the vesting period. A total of $4,319 was recorded during the three months ended March 31,
2020.
The
following table summarized the option activity for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Balance Outstanding, December 31, 2019
|
|
|
1,000,000
|
|
|
$
|
0.75
|
|
|
|
9.05
|
|
|
$
|
-
|
|
Granted
|
|
|
800,000
|
|
|
|
0.75
|
|
|
|
10
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, March 31, 2020
|
|
|
1,800,000
|
|
|
$
|
0.75
|
|
|
|
9.26
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2020
|
|
|
818,750
|
|
|
$
|
0.75
|
|
|
|
8.92
|
|
|
$
|
-
|
|
For
future periods, the remaining value of the stock options totaling approximately $52,523 will be amortized into the statement of
operations consistent with the period for which the services will be rendered.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Operating
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance
sheets as a right-of-use asset with a corresponding lease liability. Lessor accounting under the standard is substantially unchanged.
Additional qualitative and quantitative disclosures are also required. The Company adopted the standard effective January 1, 2019
using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without
adjusting the comparative periods presented. The Company adopted the following practical expedients and elected the following
accounting policies related to this standard update:
|
●
|
The
option to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs
for leases that commenced prior to January 1, 2019.
|
|
●
|
Short-term
lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term
of 12 months or less.
|
|
●
|
The
option to not separate lease and non-lease components for certain equipment lease asset categories such as freight car, vehicles
and work equipment.
|
|
●
|
The
package of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing
contracts are or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii)
not reassessing initial direct costs for any existing leases.
|
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
As
a result of the above, the adoption of ASC 842 did not have a material effect on the consolidated financial statements. The Company
will review for the existence of embedded leases in future agreements.
The
Company has inventoried all leases where the Company is a lessee as of the initial date of application and has examined other
contracts with suppliers, vendors, customers and other outside parties to identify whether such contracts contain an embedded
lease as defined under the new guidance. The Company’s lease population comprises lease for corporate office space and a
warehouse that are year-to-year basis with monthly rent ranging from approximately $150 to $3,200 and qualify under the practical
expedient of short-term leases. The Company does not have exclusive rights of control to any assets in the customer and vendor
contracts reviews and does not have any financing leases as of the date of adoption of ASC 842.
Beginning
January 1, 2020, the Company entered into a 12-month lease agreement ending December 31, 2020, with a third party in Russia. The
Company is paying rent at a rate of 17,900 Rubles ($227) per month.
Beginning
June 1, 2019, the Company entered into a 10-month lease agreement ending March 31, 2020 with a third party in Russia. The Company
is paying rent at a rate of 12,000 Rubles ($152) per month.
Additionally,
the Company also rents a warehouse. Beginning December 1, 2018, the Company entered into a 6-month warehouse rental agreement
for $2,980 per month. The lease was renewed on June 1, 2019 for an additional year ending May 31, 2020, for $3,171 per month.
Total
rent expense for the three months ended March 31, 2020 and 2019 was $11,638 and $22,060 respectively.
Equity
Incentive Plan
As
of September 21, 2018, the Company’s board of directors adopted, and stockholders approved the 2018 Equity Incentive Plan
(“the 2018 Plan”). The 2018 Plan has a 10-year term, which terminates on the day prior to the 10th anniversary
of its adoption by the Board. Under the 2018 Plan, the Company may grant equity-based incentive awards, including options, restricted
stock, and other stock-based awards, to any directors, employees, advisers, and consultants that provide services to the Company.
The vesting period, term and exercise price will be determined at the time of the grant. An aggregate of up to 3,500,000 of the
Company’s common stock are reserved for issuance under the 2018 Plan. As of March 31, 2020 the Company has granted 1,800,000
options and has 1,800,000 options outstanding under the 2018 Plan (see Note 8).
NOTE
10 – SUBSEQUENT EVENTS
In
accordance with ASC 855 “Subsequent Events,” Company management reviewed all material events through the date this
report was issued, and the following subsequent events took place.
The Effects of COVID-19
The World Health Organization (WHO) declared
the coronavirus outbreak a pandemic on January 30, 2020. Since the outbreak in China in December 2019, COVID-19 has expanded its
impact to Europe, where all of our operations reside, as well as our employees, suppliers and customers. While the disruption is
currently expected to be temporary, there is considerable uncertainty around the duration of the closings and shelter-in-place
orders and the ultimate impact of governmental initiatives. However, the financial impact and duration cannot be reasonably estimated
at this time.
Convertible
Grid Notes
On
April 21, 2020, the Company issued a Convertible Grid Promissory Note (the “Caleca Note”) to Thomas J. Caleca (“Caleca”),
an existing stockholder of the Company, pursuant to which Caleca agreed to advance to the Company the aggregate principal amount
of $125,000 (the “Caleca Aggregate Advance”). The Company also issued to Caleca a common stock purchase warrant (the
“Caleca Warrant”), granting Caleca the right to purchase up to 750,000 shares of the Company’s common stock
at a per share exercise price of $0.80 (subject to adjustment as set forth in the Caleca Warrant).
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
(unaudited)
Also on April 21, 2020, the Company issued
a Convertible Grid Promissory Note (the “Brown Note”, and together with the Caleca Note, the “Grid Notes”)
to Andrew Brown (“Brown”, and together with Caleca, the “Grid Investors”), an existing stockholder of the
Company, pursuant to which Brown agreed to advance to the Company the aggregate principal amount of $125,000 (the “Brown
Aggregate Advance”, and together with the Caleca Aggregate Advance, the “Aggregate Advance”). The Company also
issued to Brown a common stock purchase warrant (the “Brown Warrant”, and together with the Caleca Warrant, the “2020
Warrants”), granting Brown the right to purchase up to 750,000 shares of the Company’s common stock at a per share
exercise price of $0.80 (subject to adjustment as set forth in the Brown Warrant). The 2020 Warrants are exercisable at any time
commencing on the eighteen-month anniversary of the issuance of the 2020 Warrants (as may be accelerated pursuant to the terms
of the 2020 Warrants) and expiring on the five-year anniversary of the issuance of the 2020 Warrants.
On
April 22, 2020, the Grid Investors each made their first cash advance of $25,000 pursuant to the terms of the Grid Notes, for
an aggregate cash advance to the Company of $50,000 (the “First Advance”). The Grid Investors shall make additional
cash advances to the Company pursuant to the terms of their Grid Notes.
The
Grid Notes bear interest on the unpaid balances at a fixed simple rate of twelve percent (12%) per annum (subject to a rate increase
if the Company commits an Event of Default (as defined in the Grid Notes)), computed based on a 360-day year of twelve 30-day
months, commencing on the date of the respective advance and payable quarterly. The principal amount of the Aggregate Advance,
or so much thereof as has been advanced to the Company by the Grid Investors from time to time pursuant to the Grid Notes, will
be payable on April 21, 2021 (the “Maturity Date”), unless sooner converted into shares of the Company’s common
stock pursuant to the terms of the Grid Notes.
The
unpaid outstanding principal amount and accrued and unpaid interest under the Grid Notes shall be convertible at any time prior
to the Maturity Date at the election of the Grid Investors into such number of shares of the Company’s common stock obtained
by dividing the amount so converted by $1.00 (the “Conversion Price”). At the Maturity Date, all of the remaining
unpaid outstanding principal amount and accrued and unpaid interest (the “Outstanding Balance”) under the Grid Notes
shall automatically convert into such number of shares of the Company’s common stock obtained by dividing the Outstanding
Balance by the Conversion Price. The Grid Notes may not be prepaid by the Company in whole or in part without the prior written
consent of the respective Grid Investor.
The
Grid Notes contain customary events of default, which, if uncured, entitle the Grid Investors to accelerate the due date of the
unpaid principal amount of, and all accrued and unpaid interest on, their Grid Notes.