Item
2.03
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Creation
of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant
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On
September 23, 2020, Brain Scientific Inc. (the “Company”) entered into a Securities Purchase Agreement (the “Purchase
Agreement”) dated as of September 22, 2020 (the “Issuance Date”) and issued and sold to Auctus Fund, LLC (the
“Investor”), a Promissory Note (the “Note”) in the aggregate original principal amount of $600,000, of
which $100,000 aggregate principal amount was borrowed as of the Issuance Date with the balance of the principal to be borrowed
on October 19, 2020. Also pursuant to the Purchase Agreement, in connection with the issuance of the Note, the Company issued
two common stock purchase warrants (separately, “Warrant A” and “Warrant B”, and together, the “Warrants”)
to the Investor, allowing the Investor to purchase an aggregate of 1,411,764 shares of the Company’s common stock (the “Common
Stock”), with Warrant A being a commitment fee of 705,882 shares of Common Stock, and Warrant B being fully earned upon
issuance as an additional commitment fee of 705,882 shares of Common Stock, provide that Warrant B is returnable to the Company
upon the repayment of the Note, as an additional incentive for the repayment of the Note.
The
net amount received by the Company on September 23, 2020 was approximately $84,000 after payment of certain fees to the Investor
or on behalf of the Investor.
The
Company intends to use the net proceeds from the sale of the Note for the Company’s working capital and general corporate
purposes.
Subject
to certain exceptions set forth in the Purchase Agreement, unless it shall have first delivered to the Investor, at least 72 hours
prior to the closing of a “Future Offering” (as defined in the Purchase Agreement), written notice describing the
proposed Future Offering, and providing the Investor an option during such 72 hour period following delivery of such notice to
purchase the securities being offered in the Future Offering on the same terms as contemplated by such Future Offering (the “Right
of First Refusal”), the Company will not conduct any equity financing (including debt with an equity component) during the
period beginning on the Issuance Date and ending 12 months following the Issuance Date.
Commencing
as of the Issuance Date, and until the sooner of the six month anniversary of the Issuance Date or payment of the Note in full,
or full conversion of the Note, the Company shall not, directly or indirectly, without the Buyer’s prior written consent:
(a) change the nature of its business; (b) sell, divest, acquire, change the structure of any material assets other than in the
ordinary course of business; or (c) solicit any offers for, respond to any unsolicited offers for, or conduct any negotiations
with any other person or entity in respect of any variable rate debt transactions above $1,000,000, other than variable rate debt
transactions of which the Company is already a party as of the Issuance Date, that are being renegotiated or restructured.
In
the event the Company breaches any of the covenants set forth in Section 4 of the Purchase Agreement, and in addition to any other
remedies available to the Buyer pursuant to the Purchase Agreement, it will be considered an Event of Default under the Note,
the Company shall pay to the Buyer the “Standard Liquidated Damages Amount” (as defined in the Note) in cash or in
shares of Common Stock at the option of the Buyer, until such breach is cured, or with respect to the Right of First Refusal,
the Company shall pay to the Buyer the “Standard Liquidated Damages Amount” in cash or shares of Common Stock, at
the option of the Buyer, upon each violation of such provision. If the Buyer elects to have the Company pay the Standard Liquidated
Damages Amounts in shares of Common Stock, such shares shall be issued at the Conversion Price at the time of payment.
The
Note bears interest commencing on the Issuance Date at a fixed rate of 12% per annum on any unpaid principal balance, and will
be payable, along with the principal amount, on September 22, 2021 (the “Maturity Date”), unless such interest is
earlier converted into shares of the Common Stock pursuant to the conversion terms contained in the Note.
A
lump-sum interest payment for one year is due on the Issuance Date and added to the principal balance and payable on the Maturity
Date or upon acceleration or by prepayment or otherwise, notwithstanding the number of days which the principal is outstanding.
Principal payments shall be made in 6 installments each in the amount of US$100,000.00 commencing 180 days following the applicable
Issue Date (as defined in the Note”) and continuing thereafter each 30 days for 5 months.
The
unpaid outstanding principal amount and accrued and unpaid interest under the Note shall be convertible into shares of Common
Stock at any time on or after the Issuance Date at the option of the Investor. The conversion price shall be equal to the lesser
of (subject to equitable adjustments): (i) the lowest Market Price (as defined below) during the previous 5 Trading Day (as defined
in the Note) period ending on the latest complete Trading Day prior to the Issuance Date, and (ii) the Variable Conversion Price
(as defined below). The “Variable Conversion Price” shall mean the Market Price (except upon any action or proceeding
to enforce the Note, in which case it shall mean 40% of the Market Price). “Market Price” means the volume weighted
average price (VWAP) for the Common Stock during the 5 Trading Day period ending on the latest complete Trading Day prior to the
conversion date (or the date of the Note, as required above in clause (i)). The conversion price shall be adjusted downwards upon
certain events as set forth in the Note.
The
Note is subject to adjustment in the event of certain events, including mergers or consolidations of the Company, distributions
of assets to holders of Common Stock, stock repurchases, and dilutive issuances (other than “Exempt Issuances” as
defined in the Note).
Provided
that an Event of Default (as defined in the Note) has not occurred, the Company may prepay in whole or in part the amounts outstanding
under the Note by making a payment to the Investor of an amount in cash equal to the sum of: (w) the then outstanding principal
amount of the Note plus (x) accrued and unpaid interest on the unpaid principal amount of the Note plus (y) default interest,
if any.
The
conversion of the Note and the exercise of the Warrants are 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 or exercise, as the case may be.
The
Note contains customary events of default which entitle the Investor, among other things, to accelerate the due date of the unpaid
principal amount of, and all accrued and unpaid interest on, the Note. Upon an event of default, interest shall accrue at a default
interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest
permitted by law. The Note further contains monetary penalties in the event of certain events of default or breaches.
The
Note is further subject to a “most-favored nation” clause in the event the Company issues any security with any term
more favorable to the holder of such security.
The
Company is obligated to include on each effective registration statement that the Company files with SEC after the Issuance Date
all shares issuable upon conversion of the Note and exercise of the Warrants.
The
Warrants each have an exercise price of $1.28, subject to customary adjustments, and may be exercised at any time until the three
year anniversary of the Warrants; provided, however, in the event the Company repays the Note in its entirety on or prior to the
Maturity Date, Warrant B shall automatically expire and may only be exercised in the event it does not so automatically expire.
The Warrants include a cashless exercise provision as set forth therein.
The
foregoing is a brief description of the purchase of the Note and the Warrants, and is qualified in its entirety by reference to
the full text of the Securities Purchase Agreement, the Note, Warrant A and Warrant B, copies of which are included as Exhibits
10.1, 10.2, 10.3 and 10.4, respectively, to this Current Report on Form 8-K, each of which are incorporated herein by reference.