AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER
9, 2020
REGISTRATION NO. 333-236152
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Post-Effective
Amendment No.1 to FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
BRAIN SCIENTIFIC INC.
(Exact name of registrant
as specified in its charter)
Nevada
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3841
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81-0876714
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(State or jurisdiction of
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(Primary Standard Industrial
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(I.R.S. Employer
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incorporation or organization)
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Classification Code Number)
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Identification No.)
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125 Wilbur Place, Suite 170
Bohemia, New York 11716
(917) 388-1578
(Address, including zip
code, and telephone number, including area code, of principal executive offices)
Boris Goldstein
125 Wilbur Place, Suite 170
Bohemia, New York 11232
(917) 388-1578
(Name, address, including
zip code, and telephone number, including area code, of agent for service)
Copies to:
Arthur S. Marcus, Esq.
Sichenzia Ross Ference
LLP
1185 Avenue of the Americas,
37th Floor
New York, New York 10036
Phone: (212) 930-9700
Approximate date of commencement of proposed
sale to the public: From time to time after the effective date of this registration statement.
If any of the securities being registered
on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box. ☒
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment
filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment
filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☒
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Smaller reporting company ☒
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Emerging growth company ☒
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If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
(COVER CONTINUES ON FOLLOWING PAGE)
CALCULATION OF REGISTRATION FEE
Title of Class to be Registered
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Amount to be
Registered
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Proposed
Maximum Aggregate
Offering Price
Per Share (2)
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Proposed
Maximum
Aggregate Offering
Price
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Amount of
Registration
Fee
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Common Stock, par value $0.001
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4,931,461 shares(1)
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$
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3.00
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$
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14,794,386
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$
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1,920.31
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Total
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shares
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$
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$
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$
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1,920.31
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*
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(1) Represents shares of Brain Scientific
Inc. offered by the selling stockholders.
(2) Calculated in
accordance with Rule 457(e). Assumes a price of $3.00 per share.
* Previously paid.
The registrant hereby amends this Registration
Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment
which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
This Post-Effective Amendment No. 1
to Form S-1 (the “Post-Effective Amendment”) is being filed pursuant to Section 10(a)(3)of the Securities Act of
1933, as amended, to update the Registration Statement on Form S-1 (Registration Statement No. 333-2361 )(as amended, the
“Initial Registration Statement “) which was declared effective on July 20, 2020 to include the financial
information and Management’s Discussion and Analysis section from the Registrant’s Form 10-Q for the quarter
ended June 30, 2020 filed with the SEC on August 19, 2020 , to make certain changes to the Plan of Distribution section and
other disclosure to reflect that the Company’s common stock is now quoted on the OTCQB and to otherwise update
information contained herein.
The SEC declared the Initial Registration
Statement effective on July 20, 2020. No additional securities are being registered on this Post-Effective Amendment. All applicable
registration fees have been paid.
The information in this prospectus
is not complete and may be changed. The selling stockholders may not sell these securities under this prospectus until the
registration statement of which it is a part and filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
PRELIMINARY PROSPECTUS, SUBJECT
TO COMPLETION, DATED OCTOBER 9, 2020
Brain Scientific Inc.
4,931,461 Shares of Common Stock by the Selling
Stockholders
This prospectus relates to the public offering
of up to 4,931,461 shares of common stock of Brain Scientific, Inc. by the selling stockholders.
The selling stockholders will offer their
respective shares at prevailing market prices or privately negotiated prices.
We will not receive any of the proceeds from
the sale of common stock by the selling stockholders. We will pay the expenses of registering these shares.
Investing in our common stock involves
a high degree of risk. You should consider carefully the risk factors beginning on page 2 of this prospectus before purchasing
any of the shares offered by this prospectus.
Our common stock is quoted on the OTCQB
under the symbol “BRSF”. There has been extremely limited trading to date in our common stock.
We may amend or supplement this prospectus
from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or
supplements carefully before you make your investment decision.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is_________,
2020.
BRAIN SCIENTIFIC INC.
TABLE OF CONTENTS
You may only rely on the
information contained in this prospectus or that we have referred you to. We have not authorized anyone to provide you with different
information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than
the common stock offered by this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any common stock in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus
nor any sale made in connection with this prospectus shall, under any circumstances, create any implication that there has been
no change in our affairs since the date of this prospectus or that the information contained by reference to this prospectus is
correct as of any time after its date.
Prospectus Summary
This summary highlights
information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the section entitled
“Risk Factors” before deciding to invest in our common stock.
About Us
We are a neurodiagnostic
and predictive technology platform company seeking to provide a centralized platform for data acquisition and analysis of electroencephalography
(“EEG”) data that combines our medical device technologies with cloud-based telehealth services. Both our NeuroCap,
a pre-gelled disposable EEG headset, and NeuroEEG, a full-montage standard encephalograph, received FDA clearance to market in
2018. The pre-gelled electrodes are already coated with a conductive gel and vacuum sealed to ensure that it will not dry out
so that when taken out of the package they already have conductive gel to transport electricity. The full montage refers to how
the electrodes are positioned on the patient’s head. These scalp electrodes are used to record the EEG by using a machine
called an electroencephalograph.
On September 21, 2018,
we entered into a merger agreement (the “Merger Agreement”) with MemoryMD, Inc. and AFGG Acquisition Corp. to acquire
MemoryMD, Inc. (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 our
common stock. Accordingly, we acquired 100% of Memory MD, Inc. in exchange for the issuance of shares of our common stock and
MemoryMD, Inc. became our wholly-owned subsidiary.
Following the Acquisition,
the Company is now a neurodiagnostic and predictive technology platform company seeking to ultimately provide a centralized platform
for data acquisition and analysis of EEG data that combines our medical device technologies with cloud-based telehealth services.
The Company is not currently offering any data analysis services. The Company is primarily focused on establishing diagnostic
protocols to identify pathological risk factors involving the brain, and driving novel insights into cognitive health that support
early treatment of neurological disorders.
In 2019, we commenced
acting as a distributor of third-party medical devices in Russia (including those purchased from a company affiliated with one
of our officers and directors), which resulted in all of our revenue for 2019. While we intend to continue the sale of third party
medical devices, we do not intend for it to be our primary source of revenue in the long-term and expect to curtail or cease this
line of operations as, if and when we commence generating material, recurring revenues from our Products, of which we can give
no assurance. We also can give no assurance that any revenue we generate from so acting as a distributor of third-party medical
devices will continue, will continue to be material or will be sufficient to enable us to continue our operations. We have no
supply or distribution agreements in place with respect to such business. In the event that we see an opportunity to sell such
products, we procure them and then re-sell them.
Our principal executive
office is located at 67-35 St., B520, Brooklyn, New York., and our telephone number is (917) 388-1578. Our website address is
www.brainscientific.com. The information on our website is not part of this prospectus.
About This Offering
This prospectus relates
to the offering by the selling stockholders of 4,931,461 shares of common stock. The selling stockholders acquired such shares
pursuant to the Merger Agreement in exchange for shares of MemoryMd.
RISK FACTORS
An investment in the Company’s
common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described
below and the other information in this prospectus. Our business, operating results and financial condition could be harmed and
the value of our stock could go down as a result of these risks. This means you could lose all or a part of your investment.
Risks Relating to our Business
We have incurred significant operating
losses since inception and cannot assure you that we will ever achieve or sustain profitability.
We have incurred losses
since the formation of MemoryMD in 2015 and had an accumulated deficit of $3,672,077 as of December 31, 2019 and had a working
capital deficit of $897,206 as of December 31, 2019. We expect to continue to incur significant expenses and increasing operating
and net losses for the foreseeable future. To date, we have financed our operations primarily through debt and equity financings.
To date, our primary activities have been limited to, and our limited resources have been dedicated to, performing business and
financial planning, raising capital, recruiting personnel, negotiating with business partners and the licensors of our intellectual
property and conducting development activities, including the commercialization of our first two Products.
We believe that to fully
implement our business strategy we need to, among other things, raise approximately or generate revenues of $10.0 million, or
some combination thereof. We have never been profitable and do not expect to be profitable in the foreseeable future. Any profitability
in the future will be dependent upon the successful development of our business model, of which we can give no assurance of success.
We expect our expenses to increase significantly as we pursue our objectives. The extent of our future operating losses and the
timing of profitability are highly uncertain, and we expect to continue incurring significant expenses and operating losses over
the next several years. Our prior losses have had, and will continue to have, an adverse effect on our stockholders’ equity
and working capital. Any additional operating losses may have an adverse effect on our stockholders' equity, and we cannot assure
you that we will ever be able to achieve profitability. Even if we achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company
and could impair our ability to raise capital, expand our business, maintain our development efforts, obtain regulatory approvals
or continue our operations. Accordingly, we are a highly speculative venture involving significant financial risk.
We are a development stage company with
a limited operating history, making it difficult for you to evaluate our business and your investment.
Our operations are subject
to all of the risks inherent in the establishment of a new business enterprise, including but not limited to the absence of an
operating history, lack of fully-developed or commercialized products, insufficient capital, expected substantial and continual
losses for the foreseeable future, limited experience in dealing with regulatory issues, lack of manufacturing and marketing experience,
need to rely on third parties for the development and commercialization of our proposed Products, a competitive environment characterized
by well-established and well-capitalized competitors and reliance on key personnel.
We may not be successful
in carrying out our business objectives. The revenue and income potential of our proposed business and operations are unproven
as the lack of operating history makes it difficult to evaluate the future prospects of our business. There is nothing at this
time on which to base an assumption that our business operations will prove to be successful or that we will ever be able to operate
profitably. Accordingly, we have no track record of successful business activities, strategic decision-making by management, fund-raising
ability, and other factors that would allow an investor to assess the likelihood that we will be successful in our business. There
is a substantial risk that we will not be successful in fully implementing our business plan, or if initially successful, in thereafter
generating material operating revenues or in achieving profitable operations.
Since inception of MemoryMD in 2015,
we have not established any material revenues or operations that will provide financial stability in the long term, and there
can be no assurance that we will realize our plans on our projected timetable (or at all) in order to reach sustainable or profitable
operations.
We are not currently generating
any revenue from Product sales, and may never be able to successfully commercialize our NeuroEEG™ and NeuroCap™, or
other future Product candidates. Even if we succeed in commercializing any of such Products, we may never generate revenues significant
enough to achieve profitability.
In 2019, we commenced
acting as a distributor of third-party medical devices in Russia (including those purchased from a company affiliated with one
of our officers and directors), which resulted in all of our revenue for 2019. While we intend to continue the sale of third party
medical devices, we do not intend for it to be our primary source of revenue in the long-term and expect to curtail or cease this
line of operations as, if and when we commence generating material, recurring revenues from our Products, of which we can give
no assurance. We also can give no assurance that any revenue we generate from so acting as a distributor of third-party medical
devices will continue, will continue to be material or will be sufficient to enable us to continue our operations. We have no
supply or distribution agreements with respect to such business.
Investors are subject
to all the risks incident to the creation and development of a new business and each investor should be prepared to withstand
a complete loss of his, her or its investment. Furthermore, the accompanying financial statements have been prepared assuming
that we will continue as a going concern. We have not emerged from the development stage, and may be unable to raise further equity.
These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The Company has limited
experience in medical device development and commercialization. Our ability to become profitable depends primarily on: our ability
to develop our Products, our successful completion of all necessary pre-clinical testing and clinical trials on such Products,
our ability to obtain approval for such Products and, if approved, successfully commercialize such Products, our ongoing research
and development efforts, the timing and cost of clinical trials, our ability to identify personnel with the necessary skill sets
or enter into favorable alliances with third-parties who can provide substantial capabilities in clinical development, regulatory
affairs, sales, marketing and distribution and our ability to obtain and maintain necessary intellectual property rights to such
Products. Our limited experience in medical device development may make it more difficult for us to complete these tasks.
Even if we successfully
develop and market our Products, we may not generate sufficient or sustainable revenue to achieve or sustain profitability, which
could cause us to cease operations and cause you to lose all of your investment. Because we are subject to these risks, you may
have a difficult time evaluating our business and your investment in our Company.
Our ability to continue our operations
requires that we raise additional capital and our operations could be curtailed if we are unable to obtain the additional funding
as or when needed. As a result, our registered public accounting firm has included an explanatory paragraph relating to our ability
to continue as a going concern in its report on our audited financial statements included in this prospectus. We will need to
raise substantial additional funds in the future, and these funds may not be available on acceptable terms or at all. A failure
to obtain this necessary capital when needed could force us to delay, limit, scale back or cease some or all operations.
Upon the completion of
the audit of our financial statements for the year ended December 31, 2019, we concluded there was substantial doubt about our
ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory
paragraph regarding this uncertainty in its report on those financial statements.
The continued growth of
our business, including the development, regulatory approval and commercialization of our Products, will significantly increase
our expenses going forward, regardless of our revenues. As a result, we are required to seek substantial additional funds to continue
our business. Our future capital requirements will depend on many factors, including:
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the cost of developing our Products;
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obtaining and maintaining regulatory clearance
or approval for our Products;
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the costs associated with commercializing
our Products;
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any change in our development priorities;
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the revenue generated by sales of our Products,
if approved;
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the revenue generated by sales of third-party
medical devices;
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the costs associated with expanding our
sales and marketing infrastructure for commercialization of our Products, if approved;
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any change in our plans regarding the manner
in which we choose to commercialize any approved Product in the United States or internationally;
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the cost of ongoing compliance with regulatory
requirements;
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expenses we incur in connection with potential
litigation or governmental investigations;
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the costs to develop additional intellectual
property:
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anticipated or unanticipated capital expenditures;
and
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unanticipated general and administrative
expenses.
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We believe our existing
cash and cash equivalents, without raising additional capital or generating additional revenues, is insufficient to fund our operating
expenses for the foreseeable future. We expect to seek additional capital from public or private offerings of our capital stock,
borrowings under credit lines, if available, or other sources.
We may not be able to
raise additional capital on terms acceptable to us, or at all. Any failure to raise additional capital could compromise our ability
to execute on our business plan, and we may be forced to liquidate our assets. In such a scenario, the values we receive for our
assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.
If we issue equity or
debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities
may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional
funds through collaborations, licensing, joint ventures, strategic alliances, partnership arrangements or other similar arrangements,
it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies, or grant licenses
on terms that are not favorable to us.
Medical device development involves
a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing,
or ultimately be unable to complete, the development and commercialization of any Product.
Before obtaining marketing
approval from regulatory authorities for the sale of our Products under development in the United States or elsewhere, we must
complete all pre-clinical testing, clinical trials and other regulatory requirements necessitated by the FDA and foreign regulatory
bodies and demonstrate the performance and safety of our Products. Clinical testing is expensive, difficult to design and implement,
can take many years to complete and is inherently uncertain as to outcome. A failure of one or more clinical trials can occur
at any stage of testing. Further, the outcomes of completed clinical trials may not be predictive of the success of later clinical
trials, and interim results of a clinical trial do not necessarily predict final results. Clinical data is often susceptible to
varying interpretations and analyses, and many companies that have believed their products performed satisfactorily in clinical
trials have nonetheless failed to obtain marketing approval. We have limited resources to complete the expensive process of medical
device development, pre-clinical testing and clinical trials, putting at a disadvantage, particularly compared to some of our
larger and established competitors, and we may not have sufficient resources to commercialize our Products under development in
a timely fashion, if ever.
We may experience numerous
unforeseen events during or as a result of clinical trials that could delay or prevent our ability to receive marketing approval
or commercialize our Products, including:
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regulators may not authorize us or our
investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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the failure to successfully complete pre-clinical
testing requirements required by the FDA and international organizations;
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we may experience delays in reaching, or
fail to reach, agreement on acceptable clinical trial contracts with third parties or clinical trial protocols with prospective
trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different trial sites;
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clinical trials of our Products may produce
negative or inconclusive results, including failure to demonstrate statistical significance, and we may decide, or regulators
may require us, to conduct additional clinical trials or abandon our development programs;
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the number of people with brain related
disorders required for clinical trials may be larger than we anticipate, enrollment in these clinical trials may be slower
than we anticipate or people may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher
rate than we anticipate;
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our Products may have undesirable side
effects or other unexpected characteristics, causing us or our investigators, regulators or institutional review boards to
suspend or terminate the trials;
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our third-party contractors conducting
the clinical trials may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely
manner, or at all;
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regulators may require that we or our investigators
suspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements or a finding
that the participants are being exposed to unacceptable health risks;
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the cost of clinical trials of our Products
may be greater than we anticipate;
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the supply or quality of our Products or
other materials necessary to conduct clinical trials of our Products may be insufficient or inadequate; and
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delays from our suppliers and manufacturers
could impact clinical trial completion and impact revenue.
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If we are required to
conduct additional clinical trials or other testing of our Products under development beyond those that we contemplate, if we
are unable to successfully complete clinical trials of our Products under development or other testing, if the results of these
trials or tests are not favorable or if there are safety concerns, we may:
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not obtain marketing approval at all;
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be delayed in obtaining marketing approval
for our Products under development in a jurisdiction;
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be subject to additional post-marketing
testing requirements; or
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have our Products removed from the market
after obtaining marketing approval.
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Our development costs
will also increase if we experience delays in testing or marketing approvals. We do not know whether any of our clinical trials
will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays
also could allow our competitors to bring innovative products to market before we do and impair our ability to successfully commercialize
our Products.
Business or economic
disruptions or global health concerns could seriously harm our business.
Broad-based business or
economic disruptions could adversely affect our business. For example, in December 2019 an outbreak of a novel strain of coronavirus
originated in Wuhan, China, and has since spread around the world. To date, this outbreak has already resulted in extended shutdowns
of businesses around the world, including in the United States. We cannot presently predict the scope and severity of any potential
business shutdowns or disruptions, but if we or any of the third parties with whom we engage, including the suppliers, clinical
trial sites, regulators, health care providers and other third parties with whom we conduct business, were to experience shutdowns
or other business disruptions, our ability to conduct our business could be materially and negatively impacted. It is also possible
that global health concerns such as this one could disproportionately impact the hospitals, clinics and healthcare providers to
whom we intend to sell our products, as, if and when commercialized, which could have a material adverse effect on our business
and our results of operation and financial condition.
Current economic and political conditions
make tax rules in any jurisdiction subject to significant change.
We are subject to income
taxes as well as non-income based taxes, in both the U.S. and ultimately various jurisdictions outside the U.S. where we intend
to operate. We cannot predict the overall impact that changes or revisions to any such tax laws and regulations, whether in in
the U.S. or in jurisdictions outside the U.S., may have on our business. We may be subject to ongoing tax audits in various jurisdictions,
and the tax authorities conducting such audits may disagree with certain taxation positions we have taken and assess additional
taxes. Although we intend to regularly assess the likely outcomes of these audits in order to determine the appropriateness of
our tax obligations, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes
of these audits could have a material adverse effect on our financial condition and business operations.
Recent executive and legislative actions
to amend or impede the implementation of the Affordable Care Act and ongoing efforts to repeal, replace or further modify the
Affordable Care Act may adversely affect our business, financial condition and results of operations.
Recent executive and legislative
actions to amend or impede the implementation of the Affordable Care Act and ongoing efforts to repeal, replace or further modify
the Affordable Care Act may adversely affect our business, financial condition and results of operations.
There have been judicial
and congressional challenges to certain aspects of the Affordable Care Act, as well as recent efforts by the Trump administration
to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two Executive
Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or
otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Concurrently, Congress
has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress
has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the Affordable
Care Act have been signed into law. The Tax Act included a provision which repealed, effective January 1, 2019, the tax-based
shared responsibility payment imposed by the Affordable Care Act 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”. The 2018 Appropriations
Resolution delayed the implementation of certain Affordable Care Act-mandated fees, including, without limitation, the
medical device excise tax. The Bipartisan Budget Act of 2018, or BBA, among other things, amended the Affordable Care Act,
effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”.
In July 2018, CMS published a final rule permitting further collections and payments to and from certain Affordable Care
Act qualified health plans and health insurance issuers under the Affordable Care Act risk adjustment program in
response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment.
On December 14, 2018, a Texas U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its
entirety because the “individual mandate” was repealed by Congress as part of the Tax Act. While the Texas U.S. District
Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect pending appeal
of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the Affordable
Care Act will impact the Affordable Care Act and our business.
In addition, other legislative
changes have been proposed and adopted since the Affordable Care Act was enacted. These changes included aggregate reductions
to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and, due to the BBA, will
stay in effect through 2027 unless additional Congressional action is taken. In January 2013, President Obama signed into law
the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, and
increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
These new laws may result in additional reductions in Medicare and other healthcare funding, which could negatively impact customers
for our product candidates, if approved, and, accordingly, our financial operations.
We expect that other healthcare
reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding,
more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that we receive for any
approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction
in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from
being able to generate revenue, attain profitability, or commercialize our Products.
We are subject to costly and complex
laws and governmental regulations and any adverse regulatory action may materially adversely affect our financial condition and
business operations.
Our medical devices are
subject to regulation by numerous government agencies, including the FDA and comparable agencies outside of the U.S. To varying
degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing,
labeling, marketing, and distribution of our Products. We cannot guarantee that we will be able to obtain or maintain marketing
clearance for our new Products, or enhancements or modifications to existing Products, and the failure to maintain approvals or
obtain approval or clearance could have a material adverse effect on the financial condition of our business and our business
operations. Even if we are able to obtain such approval or clearance, it may take a significant amount of time, require the expenditure
of substantial resources, involve stringent clinical and pre-clinical testing, require increased post-market surveillance, involve
modifications, repairs, or replacements of our Products, and result in limitation on the proposed uses of our Products.
Both before and after
a Product or service is commercially released or offered, we have ongoing responsibilities under FDA regulations. Many of our
facilities and procedures and those of our suppliers are also subject to periodic inspections by the FDA to determine compliance
with the FDA’s requirements, including the quality system regulations and medical device reporting regulations. The results
of these inspections can include inspectional observations on FDA’s Form-483, warning letters, or other forms of enforcement.
If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices
are ineffective or pose an unreasonable health risk, the FDA could ban such medical devices, detain or seize adulterated or misbranded
medical devices, order a recall, repair, replacement, or refund of such devices, refuse to grant pending pre-market approval applications
or require certificates of non-U.S. governments for exports, and/or require us to notify health professionals and others that
the devices present unreasonable risks of substantial harm to the public health. The FDA may also assess civil or criminal penalties
against us, our officers or employees and impose operating restrictions on a company-wide basis, or enjoin and/or restrain certain
conduct resulting in violations of applicable law. The FDA may also recommend prosecution to the U. S. Department of Justice.
Governmental agencies comparable to the FDA which operate in foreign jurisdictions may also require us to comply with regulations
similar to those required by the FDA, and failing to do so may result in material adverse ramifications similar to those caused
by a failure to comply with FDA regulations. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively
marketing and selling our Products and limit our ability to obtain future pre-market clearances or approvals, and could cause
result in a substantial modification to our business practices and operations.
In addition, the FDA has
taken the position that device manufacturers are prohibited from promoting their products other than for the uses and indications
set forth in the approved product labeling. A number of enforcement actions have been taken against manufacturers that promote
products for “off-label” uses, including actions alleging that federal health care program reimbursement of products
promoted for “off-label” uses constitute false and fraudulent claims to the government. The failure to comply with
“off-label” promotion restrictions can result in significant civil or criminal exposure, administrative obligations
and costs, and/or other potential penalties from, and/or agreements with, the federal government.
Governmental regulations
outside the U.S. have become increasingly stringent and more common, and we may become subject to more rigorous regulation by
governmental authorities in the future in the event we determine to conduct business internationally. In the European Union, for
example, a new Medical Device Regulation was published in 2017 which, when it enters into full force, will impose significant
additional premarket and post-market requirements. Penalties for a company’s non-compliance with governmental regulation
could be severe, including fines and revocation or suspension of a company’s business license, mandatory price reductions
and criminal sanctions. Any governmental law or regulation imposed in the future may have a material adverse effect on us.
We are subject to environmental laws
and regulations and the risk of environmental liabilities, violations and litigation.
We are subject to numerous
U.S. federal, state, local and non-U.S. environmental, health and safety laws and regulations concerning, among other things,
the health and safety of our employees, the generation, storage, use and transportation of hazardous materials, emissions or discharges
of substances into the environment, investigation and remediation of hazardous substances or materials at various sites, chemical
constituents in medical products and end-of-life disposal and take-back programs for medical devices. Our operations involve the
use of substances regulated under such laws and regulations, primarily those used in manufacturing and sterilization processes.
If we violate these environmental laws and regulations, we could be fined, criminally charged or otherwise sanctioned by regulators.
In addition, certain environmental
laws assess liability on current or previous owners or operators of real property for the costs of investigation, removal or remediation
of hazardous substances or materials at their properties or at properties which they have disposed of hazardous substances. Liability
for investigative, removal and remedial costs under certain U.S. federal and state laws are retroactive, strict and joint and
several. In addition to clean-up actions brought by governmental authorities, private parties could bring personal injury or other
claims due to the presence of, or exposure to, hazardous substances. The ultimate cost of site clean-up and timing of future cash
outflows is difficult to predict, given the uncertainties regarding the extent of the required clean-up, the interpretation of
applicable laws and regulations, and alternative clean-up methods.
We may in the future be
subject to additional environmental claims for personal injury or clean-up based on our past, present or future business activities
(including the past activities of companies we may acquire). The costs of complying with current or future environmental protection
and health and safety laws and regulations, or liabilities arising from past or future releases of, or exposures to, hazardous
substances, may exceed our estimates, or have a material adverse effect on the financial condition of our business and our business
operations.
Our failure to comply with laws and
regulations relating to reimbursement of health care goods and services may subject us to penalties and adversely impact our reputation,
financial condition, and business operations.
Our Products are expected
to be purchased primarily by medical professionals and organizations that typically bill various third-party payers, such as governmental
programs (e.g., Medicare, Medicaid and comparable non-U.S. programs), private insurance plans and managed care plans, for the
healthcare services provided to their patients. The ability of our customers to obtain appropriate reimbursement for products
from third-party payers is critical because it affects which products customers purchase and the prices they are willing to pay
for such products. As a result, our Products are subject to regulation regarding quality and cost by the U.S. Department of Health
and Human Services, including the Centers for Medicare & Medicaid Services (“CMS”) as well as comparable state
and non-U.S. agencies responsible for reimbursement and regulation of health care goods and services. The principal U.S. federal
laws implicated include those that prohibit (i) the filing of false or improper claims for federal payment, known as the false
claims laws, (ii) unlawful inducements for the referral of business reimbursable under federally-funded health care programs,
known as the anti-kickback laws, and (iii) health care service providers from seeking reimbursement for providing certain services
to a patient who was referred by a physician who has certain types of direct or indirect financial relationships with the service
provider, known as the Stark Law. Many states have similar laws that apply to reimbursement by state Medicaid and other funded
programs as well as in some cases to all payers. Insurance companies can also bring a private cause of action claiming treble
damages against a manufacturer for causing a false claim to be filed under the federal Racketeer Influenced and Corrupt Organizations
Act. In addition, if we were to become a manufacturer of FDA-approved devices reimbursable by federal healthcare programs, we
would be subject to the Physician Payments Sunshine Act, which would require us to annually report certain payments and other
transfers of value we make to U.S.-licensed physicians or U.S. teaching hospitals.
Our anticipated domestic
and international operations may be subject to risks relating to changes in government and private medical reimbursement programs
and policies, and changes in legal regulatory requirements in the U.S. and around the world. Implementation of further legislative
or administrative reforms to the reimbursement system in the U.S. and outside of the U.S., or adverse decisions relating to our
Products or services by administrators of these systems in coverage or reimbursement, could significantly reduce reimbursement
or result in the denial of coverage, which could have an impact on the acceptance of and demand for our Products and the prices
that our customers are willing to pay for them.
The laws and regulations
of healthcare related products that are applicable to us, including those described herein, are subject to evolving interpretations
and enforcement discretion. If a governmental authority were to conclude that we are not in compliance with applicable laws and
regulations, we and our officers and employees could be subject to severe criminal and civil penalties, including, for example,
exclusion from participation as a supplier of products or services to beneficiaries covered by CMS. Any failure to comply with
laws and regulations relating to reimbursement and healthcare products could adversely affect our financial condition and business
operations.
We are subject to federal, state and
foreign healthcare regulations related to anti-bribery and anti-corruption laws, and could face substantial penalties if we fail
to fully comply with such regulations and laws.
The relationships that
we and our potential distributors and others that market or may market our Products have with healthcare professionals, such as
physicians and hospitals, are subject to scrutiny under various federal, state, foreign laws often referred to collectively as
healthcare fraud and abuse laws. In addition, U.S. and foreign government regulators have increased the enforcement of the Foreign
Corrupt Practices Act and other anti-bribery laws. We also must comply with a variety of other laws that protect the privacy of
individually identifiable healthcare information and impose extensive tracking and reporting related to all transfers of value
provided to certain healthcare professionals. These laws and regulations are broad in scope and are subject to evolving interpretation
and we could be required to incur substantial costs to monitor compliance or to alter our practices if we are found not to be
in compliance. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment
of current or former employees and exclusion from participation in governmental healthcare programs, all of which could have a
material adverse effect on our financial condition and business operations.
Quality problems with, and product liability
claims in connection with our Products could lead to recalls or safety alerts, harm to our reputation, or adverse verdicts
or costly settlements, and could have a material adverse effect on our financial condition and business operations.
Quality is extremely important
to us and our customers due to the serious and costly consequences of Product failure and our business exposes us to potential
product liability risks that are inherent in the design, manufacture, and marketing of medical devices and services. In addition,
our products may be used in intensive care settings with seriously ill patients. Component failures, manufacturing defects, design
flaws, off-label use, or inadequate disclosure of product-related risks or product-related information with respect to our products,
could result in an unsafe condition or injury to, or death of, a patient or other user of our products. These problems could lead
to the recall of, or issuance of a safety alert relating to, our Products, and could result in unfavorable judicial decisions
or settlements arising out of product liability claims and lawsuits, including class actions, which could negatively affect our
financial condition and business operations. In particular, a material adverse event involving one of our products could result
in reduced market acceptance and demand for all products offered under our brand, and could harm our reputation and ability to
market products in the future.
High quality products
are critical to the success of our business. If we fail to meet the high standards we set for ourselves and which our customers
expect, and our products are the subject of recalls, safety alerts, or other material adverse events, our reputation could be
damaged, we could lose customers, and our revenue and results of operations could decline. Our success also depends generally
on our ability to manufacture to exact tolerances precision-engineered components, subassemblies, and finished devices from multiple
materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation, competitive
advantage and market share could be negatively impacted. In certain situations, we may undertake a voluntary recall of products
or temporarily shut down product production lines if we determine, based on performance relative to our own internal safety and
quality monitoring and testing data, that we have or may be in danger of failing to meet the high quality standards we have set
for ourselves and which our customers expect. Such recalls or cessation of services or product manufacturing may also negatively
impact our business.
Any product liability
claim brought against us, with or without merit, could be costly to defend and resolve. Any of the foregoing problems, including
product liability claims or product recalls in the future, regardless of their ultimate outcome, could harm our reputation and
have a material adverse effect on our financial condition and business operations.
We are substantially dependent on patent
and other proprietary rights and failing to protect such rights or to be successful in litigation related to our rights or the
rights of others may result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability
to sell current or future Products, or prohibit us from enforcing our patent and other proprietary rights against others.
We are and will continue
to be materially dependent on a combination of patents, trade secrets, and trademarks, non-disclosure and non-competition agreements,
and other intellectual property protections which will enable us to maintain our proprietary competitiveness. We also operate
in an industry characterized by extensive patent litigation. Patent litigation against us can result in significant damage awards
and injunctions that could prevent our manufacture and sale of affected Products or require us to pay significant royalties in
order to continue to manufacture or sell affected Products. At any given time, we could potentially be involved as a plaintiff
and/or as a defendant in a number of patent infringement and/or other contractual or intellectual property related actions, the
outcomes of which may not be known for prolonged periods of time. While it is not possible to predict the outcome of such litigation,
we acknowledge the possibility that any such litigation could result in our payment of significant monetary damages and/or royalty
payments, negatively impact our ability to sell current or future Products, or prohibit us from enforcing our patent and proprietary
rights against others, which would have a material adverse effect on the financial condition of our business and on our business
operations.
While we intend to defend
against any threats to our intellectual property, including our patents, trade secrets, and trademarks, and while we intend to
defend against any actual or threatened breaches of our non-disclosure and non-competition agreements, may not adequately protect
our intellectual property or enforce such agreements. Further, patent or trademark applications currently pending that are owned
by us may not result in patents or trademarks being issued to us, patents or trademarks issued to or licensed by us in the past
or in the future may be challenged or circumvented by competitors and such patents or trademarks may be found invalid, unenforceable
or insufficiently broad to protect our proprietary advantages.
In addition, the laws
of certain countries in which we market, or intend to market, some or all of our Products do not protect our intellectual property
rights to the same extent as the laws of the U.S., which could make it easier for competitors to capture market position in such
countries by utilizing technologies and other intellectual property that are similar to those developed or licensed by us. Competitors
may also harm our sales by designing products or offering services that mirror the capabilities of our Products, or the technology
contained therein, without infringing our intellectual property rights. If we are unable to protect our intellectual property
in these countries, it could have a material adverse effect on our financial condition and business operations.
If we experience decreasing prices for
our Products and we are unable to reduce our expenses, our financial condition and business operations may suffer.
We may experience decreasing
prices for our Products due to pricing pressure experienced by our customers from managed care organizations and other third-party
payers, increased market power of our customers as the medical device industry consolidates, and increased competition among medical
engineering and manufacturing service providers. If the prices for our Products decrease and we are unable to reduce our expenses,
our results of operations will be adversely affected.
Our research and development efforts
rely upon investments and investment collaborations, and we cannot guarantee that any previous or future investments or investment
collaborations will be successful.
Our commercialization
strategy requires a wide variety of technologically advanced and capable Products. The rapid pace of technological development
in the MedTech industry and the specialized expertise required in different areas of medicine make it difficult for one company
alone to develop a broad portfolio of technological solutions. In addition to internally generated growth through our research
and development efforts, we anticipate the need to rely upon investments and investment collaborations to provide us access to
new technologies both in areas served by our contemplated businesses as well as in new areas. A failure to establish such collaborations
may harm our financial condition and business operations.
Going forward, we expect
to make future investments where we believe that we can stimulate the development or acquisition of new technologies, Products
to further our strategic objectives and strengthen our existing business ventures. Investments and investment collaborations in
and with medical technology companies are inherently risky, and we cannot guarantee that any of our previous or future investments
or investment collaborations will be successful or will not have a materially adverse effect our financial condition and business
operations.
The ability to offer our planned Products,
and the continuing development of new Products, depends upon us maintaining strong relationships with health care professionals.
If we fail to maintain
our working relationships with health care professionals, many of our Products may not be developed and offered in line with the
needs and expectations of the professionals who use and support our Products, which could cause a decline in our earnings and
profitability. The research, development, marketing, and sales of our Products is expected to be dependent upon our maintaining
working relationships with such health care professionals, and the use of our Products is expected to often require the participation
of health care professionals. In addition, health care professionals are the primary customer groups we expect to market and sell
our Products directly to, further highlighting the importance of our relationship with such health care professionals. If we are
unable to maintain our relationships with these professionals, we may lose our primary customer base, our Products may not be
utilized correctly or to their full potential, and our ability to develop, manufacture, and market future Products may be significantly
stunted.
Economic and political instability around
the world could adversely affect our financial condition and business operations.
Economic and political
instability around the world may adversely affect our ability to develop, manufacture, market, and sell our Products. Our customers
and suppliers may experience financial difficulties or be unable to borrow money to fund their operations which may adversely
impact their ability to purchase our Products or services or to pay for our Products on a timely basis, if at all. As with our
customers and suppliers, these economic conditions make it more difficult for us to accurately forecast and plan our future business
activities. In addition, a significant amount of our trade receivables are with national health care systems in the U.S. and in
many foreign countries. Repayment of these receivables is dependent upon the political and financial stability of those countries.
In light of domestic and global economic fluctuations, we continue to monitor the creditworthiness of customers located both inside
and outside the U.S. Failure to receive payment of all or a significant portion of these receivables could adversely affect our
financial condition and business operations.
Laws and regulations governing the export
of our Products could adversely impact our business.
The U.S. Department of
the Treasury’s Office of Foreign Assets Control and the Bureau of Industry and Security at the U.S. Department of Commerce
administer certain laws and regulations that restrict U.S. persons and, in some instances, non-U.S. persons, in conducting activities,
transacting business with or making investments in certain countries, governments, entities and individuals subject to U.S. economic
sanctions. Due to our planned international operations, we expect to be subject to such laws and regulations, which are complex,
could restrict our business dealings with certain countries and individuals, and are constantly changing. Further restrictions
may be enacted, amended, enforced or interpreted in a manner that adversely impacts our financial condition and business operations.
Consolidation in the health care industry
may cause a material adverse effect on our financial health and business operations.
In response to a variety
of actions by legislators, regulators, and third-party payers to reduce the perceived rise in healthcare costs, many health care
industry companies, including health care systems, are consolidating to create new companies with greater market power. As the
health care industry consolidates, competition to provide goods and services to industry participants will become more intense.
These industry participants may try to use their market power to negotiate price concessions or reductions our products which
price concessions may be unanticipated and adversely affect our financial condition and business operations.
We operate in a highly competitive industry
and we may be unable to compete effectively.
We expect to compete domestically
and internationally in the neurology and diagnostic imaging MedTech markets. These markets are characterized by rapid change resulting
from technological advances and scientific discoveries. In the product lines and offered services in which we compete, we face
a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited
selection of niche products. Development by other companies of new or improved products, processes, technologies, or the introduction
of reprocessed products or generic versions when our proprietary Products lose their patent protection may make our Products or
proposed Products less competitive. In addition, we face competition from providers of alternative medical therapies such as pharmaceutical
companies. Competitive factors include product reliability, product performance, product technology, product quality, breadth
of product lines, product services, customer support, price, and reimbursement approval from health care insurance providers.
We also face competition
for marketing, distribution, and collaborative development agreements, for establishing relationships health care professionals,
medical associations, and academic and research institutions, and for licenses to intellectual property. In addition, academic
institutions, governmental agencies and other public and private research organizations also may conduct research, seek patient
protection and establish collaborative arrangements for discovery, research, clinical development and marketing of products similar
to ours. These companies, professionals, and institutions compete with us in recruiting and retaining qualified scientific and
management personnel, as well as in acquiring necessary product technologies.
A reduction or interruption in our supply
of raw materials coupled with an inability to develop alternative sources for such raw materials, and other similar supply chain
management difficulties, may adversely affect our ability to manufacture our Products.
The manufacture of our
Products require the timely delivery of sufficient amounts of quality components and materials and is highly exacting and complex,
due in part to strict regulatory requirements, and we cannot guarantee that our efforts to secure quality components and materials
in a timely, cost effective manner will be successful. Other problems in the manufacturing process, including equipment malfunction,
failure to follow specific protocols and procedures, defective raw materials and environmental factors, could lead to launch delays,
product shortage, unanticipated costs, lost revenues and damage to our reputation. A failure to identify and address manufacturing
problems prior to the release of Products to our customers may also result in quality or safety issues.
The Company’s operating results
could be negatively impacted if it is unable to capitalize on research and development spending.
The Company has and intends
to continue to spend a significant amount of time and resources on research and development projects in order to develop and validate
new and innovative products. The Company believes these projects will result in the commercialization of new products and will
create additional future sales. However, factors including regulatory delays, safety concerns or patent disputes could delay the
introduction or marketing of new products. Additionally, unanticipated issues may arise in connection with current and future
clinical studies that could delay or terminate a product’s development prior to regulatory approval. The Company may experience
an unfavorable impact on its financial condition and business operations if we are unable to capitalize on those efforts by attaining
the proper FDA approval or to successfully market new products.
We may be unable to attract and retain
key employees.
Our sales, technical and
other key personnel play an integral role in the development, marketing and selling of our Products. If we are unable to recruit,
hire, develop and retain a talented, competitive work force, we may not be able to meet our strategic business objectives.
Risks Related to our Common Stock
There is not now, and there may never
be, an active market for our common stock and we cannot assure you that our common stock will become liquid or that it will be
listed on a securities exchange.
There currently is no
liquid market for our common stock. An investor may find it difficult to obtain accurate quotations as to the market value of
the common stock and trading of our common stock may be extremely sporadic. For example, several days may pass before any shares
may be traded. A more active market for our common stock may never develop. In addition, if we failed to meet the criteria set
forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other
than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending
or selling the common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional
capital.
The price of our common stock might
fluctuate significantly, and you could lose all or part of your investment.
Volatility in the market
price of our common stock may prevent you from being able to sell your shares of our common stock at or above the price you paid
for your shares. The trading price of our common stock may be volatile and subject to wide price fluctuations in response to various
factors, including:
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actual or anticipated fluctuations in our quarterly financial
and operating results;
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our progress toward developing our Products;
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the commencement, enrollment and results of our future clinical
trials;
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adverse results from, delays in or termination of our clinical
trials;
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adverse regulatory decisions, including failure to receive regulatory
approval;
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publication of research reports about us or our industry or
positive or negative recommendations or withdrawal of research coverage by securities analysts, if any;
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perceptions about the market acceptance of our Products and
the recognition of our brand;
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adverse publicity about our Products or industry in general;
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overall performance of the equity markets;
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introduction of Products, or announcements of significant contracts,
licenses or acquisitions, by us or our competitors;
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legislative, political or regulatory developments;
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additions or departures of key personnel;
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threatened or actual litigation and government investigations;
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sale of shares of our common stock by us or members of our management;
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general economic conditions.
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These and other factors
might cause the market price of our common stock to fluctuate substantially, which may negatively affect the liquidity of our
common stock. In addition, from time to time, the stock market experiences price and volume fluctuations, some of which may be
significant. This volatility has had a significant impact on the market price of securities issued by many companies across many
industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Accordingly,
the price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these
fluctuations could materially reduce our share price.
Securities class action
litigation has often been instituted against companies following periods of volatility in the overall market and in the market
price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our
management’s attention and resources, and harm our business, operating results and financial condition.
Our common stock is subject to the “penny
stock” rules of the SEC, which makes transactions in our stock cumbersome and may reduce the value of an investment in our
stock.
The SEC has adopted regulations
which generally define a “penny stock” as an equity security that has a market price of less than $5.00 per share,
subject to specific exemptions. The SEC’s penny stock rules require a broker-dealer, before a transaction in a penny stock
not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny
stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statements
showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally
require that before a transaction in a penny stock occurs, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the purchaser’s agreement to the transaction. If applicable
in the future, these rules may restrict the ability of brokers-dealers to sell our common stock and may affect the ability of
investors to sell their shares, until our common stock no longer is considered a penny stock.
Concentration of ownership of our common
stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant
corporate decisions.
Our executive officers,
directors and their affiliates, in the aggregate, beneficially own approximately 49% of our outstanding common stock as of October
7, 2020. As a result, these persons, acting together, would be able to significantly influence all matters requiring stockholder
approval, including the election and removal of directors, any merger, consolidation, sale of all or substantially all of our assets,
or other significant corporate transactions.
Some of these persons
or entities may have interests different than yours. For example, they may be more interested in selling our company to an acquirer
than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.
We intend to issue more shares to raise
capital, which will result in substantial dilution.
Our certificate of incorporation
authorizes the issuance of a maximum of 200,000,000 shares of common stock and 10,000,000 shares of “blank check”
preferred stock. Any additional financings effected by us may result in the issuance of additional securities without stockholder
approval and the substantial dilution in the percentage of common stock held by our then existing stockholders. Moreover, the
securities issued in any such transaction may be valued on an arbitrary or non-arm’s-length basis by our management, resulting
in an additional reduction in the percentage of common stock held by our current stockholders on an as converted, fully-diluted
basis. Our board of directors has the power to issue any or all of such authorized but unissued shares without stockholder approval.
To the extent that additional shares of common stock or other securities convertible into or exchangeable for common stock are
issued in connection with a financing, dilution to the interests of our stockholders will occur and the rights of the holder of
common stock might be materially and adversely affected.
Anti-takeover provisions that may be
in our charter and bylaws may prevent or frustrate attempts by stockholders to change the board of directors or current management
and could make a third-party acquisition of us difficult.
Our certificate of incorporation
and bylaws may contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control that
stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their
shares. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.
We do not intend to pay cash dividends
in the foreseeable future.
We have never declared
or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Accordingly,
you may have to sell some or all of your shares of our common stock in order to generate cash flow from your investment. You may
not receive a gain on your investment when you sell shares and you may lose the entire amount of the investment.
We expect to incur increased costs and
demands upon management as a result of being a public company.
As a public company in
the United States, we expect to incur significant additional legal, accounting and other costs. These additional costs could negatively
affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public
disclosure, including regulations implemented by the SEC and the stock exchange on which we may list our common stock, may increase
legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject
to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this
investment may result in increased general and administrative expenses and a diversion of management’s time and attention
from revenue-generating activities to compliance activities. If, notwithstanding our efforts to comply with new laws, regulations
and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Failure to comply with
these rules might also make it more difficult for us to obtain some types of insurance, including director and officer liability
insurance, and we might 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 events could also make it more difficult for us to attract and retain qualified
persons to serve on our board of directors, on committees of our board of directors or as members of senior management.
Failure to establish and maintain an
effective system of internal controls could result in material misstatements of our financial statements or cause us to fail to
meet our reporting obligations or fail to prevent fraud in which case, our stockholders could lose confidence in our financial
reporting, which would harm our business and could negatively impact the price of our stock. Furthermore, our management
and our independent auditors have identified certain internal control deficiencies, which management and our independent auditors
believe constitute material weaknesses.
Prior to the Acquisition,
Memory MD, Inc. was a private company with limited accounting personnel and other resources with which to address our internal
controls and procedures. Following the Acquisition, we must review and update our internal controls, disclosure controls and procedures,
and corporate governance policies as our Company continues to evolve. In addition, in connection with the Acquisition and becoming
a company that files reports with the SEC, we are required to comply with the internal control evaluation and certification requirements
of Section 404 of SOX and management is required to report annually on our internal control over financial reporting. Our independent
registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial
reporting pursuant to Section 404 of SOX until the date we are no longer a “smaller reporting company” as defined
by applicable SEC rules.
Any ineffective internal
control regarding our financial reporting could have an adverse effect on our business and financial results and the price of
our common stock could be negatively affected once we become a registrant required to file registration statements with the SEC.
This reporting requirement could also 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. Any system of internal controls, however well designed and operated, is based
in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are
met. Any failure or circumvention of the controls and procedures or failure to comply with regulation concerning control and procedures
could have a material effect on our business, results of operation and financial condition. Any of these events could result in
an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements,
which ultimately could negatively affect the market price of our shares, increase the volatility of our stock price and adversely
affect our ability to raise additional funding. The effect of these events could also make it more difficult for us to attract
and retain qualified persons to serve on our board of directors and as executive officers.
Our management’s
evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2019 concluded that our controls
were not effective, due to material weaknesses resulting from:
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Management did not maintain effective internal
controls relating to the accounting closing and financial reporting process pertaining to certain stock transactions and complicated
convertible debt instruments;
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The Company has insufficient internal personnel
resources and technical accounting and reporting expertise within the Company’s financial closing and reporting functions;
and
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Due to our small size, the Company did
not maintain effective internal controls to assure proper segregation of duties as the same employee was responsible for initiating
and recording of transactions, thereby creating a segregation of duties weakness.
|
Management believes there
is a reasonable possibility that these control deficiencies, if uncorrected, could result in material misstatements in the annual
or interim financial statements that would not be prevented or detected in a timely manner. Accordingly, we have determined that
these control deficiencies constitute material weaknesses. Although the Company is taking steps to remediate the material weaknesses,
it currently has limited resources to do so and there can be no assurance that similar incidents can be prevented in the future.
We will need to evaluate
our existing internal controls over financial reporting against the criteria set forth in Internal Control – Integrated
Framework (2013) (the “Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
During the course of our ongoing evaluation of the internal controls, we may identify other areas requiring improvement, and may
have to design enhanced processes and controls to address issues identified through this review. Remediating any deficiencies,
significant deficiencies or material weaknesses that we or our independent registered public accounting firm may identify may
require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the
measures we implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. The existence of
one or more material weaknesses could affect the accuracy and timing of our financial reporting. Investors could lose confidence
in our financial reports, and the value of our common stock may be harmed, if our internal controls over financial reporting are
found not to be effective by management or by an independent registered public accounting firm or if we make disclosure of existing
or potential material weaknesses in those controls.
Even if we conclude that
our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because
of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure
to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating
results or cause us to fail to meet our future reporting obligations.
Our reporting obligations
as a public company will place a significant strain on our management, operational and financial resources and systems for the
foreseeable future. If we fail to timely achieve and maintain the adequacy of our internal control over financial reporting, we
may not be able to produce reliable financial reports or help prevent fraud. Our failure to achieve and maintain effective internal
control over financial reporting could prevent us from filing our periodic reports on a timely basis which could result in the
loss of investor confidence in the reliability of our financial statements, harm our business and negatively impact the trading
price of our common stock.
If securities or industry analysts do
not publish research or reports, or publish unfavorable research or reports, about us, our business or our market, our stock price
and trading volume could decline.
The trading market for
our common stock will be influenced by the research and reports that securities or industry analysts publish about us and our
business. Securities or industry analysts may elect not to provide coverage of our common stock, and such lack of coverage may
adversely affect the market price of our common stock. In the event we do not secure additional securities or industry analyst
coverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our
stock could decline if one or more securities or industry analysts downgrade our stock or issue other unfavorable commentary or
research. If one or more securities or industry analysts ceases coverage of our company or fails to publish reports on us regularly,
demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
We may be subject to unknown risks and
liabilities which could harm our business, financial condition and results of operations.
Before the Acquisition,
MemoryMD conducted due diligence on, among other things, the business and financial conditions of All Soft Gels that it believed
was customary and appropriate for a transaction such as the Acquisition. However, the due diligence process may not have revealed
all material liabilities of the Company then existing or which may be asserted in the future against us relating to the Company’s
activities before the consummation of the Acquisition. In addition, the agreement with the Company contains representations with
respect to the absence of any liabilities. However, there can be no assurance that the Company had no liabilities upon the closing
of the Acquisition. Any such liabilities of the Company that survive the Acquisition Transaction could harm our revenues, business,
prospects, financial condition and results of operations.
In addition, in connection
with the Acquisition, the known liabilities existing in All Soft Gels at the time of the Acquisition were cancelled or paid by
us, as required by the Merger Agreement. Despite this requirement and the representations and warranties of All Soft Gels in the
Merger Agreement, there may be unknown liabilities, or liabilities that were known but believed to be immaterial, related to the
business of All Soft Gels that may become material liabilities we are subject to in the future. If we are subject to material
liability as a result of the conduct of All Soft Gels, we may have limited recourse for such liabilities, which could have a material
impact on our business and stock price.
FORWARD-LOOKING STATEMENTS
This prospectus contains
forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally
in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases,
you can identify forward-looking statements by the words “may,” “might,” “will,” “could,”
“would,” “should,” “expect,” “intend,” “plan,” “objective,”
“anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,”
“target,” “seek,” “contemplate,” “continue” and “ongoing,” or the
negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve
known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or
achievements to be materially different from the information expressed or implied by these forward-looking statements. Although
we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that
these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about
which we cannot be certain. Forward-looking statements include statements about:
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our plans to develop and commercialize our proposed and developing
products, technologies, and services (“Products”).
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our plans for and our expectations regarding the pre-clinical
testing and clinical trials of our Products that will be required by the U.S. Food and Drug Administration (“FDA”)
or foreign regulatory bodies;
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the timing and availability of data from pre-clinical tests
or clinical trials;
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the timing of our planned regulatory filings;
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the timing of and our ability to obtain and maintain regulatory
approval of our Products;
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our expectations regarding international opportunities for commercializing
our Products under development;
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the clinical utility of our Products under development;
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our ability to develop our Products with the benefits we hope
to offer as compared to existing technology, or at all;
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our ability to develop future generations of our Products;
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our future development priorities;
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our ability to obtain reimbursement coverage for our Products;
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our expectations about the willingness of healthcare providers
to recommend our Products to their patients;
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our future commercialization, marketing and manufacturing capabilities
and strategy;
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our ability to comply with applicable regulatory requirements;
and
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our ability to maintain our intellectual property position;
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Forward-looking statements
are based on management’s current expectations, estimates, forecasts and projections about our business and the industry
in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and
involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. You should refer to
the “Risk Factors” section of this prospectus for a discussion of important factors that may cause our actual results
to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot
assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking
statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking
statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve
our objectives and plans in any specified time frame, or at all.
These forward-looking
statements speak only as of the date of this prospectus. Except as required by law, we assume no obligation to update or revise
these forward-looking statements for any reason, even if new information becomes available in the future. You should, however,
review the factors and risks and other information we describe in the reports we will file from time to time with the SEC after
the date of this prospectus.
USE OF PROCEEDS
We will receive no proceeds
from the sale of shares of common stock offered by the selling stockholders.
SELLING SECURITY HOLDERS
This prospectus relates
to the offering by the selling stockholders of up to 4,931,461 shares of common stock offered by the selling stockholders.
The following table sets
forth, based on information provided to us by the selling stockholders or known to us, the name of each selling stockholder, and
the number of shares of our common stock beneficially owned by the stockholder before this offering. The number of shares
owned are those beneficially owned, as determined under the rules of the SEC, and the information is not necessarily indicative
of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares of common stock
as to which a person has sole or shared voting power or investment power and any shares of common stock which the person has the
right to acquire within 60 days through the exercise of any option, warrant or right, through conversion of any security or pursuant
to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement. None
of the selling stockholders is a broker-dealer or an affiliate of a broker-dealer. None of the selling stockholders has had a
material relationship, within the past three years, with us or with any of our predecessors or affiliates.
We have assumed all shares
of common stock reflected on the table will be sold from time to time in the offering covered by this prospectus. Because
the selling stockholders may offer all or any portions of the shares of common stock listed in the table below, no estimate can
be given as to the amount of those shares of common stock covered by this prospectus that will be held by the selling stockholders
upon the termination of the offering.
Selling Stockholder
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Number of Shares
Beneficially
Owned
Before Offering
|
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Number of Shares
Being
Offered
|
|
|
Number of Shares
Beneficially
Owned
After Offering
|
|
|
Percentage of Shares
Beneficially Owned
After Offering (%)
|
|
Success
Ultra Holding(1)
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506,175
|
|
|
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337,450
|
|
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|
168,725
|
|
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*
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Andrew Brown
|
|
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1,709,063
|
|
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|
1,000,000
|
|
|
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709,063
|
|
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3.6
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Alexandre Gofman
|
|
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25,238
|
|
|
|
17,667
|
|
|
|
7,571
|
|
|
|
*
|
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Thomas J. Caleca
|
|
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1,552,878
|
|
|
|
1,000,000
|
|
|
|
552,878
|
|
|
|
2.9
|
|
Peritimos Investment(2)
|
|
|
506,175
|
|
|
|
337,450
|
|
|
|
168,725
|
|
|
|
*
|
|
David M. Siwicki
|
|
|
68,303
|
|
|
|
20,491
|
|
|
|
47,812
|
|
|
|
*
|
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Barry Presman
|
|
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547,878
|
|
|
|
164,363
|
|
|
|
383,515
|
|
|
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2.0
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Khurram Sindhu
|
|
|
252,388
|
|
|
|
75,716
|
|
|
|
176,672
|
|
|
|
*
|
|
Yuri Lubomirski
|
|
|
25,200
|
|
|
|
17,767
|
|
|
|
7,433
|
|
|
|
*
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William Corbett
|
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5,000
|
|
|
|
1,500
|
|
|
|
3,500
|
|
|
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*
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Richard Clausing
|
|
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5,000
|
|
|
|
1,500
|
|
|
|
3,500
|
|
|
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*
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Maks Vasilevski
|
|
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337,450
|
|
|
|
236,215
|
|
|
|
101,235
|
|
|
|
*
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David Poiman
|
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33,745
|
|
|
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10,124
|
|
|
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23,621
|
|
|
|
*
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James F. Carter
|
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10,000
|
|
|
|
3,000
|
|
|
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7,000
|
|
|
|
*
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Bradley Fischer
|
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4,000
|
|
|
|
1,200
|
|
|
|
2,800
|
|
|
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*
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Mohsin Memon
|
|
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78,598
|
|
|
|
20,954
|
|
|
|
57,644
|
|
|
|
*
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Haidar Akmal
|
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157,125
|
|
|
|
41,887
|
|
|
|
115,238
|
|
|
|
*
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Nabil Mallick
|
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71,505
|
|
|
|
16,206
|
|
|
|
55,299
|
|
|
|
*
|
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Mehdi Alhassani
|
|
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64,463
|
|
|
|
19,339
|
|
|
|
45,124
|
|
|
|
*
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|
Irina Migalini(3)
|
|
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337,450
|
|
|
|
101,235
|
|
|
|
236,215
|
|
|
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1.2
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Sohaira Siddiqui
|
|
|
159,891
|
|
|
|
30,647
|
|
|
|
129,424
|
|
|
|
*
|
|
Saeed Bajwa
|
|
|
78,568
|
|
|
|
20,945
|
|
|
|
57,623
|
|
|
|
*
|
|
Nida Bajwa
|
|
|
78,555
|
|
|
|
20,942
|
|
|
|
57,613
|
|
|
|
*
|
|
Quasim Husain
|
|
|
78,485
|
|
|
|
16,482
|
|
|
|
62,003
|
|
|
|
*
|
|
High Technology
Capital Fund (4)
|
|
|
6,749,000
|
|
|
|
1,249,656
|
|
|
|
5,499,344
|
|
|
|
28.4
|
|
Faina Stolina
|
|
|
337,450
|
|
|
|
168,725
|
|
|
|
168,725
|
|
|
|
*
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|
* Less than 1%.
(1)
|
Alexsander Surikovs has voting and investment power over the
securities of the Company held by the selling stockholder.
|
(2)
|
Mikhael Spektr has voting and investment
power over the securities of the Company held by the selling stockholder.
|
(3)
|
The selling stockholder is the wife of Boris Goldstein, our Chairman and Executive Vice President.
|
(4)
|
The president of the selling stockholder is Boris Goldstein.
|
PLAN OF DISTRIBUTION
This prospectus includes 4,931,461 shares of
common stock offered by the selling stockholders.
Our common stock is eligible
for quotation on the OTCQB. There has been extremely limited reported trading to date in our common stock. The price reflected
in this prospectus of $3.00 per share was the initial offering price of the shares of common stock upon the effectiveness of the
registration statement of which this prospectus forms a part. The selling stockholders may, from time to time, sell any or all
of their shares of common stock covered by this prospectus in private transactions or on any stock exchange, market or trading
facility on which the shares may then be traded. Since our shares are now quoted on the OTCQB, the selling stockholders may sell
any or all of their shares at prevailing market prices or privately negotiated prices. A selling stockholder may use any one or
more of the following methods when selling shares:
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ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
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●
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block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
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purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
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an exchange distribution in accordance with the rules of the
applicable exchange;
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privately negotiated transactions;
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broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per share;
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Through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
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a combination of any such methods of sale; or
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any other method permitted pursuant to applicable law.
|
The $3.00 per share offering
price of the shares of common stock being sold under this prospectus was arbitrarily set. The price did not bear any relationship
to our assets, book value, earnings or net worth and it is not an indication of actual value. Additionally, the offering price
of our shares exceeds the per share value of our net tangible assets. Therefore, if you purchase shares in this offering, you will
experience immediate and substantial dilution. Investors should be aware of the risk of judging the real or potential future market
value, if any, of our common stock by comparison to the offering price.
The selling stockholders
may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
In addition, the selling
stockholders may transfer the shares of common stock by other means not described in this prospectus. If the selling stockholders
effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders
or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal
(which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales of the shares of common stock or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of
common stock in the course of hedging in positions they assume. The selling stockholders may also loan or pledge shares of common
stock to broker-dealers that in turn may sell such shares.
The selling stockholders
may pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time
to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of
the Securities Act amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors
in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of
common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the
selling beneficial owners for purposes of this prospectus.
To the extent required
by the Securities Act and the rules and regulations thereunder, the selling stockholders and any broker-dealer participating in
the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities
Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a
prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of common stock being
offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions
and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed
or re-allowed or paid to broker-dealers.
There can be no assurance
that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement,
of which this prospectus forms a part.
The selling stockholders
and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act, and the
rules and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which
may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating
person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the
shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing
may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.
We will pay all expenses of the registration
of the shares of common stock.
Once sold under the registration
statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
DESCRIPTION OF SECURITIES
TO BE REGISTERED
This prospectus relates
to the public offering of up to 4,931,461 shares of common stock by the selling stockholders. The following is a summary of the
rights of holders of our common stock and some of the provisions of our articles of incorporation and bylaws and of the NRS. This
summary is not complete. For more detailed information, please see our articles of incorporation and bylaws, which are filed as
exhibits to the registration statement of which this prospectus is a part, as well as the relevant provisions of the NRS.
General
Our authorized capital
stock consists of 200,000,000 shares of common stock, with a par value of $0.001 per share, and 10,000,000 shares of preferred
stock, with a par value of $0.001 per share.
Common Stock
Each holder of common
stock is entitled to one vote for each share of common stock held of record by such holder with respect to all matters to be voted
on or consented to by our stockholders, except as may otherwise be required by applicable Nevada law. A vote by the holders of
a majority of the Company’s outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation,
merger or an amendment to the Company’s certificate of incorporation. Holders of the Company’s common stock are entitled
to share in all dividends that the board of directors, in its discretion, declares from legally available funds. In the event
of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets
that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common
stock. The Company’s common stock has no pre-emptive rights, no conversion rights and there are no redemption provisions
applicable to the Company’s common stock.
Blank-Check Preferred Stock
The Company’s articles
of incorporation authorize the issuance of up to 10,000,000 shares of “blank check” preferred stock, par value $0.001
per share, in one or more series, subject to any limitations prescribed by law, without further vote or action by the stockholders. Each
such series of preferred stock shall have such number of shares, designations, preferences, voting powers, qualifications, and
special or relative rights or privileges as shall be determined by our board of directors, which may include, among others, dividend
rights, voting rights, liquidation preferences, conversion rights and pre-emptive rights.
DESCRIPTION OF BUSINESS
The Company
We are a neurodiagnostic
and predictive technology platform company seeking to provide a centralized platform for data acquisition and analysis of electroencephalography
(“EEG”) data that combines innovative medical device technologies with cloud-based telehealth services. The Company
is primarily focused on establishing diagnostic protocols through the use of its Products to identify pathological risk factors
involving the brain, and driving novel insights into cognitive health that support early treatment of neurological disorders.
We believe our approach
is unique in utilizing medical, consumer and hybrid technologies to create the value chain to ultimate
health:
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linking analysis to business/health outcomes through benefits
mapping;
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|
●
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investing in advanced analytics, starting with the assumption
that advanced information will result in predictive analytics for the integral body;
|
|
●
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validating the organization's maturity against multiple complementary
models;
|
|
●
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ensuring there is sufficient trust in the data and analysis
to change pre-existing beliefs; and
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|
●
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balancing analytic insight with the ability of an organization
to make and optimally utilize the information (coupling man + machine learning) while prioritizing incremental improvements
over integral body transformation.
|
The Company is initially
targeting brain data acquisition via the EEG medical market because it offers high revenue potential due to the established healthy
base of customer users with a broad demographic profile. Our technology solution combines a miniature, wireless, clinical device
capable of recording electroencephalograms (EEG) that is fast, portable, and easy-to-use with the capability to integrate an interpretive
cloud-based platform allowing for rapid and remote interpretation. The NeuroEEG™ Hardware Platform for data collection and
NeuroCap™ Software-like Consumables for data collection is expected to enjoy healthy margins and a business-to-business
(B2B) direct market opportunity with hospitals, neurologist, general practitioners as well as the various tele health and tele
neurology companies.
This brain monitoring
system is designed for use in physicians’ offices, sports fields, wellness centers and anywhere else that benefits from
rapid EEG testing.
Recent Events
COVID-19 Pandemic
With the outbreak of the
COVID-19 pandemic, we are promoting the use of sanitary medical practice with the NeuroCap, which we believe promotes the use
of good, sanitary medical practice and can help flatten the COVID-19 curve.
A recent report from three
COVID-19-designated hospitals in Wuhan, China indicated that more than one-third of coronavirus patients had some type of neurologic
symptom, including altered consciousness, evidence of skeletal muscle damage, and acute cerebrovascular disease. Early data implies
that COVID-19, like prior coronavirus breakouts MERS and SARS, is demonstrating a neurologic component in severe cases.
As hospitals and other
first responders to the pandemic around the world increase their purchases of supplies to fight the virus, and the U.S. government
has passed a $2 trillion aid package to prop up the country’s economy and assist in fighting the virus, we are working to
position our NeuroCap as a safe and effective diagnostic tool to help against the COVID-19 virus.
Information in this prospectus
is based on available information from prior to the pandemic. We have not yet been able to evaluate how the pandemic has or may
continue to affect our business and operations, including the potential markets for our Products.
In 2019, we commenced
acting as a distributor of third-party medical devices in Russia (including those purchased from a company affiliated with one
of our officers and directors), which resulted in all of our revenue for 2019. While we intend to continue the sale of third party
medical devices, we do not intend for it to be our primary source of revenue in the long-term and expect to curtail or cease this
line of operations as, if and when we commence generating material, recurring revenues from our Products, of which we can give
no assurance. We also can give no assurance that any revenue we generate from so acting as a distributor of third-party medical
devices will continue, will continue to be material or will be sufficient to enable us to continue our operations. We have no
supply or distribution agreements in place with respect to such business. In the event that we see an opportunity to sell such
products, we procure them and then re-sell them.
History
We were initially organized
on November 18, 2013 as a Nevada limited liability company under the name Global Energy Express LLC by the filing of articles
of organization with the Secretary of State of the State of Nevada. On December 18, 2015, the Company converted from a Nevada
limited liability company under the name Global Energy Express LLC to a Nevada corporation under the name All Soft Gels Inc. by
the filing of articles of conversion and articles of incorporation with the Secretary of State of the State of Nevada. On September
18, 2018, the Company changed its name from All Soft Gels Inc. to Brain Scientific Inc. and changed its ticker symbol on the OTC
Pink market to “BRSF”.
On September 21, 2018,
we entered into a merger agreement (the “Merger Agreement”) with MemoryMD, Inc. and AFGG Acquisition Corp. to acquire
MemoryMD, Inc. (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 our
common stock. Accordingly, we acquired 100% of Memory MD, Inc. in exchange for the issuance of shares of our common stock and
MemoryMD, Inc. became our wholly-owned subsidiary. Furthermore, the Company at such time ceased all operations and assigned all
of its assets and liabilities from prior to the Acquisition, and assumed and commenced the business of MemoryMD as the sole business
of the Company.
Our principal executive
office is located at 205 East 42nd Street, 14th Floor, New York, New York 10017, and our telephone number is (646) 388-3788. Our
website address is www.brainscientific.com. The information on our website is not part of this prospectus.
Introduction to Data Acquisition using Electroencephalography
(EEG)
Electroencephalography,
or EEG, is a method to identify and evaluate the electrical activity of the brain. The ability to do this dates back to the mid-to-late
19th century when scientists began to study the brain activity of various animals such as rabbits, dogs, and monkeys. The 1920’s
saw the first example of these involving humans, when in 1924 German physiologist and psychiatrist Hans Berger recorded the first
human EEG.
One of the first discoveries
was the EEG’s ability to identify the potential for epileptic seizures. As science and scientists began to understand the
workings of the EEG, they could identify more beneficial applications of the technology working in combination with other tests.
These include:
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Testing brain activity after a stroke
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Dementia, including Alzheimer’s Disease
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Traumatic Head Injury (sports and non-sports related)
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Sleep Disorders (e.g. Insomnia, Restless Leg Syndrome, Narcolepsy)
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The EEG may also be used
to determine the electrical activity of the brain of an individual involved in a trauma, addiction, as well as the brain activity
of comatose individuals.
It is here in the advancement
of technology where we believe our products and technology will play a key role in the use and development of EEG related activities.
Product and Services Pipeline
Our data acquisition platform is composed
of three main parts:
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Hardware - NeuroEEG™ and NeuroCap™, our two products
on the market.
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Software - interpreted by remote technicians for rapid response
time.
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NeuroNet Cloud - The database where brain data can be stored
and analyzed.
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NeuroEEG
NeuroEEG™ is an
FDA cleared 16 channel, portable, cloud-enabled data acquisition platform for electroencephalogram (EEG) activity. This wireless
system digitizes and records electrophysiological activity at 500Hz, and is further supported by advanced artifact filtering allowing
for the cleanest signal possible. The intuitive nature of the device democratizes EEG as a viable diagnostic tool that can be
implemented across environments that were formerly inaccessible by traditional EEG solutions. NeuroEEG™ is designed for
use in mobile (ambulatory care & emergency medical service vehicles), field applications (clinical trials), as well as hospital
and athletic environments.
NeuroEEG™
is non-invasive and is intended to acquire, display and store the electrical activity of a patient’s brain on a computer
(PC or laptop). The generated data serves as a clinical assessment aid within a clinical practice, rehabilitation institution,
diagnostic center, neurosurgical clinics, operating room, intensive care unit, and emergency room environments. Data acquired
by NeuroEEG™ is to be analyzed under the direction and interpretation of a licensed medical professional. This device does
not provide any diagnostic conclusion about a subject's condition. The NeuroEEG is designed to be used with our NeuroCap but can
also work with other existing brands and models of caps or with no cap at all.
The Company commenced
delivery of its first purchase order of this product in the fourth quarter of 2018, although it has not had any further material
orders to date.
NeuroCap
The NeuroCap™ is
an FDA cleared disposable, soft layered cap with an integrated electrode circuit that is designed to address existing problems
of conventional EEG systems. The silver embedded wiring is pre-gelled, so it requires no prepping of the skin before application.
NeuroCap™ makes it possible for medical staff of all levels to perform EEG tests, without having to laboriously apply electrodes
one-by-one or spend considerable time cleaning an EEG headset after each use.
The NeuroCap™
works in parallel with the NeuroEEG™ amplifier device to successfully carry out EEG tests. However, the NeuroCap™
can work also with other existing EEG devices and not just our NeuroEEG. NeuroCap’s electrode placement follow standard
alignment pursuant to the international 10-20 system. The acquisition of electrical brain activity is carried out by non-invasive
pre-gelled passive Ag/AgCl scalp (cutaneous) electrodes, ensuring maximum comfortability for the wearer.
We received our first
purchaser order for the NeuroCap from a distributor of medical supplies for testing purposes and commenced shipping product in
the fourth quarter of 2018 to several hospitals and other customers, although we have not had any further material orders to date.
NeuroNet Cloud
Our NeuroNet Cloud
infrastructure is being designed to provide for a robust platform to store and manage all forms of data that may be received from
internal and external entities such as EHRs/EMRs, IOT devices and 3rd party apps, clinical applications and other forms of patient
data. The NeuroNet Cloud is also being designed to provide for streamlined connectivity, allowing secured access to patient data
for purposes of evaluation and reporting by outside clinical specialists, such as a neurologists. The NeuroNet Cloud platform
is being designed to be able to process data from the NeuroEEG and NeuroCar products, as well as other existing EEG systems.
The Company is also developing
a HIPAA-compliant data storage and patient management cloud infrastructure to provide teleneurology services. The infrastructure
is being designed so neurologists will be able to remotely access patient EEG and clinical data to evaluate patient conditions.
We believe that such an infrastructure removes the need for direct contact with the patient, opening up underserved geographic
locations with an undersupply of physicians to meet growing demand for neurological care as aging patient populations continues
to grow.
Data is acquired
via the 16 channel NeuroCap™ and would be wirelessly transmitted to the cloud, via the NeuroEEG™, as batch data
(fully transferred before being consumed) or in real-time (data is consumed as it is being produced). It is also being designed to process information from other EEG systems.
Data can then be consumed
by a doctor or specialist who can recover the data, replay, and provide feedback, such as a report, on the selected patient data.
This infrastructure is configurable to match unique workflows of healthcare operators.
As designed, the MemoryMD™
cloud would then be able to cross-reference multiple points-of-data:
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Electronic Health Records
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We expect to have a
fully working model of the NeuroNet Cloud by the end of 2020, subject to the availability of funds as it is not our priority product.
Artificial Intelligence Infrastructure
Our infrastructure is
also being designed to gather and mine brain-imaging data. Clinicians and researchers would be able to access data profiles of
their patients and generate risk assessment and treatment plans to address neurological conditions. This data could also be useful
in establishing correlations between a myriad of brain scans, allowing us to further understand connections about the brain that
have not been discovered.
Artificial intelligence
infrastructure in the Company cloud refers to all modules used to perform automatic analysis of patient data. This infrastructure
can receive inputs from many different sources such as medical databases, normative data sets, and other patient health information.
By using machine-learning algorithms, the system is being designed to improve accuracy, providing for more advanced diagnostics
as additional brain images are acquired.
The infrastructure is
being designed to combine neural networks with a state-of-the-art tree search and pattern classification systems to build robust
neurological health profiles of patient brain scans. These models are expected to be self-learning, so the more data supplied
to it, to more “educated” it is expected to be.
We believe we will achieve
better patient outcomes at a reduced cost through robust modelling and correlational analysis of brain imaging and other biometric
data. Significant patterns recognized by the system are designed to help medical professionals detect nuances in an individual
brain, allowing them to tailor more personalized treatment plans for their patients. The MemoryMD™ cloud is being designed
to handle millions of brain images to create robust models that correlate health records, behaviors, and other neurological factors.
Intellectual Property
Protection of our intellectual
property is a strategic priority for our business. We rely on a combination of patents, trademarks, copyrights, trade secrets
as well as nondisclosure and assignment of invention agreements, material transfer agreements, confidentiality agreements and
other measures to protect our intellectual property and other proprietary rights.
Patents and trademarks
are significant to our business to the extent that a Product or an attribute of a Product represents a unique design or process.
Patent protection restricts competitors from duplicating unique designs and features. To protect our proprietary secrets and competitive
technologies, we have obtained and are seeking to further obtain patent, trade secret, trademark and other intellectual property
protection on our Products whenever appropriate. As of the date of this prospectus, the Company has applied for one U.S. nonprovisional
patent titled “Apparatus And Method For Conducting Electroencephalography” (Application No.: 15/898,611), one Chinese
patent titled “Apparatus and Method for Conducting Electroencephalography” (Application No.: 201880002338.7), and
one European patent titled “Apparatus And Method For Conducting Electroencephalography” (Application No.: 18757492.6),
all of which relate to our NeuroCap Product. All of which , are pending and if approved would expire in 2037.
We also own two registered
trademarks (Neuro EEG and NeuroCap) and have pending applications for two additional trademark registrations (Brain Scientific
and Memory MD).
In May 2018, we entered
into a Patent Assignment and License Back Agreement with Boris Goldstein, our Chairman, Secretary and Executive Vice President,
Dmitriy Prilutskiy, Stanislav Zabodaev and Medical Computer Systems Ltd. Pursuant to the agreement, among other things, Messrs.
Goldstein, Prilutskiy and Zabodaev assigned all of their rights to a patent entitled “Apparatus And Method For Conducting
Electroencephalography” (Application No.: 15/898,611), to our Company, and in return, we granted to Medical Computer Systems
Ltd., an unaffiliated entity who also provides manufacturing services to us, a limited, royalty-free, fully paid-up, worldwide,
nonexclusive license (without the right to sublicense or assign), to the patent, to practice, make and use the inventions, ideas
and information embodied therein, and to make, use, offer to sell, sell, lease or import products, services, processes, methods
and materials embodying or deriving from the inventions, ideas and information from the patent and any activities derived directly
therefrom; provided, however, that if and upon FDA approval of a Product, Medical Computer Systems’ aforementioned rights
shall be limited to manufacturing and sales solely to our Company or on our behalf provided that we purchase from Medical Computer
Systems (and Medical Computer Systems makes available for sale) a minimum of 20,000 units of Products per calendar year on reasonable
terms and conditions to be determined by the parties in good faith; provided further, however, that Medical Computer Systems can
without any limitation sell products embodying or deriving from the inventions, ideas and information from the patent in (i) the
territories that made up the former USSR (excluding the Baltic countries) and (ii) Japan. In furtherance of the foregoing first
proviso, in the event we fail to purchase the annual minimum order for a particular calendar year, Medical Computer Systems’
limitation to manufacture and sell Products only to our Company pursuant to this proviso shall be suspended for the next calendar
year.
Industry Overview
The Company competes within
the domestic and global medical device industry, referred to as the “MedTech” industry, which industry, on a global
scale, is expected to reach an estimated $432.6 billion by 2025, and it is forecast to grow at a CAGR of 4.1% from 2020 to 2025.
The MedTech industry is
characterized by rapid change resulting from technological advances and scientific discoveries. We believe that U.S. medical device
companies are highly regarded on a global scale for their innovations and high-technology products, which innovations and products
are produced due to a significant investment in research and development. U.S. sales are expected to grow from about $164 billion
in 2018 to $208 billion in 2023, according to Fitch.
The global brain monitoring
market is expected to reach $11.6 billion by 2024 from $8.7 billion in 2019, at a CAGR of 6.1% during the forecast period. We
believe the increasing incidence and prevalence of neurological disorders, rising awareness about neurodegenerative disorders,
growing incidence of traumatic brain injuries, and the increasing applications of brain monitoring in clinical trials are driving
the growth of this market. In addition, of this global market, the traumatic brain injury diagnostic market size was estimated
at approximately $38 million and it is expected to reach approximately $166 million by the end of 2025, with a CAGR of 23.6%.
Traumatic brain injury
holds the largest share of the brain monitoring market, by disease type. Some of the major factors responsible for the large share
of this market include the growing incidence of TBIs across the globe, leading to the high demand for the management of these
cases—which we believe requires the intensive use of brain monitoring devices.
We believe the hospitals
segment has accounted for the largest share of the brain monitoring market in 2019. Brain monitoring is a complex process, requiring
expensive and advanced devices and equipment that are mainly found only in hospitals. Hospitals also see a considerably larger
inflow of patients as compared to small clinics and other end users. Additionally, brain monitoring devices pose a considerable
burden in terms of maintenance expenses on healthcare facilities; we believe that in general hospitals, more than other end users,
are able to bear such costs. Hence, brain monitoring devices are mostly used in hospitals, which consequently account for the
largest market share.
U.S. Healthcare Market
The National Health Expenditure
Accounts (NHEA) are the official estimates of total health care spending in the United States. U.S. health care spending grew
4.6 percent in 2018, reaching $3.6 trillion or $11,172 per person. As a share of the nation's Gross Domestic Product, health spending
accounted for 17.7%.
Digital health innovations
are driving growth and opportunity in three major verticals of healthcare:
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Remote Patient Monitoring. Devices and applications that allow
care providers to keep tabs on chronically ill, recently released, and overall “high-risk” patients (also referred
to as remote patient management, or RPM). Wearable patches that diagnose heart conditions, sensors that monitor asthma medication
intake, and glucose monitors that send diabetics’ data straight to their smartphones are just a few examples.
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Telehealth. Doctor access and advice, from outside the confines
of an office visit. It could be mental health counselling from across the country, diagnosis and prescription writing in pediatrics
without taking a sick child to the office, alternatives to primary care physician visits, and other, similar events.
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Behavior Modification. Platforms that help patients change their
habits and adopt healthier lifestyles, with the primary aim of preventing illness and a clinically validated methodology of
doing so. That includes smoking cessation tools and diabetes prevention through digital weight loss and coaching, among other
technologies.
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Athletic Performance Market
Athletic performance encompasses
the treatment and prevention of injuries related to athletics and exercise.
The growth of this market
can be attributed to increased participation in athletic activities, thus leading to an increased risk of injuries. Also, government
support for participation in athletics to combat high obesity rates is expected to boost participation in athletics.
Our business plan includes
positioning our products and services as a go-to choice in diagnostic tools for brain-related sports injuries. The EEG with cortical
brain maps is highly capable of identifying post-concussion syndrome. Concussions and traumatic brain injuries caused by contact
sports are a growing widespread issue among athletes. The Center for Disease Control and Prevention has reported that 1.6 million
to 3.8 million concussions occur each year.
If left undetected, concussions
can lead to long-term brain damage and may even be fatal. Without professional doctors to survey the true damage of the head impact,
athletes often ignore head impacts and later suffer from the consequences. Since an estimated 90% of diagnosed concussions do
not include a loss of consciousness, many head impact injuries are dismissed. To prevent these outcomes, it is critical that coaches
and players are aware of the dangers of contact sports and are able to conduct a proper concussion evaluation. The growing number
of sports related brain injuries suggests that there is an unmet demand for a quick assessment and delivery of brain damage, which
we believe our products and services can provide.
Government Initiatives – Pre COVID
19 Pandemic
Although the Covid-19
pandemic has abruptly changed the world, which we hope is temporary, prior to the outbreak, there was a surge of regional tensions
and national security threats and many countries, including the United States, were increasing defense budgets. Also, prior to
the pandemic, we expected that stable growth in global GDP, lower commodity prices, and an increase in travel demand could lead
to more defense spending as well as investing in next generation military equipment and technology to combat terrorism and cyber-threats.
While many of those expectations and paradigms have now changed, we expect that they will return as the pandemic is contained
and the world economy rebounds.
The Defense Advanced Research
Project Agency supports the Brain Initiative, which is a program designed to revolutionize the understanding of the human brain
to find new ways to treat, cure, and prevent brain disorders. We believe our product and service offerings can be an asset in
providing millions of brain scans that allow for research and analysis. In addition to the Brain Initiative and other Government
sponsored research and grants, our scalable, easy to use EEG can serve the military and can be deployed in the field for either
proactive brain monitoring or reactive emergency response.
Education Enhancement
Global education and training
expenditures are estimated to reach approximately $10 trillion by 2030 as population growth and technology in developing markets
is expected to fuel a massive expansion in education, and training.
The growth in the market
is due to an increase in the attendance of students, the promotion of online learning, a rise in tuition costs, an escalation
of graduation rates, and an expansion of scientific research. Parents are willing to spend on education for their children and
government initiated awareness programs promote the importance of education. The US is one of the most efficient, and therefore
desired, destinations for educational purposes. In the United States, higher growth opportunity and better career prospects reinforce
the need for education and research.
Since analysis of EEGs
are useful in recognizing cognitive differences, the brain scans of the up-to 50 million potential customers in this space can
be a stepping stone for further research. Furthermore, the cognitive measurements of EEGs are useful in assessing the effectiveness
of an educational program. Conclusions drawn from the analysis can then be further applied in the classroom in the future. The
goal of selling to the education market is to have the opportunity to measure baseline EEGs of students. The baseline EEGs can
serve in multiple studies, including those that evaluate the best methods of teaching and learning in the classroom. Some additional
uses of EEGs within the education market include research and analysis into the brain images of students with learning disabilities.
Clinical Trials
The global healthcare
contract research organization market size is expected to reach approximately $62.1 billion by 2027, registering a CAGR of
6.6% over the same period, primarily resulting from the increasing cost of drug development. Rising cost of clinical trials and
challenges pertaining to patient recruitment have led biopharmaceutical companies to turn to regions like Central and Eastern
Europe, Asia Pacific, Latin America, and Middle East for cost savings and quick patient recruitment.
Clinical trials assess
the safety and efficacy of a new drug, therapy, surgical procedure, medical device, or other intervention and are essential tools
in conducting research. When used in clinical trials, we expect our products and services will give a fast and accurate analysis
that may speed the clinical trial process. Moreover, clinical imaging is the technique and process of capturing images of the
human body for clinical purposes to reveal, diagnose or examine diseases. Our EEG is a clinical imaging tool that can acquire
millions of clinical images stored on a cloud infrastructure. A vast number of clinical images can assist in revealing, diagnosing,
and examining neurological conditions.
The Global Telemedicine Market/Industry
In addition to the MedTech
industry, we are also seeking to participate within the rapidly expanding global telemedicine industry/market. This industry focuses
on the delivery of healthcare services, consultations and advice to patients wherever they are through the means of technology,
software mediated video and data portals. We believe that there is and will continue to be significant demand for such services
given the need to match physicians with patients in remote areas or without having patients travel long distances to access the
care they need. We also believe that there is a major need within this industry to also provide point of care diagnostic, which
we are seeking to develop as a niche, especially within neurology.
The global telemedicine
market was estimated at approximately $31.5 billion in 2018 and is expected to grow at a CAGR of 19.28% by 2025.
Factor such as, rising
emergency medical incidents and ageing world population are anticipated to drive such growth. North America is anticipated to
account for a significant portion of market share, and the U.S. is expected to be the largest telemedicine market in North America
over this period. The Europe telemedicine market is also expected to grow substantially, due to factors such as rising cost of
healthcare and rising prevalence of chronic diseases, while Asia-Pacific is projected to record the fastest growth over such period.
Market Dynamics
Driver: Growing incidence of traumatic
brain injuries
A traumatic brain injury
(“TBI”) is non-degenerative, non-congenital damage to the brain from an external mechanical force, possibly leading
to permanent or temporary impairment. TBI is a major public health concern, and the most common cause of death and disability
in developed as well as developing countries.
According to the CDC,
TBI is a leading cause of morbidity and mortality, responsible for approximately 2.8 million accidents and emergency department
visits annually in the U.S. and approximately 1 million in the UK. It is one of the most common causes of mortality in people
aged under 25, and its incidence is high in adults and very young children, as well. However, the rate of TBI-related hospitalizations
and deaths is the highest in the elderly. According to Headway, in 2016–2017, there were 348,453 hospital admissions related
to brain injuries in the UK.
TBI, if ignored, can lead
to permanent disabilities or death. Close monitoring and immediate therapy for related abnormalities are crucial to reducing the
rate of mortality or morbidity associated with TBIs. As intercranial pressure monitoring (ICP) is the most common cause of death
in patients with severe TBI, ICP monitoring is considered as the standard of care. The growing incidence of TBIs is, therefore,
likely to support market growth.
Opportunity: Increasing Expanding therapeutic
applications of brain monitoring devices
Apart from applications
in neurological disorders, neurodegenerative diseases, and psychiatric disorders, brain monitoring devices are also used in other
therapeutic areas like insomnia, post-traumatic stress disorder (PTSD), and sleep apnea. Quantitative EEG analysis is widely used
to investigate the neurophysiological characteristics of insomnia. EEG biofeedback is a training process that has been scientifically
proven to aid in the management of PTSD.
A number of research studies
have demonstrated the effectiveness of neurofeedback for PTSD in adults. For instance, a research study published by the NCBI
in 2016 demonstrated that 24 sessions of neurofeedback significantly reduced PTSD symptoms in adult sample populations. Similar
studies are also being conducted in children. Such positive research outcomes suggest that neurofeedback is a promising approach
in the treatment of PTSD. This is especially important because existing treatments can be quite difficult to tolerate and have
limited effectiveness for many individuals with PTSD. In addition, EEG is routinely used to measure and record brain wave activity
for the diagnosis and treatment of sleep apnea. These extended applications of brain monitoring devices are expected to provide
growth opportunities for players operating in this market.
Challenge: Shortage of trained professionals
Trained medical personnel
are required to effectively operate devices involved in the complex process of brain monitoring. The positioning of electrodes
on the scalp and the insertion of muscular needles require accuracy and can be performed only by highly trained personnel. In
addition, the results generated by brain monitoring machines are complex and can only be interpreted by qualified technicians
or skilled professionals. Without these fundamental skills, end users will face difficulties in maximizing the utility of their
brain monitoring equipment. The presence of highly skilled medical personnel and staff is, therefore, vital for the effective
use of brain monitoring equipment.
Currently, there is a
shortage of skilled medical personnel in both developed and developing countries. It has been estimated that the United States
will see a shortage of up to nearly 122,000 physicians by 2032 as demand for physicians continues to grow faster than supply,
Furthermore, according to the American Association of Colleges of Nursing, there is a projected shortage of registered nurses
in the US, and it is expected to intensify by 2030. Moreover, the shortage of trained and experienced neurodiagnostic technologists
globally has compelled hospitals to cross-train other allied health professionals to perform neurodiagnostic examinations. This
presents a key challenge for the growth of the global brain monitoring devices market.
We believe the market
remains fragmented as many medical practices rely on dated technology and complicated brain monitoring solutions. We also believe
that the overpricing and technological barriers currently existing in the market make our innovative EEG platform truly disruptive
by being both user friendly and cost effective.
Competition
Our Products face a mixture
of competitors ranging from large manufacturers with multiple business lines to small manufacturers offering a limited selection
of products and services. Many of the competitors whom we directly compete with include companies who develop or intend to develop
medical EEG products with FDA clearance to support clinical diagnosis of brain disorders. Our indirect competitors offer similar
products and services, but target audiences in the clinical research and consumer solutions markets, as opposed to the medical
solution market the Company targets. These indirect competitors are largely focused on the development of EEG products for research,
consumer, and athletic application.
Major shifts in industry
market share have occurred in connection with product problems, physician advisories, safety alerts, and publications about MedTech
products, reflecting the importance of product quality, product efficacy, and quality systems in the medical device industry.
In addition, in the current environment of managed care, economically motivated customers, consolidation among health care providers,
increased competition, and declining reimbursement rates, the Company anticipates an increasing need to compete on the basis of
price and quality. In order to continue to compete effectively, we must continue to create or acquire advanced technology, incorporate
this technology into our current and future proprietary Products, obtain regulatory approvals in a timely manner, maintain high-quality
manufacturing processes, and successfully market these Products. Some of these initiatives include, but are not limited to, creating
integrated cloud solutions that connect specialists with generalists for simple data transfer and analysis, streamlining clinical
diagnoses with new medical devices, and opening up revenue streams from secondary healthcare markets, such as primary care medical
professionals who utilize EEG analyses in their practices.
The medical device companies
who we deem as competitors include the following, along with a description of their business based on publicly available information:
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Advanced Brain Monitoring - A California- based private company
specializing in developing neurological medical devices. The company specializes in two specific areas: neurotechnology and
sleep medicine. Advanced Brain Monitoring primarily is a medical device and software company that sells its products to clinical
trials and pharmaceutical companies, ignoring several profitable and addressable markets.
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Elmiko Medical - A Warsaw-based private company specializing
in designing and developing medical electronics and IT solutions. Elmiko primarily sells their products and services to scientific
institutes, medical universities, hospitals, and private clinics across the world.
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Contec - A China-based private medical device company focusing
on research, manufacturing, and distribution of medical instrument since 1996. Contec currently has over 20 products in its
portfolio focusing on the medical-technology industry ranging from stethoscopes to EEGs.
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EGI (Electrical Geodesics, Inc) - An Oregon-based medical-device
company founded in 1992, EGI specializes in making dense array EEG (dEEG) for research laboratories.
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Masimo Corporation - A California-based public (NASDAQ: MASI)
medical technology company that develops and manufactures innovative noninvasive patient monitoring technologies, including
medical devices and a wide array of sensors. Masimo has a wide array of products, ranging from pulse oximetry to EEGs. The
company serves mainly the sleep study, clinical trial, and athletic performance markets.
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NeuroSky, Inc - A health and wellness tracking and analysis
company that are advancing health solutions through consumer wearables and mobile devices, including biosensor technologies.
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Oculogica, Inc – A private company looking to better learn
and treat concussions, having developed an eye tracking technology that works to detect concussions, the severity of the concussion,
and the treatment for the concussion.
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Picofemto LLC - A healthcare company focusing on assisting clinicians
and research professionals with a web platform that analyzes raw primary medical data at the point of evaluation. They have
developed a cloud-based service called Cliniscan, which allows the clinician and researcher to work in the cloud with a wide
range of biomedical modalities.
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Satoris, Inc - A molecular diagnostics company, engages in the
development and commercialization of neurodiagnostic tests for Alzheimer’s disease. Satoris plans to have their product
manage and treat neurodegenerative diseases through diagnostic tests. These tests are developed through data of molecular
biology and bioinformatics.
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CAS Medical Systems, Inc - A developer of innovative, non-invasive
vital signs monitoring technologies and products that deliver patient data.
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Emotiv Systems, Inc. - A bioinformatics company advancing understanding
of the human brain using EEG. Their technology aims to track cognitive performance, monitor emotions, and control both virtual
and physical objects via machine learning of trained mental commands.
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Atlas Wearables, Inc. - A data analytics company and the developer
of a fitness monitor designed to improve indoor and outdoor training. Their goal is to use the combination of data acquired
from the lab along with each unique set of data from the customer, to provide clear and current knowledge based on data results.
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BaziFIT - A modular sensor system that works to monitor the
neuromuscular efficiency, strength, stability, and calories burned during the customer’s workout. Their physical technology
is an attachment that goes on various workout equipment that helps the customer get exercise content and quantifiable feedback
on every workout instantly. Their app uses the data collected by their attachment to assess the customer’s progress
and health and suggests various workouts for the customer to do to optimize the progress of their health.
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MAD Apparel Inc. - The developer of the product Athos, a performance
apparel that monitors biosignals and distills them into meaningful information to improve the level of exercise the customer
is performing. The technology receives data in real time and shows the customer their stats so they can alter or continue
the workout.
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Mechio Inc. - A developer of wearable fitness technology to
monitor the health, fitness, and sleep of the customer.
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Sarvint Technologies, Inc. - An Atlanta-based wearables technology
company born from smart-garment technology research at Georgia Tech. The research led to the development of their Smart Shirt,
a garment that uses special fibers to detect and monitor body vital signs. It then sends these signals to a program that can
be downloaded onto smart phones to easily monitor the information collected.
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Sensifree Inc. – A company developing technology to solve
the shortcomings of optical sensors. Their RF based sensor technology monitors heart rate from different parts of the human
body.
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Sensoria Inc. - A developer of wearable fitness technology that
collects fitness data and connects with a real time virtual coach that gives performance and running form feedback.
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CorTechs Labs- A developer of medical device software solutions
capable of automatically segmenting and quantifying brain structures, making quantitative analysis of MRI images of the human
brain a routine part of clinical practice.
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Other EEG makers that
we may compete against include Ceribell, Biosignal Group and Zeto. The major U.S. medical device companies who we deem as competitors
include Baxter, Beckman Coulter, Becton Dickinson, Boston Scientific, GE Healthcare Technologies, Johnson & Johnson, St. Jude,
Stryker Corporation, and Medtronic. Many of the companies against which we may compete in the future have significantly greater
financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology
and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller
or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large
and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management
personnel and establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies
complementary to, or necessary for, our development.
We intend to compete based
on our belief in the superiority of our products and services in functionality, cost-effectiveness, efficiency, ease of use and
accuracy.
Because our business plan
contemplates servicing the neurotech industry across multiple platforms including hardware, software, service and cloud computing,
and our existing and proposed product and service platforms are in a growing industry, we believe we are in a position to take
a leadership position within the sector due to our:
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Strong Portfolio of Intellectual Property. Our diverse intellectual
property portfolio includes a series of patents and FDA approvals, ranging from hardware to firmware applications.
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Diverse Commercial Application Opportunities. From smart wearable
devices that monitor cognitive and behavioral health in real-time, to enhanced Brain Computer Interface (“BCI”)
capabilities within the connected home and car environments, our EEG technologies span a range of novel applications and commercial
uses, including:
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Global Brain Monitoring Market
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Scalable Integration. We believe that we offer the highest level
of integration and flexibility while providing an optimal combination of convenience and performance. This is achieved through
the modular design and build of our products, allowing seamless integration of hardware and software components into existing
platforms. We are also engaged with strategic partners to augment the next generation of health wearables and technologies,
forging relationships with companies and individuals seeking to implement EEG solutions across a multitude of segments.
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Experienced Leadership Team. The MemoryMD™ team has over
30 years of combined experience in sectors spanning across artificial intelligence, data mining, software development, commercialization,
EEG imaging, and biotechnology. With a firm background in medical grade EEG applications, our team has a qualified perspective
on electrode quality and brain wave interpretation.
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Centralized Cloud Data Collection. Neuro-net algorithms and
other mathematical models based on EEG interpretation mine for unique brain patterns on a global scale. These patterns are
continuously trained and visualized to provide reliable health data and insights that consumers, developers, and companies
can leverage across the entire MemoryMD™ platform.
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Market Application
For neurologists and other
health providers, we aim to provide a solution for monitoring patient health and safety across a variety of locations including
the hospital, specialized clinics, and home settings. In managing patients with epilepsy, providers can improve in areas concerning
patient re-admittance, patient mortality and morbidity. Providers can also proactivity prevent the onset of negative chronic health
conditions by engaging with at-risk populations at a fraction of the cost by implementing our affordable EEG solutions.
For health providers,
our offering of an EEG monitoring solution could ease data collection efforts. By providing an accurate and consistent stream
of EEG data, our products and services are being designed to allow physicians and other health professionals to make use of newly
available bio-metric data to improve diagnosis, treatment and management of various neurological illnesses, effectively increasing
the quality and value add of medical services.
Our portability and integration
potential augment the existing suite of remote monitoring solutions, allowing physicians to more accurately differentiate between
nuanced neurological conditions happening within and outside the hospital setting. An example includes helping neurologist’s
contrast nocturnal epilepsy patterns across other sleep disorders such as parasomnias where individuals engage in abnormal movements
during sleep.
Furthermore, we believe
a range of medical based applications can be created in conjunction with our EEG solutions around managing patient behavior, offering
incentives and parameters for individuals. By understanding what is going on with their brain and being alerted when discrepancies
occur, we believe that physicians will be able to better communicate health information, improving the effectiveness and relationship
between physicians and patients in improving health outcomes, and individuals with the support of their physicians will be able
to better regulate targeted mental states or emotions reducing the sole reliance on on-site visits to hospitals for mental health
treatment plans.
Sales and Marketing
We have commenced the
commercial roll-out of the NeuroEEG™ and NeuroCap™, on a limited basis, initially targeting the United States market
following with Canada market. We expect the following developmental milestones to be completed within the next 24 months, subject
to cash availability:
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Scale production in US, Europe and Russia
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Release new products to the market:
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12 channel EEG cap for adults and pediatric use
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Long Term Monitoring caps
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Long Term Monitoring 24 channel EEG
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Data storage for normalized data brain scans
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AI neuro net development focused on epilepsy to start, with
following up on pre-Alzheimer and BCI prediction
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Minimally invasive graphene electrodes connected to the micro
EEG
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Expend AI prediction toward concussion, pain and autism applications
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File international applications in Latin America, Europe and
beyond.
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We are identifying additional
long-term partners to accelerate market penetration, product diversification, and ultimate survivability across targeted verticals.
Through new implementations of our EEG products and services, we expect to retain and capture additional market share through
continuous enhancements.
We plan to utilize partner
relationships and co-marketing opportunities as the initial driver of our marketing efforts, thereby benefiting from increased
speed-to-market, as well as the ability to leverage a pre-existing audience/customer base and communications channels. We expect
to offer to early adopters our products and services at preferential rates in exchange for expediting development, distribution,
and sales of such products and services.
Our marketing and sales
strategy is focused on rapid, cost-effective delivery of high-quality products into the U.S. and international healthcare market.
The sales strategy is based on penetrating the neurology and diagnostic imaging subsectors of the MedTech industry market via
planned medical device distributor arrangements or partnering on distribution of NeuroCaps through existing EEG manufacturers,
and expanding into nursing homes and primary care practices. Included amongst the customers to whom we intend to market and sell
our Products through distributors and partners (B2B), are individual physicians, medical practices, urgent care facilities, physician
associations, and other medical professionals and medical professional groups, hospitals, health clinics, nursing homes, physical
rehabilitation centers, addiction rehabilitation centers and other medical institutions, athletic organizations, and colleges,
universities, and other academic institutions. To date, we have not entered into any distribution or partnership arangements.
We intend for our products’
initial entry into the market would be at emergency departments, ICU’s and other acute care settings in the United States.
We will also be looking
at forming partnerships with national and global telemedicine and teleneurology companies in order to leverage their relationships,
to access our target end-users. This would allow our initial entry into the rapidly growing global telemedicine and teleneurology
markets.
As we grow, we intend
to expand to global distributors, Group Purchasing Organizations (GPOs) of medical supplies, and Independent Physician Associations
(IPAs) to scale business operations. At this time, we do not provide financing for potential customers, but we are evaluating
implementing a leasing program.
We do not at this time have plans to have
direct sales or hire a direct sales force.
Reimbursement
Coverage in the United States
Reimbursement from private
third-party healthcare payors and, to a lesser extent, Medicare will be an important element of our success. Although the Centers
for Medicare and Medicaid, or CMS, and third-party payors have adopted coverage policies for our targeted indications, there is
no guarantee this will continue at the same levels or at all in the future.
Regarding ICD-10 codes,
the International Classification of Diseases, Tenth Edition (ICD-10) is a clinical cataloging system that went into effect for
the U.S. healthcare industry on Oct. 1, 2015, after a series of lengthy delays. Accounting for modern advances in clinical treatment
and medical devices, ICD-10 codes offer many more classification options compared to those found in its predecessor, ICD-9. Within
the healthcare industry, providers, coders, IT professionals, insurance carriers, government agencies and others use ICD codes
to properly note diseases on health records, to track epidemiological trends and to assist in medical reimbursement decisions.
We believe that many of
the indications we are pursuing with our technologies are currently reimbursed on a widespread basis by Medicare, Medicaid and
private insurance companies.
Medicare, Medicaid, health
maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement of new medical devices, and, as a result, their coverage policies may be restrictive,
or they may not cover or provide adequate payment for our Products. In order to obtain reimbursement arrangements, we may have
to agree to a net sales price lower than the net sales price we might charge in other sales channels. Our revenue may be limited
by the continuing efforts of government and third-party payors to contain or reduce the costs of healthcare through various increasingly
sophisticated means, such as requiring prospective reimbursement and second opinions, purchasing in groups, or redesigning benefits.
Our future dependence on the commercial success of our technologies makes us particularly susceptible to any cost containment
or reduction efforts. Accordingly, unless government and other third-party payors provide adequate coverage and reimbursement
for our Products and the related insertion and removal procedures, our financial performance may be limited.
Coverage Outside the United States
If we seek to commercialize
our Products in countries outside the United States, coverage may be available from certain governmental authorities, private
health insurance plans, and labor unions. Coverage systems in international markets vary significantly by country and, within
some countries, by region. If we seek to commercialize our technology, if approved, outside the U.S., coverage approvals must
be obtained on a country-by-country, region-by-region or, in some instances, a case-by case basis. Based on our ongoing evaluation,
certain countries reimburse more highly than others.
Manufacturing, Supply and Quality Assurance
We currently outsource
the supply and manufacture of all components of our NeuroEEG and NeuroCap. We plan to continue with an outsourced manufacturing
arrangement for the foreseeable future. We expect that our third-party manufacturers will be competent to manufacture our Products
and have quality systems established that meet FDA requirements. We believe the manufacturers we currently utilize or that we
may utilize in the future have sufficient capacity to meet our launch requirements if our technology under development is approved
in the future and are able to scale up their capacity relatively quickly with minimal capital investment. We believe that, as
we increase our demand in the future, our per unit costs will decrease materially. We have also identified capable second source
manufacturers and suppliers in the event of disruption from any of our primary vendors.
Our suppliers meet ISO
13485:2003 certification, which includes design control requirements. As a medical device developer, the facilities of our sterilization
and other critical suppliers are subject to periodic inspection by the FDA and corresponding state and foreign agencies. We plan
to audit our suppliers periodically to ensure conformity with the specifications, policies and procedures for our devices.
With respect to graphene
electrodes, our goal is to start working with specific 3D printers and print prototypes of the next generation electrodes. Upon
successful testing, of which we can give no assurance of success, we plan to submit the graphene electrode for biocompatibility
testing in 2020/2021 with a follow up application to the FDA in 2021 and projected approval in 2022 with commercial implementation
to follow.
Research and Development
Our research and development
programs are generally pursued by engineers and scientists employed by us on a full-time basis or hired as per diem consultants
or through partnerships with industry leaders in manufacturing and design and researchers and academia. We are also working with
subcontractors in developing specific components of our technologies.
The primary objective
of our research and development program is to advance the development of our existing and proposed Products, to enhance the commercial
value of such Products.
We have incurred research
and development costs of $103,616 for the year ended December 31, 2019 and $210,206 for the year ended December 31, 2018. We have
commenced evaluating the use of graphene for brain electrodes, with an affiliate of Boris Goldstein, our Chairman of the Board.
We believe the main benefits of using graphene for electrodes are:
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No reaction to any chemicals or human organs
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Inexpensive compared to platinum
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Potential electronic applications
of graphene in EEG include ultra-small transistors, super-dense data storage, touchscreens and a wearable e-tattoo EEG patch.
In the energy field, potential applications include ultra-capacitors to store and transmit electrical power as well as highly
efficient solar cells. We believe graphene-based batteries in EEG will be able to charge faster and last longer, although we have
not commenced any work towards that goal at this time.
We also have formed a
Medical Advisory Board. The current members are Dr. John Gaitanis, MD, Tufts Medical Center; and Dr. John Hixson, MD, Associate
Professor of Neurology, University of California San Francisco. We intend to grant to such members from time to time equity for
the services they provide to us.
Government Regulation
Our NeuroEEG and NeuroCap
are each a medical device subject to extensive and ongoing regulation by the FDA, the U.S. Centers for Medicare & Medicaid
Services, or CMS, the European Commission, and regulatory bodies in other countries. Regulations cover virtually every critical
aspect of a medical device company’s business operations, including research activities, product development, quality and
risk management, contracting, reimbursement, medical communications, and sales and marketing. In the United States, the Federal
Food, Drug and Cosmetic Act, or FDCA, and the implementing regulations of the FDA govern product design and development, pre-clinical
and clinical testing, premarket clearance or approval, product manufacturing, quality systems, import and export, product labeling,
product storage, recalls and field safety corrective actions, advertising and promotion, product sales and distribution, and post-market
clinical surveillance. Our business is subject to federal, state, local, and foreign regulations, such as ISO 13485, ISO 14971,
FDA’s Quality System Regulation, or QSR, contained in 21 CFR Part 820, and the European Commission’s Directive 93/42/EEC
concerning medical devices and its amendments.
U.S. Regulation
The FDA characterizes
medical devices into one of three classes. Devices that are considered by the FDA to pose lower risk are classified as Class I
or II. Class I devices and are subject to controls for labeling, pre-market notification and adherence to the FDA’s QSR.
This pertains to manufacturers’ methods and documentation of the design, testing, production, control quality assurance,
labeling, packaging, sterilization, storage and shipping of products, but are usually exempt from premarket notification requirements.
Class II devices are subject to the same general controls but may be subject to special controls such as performance standards,
post-market surveillance, FDA guidelines, or particularized labeling, and may also require clinical testing prior to clearance
or approval. Class III devices are those for which insufficient information exists to assure safety and effectiveness solely through
general or special controls, including devices that support or sustain human life, are of substantial importance in preventing
impairment of human health, or which present a potential, unreasonable risk of illness or injury.
Some Class I and Class
II devices are exempted by regulation from the pre-market notification requirement under Section 510(k) of the FDCA, also referred
to as a 510(k) clearance, and the requirement of compliance with substantially all of the QSR. However, a pre-market approval,
or PMA application, is required for devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting
or certain implantable devices, or those that are “not substantially equivalent” either to a device previously cleared
through the 510(k) process or to a “preamendment” Class III device in commercial distribution before May 28, 1976
when PMA applications were not required. The PMA approval process is more comprehensive than the 510(k) clearance process and
typically takes several years to complete. While the 510(k) process is typically shorter than a PMA process, both the 510(k) clearance
and PMA processes can be expensive and lengthy.
Our NeuroCap device is
characterized as a Class I device and our NeuroEEG device is characterized as a Class II device.
FDA review of a PMA application
generally takes between one and three years, but may take significantly longer. The FDA can delay, limit or deny approval of a
PMA application for many reasons, including:
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the device may not be safe, effective, reliable or accurate
to the FDA’s satisfaction;
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the data from pre-clinical studies and clinical trials may be
insufficient to support approval;
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the manufacturing process or facilities may not meet applicable
requirements; and
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changes in FDA approval policies or adoption of new regulations
may require additional data.
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If an FDA evaluation of
a PMA application is favorable, the FDA will either issue an approval letter, or approvable letter, which usually contains a number
of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled
to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of a device, subject
to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application
or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA
also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several
months or years while the trials are conducted, and data is submitted in an amendment to the PMA. The PMA process can be expensive,
uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved
by the FDA for marketing.
New PMA applications or
PMA supplements may be required for modifications to the manufacturing process, labeling, device specifications, materials or
design of a device that has been approved through the PMA process. PMA supplements often require submission of the same type of
information as an initial PMA application, except that the supplement is limited to information needed to support any changes
from the device covered by the approved PMA application and may or may not require as extensive technical or clinical data or
the convening of an advisory panel.
Clinical trials are typically
required to support a PMA application and are sometimes required for a 510(k) clearance. These trials generally require submission
of an application for an 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 testing 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 abbreviated IDE requirements. Generally, clinical trials for a significant risk device may begin
once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate institutional
review boards at the clinical trial sites. The FDA’s approval of an IDE allows clinical testing to go forward, but it does
not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if the
trial meets its intended success criteria. All clinical trials must be conducted in accordance with the FDA’s IDE regulations
that govern investigational device labeling, prohibit promotion, and specify an array of recordkeeping, reporting and monitoring
responsibilities of study sponsors and study investigators. Clinical trials must further comply with the FDA’s regulations
for institutional review board approval and for informed consent and other human subject protections. Required records and reports
are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and efficacy
success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product. Clinical
trials must be entered into the clinical trials registry at clintrials.gov.
The commencement or completion
of any clinical trial may be delayed or halted, or be inadequate to support approval of a PMA application, for numerous reasons,
including, but not limited to, the following:
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the FDA or other regulatory authorities do not approve a clinical
trial protocol or a clinical trial, or place a clinical trial on hold;
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patients do not enroll in clinical trials at the rate expected;
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patients, sponsor or study sites do not comply with trial protocols;
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patient follow-up is not at the rate expected;
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patients experience adverse side effects;
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patients die during a clinical trial, even though their death
may not be related to the products that are part of our trial;
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institutional review boards and third-party clinical investigators
may delay or reject the trial protocol;
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third-party clinical investigators decline to participate in
a trial or do not perform a trial on the anticipated schedule or consistent with the clinical trial protocol, good clinical
practices or other FDA requirements;
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the sponsor or third-party organizations do not perform data
collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol or investigational
or statistical plans;
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third-party clinical investigators have significant financial
interests related to the sponsor or the study that the FDA deems to make the study results unreliable, or the company or investigators
fail to disclose such interests;
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regulatory inspections of our clinical trials or manufacturing
facilities, which may, among other things, require us to undertake corrective action or suspend or terminate our clinical
trials;
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changes in governmental regulations or administrative actions;
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the interim or final results of the clinical trial are inconclusive
or unfavorable as to safety or efficacy; and
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the FDA concludes that our trial design is inadequate to demonstrate
safety and efficacy.
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International Regulation
International sales of
medical devices are subject to local government regulations, which may vary substantially from country to country. The time required
to obtain approval in another country may be longer or shorter than that required for FDA approval, and the requirements may differ.
There is a trend towards harmonization of quality system standards among the European Union, United States, Canada and various
other industrialized countries.
The primary regulatory
body in Europe is that of the European Union, the European Commission, which includes most of the major countries in Europe. Other
countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect
to medical devices. The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical
trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of these relevant
directives will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements
of the applicable directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity
varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a
third party assessment by a “Notified Body.” This third-party assessment may consist of an audit of the manufacturer’s
quality system and specific testing of the manufacturer’s product. An assessment by a Notified Body of one country within
the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union.
Additional local requirements may apply on a country-by-country basis. Outside of the European Union, regulatory approval would
need to be sought on a country-by-country basis in order for us to market our Products.
Medical devices in Europe
are classified into four primary categories. They are as follows:
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Invasive medical devices
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Special Rules (including contraceptive, disinfectant, and radiological
diagnostic medical devices)
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Devices are further segmented
into the classes noted below. In Vitro Diagnostic devices (IVDs) have their own classification scheme and while active implantable
devices do not follow the same classification system as provided by the Medical Device Directive (MDD), they are subject to similar
requirements as Class III devices:
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Class I – Provided non-sterile or do not have a measuring
function (low risk)
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Class I – Provided sterile and/or have a measuring function
(low/medium risk)
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Class IIa (medium risk)
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Class IIb (medium/high risk)
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We
have established a wholly-owned subsidiary in Russia and are seeking to establish a wholly-owned subsidiary in Europe (Poland)
for product distribution and certification.
Other Regulatory Requirements
Even after a device receives
clearance or approval and is placed in commercial distribution, numerous regulatory requirements apply. These include:
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establishment registration and device listing;
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QSR, which requires manufacturers, including third party manufacturers,
to follow stringent design, testing, risk management, production, control, supplier/contractor selection, complaint handling,
documentation and other quality assurance procedures during all aspects of the manufacturing process;
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labeling regulations that prohibit the promotion of products
for uncleared, unapproved or “off-label” uses, and impose other restrictions on labeling, advertising and promotion;
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MDR regulations, which require that manufacturers report to
the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely
cause or contribute to a death or serious injury if the malfunction were to recur;
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voluntary and mandatory device recalls to address problems when
a device is defective and could be a risk to health; and
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corrections and removals 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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Also, the FDA may require
us to conduct post-market surveillance studies or establish and maintain a system for tracking our Products through the chain
of distribution to the patient level. The FDA enforces regulatory requirements by conducting periodic, unannounced inspections
and market surveillance. Inspections may include the manufacturing facilities of our subcontractors.
Failure to comply with
applicable regulatory requirements can result in enforcement actions by the FDA and other regulatory agencies. These may include
any of the following sanctions or consequences:
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warning letters or untitled letters that require corrective
action;
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fines and civil penalties;
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unanticipated expenditures;
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delays in approving or refusal to approve future products;
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FDA refusal to issue certificates to foreign governments needed
to export products for sale in other countries;
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suspension or withdrawal of FDA clearance or approval;
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product recall or seizure;
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interruption of production;
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operating restrictions;
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Our contract manufacturers,
specification developers and some suppliers of components or device accessories, also are required to manufacture our Products
in compliance with current good manufacturing practice requirements set forth in the QSR. The QSR requires a quality system for
the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and it includes extensive
requirements with respect to quality management and organization, device design, buildings, equipment, purchase and handling of
components or services, production and process controls, packaging and labeling controls, device evaluation, distribution, installation,
complaint handling, servicing, and record keeping. The FDA evaluates compliance with the QSR through periodic unannounced inspections
that may include the manufacturing facilities of our subcontractors. If the FDA believes that any of our contract manufacturers
or regulated suppliers are not in compliance with these requirements, it can shut down such manufacturing operations, require
recall of our Products, refuse to approve new marketing applications, institute legal proceedings to detain or seize products,
enjoin future violations or assess civil and criminal penalties against us or our officers or other employees.
Health Insurance Portability and Accountability
Act of 1996 and Similar Foreign and State Laws and Regulations Affecting the Transmission, Security and Privacy of Health Information
We may also be subject
to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their respective implementing
regulations, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health
information. Among other things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined
as service providers of covered entities that create, receive, maintain or transmit protected health information in connection
with providing a service for or on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties
and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the
federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, many
state laws govern the privacy and security of health information in certain circumstances, many of which differ from HIPAA and
each other in significant ways and may not have the same effect.
Foreign data privacy regulations,
such as the EU Data Protection Directive (Directive 95/46/EC), the country-specific regulations that implement Directive 95/46/EC,
and the EU General Data Protection Regulation (GDPR) also govern the processing of personally identifiable data, and may be stricter
than U.S. laws.
Fraud and Abuse Laws
In addition to FDA restrictions,
there are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician
self-referral laws. Our relationships with healthcare providers and other third parties are subject to scrutiny under these laws.
Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion
from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health
programs.
Federal Anti-Kickback and Self-Referral
Laws
The federal Anti-Kickback
Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration (including any
kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce either the referral of an individual, or the
furnishing, recommending, or arranging of a good or service, for which payment may be made under a federal healthcare program
such as Medicare and Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted
to include anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, credit arrangements,
waiver of payments and providing anything at less than its fair market value. Although there are a number of statutory exceptions
and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly.
Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may
be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular
applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute.
Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a review of all its relevant facts
and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an
arrangement involving remuneration is to induce referrals of (or purchases, or recommendations related to) federal healthcare
covered business, the Anti-Kickback Statute has been implicated and potentially violated.
The penalties for violating
the federal Anti-Kickback Statute include imprisonment for up to five years, fines of up to $25,000 per violation and possible
exclusion from federal healthcare programs such as Medicare and Medicaid. Many states have adopted prohibitions similar to the
federal Anti-Kickback Statute, some of which do not have the same exceptions and apply to the referral of patients for healthcare
services reimbursed by any source, not only by the Medicare and Medicaid programs. Further, the Anti-Kickback Statute was amended
by the Patient Protection and Affordable Care Act, or PPACA. Specifically, as noted above, under the Anti-Kickback Statute, the
government must prove the defendant acted “knowingly” to prove a violation occurred. The PPACA added a provision to
clarify that with respect to violations of the Anti-Kickback Statute, “a person need not have actual knowledge” of
the statute or specific intent to commit a violation of the statute. This change effectively overturns case law interpretations
that set a higher standard under which prosecutors had to prove the specific intent to violate the law. In addition, the PPACA
codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes
a false or fraudulent claim for purposes of the federal civil False Claims Act.
We plan to provide the
initial training to providers and patients necessary for appropriate use of our technology either through our own educators or
by contracting with outside educators that have completed an appropriate training course. Outside educators are reimbursed for
their services at fair market value.
Noncompliance with the
federal anti-kickback legislation could result in our exclusion from Medicare, Medicaid or other governmental programs, restrictions
on our ability to operate in certain jurisdictions, and civil and criminal penalties.
Federal law also includes
a provision commonly known as the “Stark Law,” which prohibits a physician from referring Medicare or Medicaid patients
to an entity providing “designated health services,” including a company that furnishes durable medical equipment,
in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement.
Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant arrangement,
civil penalties, and exclusion from Medicare, Medicaid or other governmental programs. We believe that we have structured our
provider arrangements to comply with current Stark Law requirements.
Nevertheless, a determination
of liability under such laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.
Additionally, as some
of these laws are still evolving, we lack definitive guidance as to the application of certain key aspects of these laws as they
relate to our arrangements with providers with respect to patient training. We cannot predict the final form that these regulations
will take or the effect that the final regulations will have on us. As a result, our provider and training arrangements may ultimately
be found to be not in compliance with applicable federal law.
Federal False Claims Act
The Federal False Claims
Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented,
or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement
or used a false record to get a claim approved. In addition, amendments in 1986 to the Federal False Claims Act have made it easier
for private parties to bring “qui tam” whistleblower lawsuits against companies under the Federal False Claims Act.
Penalties include fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages that the federal
government sustained because of the act of that person. Qui tam actions have increased significantly in recent years, causing
greater numbers of healthcare companies to have to defend a false claim action, pay fines or be excluded from Medicare, Medicaid
or other federal or state healthcare programs as a result of an investigation arising out of such action.
There are other federal
anti-fraud laws that that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme
to defraud any healthcare benefit program, including private third-party payors, 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 in connection
with the delivery of or payment for healthcare benefits, items or services.
Additionally, HIPAA established
two federal crimes in the healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits
knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of
this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements
statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false,
fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A
violation of this statute is a felony and may result in fines or imprisonment.
Civil Monetary Penalties Law
In addition to the Anti-Kickback
Statute and the civil and criminal False Claims Acts, the federal government has the authority to seek civil monetary penalties,
or CMPs, assessments, and exclusion against an individual or entity based on a wide variety of prohibited conduct. For example,
the Civil Monetary Penalties Law authorizes the imposition of substantial CMPs against an entity that engages in activities including,
but not limited to: (1) knowingly presenting or causing to be presented, a claim for services not provided as claimed or which
is otherwise false or fraudulent in any way; (2) knowingly giving or causing to be given false or misleading information reasonably
expected to influence the decision to discharge a patient; (3) offering or giving remuneration to any beneficiary of a federal
health care program likely to influence the receipt of reimbursable items or services; (4) arranging for reimbursable services
with an entity which is excluded from participation from a federal health care program; (5) knowingly or willfully soliciting
or receiving remuneration for a referral of a federal health care program beneficiary; or (6) using a payment intended for a federal
health care program beneficiary for another use. Noncompliance can result in civil money penalties of up to $10,000 for each wrongful
act, assessment of three times the amount claimed for each item or service and exclusion from the federal healthcare programs.
State Fraud and Abuse Provisions
Many states have also
adopted some form of anti-kickback and anti-referral laws and a false claims act. We believe that we are in conformance to such
laws. Nevertheless, a determination of liability under such laws could result in fines and penalties and restrictions on our ability
to operate in these jurisdictions.
Physician Payment Sunshine Act
Transparency laws regarding
payments or other items of value provided to healthcare providers and teaching hospitals may also impact our business practices.
The federal Physician Payment Sunshine Act requires most medical device manufacturers to report annually to the Secretary of Human
Health Services financial arrangements, payments, or other transfers of value made by that entity to physicians and teaching hospitals.
The payment information is made publicly available in a searchable format on a CMS website. Over the next several years, we will
need to dedicate significant resources to establish and maintain systems and processes in order to comply with these regulations.
Failure to comply with the reporting requirements can result in significant civil monetary penalties. Similar laws have been enacted
or are under consideration in foreign jurisdictions.
U.S. Foreign Corrupt Practices Act
The U.S. Foreign Corrupt
Practices Act, or FCPA, prohibits U.S. corporations and their representatives from offering, promising, authorizing or making
corrupt payments, gifts or transfers to any foreign government official, government staff member, political party or political
candidate in an attempt to obtain or retain business abroad. The FCPA also obligates companies whose securities are listed in
the United States to comply with accounting provisions requiring the company to maintain books and records that accurately and
fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate
system of internal accounting controls for international operations. Activities that violate the FCPA, even if they occur wholly
outside the United States, can result in criminal and civil fines, imprisonment, disgorgement, oversight, and debarment from government
contracts.
Employees
As of October 7, 2020,
we had seven employees, none of whom are represented by a labor union or covered by a collective bargaining agreement. We consider
our relationship with our employees to be satisfactory.
DESCRIPTION OF PROPERTY
Our principal executive
office is located in leased premises of approximately 3,481 square feet at a rental cost of $3,984 per month at 125
Wilbur Place, Suite 170, Bohemia, New York, 11716. We believe that these facilities are adequate for our needs, including providing
the space and infrastructure to accommodate our development work based on our current operating plan. We do not own any real estate.
LEGAL PROCEEDINGS
We are not party to, and our property is the
subject of, any material legal proceedings.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward
Looking Statements
The following discussion
should be read in conjunction with our audited and unaudited financial statements and related notes included in this Prospectus.
Certain information contained in this MD&A includes “forward-looking statements.” Statements which are not historical
reflect our current expectations and projections about our future results, performance, liquidity, financial condition and results
of operations, prospects and opportunities and are based upon information currently available to us and our management and their
interpretation of what is believed to be significant factors affecting our existing and proposed business, including many assumptions
regarding future events. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities
could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a
result of various risks, uncertainties and other factors, including those risks described in detail in the section entitled “Risk
Factors” of this Prospectus.
Forward-looking
statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable
by use of the words “may,” “should,” “would,” “will,” “could,” “scheduled,”
“expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,”
or “project” or the negative of these words or other variations on these words or comparable terminology.
In
light of these risks and uncertainties, and especially given the nature of our existing and proposed business, there can be
no assurance that the forward-looking statements contained in this section and elsewhere in this Prospectus will in fact occur. Potential investors should not place undue reliance on any forward-looking statements.
Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any
forward-looking statements, whether as a result of new information, future events, changed circumstances or any other
reason.
Overview
We
are a neurodiagnostic and predictive technology platform company seeking to provide a centralized platform for data acquisition
and analysis of EEG data that combines cutting-edge medical device technologies with cloud-based telehealth services. Both our
NeuroCap, a pre-gelled disposable EEG headset, and NeuroEEG, a full-montage standard encephalograph, received FDA clearance to
market in 2018.
On
September 21, 2018, we entered into a merger agreement (the “Merger Agreement”) with MemoryMD, Inc. and AFGG Acquisition
Corp. to acquire MemoryMD, Inc. (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 our common stock. Accordingly, we acquired 100% of Memory MD, Inc. in exchange for the issuance of shares of our common
stock and MemoryMD, Inc. became our wholly-owned subsidiary. We issued an additional 4,083,252 shares of our 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 Inc., and we further issued an additional 1,604,378 shares of our 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 Inc.
As
of immediately prior to the closing of the Acquisition, we entered into an Assignment and Assumption Agreement with Chromium 24
LLC, pursuant to which Chromium 24 LLC assumed all of our remaining assets and liabilities through the closing of the Acquisition.
Accordingly, as of the closing of the Acquisition, we had no assets or liabilities.
Following
the Acquisition, the Company is now a neurodiagnostic and predictive technology platform company seeking to ultimately provide
a centralized platform for data acquisition and analysis of EEG data that combines our medical device technologies with cloud-based
telehealth services. The Company is not currently offering any data analysis services. The Company is primarily focused on establishing
diagnostic protocols to identify pathological risk factors involving the brain, and driving novel insights into cognitive health
that support early treatment of neurological disorders.
In 2019, we commenced acting as a distributor
of third-party medical devices in Russia (including those purchased from a company affiliated with one of our officers and directors),
which resulted in all of our revenue for 2019. Sales in Russia is also the majority of all revenue in 2020 (except for $7,498
that was from sales from the U.S. operating subsidiary). While we intend to continue the sale of third party medical devices,
we do not intend for it to be our primary source of revenue in the long-term and expect to curtail or cease this line of operations
as, if and when we commence generating material, recurring revenues from our products, of which we can give no assurance. We also
can give no assurance that any revenue we generate from so acting as a distributor of third-party medical devices will continue,
will continue to be material or will be sufficient to enable us to continue our operations. We have no supply or distribution
agreements in place with respect to such business. In the event that we see an opportunity to sell such products, we procure them
and then re-sell them.
Our
sole business since the Acquisition is the business of MemoryMD. Our management’s discussion and analysis below is based
on the financial results of MemoryMD.
We
have very limited resources. To date, our primary activities have been limited to, and our limited resources have been dedicated
to, performing business and financial planning, raising capital, recruiting personnel, negotiating with business partners and
the licensors of our intellectual property and conducting development activities, although we have acted as a distributor of third-party
medical devices in Russia (including those purchased from a company affiliated with one of our officers and directors) which has
generated revenue for us. Our first products, the NeuroCap and NeuroEEG, are ready for commercialization and sale and we have
commenced some non-recurring, initial sales. Our other products are still being tested or are still under development.
We have incurred losses since inception
of MemoryMD in 2015 and had an accumulated deficit of $6,439,602 as of June 30, 2020, primarily as a result of expenses incurred
in connection with our research and development programs and from general and administrative expenses associated with our operations.
We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future.
Historically, our primary source of
cash has been proceeds from the sale of convertible promissory notes and other borrowings. To fund our operations, for the six
months ended June 30, 2020, we issued one promissory note for gross proceeds of $20,000. For the year ended December 31, 2019,
we issued convertible promissory notes for aggregate gross proceeds of $655,000. In addition, during the fiscal year ended December
31, 2019, we borrowed an aggregate of $273,084 from related parties. Additionally, in April 2020, existing stockholders of the
Company agreed to advance to the Company an aggregate amount of $250,000 pursuant to the terms of Convertible Grid Promissory
Notes (the “Grid Notes”). As of June 30, 2020, a total aggregate amount of $200,000 has been advanced pursuant to
the terms of the Grid Notes.
We
need to obtain substantial additional funding in connection with our continuing operations through public or private equity or
debt financings or other sources, which may include collaborations with third parties. However, we may be unable to raise additional
funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a negative impact
on our financial condition and our ability to develop and commercialize our products and future products and our ability to pursue
our business strategy. See “–Liquidity and Capital Requirements” below.
Financial
Overview
Revenue
For
the six months ended June 30, 2020, we have generated approximately $220,000 of revenue through our acting as a distributor of
third-party medical devices in Russia (including those purchased from a company affiliated with one of our officers and directors),
while we continue to commercialize our products. While we intend to continue generating revenues through the sale of third-party
medical devices, we do not intend for it to be our primary source of revenue in the long-term. We do not expect to generate recurring,
material revenue from our products unless or until we successfully commercialize our products. If we fail to successfully commercialize
our developed products or fail to complete the development of any other product candidate we may pursue in the future, in a timely
manner, or fail to obtain regulatory approval, we may not be able to solely rely on generating substantial and material revenue
from the distribution of third-party medical devices.
General
and Administrative
General
and administrative expenses consist primarily of personnel-related costs for personnel in functions not directly associated with
research and development activities. Other significant costs include legal fees relating to corporate matters, intellectual property
costs, professional fees for consultants assisting with regulatory, clinical, product development and financial matters, and product
costs. We anticipate that our general and administrative expenses will significantly increase in the future to support our continued
research and development activities, commercialization of our products, if approved, and the increased costs of operating as a
public company. These increases will include increased costs related to the hiring of additional personnel and fees for legal
and professional services, as well as other public company related costs.
Research
and Development
Research
and development expenses consist of expenses incurred in performing research and development activities in developing our products.
Research and development expenses include compensation and benefits for research and development employees, overhead expenses,
cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations,
fees paid to consultants, and other outside expenses. Research and development costs are expensed as incurred and costs incurred
by third parties are expensed as the contracted work is performed.
We
expect our research and development expenses to remain substantially the same for the next six to nine months as we continue to
develop and commercialize our products. As we develop our cloud-based computing system, we expect our research and development
expenses to significantly increase.
Interest
Expense
Interest
expense primarily consists of amortized note issuance costs and interest costs related to the convertible notes we issued in 2019.
The convertible notes bear interest at fixed rate ranging from 8%-10% per annum.
Results
of Operations
The
following table sets forth the results of operations of the Company for the three and six months ended June 30, 2020 and 2019.
|
|
Three Months Ended June
30,
|
|
|
Period to
|
|
|
Six Months Ended June
30,
|
|
|
Period to
|
|
|
|
2020
|
|
|
2019
|
|
|
Period Change
|
|
|
2020
|
|
|
2019
|
|
|
Period Change
|
|
Revenue
|
|
$
|
86,659
|
|
|
$
|
75,376
|
|
|
$
|
11,283
|
|
|
$
|
220,504
|
|
|
$
|
77,626
|
|
|
$
|
142,878
|
|
Cost of goods sold
|
|
$
|
62,832
|
|
|
$
|
47,042
|
|
|
$
|
15,790
|
|
|
$
|
167,814
|
|
|
$
|
47,042
|
|
|
$
|
120,772
|
|
Research and development
|
|
$
|
46,955
|
|
|
$
|
27,776
|
|
|
$
|
19,179
|
|
|
$
|
143,345
|
|
|
$
|
50,066
|
|
|
$
|
93.279
|
|
Professional fees
|
|
$
|
93,465
|
|
|
$
|
40,102
|
|
|
$
|
53,363
|
|
|
$
|
217,073
|
|
|
$
|
151,175
|
|
|
$
|
65,898
|
|
Sales and marketing expenses
|
|
$
|
47,585
|
|
|
$
|
12,006
|
|
|
$
|
35,579
|
|
|
$
|
88,169
|
|
|
$
|
59,798
|
|
|
$
|
28,371
|
|
General and administrative
|
|
$
|
178,512
|
|
|
$
|
120,286
|
|
|
$
|
58,226
|
|
|
$
|
387,147
|
|
|
$
|
321,527
|
|
|
$
|
65.619
|
|
Interest expense
|
|
$
|
1,182,619
|
|
|
$
|
10,971
|
|
|
$
|
1,171,648
|
|
|
$
|
1,636,235
|
|
|
$
|
19,024
|
|
|
$
|
1,617,211
|
|
Three
Months Ended June 30, 2020 vs. June 30, 2019
Revenues
Revenue for the three months ended
June 30, 2020 was $86,659, compared to $75,376 for the three months ended June 30, 2019. In the three months ended June 30 2020
and 2019, we generated our revenue through acting as a distributor of third-party medical devices in Russia (including those purchased
from a company affiliated with one of our officers and directors).
General
and administrative expenses
General and administrative expenses were
$178,512 for the three months ended June 30, 2020, compared to $120,286 for the three months ended June 30, 2019. The increase
in general and administrative expenses were primarily due to an increase in consulting fees related to the Company listing on
the OTC and medical consultants related to the preparation of submission of the revised Neurocaps to the FDA. In addition, wages
increased in the current quarter due to the accrual of salaries pursuant to employment agreements in the current year.
Research
and development expenses
Research
and development expenses were $46,955 for the three months ended June 30, 2020, compared to $27,776 for the three months ended
June 30, 2019. The increase was primarily due to an increase in development activities surrounding the development of a new, modified
version of the NeuroCap.
Professional fees
Professional
fees were $93,465 for the three months ended June 30, 2020, compared to $40,102 for the three months ended June 30, 2019. The
increase was primarily due to an increase accounting and legal fees and accounting fees in the current year.
Interest
expense
Interest expense for the three months
ended June 30, 2020 was $1,182,619, consisting of interest expense of $23,942 and amortization of debt issuance costs of approximately
$1,158,677 related to the Company’s convertible promissory notes totaling $855,000.
Six
Months Ended June 30, 2020 and 2019
Revenues
Revenue
for the six months ended June 30, 2020 was $220,504 compared to $77,626 for the six months ended June 30, 2019. In the six months
ended June 30, 2020, we generated our revenue through acting as a distributor of third-party medical devices in Russia (including
those purchased from a company affiliated with one of our offices and directors). In the six months ended June 30, 2019, our revenue
was related to data analysis of the EEG software.
General
and administrative expenses
General and administrative expenses
were $387,147 for the six months ended June 30, 2020, compared to $321,527 for the six months ended June 30, 2019. The increase
in general and administrative expenses were primarily due to an increase in consulting fees related to the Company listing on
the OTC and medical consultants related to the preparation of submission of the revised Neurocaps to the FDA. In addition, wages
increased in the current quarter due to the accrual of salaries pursuant to employment agreements in the current year.
Research
and development expenses
Research
and development expenses were $143,345 for the six months ended June 30, 2020, compared to $50,066 for the six months ended June
30, 2019. The increase was primarily due to an increase in development activities surrounding the development of a new, modified
version of the NeuroCap.
Professional fees
Professional
fees were $217,073 for the six months ended June 30, 2020, compared to $151,175 for the six months ended June 30, 2019. The increase
was primarily due to an increase in accounting and legal fees in the current year.
Interest
expense
Interest expense, for the six months
ended June 30, 2020 was $1,636,235, of which, approximately $1,590,400 is related to the amortization of debt discount and non-cash
interest expense related to the Company’s convertible promissory notes. An additional $45,835 is related to interest expense
related to the Company’s convertible notes and promissory notes. Interest expense, for the six months ended June 30, 2019
was $19,024, consisting of interest expense of $9,964 and amortization of debt issuance costs of $7,704 related to the Company’s
convertible promissory notes totaling $230,000, as well as interest expense related to a lease of $1,356.
Liquidity
and Capital Resources
While we have generated revenue in 2019
and 2020, we anticipate that we will continue to incur losses for the foreseeable future. Furthermore, substantially all of such
revenue was generated through acting as a distributor of third-party medical devices in Russia, and we did not have any material
sales of our products. We anticipate that our expenses will increase substantially as we develop our products and pursue pre-clinical
testing and clinical trials, seek any further regulatory approvals, contract to manufacture any products, establish our own sales,
marketing and distribution infrastructure to commercialize our products, hire additional staff, add operational, financial and
management systems and operate as a public company.
Historically, our primary source of
cash has been proceeds from the sale of convertible promissory notes and related party loans. On December 31, 2019, we issued
and sold to a third party a convertible note in the original principal amount of $275,000, and a warrant to purchase 100,000 shares
of our common stock, pursuant to which we received $250,000 after an original issue discount of $25,000. We have also from time
to time issued shares of our common stock to individuals and entities as payment for services rendered to us in lieu of cash.
All
of our then-outstanding convertible promissory notes, in the aggregate principal amount plus interest through September 21, 2018
of $2,275,050, converted into aggregate of 5,687,630 shares of our common stock upon or immediately after the closing of the Acquisition.
In
connection with the private placement of the convertible promissory notes, we paid the placement agent a cash fee of $117,880,
in addition to equity compensation in the form of common stock purchase warrants.
We
have no current source of revenue to sustain our present activities other than as acting as a distributor of medical devices in
Russia (including those purchased from a company affiliated with one of our offices and directors), which is not our primary business
goal, and we do not expect to generate material revenue, from our products until, and unless, the FDA or other regulatory authorities
approve our products under development and we successfully commercialize our products. Until such time, if ever, as we can generate
substantial product revenue, we expect to finance our cash needs through our distributorship revenue, a combination of equity
(preferred stock or common stock) and debt financings as well as collaborations, strategic alliances and licensing arrangements.
We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity
or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities
may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available,
may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring
additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic
alliances or licensing arrangements with third-party partners, we may have to relinquish valuable rights to our technologies,
future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds
through equity or debt financings or through collaborations, strategic alliances or licensing arrangements when needed, we may
be required to delay, limit, reduce or terminate our Product development, future commercialization efforts, or grant rights to
develop and market our cortical strip, grid electrode and depth electrode technology that we would otherwise prefer to develop
and market ourselves.
Our
independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of
and for the years ended December 31, 2019 and 2018, noting the existence of substantial doubt about our ability to continue as
a going concern. This uncertainty arose from management’s review of our results of operations and financial condition and
its conclusion that, based on our operating plans, we did not have sufficient existing working capital to sustain operations for
a period of twelve months from the date of the issuance of these financial statements.
We believe our existing cash and cash
equivalents, without raising additional funds or generating revenues, will be sufficient to fund our operating expenses only to
approximately October 2020.
In January 2019, we commenced a convertible
note offering for up to $500,000, of which we have raised $380,000 through July 23, 2019. In December 2019, we also raised an
aggregate gross amount of $275,000, less a $25,000 original issue discount, from an investor pursuant to a securities purchase
agreement. In April 2020, existing stockholders of the Company agreed to advance to the Company an aggregate amount of $250,000
pursuant to the terms of Convertible Grid Promissory Notes. As of July 9, 2020, a total aggregate amount of $250,000 has been
advanced pursuant to the terms of the grid notes. We may obtain additional financing in the future through the issuance of our
common stock, through other equity or debt financings or through collaborations or partnerships with other companies. We may not
be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed
could compromise our ability to execute on our business plan.
The
development of our products is subject to numerous uncertainties, and we have based these estimates on assumptions that may prove
to be substantially different than we currently anticipate and could use our cash resources sooner than we expect. Additionally,
the process of developing medical devices is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain.
Our ability to successfully transition to profitability will be dependent upon achieving a level of product sales adequate to
support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating
activities.
Net
cash used in operating activities
Net cash used in operating activities
was $414,135 for the six months ended June 30, 2020 compared to $581,044 for the six months ended June 30, 2019. This fluctuation
is primarily due to an increase in net loss of approximately $2,151,000 offset by an increase in accounts payable and changes
in accrued expenses third party and related party of approximately $340,000 and an increase in the amortization of debt discount
and non-cash interest expense of approximately $1,583,000, and an increase in loss from the change in fair value of derivative
liabilities of approximately $334,000. Additionally there was an approximately $33,000 increase in common stock issued for services.
Net
cash used in investing activities
Net
cash used in investing activities was $0 for the six months ended June 30, 2020, compared to $1,005 for the six months ended June
30, 2019. The decrease is due to no new purchases of fixed assets in the six months ended June 30, 2020 as compared to June 30,
2019.
Net
cash provided by financing activities
Net cash provided by financing activities
was $220,000 for the six months ended June 30, 2020, which primarily consisted of the sale of the Company’s convertible
promissory notes for aggregate gross proceeds of $200,000 as well as proceeds from the issuance of a third-party promissory note
of $20,000.
Net
cash provided by financing activities was $445,153 for the six months ended June 30, 2019, which primarily consisted of the sale
of the Company’s convertible promissory notes for aggregate gross proceeds of $230,000 as well as proceeds from a related
party loan of $215,000.
Critical
Accounting Policies and Significant Judgments and Estimates
Our
management’s discussion and analysis of our financial condition and results of operations is based on our financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.
The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the
reported amounts of revenue and expenses during the reporting periods. In accordance with GAAP, we base our estimates on historical
experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates
are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We
periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions
in estimates are reflected in our financial statements prospectively from the date of the change in estimate.
While
our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this
Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that
require significant estimates and judgments.
Use of Estimates: The preparation
of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates in the accompanying consolidated financial statements include the estimates of useful
lives for depreciation, the valuation of stock options, and the valuation of derivative liabilities.
Fair
Value of Financial Instruments: Fair value is defined as the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participants. A fair value hierarchy has been established for valuation
inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority
to unobservable inputs. The fair value hierarchy is as follows:
|
●
|
Level 1 Inputs
- Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability
to access at the measurement date.
|
|
●
|
Level 2 Inputs
- Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or
liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally
from or corroborated by market data by correlation or other means.
|
|
●
|
Level 3 Inputs
- Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions
about the assumptions that market participants would use in pricing the assets or liabilities.
|
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts payable and borrowings. The fair value of current
financial assets and current financial liabilities approximates their carrying value because of the short-term maturity of these
financial instruments.
Income
Taxes. The Company accounts for income taxes under the asset and liability method, as required by the accounting standard
for income taxes, ASC 740. Under this method, 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 basis, as well as net operating loss 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 deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date.
Stock
Based Compensation. The Company accounts for the grant of restricted stock awards in accordance with ASC 718, “Compensation-Stock
Compensation.” ASC 718 requires companies to recognize in the statement of operations the grant-date fair value of equity
based compensation. The expense is recognized over the period during which the employee is required to provide service in exchange
for the compensation. Any remaining unrecognized balance will be recognized ratably over the life of the vesting period
and is a reduction of stockholders’ equity.
The
Company accounts for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 505-50
“Equity-Based Payments to Non-Employees.”
Recent
Accounting Pronouncements
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.
Off-Balance Sheet Arrangements
As June 30, 2020,
we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources.
MARKET
FOR AND DIVIDENDS ON REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There has been an extremely
limited trading market for our common stock since inception. There can be no assurance that a trading market will ever develop
or, if such a market does develop, that it will continue. Our common stock is currently quoted on the OTCQB under the ticker symbol
BRSF.The common stock had a closing price of $1.12 per share on October 7, 2020.
Holders
As
of October 7, 2020, there were approximately 67 holders of record of our common stock.
Dividends
We have never declared
or paid any cash dividend. We do not anticipate that we will declare or pay any dividends in the foreseeable future. Our current
policy is to retain earnings, if any, to fund operations, and the development and growth of our business. Any future determination
to pay cash dividends will be at the discretion of our Board and will be dependent upon our financial condition, operation results,
capital requirements, applicable contractual restrictions, restrictions in our organizational documents, and any other factors
that our Board deems relevant.
Securities Authorized for Issuance under
Equity Compensation Plans
In August 2018, our board
of directors adopted and stockholders approved the 2018 Equity Incentive Plan.
Under the 2018 Equity
Incentive Plan, we 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 us or any of our subsidiaries on terms and conditions
that are from time to time determined by us. An aggregate of up to 3,500,000 of our common stock are reserved for issuance under
the 2018 Plan. The purpose of the 2018 Plan is to provide financial incentives for selected directors, employees, advisers, and
consultants of the Company and/or its subsidiaries, thereby promoting the long-term growth and financial success of the Company.
The board of directors believes that the 2018 Plan will serve a critical role in attracting and retaining high caliber employees,
consultants and directors essential to our success and in motivating these individuals to strive to meet our goals.
The table below sets forth
information as of December 31, 2019 with respect to compensation plans under which our common stock is authorized for issuance.
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Plan Category
|
|
Number of
securities
to be
issued upon
exercise of
outstanding
options,
warrants and rights
|
|
|
Weighted- average
exercise price
of outstanding
options,
warrants and rights
|
|
|
Number of securities
remaining available
for future
issuance under equity
compensation plans
(excluding securities
reflected
in
column (a))
|
|
Equity compensation plans approved by security holders
|
|
|
1,000,000
|
|
|
$
|
0.75
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,000,000
|
|
|
|
|
|
|
|
2,500,000
|
|
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
DIRECTORS AND EXECUTIVE
OFFICERS
Our executive officers and directors are as
follows:
Name
|
|
Age
|
|
Position
|
Boris (Baruch) Goldstein
|
|
56
|
|
Chairman of the Board, Secretary and Executive Vice President
|
Nickolay Kukekov
|
|
46
|
|
Director
|
Mark Corrao
|
|
62
|
|
Chief Financial Officer
|
Boris (Baruch) Goldstein,
Chairman of the Board, Secretary and Executive Vice President. Dr. Goldstein is the founder and has been Chairman of the
Board of MemoryMD since its inception, and has been the executive Chairman of the Board of the Company since the Closing of the
Acquisition and Executive Vice President since January 2019. Dr. Goldstein is a serial entrepreneur, having founded or co-founded
over a dozen private companies over the past 10 years alone. Since February 2014, he is the founder and Chairman of Potbotics
Inc., a private data aggregation and technology company focused on the global medical cannabis market. Since April 2015, he is
the founder, Dr. Goldstein is also since July 2016 the founder and the Chairman of the Board of Nano Graphene Inc., a private,
commercial scale graphene and graphene based materials producer and supply company. Dr. Goldstein is the founder in November 2016
and the president of High Technology Capital Fund and High Technology Capital Management LLC, and is a partner in High Accelerator,
which helps build and support next generation technologies.
Dr. Goldstein received
his B.A., MBA and Ph.D. in Applied Mathematics from Latvian Technical University.
The Company believes that
Dr. Goldstein is qualified to serve as Chairman of the Board due to his extensive experience as a founder and operator of numerous
start-up and other companies, and due his role as a founder of MemoryMD.
Nickolay V. Kukekov,
Director. Dr. Kukekov has been a member of MemoryMD’s Board of Directors since September 2017, and a member of the
Board of the Company since the Closing of the Acquisition. Dr. Kukekov currently serves as the managing director of HRA Capital
(formerly Highline Research Advisors), a division of Corinthian Partners L.L.C. Prior to forming Highline Research Advisors in
2012, Dr. Kukekov was the Managing Director of Healthcare Investment Banking at Summer Street Research from October 2010 to August
2012. In September 2009, Dr. Kukekov was a co-founder of the Healthcare Investment Banking group at Gilford Securities. From December
2007 to July 2009, Dr. Kukekov served as the managing director of Paramount BioCapital, where he ran the advisory, M&A and
capital raising services for in-house private and public portfolio companies. Dr. Kukekov holds a Bachelor of Science degree in
Molecular, Cellular and Developmental Biology from the University of Colorado at Boulder and a Ph.D. in Neuroscience from Columbia
University, College of Physicians and Surgeons in New York.
The Company believes that
Dr. Kukekov is qualified to serve as a member of the Board of Directors due to his extensive experience in healthcare and medical
device investment banking.
Mark Corrao, Chief
Financial Officer. Mr. Corrao has been the part-time chief financial officer of MemoryMD since August 2018 and Chief Financial
Officer of the Company since November 2018. He is a Managing Director for the CFO Squad, an accounting firm that specializes in
pre-audit accounting for public and private companies, which provides those services to the Company. Additionally, Mr. Corrao
is currently the Chief Financial Officer for Generex Biotechnology Corporation and Kannalife Sciences, Inc. Mr. Corrao was formerly
a founder and Chief Financial Officer of Strikeforce Technologies, Inc., a publicly traded software development and services company
specializing in the development of a suite of integrated computer network security products. In addition to the ten years of his
service at Strikeforce, Mr. Corrao has spent numerous years in the public accounting arena specializing in certified auditing,
SEC accounting, corporate taxation and financial planning. Mr. Corrao’s background also includes numerous years on Wall
Street with Merrill Lynch, Spear Leeds & Kellogg and Greenfield Arbitrage Partners. While on Wall Street Mr. Corrao was involved
in several IPO’s and has been a guiding influence in several start-up companies. Prior to joining StrikeForce, he was a
Director at Applied Digital Solutions from December 2000 through December 2001. Mr. Corrao was a Vice President and Chief Financial
Officer at Advanced Communications Sciences from March 1997 through December 2000. Mr. Corrao has a B.S. in Accounting from CUNY.
There are no family relationships
between any of our officers and directors.
Structure and Operation of the Board
We do not have standing
audit, compensation or nominating committees of our Board. However, the full Board performs all of the functions of a standing
audit committee, compensation committee and nominating committee. The Board currently consists of three directors: Dr. Goldstein
(Chairman) and Messrs. Sakharov and Kukekov. The following is a brief description of these functions of the Board:
Nomination of Directors
The Board does not currently
have a standing nominating committee, and thus we do not have a nominating committee charter. Due to our small size and limited
operations to date, the Board determined that it was appropriate for the entire Board to act as the nominating committee. The full
Board currently has the responsibility of selecting individuals to be nominated for election to the Board. Board candidates are
typically identified by existing directors or members of management. The Board will consider director candidates recommended by
stockholders. Any such candidates will be evaluated on the same basis as other candidates being evaluated by the Board. Information
with respect to such candidates should be sent to Brain Scientific Inc., c/o CEO, 125 Wilbur Place, suite 170, Bohemia, N.Y. 11716.
The Board considers the needs for the Board as a whole when identifying and evaluating nominees and, among other things, considers
diversity in background, age, experience, qualifications, attributes and skills in identifying nominees, although it does not have
a formal policy regarding the consideration of diversity.
Audit Committee Related Function
We do not have a standing
audit committee, and thus we do not have an audit committee charter. Due to our small size and limited operations to date, the
Board determined that it was appropriate for the entire Board to act as the audit committee. The Board intends to review with
management and the Company’s independent public accountants the Company’s financial statements, the accounting principles
applied in their preparation, the scope of the audit, any comments made by the independent accountants upon the financial condition
of the Company and its accounting controls and procedures and such other matters as the Board deems appropriate. Because the Company’s
common stock is traded on the OTCQB, the Company is not subject to the listing requirements of any securities exchange
regarding audit committee related matters.
Audit Committee Financial Expert
We do not have an audit
committee financial expert, because we do not have an audit committee.
Risk Oversight
The Board’s risk
oversight is administered primarily through the following:
|
●
|
review and approval of an annual business plan;
|
|
●
|
review of a summary of risks and opportunities at meetings of
the Board;
|
|
●
|
review of business developments, business plan implementation
and financial results;
|
|
●
|
oversight of internal controls over financial reporting; and
|
|
●
|
review of employee compensation and its relationship to our
business plans.
|
Due to the small size
and early stage of the Company, we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions
should be separate or combined.
Compensation Committee Related Function
The Board does not currently
have a standing compensation committee, and thus we do not have a compensation committee charter. Due to our small size and limited
operations to date, the Board determined that it was appropriate for the entire Board to act as the compensation committee. The
full Board currently has the responsibility for reviewing and establishing compensation for executive officers and making policy
decisions concerning salaries and incentive compensation for executive officers of the Company.
The Company’s executive
compensation program is administered by the Board, which determines the compensation of the Chief Executive Officer and other
executive officers of the Company. In reviewing the compensation of the individual executive officers (other than the Chief Executive
Officer), the Board considers the recommendations of the Chief Executive Officer, published compensation surveys and current market
conditions.
Involvement in Certain Legal Proceedings
To our knowledge, our
directors and executive officers have not been involved in any of the following events during the past ten years:
|
1.
|
any bankruptcy petition filed by or against such person or any
business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two
years prior to that time;
|
|
|
|
|
2.
|
any conviction in a criminal proceeding or being subject to
a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
|
|
|
3.
|
being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise
limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing
in banking or securities activities;
|
|
|
|
|
4.
|
being found by a court of competent jurisdiction in a civil
action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or vacated;
|
|
|
|
|
5.
|
being subject of, or a party to, any Federal or state judicial
or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged
violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial
institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any
business entity; or
|
|
|
|
|
6.
|
being subject of or party to any sanction or order, not subsequently
reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association,
entity or organization that has disciplinary authority over its members or persons associated with a member.
|
EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets
forth information regarding each element of compensation that was paid or awarded to the named executive officers of the Company
for the periods indicated.
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock Awards
($)
|
|
|
Option Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Boris (Baruch)
Goldstein
|
|
2019
|
|
|
32,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,689
|
(5)
|
|
|
-
|
|
|
|
-
|
|
|
|
45,689
|
|
Chairman and Executive Vice President
|
|
2018
|
|
|
93,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jesse W. Crowne (1)
|
|
2019
|
|
|
53,333
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,366
|
(6)
|
|
|
-
|
|
|
|
-
|
|
|
|
55,699
|
|
Former Chief Executive Officer
|
|
2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vadim Sakharov (2)
|
|
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,422
|
(7)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,432
|
|
President and Chief Technology Officer
|
|
2018
|
|
|
83,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Corrao (3)
|
|
2019
|
|
|
18,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,000
|
|
Chief Financial Officer
|
|
2018
|
|
|
7,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amer Samad (4)
|
|
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Mr. Crowne was appointed as the Company’s Chief Executive
Officer on January 25, 2019 and resigned as Chief Executive Officer on May 31, 2019.
|
(2)
|
Mr. Sakhavov also previously served as Chief Executive Officer. He resigned
as Chief Executive Officer on January 25, 2019. He was paid pursuant to a consulting agreement with the Company which has been
replaced with an employment agreement. Mr. Sakarov resigned as President and Chief Technology Officer on September 22, 2020.
|
(3)
|
Mr. Corrao commenced his position as an at-will, part-time
CFO of the Company in August 2018. He is paid a monthly fee for his services of $1,500.
|
(4)
|
Mr. Samad was the President, CEO, CFO and Secretary of All Soft
Gels from November 27, 2017 until his resignation on September 21, 2018.
|
(5)
|
Represents grant date fair value computed in accordance with
FASB ASC Topic 718. The following assumptions were used in the valuation: (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.
|
(6)
|
Represents grant date fair value computed in accordance with
FASB ASC Topic 718. The following assumptions were used in the valuation: (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.
|
(7)
|
Represents grant date fair value computed in accordance with
FASB ASC Topic 718. The following assumptions were used in the valuation: (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.
|
Outstanding Equity Awards at Fiscal Year-End
The following table presents
the outstanding equity awards held by each of the named executive officers as of the end of the fiscal year ended December 31,
2019.
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
|
|
|
Option Exercise Price
|
|
|
Option
Expiration
Date
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
|
|
|
Market
value of
Shares of
Units of
Stock That
Have Not
Vested
|
|
|
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That Have
Not Vested
|
|
|
Equity Incentive
Plan Awards:
Market or Payout
Value of
Unearned Shares,
Units or Other
Rights That Have
Not Vested
|
|
Boris Goldstein
|
|
|
500,000
|
|
|
|
300,000
|
|
|
$
|
0.75
|
|
|
01/14/29
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Vadim Sakharov
|
|
|
125,000
|
|
|
|
75,000
|
|
|
$
|
0.75
|
|
|
01/14/29
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Long-Term Incentive Plans and Awards
In August, 2018, our board
of directors adopted and stockholders approved the 2018 Equity Incentive Plan. There were 1,000,000 outstanding equity awards
granted under the 2018 Equity Incentive Plan as of the end of the fiscal year ended December 31, 2019.
Director Compensation
There were no amounts
paid or stock awards made to our non-employee directors during the fiscal year ended December 31, 2019.
Messrs. Goldstein, Crowne
and Sakharov received compensation for their services to the Company as set forth under the summary execution compensation table
above. In 2019, our directors were entitled to reimbursement for expenses incurred by them in connection with attending board
meetings. Our directors also were eligible for stock option grants and other equity grants.
Employment Agreements
Jesse W. Crowne
The Company and Mr. Crowne
entered into an employment agreement, effective as of January 25, 2019. Under the employment agreement, Mr. Crowne was to receive
an initial annual base salary of $160,000, which would be increased to $175,000 per annum in the event the Company is successful
in raising at least $1,000,000 (the “Capital Raise”) from the date of the employment agreement. In addition, Mr. Crowne
could receive an annual cash bonus of up to $40,000 based on Mr. Crowne’s performance as determined by the Company’s
Compensation Committee of the Board of Directors, and would receive a $30,000 sign-on bonus payable in two tranches. Mr. Crowne
was also entitled to participate in the Company’s long-term incentive compensation plans generally made available to senior
executives of the Company, pursuant to which the Company issued to Mr. Crowne options to purchase 800,000 (or 1,000,000 in the
event of a Capital Raise) shares of the Company’s common stock at an exercise price of $0.75 per share, of which 200,000
(or 250,000 in the event of a Capital Raise) shares shall vest on the one year anniversary of the date of grant, and 600,000 (or
750,000 in the event of a Capital Raise) shall vest ratably on a quarterly basis over the following two years.
In the event Mr. Crowne’s
employment were terminated as a result of death during or disability, Mr. Crowne or his beneficiaries or legal representatives
would be provided any earned base salary and all benefits payable under any employee benefit plan applicable at the time or termination
(the “Unconditional Entitlements”).
In the event of the Mr.
Crowne’s termination for cause or termination by Mr. Crowne other than for a good reason, Mr. Crowne would be provided the
Unconditional Entitlements.
In the event of a termination
by Mr. Crowne for good reason or by the Company without cause, Mr. Crowne would be provided the Unconditional Entitlements and
the Company would provide Mr. Crowne his base salary then in effect for a period of 12 months after the date of termination (provided
that the Company is successful in raising at least $2,000,000 from the date of the employment agreement), 100% of the cost of
premiums for COBRA for a period of 12 months from the date of termination, acceleration of the vesting his stock options, and
continued vesting of any restricted stock or other equity awards subject to vesting.
The employment agreement
contained customary non-competition and non-solicitation provisions in favor of the Company. Mr. Crowne also agreed to customary
terms regarding confidentiality and ownership of intellectual property.
As noted above, Mr. Crowne
resigned as Chief Executive Officer on May 31, 2019. He resigned as a director of the Company on November 14, 2019. His options
were forfeited.
Boris Goldstein
On March 25, 2020, the
Company and Mr. Goldstein entered into an employment agreement, effective as of January 30, 2020 (the “Goldstein Employment
Agreement”). Under the Goldstein Employment Agreement, Mr. Goldstein will receive an initial annual base salary of $180,000,
which shall be reviewed annually and may be increased, but not decreased, by the Compensation Committee of the Board of Directors,
or if there be no such Compensation Committee, the Board of Directors (in either case, the “Committee”). In addition,
Mr. Goldstein shall be eligible to receive an annual cash bonus equal to a target of 50% of his annual base salary, based on the
Company’s achievement of certain performance metrics and goals as may be determined by the Committee in consultation with
Mr. Goldstein prior to or promptly following the beginning of each fiscal year. Mr. Goldstein shall also be entitled to participate
in any stock option, performance share, performance unit or other equity based long-term incentive compensation plan, program
or arrangement generally made available to senior executive officers of the Company, pursuant to which the Company issued to Mr.
Goldstein options to purchase 800,000 shares of the Company’s common stock at an exercise price of $0.75 per share, which
shall vest ratably on a quarterly basis over the following two years.
In the event Mr. Goldstein’s
employment is terminated as a result of death or disability, Mr. Goldstein or his estate shall be provided any earned base salary,
any earned but unpaid annual bonus for the year prior to termination (the “Prior Year Bonus”), a pro-rated annual
bonus for the year of termination (the “Pro-Rated Bonus), if any, reimbursement of any unpaid business expenses and accrued
vacation, and, in the event of termination for disability, all benefits payable under any employee benefit plan applicable at
the time of termination.
In the event Mr. Goldstein’s
employment is terminated for cause or by Mr. Goldstein without good reason, Mr. Goldstein shall forfeit the right to receive any
and all further payments under the Goldstein Employment Agreement, other than the right to receive any unpaid earned annual base
salary, the Prior Year Bonus, reimbursement of business expenses and accrued vacation, if any, and benefits payable under any
employee benefit plan applicable at the time of termination, in each case as accrued through the date of termination.
In the event Mr. Goldstein’s
employment is terminated by Mr. Goldstein for good reason or by the Company without cause, Mr. Goldstein shall be paid (i) his
accrued but unpaid annual base salary as of the termination date, (ii) his annual base salary then in effect for a period of 24
months after the date of termination (or 60 months if the termination without cause or for good reason occurs within 24 months
of a change of control (as defined in the Goldstein Employment Agreement)), (iii) the target annual bonus for the year of termination,
if any, (iv) any unpaid Prior Year Bonus, (v) reimbursement of unpaid business expenses and the dollar value of any unused and
accrued vacation days, and (vi) 100% of the cost of premiums for COBRA for a period of 12 months from the date of termination.
In addition, 100% of any unvested portion of Mr. Goldstein’s outstanding option grants shall immediately vest and become
exercisable and remain exercisable for the periods specified in such option.
The Sakharov Employment
Agreement contains customary non-competition and non-solicitation provisions in favor of the Company. Mr. Sakharov also agreed
to customary terms regarding confidentiality and ownership of intellectual property. On September 21, 2020, Mr. Sakharov resigned
as President, Chief Technology Officer and Director.
Vadim Sakharov
On March 25, 2020, the
Company and Mr. Sakharov entered into an employment agreement, effective as of January 30, 2020 (the “Sakharov Employment
Agreement”). Under the Sakharov Employment Agreement, Mr. Sakharov will receive an initial annual base salary of $60,000,
which shall be reviewed annually and may be increased, but not decreased, by the Committee. In addition, Mr. Sakharov shall be
eligible to receive an annual cash bonus equal to a target of 50% of his annual base salary, based on the Company’s achievement
of certain performance metrics and goals as may be determined by the Committee in consultation with Mr. Sakharov prior to or promptly
following the beginning of each fiscal year. Mr. Sakharov shall also be entitled to participate in any stock option, performance
share, performance unit or other equity based long-term incentive compensation plan, program or arrangement generally made available
to senior executive officers of the Company, pursuant to which the Company issued to Mr. Sakharov options to purchase 200,000
shares of the Company’s common stock at an exercise price of $0.75 per share, which shall vest ratably on a quarterly basis
over the following two years.
In the event Mr. Sakharov’s
employment is terminated as a result of death or disability, Mr. Sakharov or his estate shall be provided any earned base salary,
any earned but unpaid annual bonus for the year prior to termination (the “Prior Year Bonus”), a pro-rated annual
bonus for the year of termination (the “Pro-Rated Bonus), if any, reimbursement of any unpaid business expenses and accrued
vacation, and, in the event of termination for disability, all benefits payable under any employee benefit plan applicable at
the time of termination.
In the event Mr. Sakharov’s
employment is terminated for cause or by Mr. Sakharov without good reason, Mr. Sakharov shall forfeit the right to receive any
and all further payments under the Sakharov Employment Agreement, other than the right to receive any unpaid earned annual base
salary, the Prior Year Bonus, reimbursement of business expenses and accrued vacation, if any, and benefits payable under any
employee benefit plan applicable at the time of termination, in each case as accrued through the date of termination.
In the event Mr. Sakharov’s
employment is terminated by Mr. Sakharov for good reason or by the Company without cause, Mr. Sakharov shall be paid (i) his accrued
but unpaid annual base salary as of the termination date, (ii) his annual base salary then in effect for a period of 4 months
after the date of termination (or 6 months if the termination without cause or for good reason occurs within 24 months of a change
of control (as defined in the Sakharov Employment Agreement)), (iii) the target annual bonus for the year of termination, if any,
(iv) any unpaid Prior Year Bonus, (v) reimbursement of unpaid business expenses and the dollar value of any unused and accrued
vacation days, and (vi) 100% of the cost of premiums for COBRA for a period of 12 months from the date of termination. In addition,
100% of any unvested portion of Mr. Sakharov’s outstanding option grants shall immediately vest and become exercisable and
remain exercisable for the periods specified in such option.
The Sakharov
Employment Agreement contains customary non-competition and non-solicitation provisions in favor of the Company. Mr. Sakharov
also agreed to customary terms regarding confidentiality and ownership of intellectual property. On September 22, 2020,
Mr. Sakharov resigned as President, Chief Technology Officer and Director.
Limits on Liability and Indemnification
We provide directors and
officers insurance for our current directors and officers.
Our certificate of incorporation
eliminates the personal liability of our directors to the fullest extent permitted by law. The certificate of incorporation further
provides that the Company will indemnify its officers and directors to the fullest extent permitted by law. We believe that this
indemnification covers at least negligence on the part of the indemnified parties. Insofar as indemnification for liabilities
under the Securities Act may be permitted to our directors, officers, and controlling persons under the foregoing provisions or
otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table
shows the beneficial ownership of our common stock as of October 7, 2020 held by (i) each person known to us to be the beneficial
owner of more than five percent (5%) of our common stock; (ii) each director; (iii) each executive officer; and (iv) all directors
and executive officers as a group.
Beneficial ownership is
determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respect to
the securities held. Shares of common stock subject to options and warrants currently exercisable or which may become exercisable
within 60 days of October 7, 2020 are deemed outstanding and beneficially owned by the person holding such options or warrants
for purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstanding
for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table,
the persons or entities named have sole voting and investment power with respect to all shares of our common stock shown as beneficially
owned by them.
The following table provides
for percentage ownership assuming 19,478,258 shares are issued and outstanding as of October 7, 2020. Unless otherwise indicated,
the address of each beneficial holder of our common stock is our corporate address.
Name of Beneficial Owner
|
|
Shares of
Common Stock
Beneficially Owned
|
|
|
% of Shares of
Common Stock
Beneficially Owned
|
|
Greater Than 5% Stockholders
|
|
|
|
|
|
|
High Technology Capital Fund LP(1)
|
|
|
6,749,000
|
|
|
|
34.6
|
%
|
Lifestyle Healthcare LLC(2)
|
|
|
1,384,980
|
|
|
|
7.1
|
%
|
Andrew Brown(3)
|
|
|
2,459,063
|
|
|
|
12.2
|
%
|
Thomas J Caleca(4)
|
|
|
2,302,878
|
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
Named Executive Officers and Directors
|
|
|
|
|
|
|
|
|
Boris (Baruch) Goldstein(1)(5)
|
|
|
8,556,242
|
|
|
|
41.5
|
%
|
Nickolay Kukekov(6)
|
|
|
1,484,980
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
Mark Corrao
|
|
|
-
|
|
|
|
-
|
|
All Directors and Officers as a Group (3 persons)
|
|
|
10,151,222
|
|
|
|
48.5
|
%
|
(1)
|
Dr. Goldstein is the manager of High Technology Capital Management
LLC (“LLC”), the general partner of High Technology Capital Fund LP (“LP”). As the manager of the
LLC, Dr. Goldstein has voting and dispositive control over the shares owned by the LP. Dr. Goldstein disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest therein.
|
(2)
|
The address of Lifestyle Healthcare is 4524 Westway Avenue,
Dallas, TX 75205. Nickolay Kukekov has voting and dispositive power over the shares. Dr. Kukekov disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest therein.
|
(3)
|
The address of Mr. Brown is 300 Prospect Avenue, Hackensack, NJ 07601. Includes 750,000 warrants that have vested or will vest within 60 days of October 7, 2020.
|
(4)
|
Includes 750,000 warrants that have vested or will vest within 60 days of October 7, 2020.
|
(5)
|
Of such shares, 6,749,000 are held of record by High Technology Capital Fund LP and 337,450 are held of record by Irina Migalina, Dr. Goldstein’s wife. Includes an aggregate of 1,141,667 options that have vested or will vest within 60 days of October 7, 2020. Dr. Goldstein disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein.
|
(6)
|
Includes 1,384,980 held by Lifestyle Healthcare LLC and 100,000 shares of our common stock underlying warrants issued to Dr. Kukekov. Dr. Kukekov disclaims beneficial ownership of the shares held by Lifestyle except to the extent of his pecuniary interest therein.
|
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
During the year ended December
31, 2017, an entity controlled by Vadim Sakharov, the Company’s then CEO , provided a non-interest-bearing, no-term loan
to the Company. The Company repaid that loan in full during the year ended December 31, 2018. During the year ended December 31,
2018, an entity controlled by Mr. Sakharov provided a $50,000 non-interest-bearing, no-term loan to the Company. As of December
31, 2019, and December 31, 2018, the balance was $50,000 and $50,000, respectively.
On May 9, 2017, MemoryMD
entered into a sublease agreement with Nano Graphene Inc., a company controlled by Dr. Goldstein and his affiliates. In the years
ended December 31, 2019 and 2018 Nano Graphene paid rent, of $0 and $10,626, respectively, for warehouse space in the facility.
During the years ended
December 31, 2019 and 2018, the Company had expenses related to research and development costs of $50,713 and $59,788, respectively,
to an entity controlled by Mr. Sakharov. During the six months ended June 30, 2020, the Company had expenses related to research
and development costs of $12,800 to an entity controlled by Mr. Sakharov.
During the years ended
December 31, 2019 and 2018, the Company had expenses related to marketing and sales costs of $0 and $15,000, respectively, to
entities controlled by the Company’s Chairman.
During the years ended
December 31, 2019 and 2018, the Company had expenses related to consulting fees of $0 and $83,377, respectively, to Mr. Sakharov.
Nickolay Kukekov, a director
of the Company, was a Partner of HRA Capital. HRA Capital, through Corinthian Partners, LLC, acted as placement agent for MemoryMD’s
convertible note offerings pursuant to which Corinthian received aggregate fees of $117,880 and warrants to purchase an estimated
291,740 shares of Company common stock.
In May 2018, we entered
into a Patent Assignment and License Back Agreement with Boris Goldstein, our Chairman, Secretary and Executive Vice President,
Dmitriy Prilutskiy, Stanislav Zabodaev and Medical Computer Systems Ltd. Pursuant to the agreement, among other things, Messrs.
Goldstein, Prilutskiy and Zabodaev assigned all of their rights to a patent entitled “Apparatus And Method For Conducting
Electroencephalography” (Application No.: 15/898,611), to our Company, and in return, we granted to Medical Computer Systems
Ltd., an unaffiliated entity who also provides manufacturing services to us, a limited, royalty-free, fully paid-up, worldwide,
nonexclusive license (without the right to sublicense or assign), to the patent, to practice, make and use the inventions, ideas
and information embodied therein, and to make, use, offer to sell, sell, lease or import products, services, processes, methods
and materials embodying or deriving from the inventions, ideas and information from the patent and any activities derived directly
therefrom; provided, however, that if and upon FDA approval of a Product, Medical Computer Systems’ aforementioned rights
shall be limited to manufacturing and sales solely to our Company or on our behalf provided that we purchase from Medical Computer
Systems (and Medical Computer Systems makes available for sale) a minimum of 20,000 units of Products per calendar year on reasonable
terms and conditions to be determined by the parties in good faith; provided further, however, that Medical Computer Systems can
without any limitation sell products embodying or deriving from the inventions, ideas and information from the patent in (i) the
territories that made up the former USSR (excluding the Baltic countries) and (ii) Japan. In furtherance of the foregoing first
provision, in the event we fail to purchase the annual minimum order for a particular calendar year, Medical Computer Systems’
limitation to manufacture and sell Products only to our Company pursuant to this proviso shall be suspended for the next calendar
year.
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 years ended December
31, 2019 and 2018, the Company made approximately $4,900 and $6,202, respectively, in rent payments to the related party. For
the six months ended June 30, 2020 and 2019, the Company made approximately $0 and $4,900, respectively, in rent payments to
the related party.
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 a non-interest-bearing, no-term loan to the Company. As of June 30, 2020 and
December 31, 2019, the balance was $50,000 and $50,000, respectively.
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 June 30, 2020 and December 31, 2019, the balance was $217,000 and
$217,000, respectively.
During the year ended December
31, 2019, we purchased an aggregate of $386,421 of medical devices for resale and distribution from Neurotech, a company that Mr.
Sakharov is a shareholder and executive manager. During the six months ended June 30, 2020 and 2019, the Company purchased an aggregate
of $167,659 and $47,042 of medical devices for resale and distribution from Neurotech, respectively.
The
Acquisition
Pursuant to the Merger
Agreement for the Acquisition whereby Memory MD, Inc. became a wholly-owned subsidiary of the Company, each holder of MemoryMD
Shares outstanding immediately prior to the Closing received shares of our common stock in exchange therefore based on the Exchange
Ratio, with all fractional shares rounded up to the nearest whole share. Accordingly, we issued 675,575 and 337,450 shares of
our common stock to Messrs. Goldstein (and his wife) and Sakharov, respectively and 6,749,000 shares of our common stock to High
Technology Capital Fund LP, an affiliate of Dr. Goldstein. Furthermore, as of the Closing, Mr. Amer Samad, the sole director and
executive officer of All Soft Gels, committed to tender for cancellation 6,495,000 shares of our common stock as part of the conditions
to Closing, of which 6,375,000 shares have been subsequently cancelled and of which 120,000 shares are expected to be tendered
to us for cancellation as soon as practicable. The Merger Agreement also provided that Drs. Goldstein and Kukekov be appointed
as a director of the Company upon the Closing of the Acquisition.
Related Person Transaction Policy
The Board reviews, approves
and oversees any transaction between us and any related person and any other potential conflict of interest situations on an ongoing
basis, in accordance with our policies and procedures, and develops policies and procedures for the approval of related party
transactions. Prior to consideration of a transaction with a related person, the material facts as to the related person’s
relationship or interest in the transaction are disclosed to the disinterested directors. The transaction is not approved unless
a majority of the members of the Board who are not interested in the transaction approve the transaction. The Board takes into
account, among other factors that it deems appropriate, whether the related person transaction is on terms no less favorable to
us than terms generally available in a transaction with an unrelated third-party under the same or similar circumstances and the
extent of the related person’s interest in the related person transaction. Our current policy with respect to approval of
related person transactions is not set forth in writing.
Director Independence
None of our directors is independent as that
term is defined under the Nasdaq Marketplace Rules.
ADDITIONAL
INFORMATION
Federal securities laws
require us to file information with the SEC concerning our business and operations. Accordingly, we file annual, quarterly, and
special reports, and other information with the SEC. Such reports and other information that we file with the SEC are available
at the SEC’s web site at www.sec.gov.
We have filed with the
SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock being offered hereby. As permitted
by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration statement
and the exhibits and schedules thereto. For further information with respect to the Company and the common stock offered hereby,
reference is made to the registration statement, and such exhibits and schedules. A copy of the registration statement, and the
exhibits and schedules thereto, may be accessed at the SEC’s web site.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation
and Bylaws provide that, we will indemnify our officers, directors and agents to the extent permitted under the Nevada Revised
Statute (“NRS”), provided that, we will not be obligated to indemnify any person in connection with any proceeding:
(i) for which payment
has actually been made to or on behalf of such person under any statute, insurance policy, indemnity provision, vote or otherwise,
except with respect to any excess beyond the amount paid;
(ii) for an accounting
or disgorgement of profits pursuant to Section 16(b) of the Exchange Act, or similar provisions of federal, state or local statutory
law or common law, if such person is held liable therefor (including pursuant to any settlement arrangements);
(iii) for any reimbursement
of the Company by such person of any bonus or other incentive-based or equity-based compensation or of any profits realized by
such person from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements
that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act”), or the payment to the Company of profits arising from the purchase and sale by such person of securities in violation
of Section 306 of the Sarbanes-Oxley Act), if such person is held liable therefor (including pursuant to any settlement arrangements);
(iv) initiated by such
person, including any proceeding initiated by such person against the Company or its directors, officers, employees, agents or
other indemnitees, unless (a) the Board authorized the proceeding prior to its initiation, (b) the Company provides the indemnification,
in its sole discretion, pursuant to the powers vested in the Corporation under applicable law, (c) otherwise required to be made
under the Bylaws or (d) otherwise required by applicable law; or
(v) if prohibited by
applicable law.
NRS Section 78.7502 provides
that a corporation shall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys’
fees, actually and reasonably incurred by him in connection with any the defense to the extent that a director, officer, employee
or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred
to Section 78.7502(1) or 78.7502(2), or in defense of any claim, issue or matter therein.
NRS 78.7502(1) provides
that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the
right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable
pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
NRS Section 78.7502(2)
provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection
with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith
and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification
may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
NRS Section 78.747 provides
that except as otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt
or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter
of law must determine the question of whether a director or officer acts as the alter ego of a corporation.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person
of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against
public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
LEGAL MATTERS
The validity of the shares
offered hereby will be passed upon for us by Sichenzia Ross Ference LLP, New York, New York.
EXPERTS
The consolidated financial
statements of the Company as of and for the years ended December 31, 2019 and December 31, 2018, included in this registration
statement on Form S-1 have been so included in reliance on the report of Sadler, Gibb & Associates, LLC, an independent
registered public accounting firm, given upon their authority as experts in accounting and auditing.
Brain
Scientific Inc. and Subsidiaries
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
67,995
|
|
|
$
|
261,436
|
|
Accounts receivable
|
|
|
6,528
|
|
|
|
5,555
|
|
Inventory
|
|
|
371
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
9,628
|
|
|
|
21,637
|
|
Prepaid expenses and other current assets - related
party
|
|
|
700
|
|
|
|
700
|
|
TOTAL CURRENT ASSETS
|
|
|
85,222
|
|
|
|
289,328
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
992
|
|
|
|
1,674
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
86,214
|
|
|
$
|
291,002
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
670,946
|
|
|
$
|
298,578
|
|
Accounts payable and accrued expenses - related party
|
|
|
12,260
|
|
|
|
9,263
|
|
Notes payable
|
|
|
70,000
|
|
|
|
50,000
|
|
Convertible notes payable, net
|
|
|
630,209
|
|
|
|
499,232
|
|
Derivative liabilities
|
|
|
1,993,239
|
|
|
|
-
|
|
Finance lease - short term
|
|
|
4,595
|
|
|
|
6,377
|
|
Loans payable - related party
|
|
|
324,637
|
|
|
|
323,084
|
|
TOTAL CURRENT LIABILITIES:
|
|
|
3,705,886
|
|
|
|
1,186,534
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
3,705,886
|
|
|
|
1,186,534
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized, 0
shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value; 200,000,000 shares authorized, 19,397,596
and 19,380,460 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
|
|
|
19,398
|
|
|
|
19,381
|
|
Additional paid in capital
|
|
|
2,801,025
|
|
|
|
2,756,798
|
|
Accumulated deficit
|
|
|
(6,439,602
|
)
|
|
|
(3,672,077
|
)
|
Accumulated other comprehensive income
|
|
|
(493
|
)
|
|
|
366
|
|
TOTAL STOCKHOLDERS’ DEFICIT
|
|
|
(3,619,672
|
)
|
|
|
(895,532
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
86,214
|
|
|
$
|
291,002
|
|
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
Brain
Scientific Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
86,659
|
|
|
$
|
75,376
|
|
|
$
|
220,504
|
|
|
$
|
77,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
62,832
|
|
|
|
47,042
|
|
|
|
167,814
|
|
|
|
47,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
23,827
|
|
|
|
28,334
|
|
|
|
52,690
|
|
|
|
30,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
46,955
|
|
|
|
27,776
|
|
|
|
143,345
|
|
|
|
50,066
|
|
Professional fees
|
|
|
93,465
|
|
|
|
40,102
|
|
|
|
217,073
|
|
|
|
151,175
|
|
Sales and marketing expenses
|
|
|
47,585
|
|
|
|
12,006
|
|
|
|
88,169
|
|
|
|
59,798
|
|
Occupancy expenses
|
|
|
10,992
|
|
|
|
23,690
|
|
|
|
22,630
|
|
|
|
45,750
|
|
General and administrative expenses
|
|
|
178,512
|
|
|
|
120,286
|
|
|
|
387,147
|
|
|
|
321,527
|
|
TOTAL SELLING, GENERAL AND ADMINISTRATIVE
|
|
|
377,509
|
|
|
|
223,860
|
|
|
|
858,364
|
|
|
|
628,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(353,680
|
)
|
|
|
(195,526
|
)
|
|
|
(805,674
|
)
|
|
|
(597,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,182,619
|
)
|
|
|
(10,971
|
)
|
|
|
(1,636,235
|
)
|
|
|
(19,024
|
)
|
Other income
|
|
|
6,970
|
|
|
|
-
|
|
|
|
8,260
|
|
|
|
-
|
|
Change in fair market value of derivative liabilities
|
|
|
(286,598
|
)
|
|
|
-
|
|
|
|
(333,817
|
)
|
|
|
-
|
|
Foreign currency transaction loss
|
|
|
64
|
|
|
|
-
|
|
|
|
(59
|
)
|
|
|
-
|
|
TOTAL OTHER EXPENSE
|
|
|
(1,462,183
|
)
|
|
|
(10,971
|
)
|
|
|
(1,961,851
|
)
|
|
|
(19,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(1,815,865
|
)
|
|
|
(206,497
|
)
|
|
|
(2,767,525
|
)
|
|
|
(616,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(1,815,671
|
)
|
|
|
(206,497
|
)
|
|
|
(2,767,525
|
)
|
|
|
(616,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
194
|
|
|
|
316
|
|
|
|
(859
|
)
|
|
|
316
|
|
TOTAL COMPREHENSIVE LOSS
|
|
$
|
(2,167,344
|
)
|
|
$
|
(206,181
|
)
|
|
$
|
(2,768,384
|
)
|
|
$
|
(616,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
19,383,794
|
|
|
|
19,218,958
|
|
|
|
19,382,127
|
|
|
|
19,212,328
|
|
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
Brain
Scientific Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
19,380,460
|
|
|
$
|
19,381
|
|
|
$
|
2,756,798
|
|
|
$
|
(3,672,077
|
)
|
|
$
|
366
|
|
|
$
|
(895,532
|
)
|
Fair value of stock options vested
|
|
|
-
|
|
|
|
-
|
|
|
|
5,914
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,914
|
|
Issuance of common stock for services
|
|
|
3,334
|
|
|
|
3
|
|
|
|
9,999
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,002
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,053
|
)
|
|
|
(1,053
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(951,660
|
)
|
|
|
|
|
|
|
(951,660
|
)
|
Balances at March 31, 2020
|
|
|
19,383,794
|
|
|
$
|
19,384
|
|
|
$
|
2,772,711
|
|
|
$
|
(4,623,737
|
)
|
|
$
|
(687
|
)
|
|
$
|
(1,832,329
|
)
|
Fair value of stock options vested
|
|
|
-
|
|
|
|
-
|
|
|
|
8,038
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,038
|
|
Issuance of common stock for services
|
|
|
13,802
|
|
|
|
14
|
|
|
|
20,276
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,290
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194
|
|
|
|
194
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,815,865
|
)
|
|
|
-
|
|
|
|
(1,815,865
|
)
|
Balances at June 30, 2020
|
|
|
19,397,596
|
|
|
|
19,398
|
|
|
|
2,801,025
|
|
|
|
(6,439,602
|
)
|
|
|
(493
|
)
|
|
|
(3,619,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
19,205,624
|
|
|
$
|
19,206
|
|
|
$
|
2,595,034
|
|
|
$
|
(2,668,212
|
)
|
|
$
|
-
|
|
|
$
|
(53,972
|
)
|
Fair value of stock options vested
|
|
|
-
|
|
|
|
-
|
|
|
|
4,334
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,334
|
|
Issuance of common stock for services
|
|
|
13,334
|
|
|
|
13
|
|
|
|
547
|
|
|
|
-
|
|
|
|
-
|
|
|
|
560
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(410,259
|
)
|
|
|
|
|
|
|
(410,259
|
)
|
Balances at March 31, 2019
|
|
|
19,218,958
|
|
|
$
|
19,219
|
|
|
$
|
2,599,915
|
|
|
$
|
(3,078,471
|
)
|
|
$
|
-
|
|
|
$
|
(459,337
|
)
|
Fair value of stock options vested
|
|
|
-
|
|
|
|
-
|
|
|
|
4,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,874
|
|
Issuance of common stock for services
|
|
|
13,334
|
|
|
|
13
|
|
|
|
547
|
|
|
|
-
|
|
|
|
-
|
|
|
|
560
|
|
Capital contribution - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
316
|
|
|
|
316
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(206,497
|
)
|
|
|
-
|
|
|
|
(206,497
|
)
|
Balances at June 30, 2019
|
|
|
19,232,292
|
|
|
|
19,232
|
|
|
|
2,605,489
|
|
|
|
(3,284,968
|
)
|
|
|
316
|
|
|
|
(659,931
|
)
|
The accompanying notes are an integral
part of these consolidated financial statements.
Brain
Scientific Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,767,525
|
)
|
|
$
|
(616,756
|
)
|
Change in net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
682
|
|
|
|
640
|
|
Amortization of debt discount and non-cash interest expense
|
|
|
1,590,398
|
|
|
|
7,704
|
|
Change in fair value of derivative liabilities
|
|
|
333,817
|
|
|
|
-
|
|
Fair value of stock options vested
|
|
|
13,952
|
|
|
|
9,208
|
|
Common stock issued for services
|
|
|
30,292
|
|
|
|
1,120
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(973
|
)
|
|
|
(6,332
|
)
|
Inventory
|
|
|
(371
|
)
|
|
|
(609
|
)
|
Other liabilities
|
|
|
(1,782
|
)
|
|
|
(2,906
|
)
|
Prepaid expenses and other current assets
|
|
|
12,009
|
|
|
|
(5,030
|
)
|
Accounts payable and accrued expenses
|
|
|
372,369
|
|
|
|
63,817
|
|
Accounts payable - related party
|
|
|
2,997
|
|
|
|
(31,900
|
)
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
$
|
(414,135
|
)
|
|
$
|
(581,044
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
$
|
-
|
|
|
$
|
(1,005
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
$
|
-
|
|
|
$
|
(1,005
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable
|
|
$
|
200,000
|
|
|
$
|
230,000
|
|
Proceeds from note payable
|
|
|
20,000
|
|
|
|
215,000
|
|
Capital contribution - related party
|
|
|
-
|
|
|
|
153
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
$
|
220,000
|
|
|
$
|
445,153
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
694
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
|
(193,441
|
)
|
|
|
(136,580
|
)
|
CASH AT BEGINNING OF THE PERIOD
|
|
|
261,436
|
|
|
|
163,563
|
|
CASH AT END OF THE PERIOD
|
|
$
|
67,995
|
|
|
$
|
26,983
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
6,280
|
|
|
$
|
-
|
|
Cash paid for taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing
and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing fees payable to a related party related to the issuance of
convertible debentures
|
|
$
|
-
|
|
|
$
|
18,400
|
|
Debt discount and derivative liability associated with convertible notes
payable
|
|
$
|
376,274
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
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
June 30, 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 June 30, 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 June 30, 2020, and December 31, 2019, the
Company had $0 and $11,436, respectively, in excess over the FDIC insurance limit.
Inventory
Inventory consists of finished goods that
are valued at lower of cost or market using the weighted average method. As of June 30, 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 $682 and $640 for the six months ended June 30, 2020 and
2019, respectively. Depreciation expense was $341 for the three months ended June 30, 2020 and 2019.
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
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. For certain notes, the
conversion features are contingent upon future events, whereby, the holder agreed not to convert until the contingent future event
has occurred.
Derivative Instruments
The Company evaluates its convertible
notes and warrants to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately
accounted for in accordance with ASC 815. The result of this accounting treatment is that the fair value of the embedded derivative
is recorded as a liability and marked-to-market each balance sheet date. In the event that the fair value is recorded as a liability,
the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of
a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified
to equity.
The Company utilizes the Monte Carlo
Method that values the liability of the debt conversion feature derivative financial instruments and derivative warrants based
on a probability of a down round event. The reason the Company selected the lattice binomial model is that in many cases there
may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation
does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models.
From time to time, certain of the Company’s
embedded conversion features on debt and outstanding warrants have been treated as derivative liabilities for accounting purposes
under ASC 815 due to insufficient authorized shares to fully settle conversion features of the instruments if exercised. In this
case, the Company utilized the latest inception date sequencing method to reclassify outstanding instruments as derivative instruments.
These contracts were recognized at fair value with changes in fair value recognized in earnings until such time as the conditions
giving rise to such derivative liability classification were settled.
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 six months ended June 30, 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 six months ended June 30, 2020 and 2019 were $143,345 and $50,066, respectively. Research and development costs recognized
in the statement of operations for the three months ended June 30, 2020 and 2019 were $46,955 and $27,776, 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 June
30, 2020 and 2019 were $47,585 and $12,006, respectively. Advertising and marketing costs recognized in the statement of operations
for the six months ended June 30, 2020 and 2019 were $88,169 and $59,798, 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
June 30, 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 six months ended June 30, 2020 4,239,954 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 non-performance.
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 or Level 2 assets or liabilities as of June 30, 2020 and the Company did not have any other Level 1, Level 2 or Level 3 assets
or liabilities as of December 31, 2019.
Fair Value of Financial Assets and
Liabilities Measured on a Recurring Basis
Financial liabilities measured at fair
value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as of June 30, 2020.
Liabilities
|
|
Amounts at Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability – conversion feature
|
|
$
|
215,947
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
215,947
|
|
Derivative liability - warrants
|
|
|
1,777,292
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,777,292
|
|
Total
|
|
$
|
1,993,239
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,993,239
|
|
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
carry forwards. 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
June 30, 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 June 30, 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 analysed, 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 six months ended June 30, 2020, the Company had $220,504
in revenues, a net loss of $2,767,525 and had net cash used in operations of $414,135. Additionally, as of June 30, 2020, the
Company had working capital deficit, stockholders’ deficit and accumulated deficit of $3,620,664, $3,619,672 and $6,439,602
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.
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 fulfil 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.
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
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 $18,947 of accrued
interest and has a total outstanding principal balance of $380,000 as of June 30, 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 $18,857 of
accrued interest and has a total outstanding principal balance of $275,000 as of June 30, 2020.
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 favourable 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.
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
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. The Note is considered a derivative liability due to the variable market-based conversion
price upon default. The warrants are accounted for as a discount to the Note, and therefore fair valued and recorded as a derivative
liability as well. On March 18, 2020, the warrants were revalued and recorded as a derivative liability in the amount of $255,899.
On June 30, 2020, the warrant derivative was valued at $162,605. For the three and six months ended June 30, 2020, the Company
recorded a gain on the change in fair market value of derivative liabilities in the amount of $100,776 and $93,294, respectively,
in relation to the warrant derivative.
In the year ended December 31, 2019,
the Company recorded a total debt discount of $155,768 related to the above convertible notes. During the six months ended June
30, 2020, the Company recorded an additional debt discount of $176,274 related to the above convertible notes. Amortization of
the debt discount is recorded as interest expense and a total of $268,894 was amortized during the six months ended June 30, 2020.
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).
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. As of June 30, 2020, a total of $200,000 in principal was advanced to the Company. During the six
months ended June 30, 2020, the Company recorded debt discount of $200,000 related to the Grid Notes. Amortization of the debt
discount is recorded as interest expense and a total of $38,356 was amortized during the six months ended June 30, 2020.
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.
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
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.
Derivative
Accounting for the Convertible Notes Payable
The
Company evaluated the terms and conditions of the Note and the Grid Notes under the guidance of ASC 815. The conversion terms
of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock.
The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number
of shares of common stock issuable upon conversion of the promissory note is indeterminate. Due to the fact that the number of
shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted, and
all additional convertible debentures and warrants are included in the value of the derivative liabilities. Pursuant to ASC 815-15
Embedded Derivatives, the fair values of the variable conversion options and warrants and shares to be issued were recorded as
derivative liabilities on the issuance date and revalued at each reporting period.
Certain
of the Company’s embedded conversion features on debt and outstanding warrants are treated as derivative liabilities for
accounting purposes under ASC 815 due to insufficient authorized shares to settle these outstanding contracts, or due to other
rights connected with these contracts, such as registration rights. In the case of insufficient authorized share capital available
to fully settle outstanding contracts, the Company utilizes the issuance date sequencing method to reclassify outstanding contracts
as derivative instruments. These instruments do not trade in an active securities market.
Derivative
Liabilities
The
table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30,
2020:
|
|
Amount
|
|
Balance on December
31, 2019
|
|
$
|
-
|
|
Issuances
to debt discount
|
|
|
376,274
|
|
Issuances to interest
expense
|
|
|
1,283,148
|
|
Change in fair value
of derivative liabilities
|
|
|
(240,517
|
)
|
Change in fair value of warrant liabilities
|
|
|
574,334
|
|
Balance on June 30, 2020
|
|
$
|
1,993,239
|
|
The
fair value of the derivative conversion features and warrant liabilities as of June 30, 2020 were calculated using a Monte-Carlo
option model valued with the following assumptions:
|
|
June
30,
2020
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
83%
- 108
|
%
|
Risk free interest rate
|
|
|
0.16%
- 0.47
|
%
|
Contractual terms (in years)
|
|
|
0.08
– 4.50
|
|
Conversion/Exercise price
|
|
$
|
0.80
- $1.25
|
|
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
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 are payable on October 21, 2020. The Company recorded $1,358 of accrued interest and has a total outstanding
principal balance of $50,000 as of June 30, 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.
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 are payable on July 1, 2020. The Company recorded $260 of accrued interest and has a total outstanding
principal balance of $20,000 as of June 30, 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 June 30, 2020 and December 31, 2019, total liability to the financing company reflected in Other
Liabilities is $4,595 and $6,377, respectively. The Company did not make payments in the current quarter and are in discussion
as to future payments since the equipment was not returned as per the agreement.
Future
minimum commitments related to the EEG liability consisted of the following at June 30, 2020:
Years ended December 31,
|
|
Amount (USD)
|
|
Remainder 2020
|
|
|
4,595
|
|
Total
|
|
$
|
4,595
|
|
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
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 June 30, 2020, and December
31, 2019, the balance was $55,530 and $55,530, respectively.
During
the six months ended June 30, 2020 and 2019, the Company had expenses related to research and development costs of $12,800 and
$27,390, 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 June 30, 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
six months ended June 30, 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 June 30, 2020 and December 31, 2019, the balance was $217,000
and $217,000, respectively.
During the six months ended June 30, 2020
and 2019, the Company purchased an aggregate of $167,659 and $47,042 of medical devices for resale and distribution from Neurotech,
a company that Mr. Sakharov is a shareholder and executive manager.
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 June 30, 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 June 30, 2020, the Company had 19,397,596 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 an aggregate total of 5,068 shares for the services provided during the six months ended June 30, 2020 at a weighted
average value of $1.97 per share or $10,001.
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 an aggregate total of 5,068 shares for the services provided during the six months ended June 30, 2020 at a weighted
average value of $1.97 per share or $10,001.
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
On
June 19, 2020, the Company entered into a 4-month agreement with an advisor for consulting services whereby for services rendered
the Company will issue 7,000 shares of common stock on a monthly basis. The agreement is effective from June 1, 2020 and if not
terminated by either party by September 30, 2020 the parties will then negotiate an employment agreement. As of June 30, 2020,
the Company issued 7,000 shares of common stock at a value of $1.47 per share or $10,290.
Warrants
The
following table summarized the warrant activity for the six months ended June 30, 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
|
|
|
1,500,000
|
|
|
|
0.80
|
|
|
|
5.0
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, June 30, 2020
|
|
|
2,002,250
|
|
|
$
|
0.74
|
|
|
|
4.48
|
|
|
$
|
1,457,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2020
|
|
|
502,250
|
|
|
$
|
0.57
|
|
|
|
3.48
|
|
|
$
|
452,408
|
|
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 $3,191 was recorded during the six months ended June 30, 2020.
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 $10,762 was recorded during the six months ended June 30, 2020.
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
The
following table summarized the option activity for the six months ended June 30, 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, June 30, 2020
|
|
|
1,800,000
|
|
|
$
|
0.75
|
|
|
|
9.01
|
|
|
$
|
1,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2020
|
|
|
1,012,500
|
|
|
$
|
0.75
|
|
|
|
8.75
|
|
|
$
|
729,000
|
|
For
future periods, the remaining value of the stock options totalling approximately $44,484 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.
|
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 ($252) per month.
Beginning
June 1, 2019, the Company entered into a 10-month lease agreement ending June 30, 2020 with a third party in Russia. The Company
is paying rent at a rate of 12,000 Rubles ($169) per month.
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
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 six months ended June 30, 2020 and 2019 was $22,630 and $45,750 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 June 30, 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 – RESTATEMENT OF PREVIOUSLY
ISSUED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The Company, while undergoing the review
of its consolidated financial statements for the six months ended June 30, 2020, commenced an evaluation of its accounting in
connection with the Note and the Grid Notes for derivative accounting in accordance with ASC 815. Management originally deemed
these agreements to be fixed in nature and a derivative would not need be recognized. On August 12, 2020, under the authority
of the board of directors, the Company determined that these agreements and underlying warrants should have been recorded as a
derivative with changes in the fair value of the derivate to be recorded in the condensed consolidated statement of operations
and comprehensive loss (see Note 4). Accordingly, the Company will restate the condensed consolidated interim financial
statements and include the required disclosures for the three months ended March 31, 2020.
The following table sets forth the
effects of the adjustments on affected items within the Company’s previously reported Condensed Consolidated Balance Sheet
at March 31, 2020 had the adjustments been made in the corresponding quarter:
|
|
March 31, 2020
|
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
Convertible notes payable, net
|
|
$
|
565,781
|
|
|
$
|
(159,299
|
)
|
|
$
|
406,482
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
571,843
|
|
|
$
|
571,843
|
|
Current liabilities
|
|
$
|
1,467,171
|
|
|
$
|
412,544
|
|
|
$
|
1,879,715
|
|
Total liabilities
|
|
$
|
1,467,171
|
|
|
$
|
412,544
|
|
|
$
|
1,879,715
|
|
Accumulated deficit
|
|
$
|
(4,211,193
|
)
|
|
$
|
(412,544
|
)
|
|
$
|
(4,623,737
|
)
|
Total stockholders’ deficit
|
|
$
|
1,419,785
|
|
|
$
|
(412,544
|
)
|
|
$
|
(1,832,329
|
)
|
The following table sets forth the
effects of the adjustments on affected items within the Company’s previously reported Condensed Consolidated Statement of
Operations and Comprehensive Loss for the three months ended March 31, 2020, had the adjustments been made in the appropriate
quarter:
|
|
March 31, 2020
|
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
Interest expense
|
|
$
|
(88,291
|
)
|
|
$
|
(365,325
|
)
|
|
$
|
(453,616
|
)
|
Change in fair market value of derivative liabilities
|
|
$
|
-
|
|
|
$
|
(47,219
|
)
|
|
$
|
(47,219
|
)
|
Net Loss
|
|
$
|
(539,116
|
)
|
|
$
|
(412,544
|
)
|
|
$
|
(951,660
|
)
|
Total comprehensive loss
|
|
$
|
(540,169
|
)
|
|
$
|
(412,544
|
)
|
|
$
|
(952,713
|
)
|
Net loss per common share, basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(unaudited)
NOTE
11 – 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.
Allonges
to Promissory Notes
On July 28, 2020, the Company entered into
an Allonge to Promissory Note, effective as of July 1, 2020, which amends that certain Non-Convertible Promissory Note of the
Company in the principal amount of $20,000 dated February 21, 2020, in favor of ProudLiving, LLC. The allonge amends the original
note by extending the maturity date thereof to February 21, 2021.
On July 29, 2020, the Company entered into
an Allonge to Convertible Promissory Note, which amends that certain Convertible Promissory Note of the Company in the principal
amount of $150,000 dated July 23, 2019, in favor of John Silvestri. The allonge amends the original note by extending the maturity
date thereof to February 21, 2021.
On August 5, 2020, the Company entered
into an Allonge to Convertible Note, dated as of August 8, 2020, which amends the Note. The allonge amends the Note by extending
the maturity date thereof from seven months from the date of the loan to ten months from the date of the loan. The allonge further
provided that the piggyback registration rights set forth in the Note did not apply to the Company’s recently filed Registration
Statement on Form S-1. As consideration for the allonge, the original principal amount was increased by ten percent, and the Company
agreed to issue 50,000 shares of its common stock to Vista Capital Investments, LLC.
INDEX
TO FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Brain Scientific Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Brain Scientific Inc. (“the Company”) as of December 31, 2019 and 2018, the related consolidated
statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the two-year
period ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”). In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year
period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph Regarding Going Concern
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements,
the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Sadler, Gibb & Associates, LLC
We have served as the Company’s auditor
since 2018.
Salt Lake City, UT
March 30, 2020
Brain
Scientific Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
261,436
|
|
|
$
|
163,563
|
|
Accounts
receivable
|
|
|
5,555
|
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
21,637
|
|
|
|
14,552
|
|
Prepaid
expenses and other current assets - related party
|
|
|
700
|
|
|
|
-
|
|
TOTAL
CURRENT ASSETS
|
|
|
289,328
|
|
|
|
178,115
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,674
|
|
|
|
1,999
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
291,002
|
|
|
$
|
180,114
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
298,578
|
|
|
$
|
139,637
|
|
Accounts
payable and accrued expenses - related party
|
|
|
9,263
|
|
|
|
31,900
|
|
Notes
payable
|
|
|
50,000
|
|
|
|
-
|
|
Convertible
notes payable, net
|
|
|
499,232
|
|
|
|
-
|
|
Finance
lease - short term
|
|
|
6,377
|
|
|
|
5,454
|
|
Loans
payable - related party
|
|
|
323,084
|
|
|
|
50,000
|
|
TOTAL
CURRENT LIABILITIES:
|
|
|
1,186,534
|
|
|
|
226,991
|
|
|
|
|
|
|
|
|
|
|
Finance
lease, net of current portion
|
|
|
-
|
|
|
|
7,095
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
1,186,534
|
|
|
|
234,086
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 10,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2019 and December
31, 2018, respectively
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value; 200,000,000 shares authorized, 19,380,460 and 19,205,624 shares issued and outstanding as of December
31, 2019 and December 31, 2018, respectively
|
|
|
19,381
|
|
|
|
19,206
|
|
Additional
paid in capital
|
|
|
2,756,798
|
|
|
|
2,595,034
|
|
Accumulated
deficit
|
|
|
(3,672,077
|
)
|
|
|
(2,668,212
|
)
|
Accumulated
other comprehensive income
|
|
|
366
|
|
|
|
-
|
|
TOTAL
STOCKHOLDERS' DEFICIT
|
|
|
(895,532
|
)
|
|
|
(53,972
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
291,002
|
|
|
$
|
180,114
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Brain
Scientific Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
489,202
|
|
|
$
|
58,113
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
387,194
|
|
|
|
33,939
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
102,008
|
|
|
|
24,174
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
103,616
|
|
|
|
210,206
|
|
Professional
fees
|
|
|
255,332
|
|
|
|
271,718
|
|
Sales
and marketing expenses
|
|
|
95,165
|
|
|
|
93,190
|
|
Occupancy
expenses
|
|
|
85,771
|
|
|
|
58,301
|
|
General
and administrative expenses
|
|
|
532,312
|
|
|
|
675,882
|
|
TOTAL
SELLING, GENERAL AND ADMINISTRATIVE
|
|
|
1,072,196
|
|
|
|
1,309,297
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(970,188
|
)
|
|
|
(1,285,123
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(32,922
|
)
|
|
|
(159,165
|
)
|
Other
income
|
|
|
2,108
|
|
|
|
18,186
|
|
Other
expense
|
|
|
(597
|
)
|
|
|
-
|
|
Foreign
currency transaction loss
|
|
|
(52
|
)
|
|
|
-
|
|
TOTAL
OTHER EXPENSE
|
|
|
(31,463
|
)
|
|
|
(140,979
|
)
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(1,001,651
|
)
|
|
|
(1,426,102
|
)
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
(2,214
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(1,003,865
|
)
|
|
|
(1,426,102
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
366
|
|
|
|
-
|
|
TOTAL
COMPREHENSIVE LOSS
|
|
$
|
(1,003,499
|
)
|
|
$
|
(1,426,102
|
)
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
19,236,380
|
|
|
|
12,471,618
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Brain
Scientific Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
|
9,906,526
|
|
|
$
|
9,907
|
|
|
$
|
321,522
|
|
|
$
|
(1,242,110
|
)
|
|
$
|
-
|
|
|
$
|
(910,681
|
)
|
Fair
value of warrants issued in connection with convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
2,604
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,604
|
|
Conversion
of convertible notes and accrued interest to common stock
|
|
|
5,687,630
|
|
|
|
5,688
|
|
|
|
2,269,362
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,275,050
|
|
Issuance
of common stock for services
|
|
|
106,468
|
|
|
|
106
|
|
|
|
5,042
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,148
|
|
Effect
of reverse recapitalization
|
|
|
3,505,000
|
|
|
|
3,505
|
|
|
|
(3,496
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,426,102
|
)
|
|
|
-
|
|
|
|
(1,426,102
|
)
|
Balances
at December 31, 2018
|
|
|
19,205,624
|
|
|
$
|
19,206
|
|
|
$
|
2,595,034
|
|
|
$
|
(2,668,212
|
)
|
|
$
|
-
|
|
|
$
|
(53,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of stock options vested
|
|
|
-
|
|
|
|
-
|
|
|
|
12,797
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,797
|
|
Fair
value of warrants issued in connection with convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
130,768
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130,768
|
|
Capital
contribution and write off of related party accounts payable
|
|
|
-
|
|
|
|
-
|
|
|
|
653
|
|
|
|
-
|
|
|
|
-
|
|
|
|
653
|
|
Issuance
of common stock for services
|
|
|
174,836
|
|
|
|
175
|
|
|
|
17,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,721
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
366
|
|
|
|
366
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,003,865
|
)
|
|
|
-
|
|
|
|
(1,003,865
|
)
|
Balances
at December 31, 2019
|
|
|
19,380,460
|
|
|
$
|
19,381
|
|
|
$
|
2,756,798
|
|
|
$
|
(3,672,077
|
)
|
|
$
|
366
|
|
|
$
|
(895,532
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
Brain
Scientific Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,003,865
|
)
|
|
$
|
(1,426,102
|
)
|
Change
in net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
1,330
|
|
|
|
656
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
77,889
|
|
Fair
value of stock options vested
|
|
|
12,797
|
|
|
|
-
|
|
Common
stock issued for services
|
|
|
17,720
|
|
|
|
5,148
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,555
|
)
|
|
|
-
|
|
Inventory
|
|
|
(7,085
|
)
|
|
|
-
|
|
Other
liabilities
|
|
|
(6,172
|
)
|
|
|
(12,593
|
)
|
Prepaid
expenses and other current assets
|
|
|
(700
|
)
|
|
|
(3,570
|
)
|
Accounts
payable and accrued expenses
|
|
|
159,441
|
|
|
|
213,982
|
|
Accounts
payable - related party
|
|
|
(22,637
|
)
|
|
|
31,900
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
$
|
(854,726
|
)
|
|
$
|
(1,112,690
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
$
|
(1,005
|
)
|
|
$
|
(1,143
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
$
|
(1,005
|
)
|
|
$
|
(1,143
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from convertible notes payable
|
|
$
|
630,000
|
|
|
$
|
964,120
|
|
Proceeds
from note payable
|
|
|
50,000
|
|
|
|
-
|
|
Proceeds
from related party loans
|
|
|
273,084
|
|
|
|
50,000
|
|
Payments
of related party loans
|
|
|
-
|
|
|
|
(34,252
|
)
|
Capital
contribution - related party
|
|
|
154
|
|
|
|
-
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
$
|
953,238
|
|
|
$
|
979,868
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
366
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH
|
|
|
97,873
|
|
|
|
(133,965
|
)
|
CASH
AT BEGINNING OF THE YEAR
|
|
|
163,563
|
|
|
|
297,528
|
|
CASH
AT END OF THE YEAR
|
|
$
|
261,436
|
|
|
$
|
163,563
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
|
$
|
3,615
|
|
Cash
paid for taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounts
related to warrants issued in connection with convertible debentures
|
|
$
|
130,768
|
|
|
$
|
2,604
|
|
Conversion
of convertible notes and accrued interest to common stock
|
|
|
|
|
|
$
|
2,275,050
|
|
Write
off of related party accounts payable
|
|
$
|
500
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BRAIN SCIENTIFIC
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
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 THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
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 December 31, 2019 and December 31, 2018, 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 December 31, 2019 and December 31, 2018,
the Company had $11,436 and $0, respectively, in excess over the FDIC insurance limit.
Property and Equipment
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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
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 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 year ended December 31, 2019 is from the sale of medical devices purchased from Neurotech, a related party. All revenue
for the year ended December 31, 2018 was from the sale of NeuroCaps.
Research and Development
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 years ended December 31, 2019 and 2018 were $103,616 and $210,206, respectively.
Sales
and Marketing
Advertising
and marketing costs are expensed as incurred. Advertising and marketing costs recognized in the statement of operations for the
years ended December 31, 2019 and 2018 were $95,165 and $93,190, 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.
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 years ended December 31,
2019 and 2018, 1,502,250 and 402,250, respectively, of 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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
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 December 31, 2019 and December 31, 2018.
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 carry forwards. 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.
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 December 31, 2019 and
2018, 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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
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.
|
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 $200 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.
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
In
June 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
2018-07, Compensation – Stock Compensation (Topic 718). This update is intended to reduce cost and complexity and to improve
financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel,
suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes
share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services.
Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard
will be effective for financial statements issued by public companies for the annual and interim periods beginning after December
15, 2018. Early adoption of the standard is permitted. The adoption of this ASU did not have a material effect on the Company’s
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 year ended December 31, 2019,
the Company had $489,202 in revenues, a net loss of $1,003,865 and had net cash used in operations of $854,726. Additionally,
as of December 31, 2019, the Company had working capital deficit, stockholders’ deficit and accumulated deficit of $897,206,
$895,532 and $3,672,077, 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.
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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
NOTE 4 – PROPERTY AND EQUIPMENT
Property
and equipment, net consists of the following:
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
Computer equipment
|
|
$
|
4,105
|
|
|
$
|
3,100
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(2,431
|
)
|
|
|
(1,101
|
)
|
Total
|
|
$
|
1,674
|
|
|
$
|
1,999
|
|
Depreciation expense was $1,330
and $656 for the years ended December 31, 2019 and 2018, respectively.
NOTE
5 – CONVERTIBLE NOTES PAYABLE
2017
Debt Offering
During
the year ended December 31, 2017, the Company commenced a private offering (the “Bridge Financing Transaction”) of
up to $1,000,000, which was amended on September 19, 2017 to a maximum offering amount of $1,100,000 and amended again on April
4, 2018 to $1,500,000, pursuant to which the Company issued convertible notes totaling $1,087,500. The notes all have a maturity
date of one year from the date of issuance and accrue interest at a rate of 8% per annum. In a qualified financing, reverse merger,
change of control or an initial public offering (“Conversion Event”), the notes, including interest thereon, will
automatically convert at $0.40 per share. Based on the terms of the conversion, the holders may receive a discount and is considered
a contingent beneficial conversion feature. At the closing of the Conversion Event, the Company will recognize an expense related
to the intrinsic value. The Company recorded $50,389 of accrued interest and has a total outstanding principal balance of $1,087,500
as of December 31, 2017.
In
January 2018 the Company issued an additional $97,000 convertible note payable to a third party. The funding of the note was comprised
of the $50,000 loaned to the Company on December 28, 2017, plus additional cash proceeds of $47,000 on January 3, 2018.
On
April 24, 2018, the Company extended the maturity dates of all convertible notes issued during the year ended December 31, 2017
to the earlier of April 30, 2019 or the consummation of a qualified financing or other event pursuant to which the Conversion
shares are to be issued.
The
Company issued 12 additional convertible notes payable to third parties in the aggregate principal amount of $962,500 from February
through September 2018. The terms of the convertible note are substantially the same as the notes issued during the year ended
December 31, 2017. On September 21, 2018 the outstanding principal balances of all of the convertible notes in the amount of $2,147,000
and $128,050 in accrued interest was converted into shares of the Company’s common stock (see Note 9).
The
Company recorded a total debt discount of $122,615 related to all the above convertible notes. Amortization of the debt discount,
which is recorded as interest expense, was $77,889 and $44,726 for the years ended December 31, 2018 and 2017, respectively. The
discount related to the convertible notes was fully amortized on September 21, 2018 in relation to the conversion of the convertible
notes to shares of the Company’s common stock.
January
2019 Debt Offering
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 $28,043 of accrued interest and has a total outstanding principal balance of $380,000 as of December 31, 2019.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
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 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 $0 of accrued interest and has a total outstanding principal balance of $275,000
as of December 31, 2019.
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.
The
Company recorded a total of $155,768 of debt discounts related to the above Note during the year ended December 31, 2019. Amortization
of debt discount for the year ended December 31, 2019 was $0.
NOTE
6 – PROMISSORY NOTE
On October 23, 2019, an investor of the Company
subscribed for a promissory note (the “Note”) and loaned to the Company $50,000.
The
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 Note
is payable on October 21, 2020. The Company recorded $1,360 of accrued interest and has a total outstanding principal balance
of $50,000 as of December 31, 2019.
The
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, its Note.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
NOTE
7 – OTHER LIABILITIES
In
2016, the Company recorded a liability in connection with the sale of two 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 December
31, 2019 and December 31, 2018, total liability to the financing company reflected in Other Liabilities is $6,377 and $12,549,
respectively.
Future
minimum commitments related to the EEG liability consisted of the following at December 31, 2019:
Years ended December 31,
|
|
Amount (USD)
|
|
2020
|
|
|
6,377
|
|
Total
|
|
$
|
6,377
|
|
NOTE
8 – RELATED PARTY TRANSACTIONS
On
May 9, 2017, the Company entered into a sublease agreement with Nano Graphene Inc., a company controlled by the Company’s
chairman and his affiliates. In the years ended December 31, 2019 and 2018 Nano Graphene paid rent of $0 and $10,626, respectively,
for warehouse space the Company rents from a third party. The Company has recorded the payments as other income.
During
the year ended December 31, 2017, an entity controlled by Vadim Sakharov, the Company’s then CEO and current President and
CTO, provided a non-interest-bearing, no-term loan to the Company. The Company repaid that loan in full during the year ended
December 31, 2018. During the year ended December 31, 2018, an entity controlled by Mr. Sakharov provided a $50,000 non-interest-bearing,
no-term loan to the Company. As of December 31, 2019, and December 31, 2018, the balance was $50,000 and $50,000, respectively.
During
the year ended December 31, 2019, a company controlled by the Company’s Mr. Sakharov provided an aggregate total of $5,530
in non-interest bearing, no-term loans to the Company. As of December 31, 2019, the balance was $5,530.
During
the years ended December 31, 2019 and 2018, the Company purchased an aggregate of $386,421 and $0 of medical devices for resale
and distribution from Neurotech, a company that Mr. Sakharov is a shareholder and executive manager.
During
the years ended December 31, 2019 and 2018, the Company had expenses related to consulting fees of $0 and $83,377, respectively,
to Mr. Sakharov.
During
the years ended December 31, 2019 and 2018, the Company had expenses related to research and development costs of $50,713 and
$59,788, respectively, to an entity controlled by Mr. Sakharov.
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
years ended December 31, 2019 and 2018, the Company made approximately $4,900 and $6,202, respectively, in rent payments to the
related party.
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 a non-interest-bearing, no-term loan to the Company. As of December 31, 2019, the balance was $50,000.
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 December 31, 2019, the balance was $217,000.
During
the years ended December 31, 2019 and 2018, the Company had expenses related to marketing and sales costs of $0 and $15,000, respectively,
to entities controlled by the Company’s Chairman.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
NOTE
9 – INCOME TAXES
The
Company files corporate income tax returns in the United States (federal) and New York. The Company is subject to federal, state
and local income tax examinations by tax authorities through inception.
As
of December 31, 2019 and 2018, the Company had federal and state net operating loss carry forwards of $3,617,000 and $2,655,000,
respectively that may be offset against future taxable income which will begin to expire in 2035 through 2039.
There
was a foreign provision for income tax during the year ended December 31, 2019 and no provision or benefit for income taxes in
2018. The tax effects of temporary differences which give rise to deferred tax assets (liabilities) are summarized as follows:
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net operating loss carry forwards
|
|
$
|
1,016,339
|
|
|
$
|
746,028
|
|
Stock based compensation
|
|
|
3,596
|
|
|
|
-
|
|
Depreciation
|
|
|
(22
|
)
|
|
|
(41
|
)
|
Valuation allowance
|
|
|
(1,019,913
|
)
|
|
|
(745,987
|
)
|
Net Deferred Tax Asset
|
|
$
|
-
|
|
|
$
|
-
|
|
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Deferred tax assets consist
primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred tax assets
because of the uncertainty regarding its realizability.
Reconciliation
of the statutory federal income tax to the Company's effective tax:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
%
|
|
|
%
|
|
Statutory federal tax rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
State taxes, net of federal benefit
|
|
|
6.99
|
%
|
|
|
8.40
|
%
|
Valuation allowance
|
|
|
-27.70
|
%
|
|
|
-29.40
|
%
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
0.30
|
%
|
|
|
0.00
|
%
|
The
Company’s policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes
in the statement of operations. As of December 31, 2019 and 2018 the Company had no unrecognized tax benefits. There
were no changes in the Company’s unrecognized tax benefits during the years ended December 31, 2019 and 2018. The Company
did not recognize any interest or penalties during fiscal 2019 or 2018 related to unrecognized tax benefits.
All
tax years remain open to examination for federal income tax purposes and by other major taxing jurisdictions to which the Company
is subject.
NOTE
10 – STOCKHOLDERS’ DEFICIT
Preferred
Stock
The
Company has authorized 10,000,000 shares of undesignated preferred stock with a $0.001 par value. As of December 31, 2019, 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 December 31, 2019, the Company has deemed 19,380,460
shares outstanding or deemed outstanding.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
Shares
Issued for Services
On
May 5, 2018, the Company entered into an agreement with a third-party consultant to provide services to the Company over an indefinite
period until either party provides written notice of termination with thirty days notice. As compensation for such services, the
Company has agreed to pay the consultant $75 an hour in cash and $75 an hour in shares of common stock with a monthly cap of $6,500
in cash and $6,500 a month in shares of common stock. The Company has additionally agreed to pay the consultant 1.5% of the gross
revenue during the term of the agreement and six months after. On September 17, 2018, the agreement was amended related to services
performed from July 1, 2018 through August 31, 2018. The Company has agreed to pay 10,134 shares of common stock for services
performed during such time. The shares were valued at $0.05 per share or $734. No shares were earned prior to July 1, 2018. Commencing
September 1, 2018, the May 5, 2018 consulting agreement shall be in accordance with the terms stated above and from September
through December 31, 2018, the Company issued an additional 13,000 shares to the consultant at an average fair market value of
$0.04 per share or $562.
For
services rendered from July 2018 through September 2018, the Company agreed to issue 70,000 shares of common stock to a consultant
pursuant to an agreement dated October 10, 2018. The Company valued the shares at $0.04 per share based on fair market value or
$3,290. No further compensation is due to this consultant.
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. 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, beginning the quarter ended December 31, 2018. The Company elected to issue 26,668 shares for the services provided during
the year ended December 31, 2019 at an average value of $0.08 per share or $1,653.
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. 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, beginning the quarter ended December 31, 2018. The Company elected to issue 26,668 shares for the services provided during
the year ended December 31, 2019 at an average value of $0.08 per share or $1,653.
On
September 1, 2019, the Company entered into a four-month agreement with an advisor for consulting services. Pursuant to the agreement,
the Company shall pay the advisor 5,000 shares of common stock a month. As of December 31, 2019, the Company has issued 20,000
shares for services provided by the advisor at an average value of $0.10 per share or $2,000.
On
October 1, 2019, the Company entered into a three-month agreement with an advisor for consulting services. Pursuant to the agreement,
the Company shall pay the advisor 4,000 shares of common stock a month. As of December 31, 2019, the Company has issued 4,000
shares at a value of $0.12 per share or $488. The agreement was terminated on October 31, 2019.
On
October 7, 2019, the Company entered into a three-month agreement with an advisor for consulting services. Pursuant to the agreement,
the Company shall pay the advisor 7,500 shares of common stock a month. As of December 31, 2019, the Company has issued 22,500
shares at a value of $0.12 per share or $2,745.
On
December 4, 2019, the Company entered into an agreement with an advisor to memorialize certain services rendered to the Company.
Pursuant to the terms of the agreement, in consideration for those services, the Company issued the advisor 75,000 shares of common
stock. The shares were valued at $0.12 per share or $9,150.
Shares
issued for conversion of convertible debt
During
the year ended December 31, 2018, the Company issued 5,687,630 shares of its common stock at a conversion price of $0.40 as a
result of the conversion of principal and interest in the aggregate amount of $2,275,050 underlying the outstanding convertible
notes converted during the period.
Warrants
During
the year ended December 31, 2018, cash consideration of $45,380 was paid and 167,875 warrants were issued to a third party on
September 20, 2018 for services rendered in connection with the issuance of the convertible notes related to the Bridge Financing
Transaction. During the year ended December 31, 2017 a total of 234,375 warrants were issued. The warrants are immediately exercisable
upon issuance at a per share price of $0.40 and expire on September 20, 2023. The Company calculated the fair value of the warrants
and recorded a total debt discount in the amount of $4,735 which was amortized through September 21, 2018, the date of the reverse
merger. The fair value was calculated using the Black-Scholes pricing model with the following assumptions: (i) expected life
5 years, (ii) volatility of 78% - 86%, (iii) risk free rate of 2.27% - 2.90%, (iv) dividend rate of zero, (v) stock price of $0.05,
and (vi) exercise price of $0.40.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
During
the year ended December 31, 2019, in connection with the Securities Purchase Agreement (see Note 4), the company issued 100,000
warrants to a third party. The warrants were accounted for as a discount to the December 31, 2019 convertible note and therefor
fair-valued using the Monte Carlo model with the following assumptions:
-
|
The
stock price of $0.1208 would fluctuate with an annual volatility
|
-
|
The
projected volatility curve was based on historical volatility of comparable companies
for the valuation period and the remaining term of the warrants. The volatility used
was 85.2%.
|
-
|
The
stock price projection was modeled such that it follows a geometric Brownian motion with
constant drift and a constant volatility, starting with market prices.
|
-
|
The
warrants are exercised at maturity, December 31, 2024, by the holder if they are in the
money based on the adjusted exercise price (adjusted for full ratchet reset events).
|
-
|
The
warrants have a fixed $1.25 exercise price subject to full ratchet reset provisions.
Capital raising events triggering a reset to 100% of the projected stock price (no discount
to the market) are projected for the warrants on 6/30/20, 6/30/21 and 6/30/22.
|
-
|
The
cash flows are discounted to net present values using risk free rates. Discount rates
were based on risk free rates in effect based on the remaining term.
|
The
following table summarized the warrant activity for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Warrants
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Balance Outstanding, December 31, 2017
|
|
|
234,375
|
|
|
$
|
0.40
|
|
|
|
5.00
|
|
|
$
|
-
|
|
Granted
|
|
|
167,875
|
|
|
$
|
0.40
|
|
|
|
5.00
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, December 31, 2018
|
|
|
402,250
|
|
|
$
|
0.40
|
|
|
|
4.72
|
|
|
$
|
-
|
|
Granted
|
|
|
100,000
|
|
|
|
1.25
|
|
|
|
5.00
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, December 31, 2019
|
|
|
502,250
|
|
|
$
|
0.57
|
|
|
|
3.98
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
502,250
|
|
|
$
|
0.57
|
|
|
|
3.98
|
|
|
$
|
-
|
|
Options
On
January 14, 2019, the Board of Directors approved the issuance of options to purchase an aggregate of 800,000 and 200,000 share
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.
On
January 25, 2019, the Company appointed Jesse W. Crowne as the Company’s new Chief Executive Officer. In connection with
this appointment, the Company and Mr. Crowne entered into an employment agreement effective as of January 25, 2019. As part of
his compensation, Mr. Crowne received options to purchase 800,000 shares of the Company’s common stock at an exercise price
of $0.75 per share, of which 200,000 vest on the one year anniversary of the date of grant and the remaining 600,000 shares vest
ratably on a quarterly basis over the following two years. The options will expire January 25, 2029. Under certain circumstances,
the Company would be obligated to grant options to purchase an additional 200,000 shares at substantially similar terms. The fair
value of $13,714 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 2.76% (iv) dividend rate of zero, (v) stock price of $0.042, and (vi) exercise
price of $0.75. On May 31, 2019, Mr. Crowne resigned as Chief Executive Officer, and in November 2019 he resigned as a director
of the Company’s Board. As a result of his resignation as Chief Executive Officer, his options were cancelled. The fair
value of the stock option expense was amortized over the vesting period and a total of $2,366 was recorded through the date resignation.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
The
following table summarized the option activity for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Balance Outstanding, December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
1,800,000
|
|
|
|
0.75
|
|
|
|
10
|
|
|
|
-
|
|
Forfeited
|
|
|
(800,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, December 31, 2019
|
|
|
1,000,000
|
|
|
$
|
0.75
|
|
|
|
9.05
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
625,000
|
|
|
$
|
0.75
|
|
|
|
9.05
|
|
|
$
|
-
|
|
For
future periods, the remaining value of the stock options totaling approximately $6,680 will be amortized into the statement of
operations consistent with the period for which the services will be rendered.
NOTE
11 – CONCENTRATIONS
In
the year ending December 31, 2019, the Company purchased 99.84% of its medical devices for resale and distribution from Neurotech,
a company that Vadim Sakharov is a shareholder and executive manager.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Financial
Advisory Agreement
On
February 1, 2017, the Company entered into a one-year agreement with a third party to act as the Company’s exclusive financial
advisor (the “Financial Advisor”). In consideration for services, the Company will pay a cash fee equal to 8% of the
total amount of capital received by the Company from institutions and 10% of the total amount of capital received by the Company
from retail. With the exception of the Bridge Private Placement Transaction, the Company will also pay a cash amount, representing
a non-accountable expense allowance payable immediately upon closing of a financing equal to 3% of the aggregate gross proceeds
raised in the transactions from retail. In addition to the cash consideration, the Company will also issue warrants to purchase
common stock to the Financial Advisor in an amount equal to 10% of the number of shares of common stock purchased by the investors
and that the investors obtain a right to acquire through purchase, conversion or exercise of convertible securities issued by
the Company. Those warrants will be immediately exercisable at the price per share at which the investor can acquire the common
stock. On February 5, 2018, the agreement was amended to extend the exclusivity period another 12 months through February 1, 2019,
all other terms and conditions of the agreement remained the same.
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.
|
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
|
●
|
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.
|
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 $200 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.
The
Company conducts its U.S. operations from one office located in New York, NY. Beginning September 1, 2018, the Company entered
into a six-month agreement from September 1, 2018 through February 28, 2019 at $1,598 per month. The Company continues to rent
this location on a month to month basis at a rate of $1,750 per month. In March 2019, the Company rented an additional office
at this location at a rate of $1,700 per month, which was terminated on June 30, 2019.
Beginning
September 1, 2018, the Company entered into a one-year lease agreement with a related party (see Note 5). The Company is paying
the related party one half of the $3,000 monthly rent or $1,500 per month, plus expenses. This lease was terminated on March 31,
2019.
Beginning
January 2, 2019, the Company entered into a 12-month lease agreement ending December 31, 2019, with a third party in Russia. The
Company is paying rent at a rate of 17,200 Rubles ($272) 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 ($190) 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 years ended December 31, 2019 and 2018 was $85,771 and $58,301, 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 December 31, 2019, the Company has granted and
has 1,000,000 options outstanding under the 2018 Plan (see Note 9).
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2019 and 2018
NOTE
13 – 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.
Employee
Agreements
On
March 25, 2020, effective retroactive to January 30, 2020, the Company entered into an employment agreement with Boris Goldstein
pursuant to which Mr. Goldstein received 800,000 options to purchase shares of the Company’s common stock. The options vest
ratably on a quarterly basis over the following two years.
On
March 25, 2020, effective retroactive to January 30, 2020, the Company entered into an employment agreement with Vadim Sakharov
pursuant to which Mr. Sakharov will receive an annual salary of $60,000.
Non-Convertible
Promissory Note
On
February 21, 2020, a third party loaned the Company $20,000, evidenced by a non-convertible promissory note (the “Note”).The
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 Note
is payable on July 1, 2020 (the “Maturity Date”). The 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 Note.
Extension
of Existing Convertible Promissory Notes
On
February 28, 2020, the Company entered into allonges to extend the maturity date of certain existing Convertible Promissory Notes
of the Company (each, a “Note”). The Allonge relating to the Note in the principal amount of $130,000, provides for
the maturity date thereof to be extended to February 5, 2021, subject to earlier conversion pursuant to the terms of such Note.
The Allonge relating to the Note in the principal amount of $100,000, provides for the maturity date thereof to be extended to
January 18, 2021, subject to earlier conversion pursuant to the terms of such Note. Other than as set forth in each Allonge, the
terms of the Notes remain the same.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
We will pay all expenses
in connection with the registration and sale of the common stock by the selling shareholders. The estimated expenses
of issuance and distribution are set forth below.
SEC filing fee
|
|
$
|
2,462
|
|
Legal expenses
|
|
$
|
100,000
|
*
|
Accounting expenses
|
|
$
|
50,000
|
*
|
Miscellaneous
|
|
$
|
5,000
|
*
|
Total
|
|
$
|
157,462
|
*
|
Item 14. Indemnification of Directors and Officers.
Our Articles of Incorporation
and Bylaws provide that, we will indemnify our officers, directors and agents to the extent permitted under the Nevada Revised
Statute (“NRS”), provided that, we will not be obligated to indemnify any person in connection with any proceeding:
(i) for which payment
has actually been made to or on behalf of such person under any statute, insurance policy, indemnity provision, vote or otherwise,
except with respect to any excess beyond the amount paid;
(ii) for an accounting
or disgorgement of profits pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
or similar provisions of federal, state or local statutory law or common law, if such person is held liable therefor (including
pursuant to any settlement arrangements);
(iii) for any reimbursement
of the Company by such person of any bonus or other incentive-based or equity-based compensation or of any profits realized by
such person from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements
that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act”), or the payment to the Company of profits arising from the purchase and sale by such person of securities in violation
of Section 306 of the Sarbanes-Oxley Act), if such person is held liable therefor (including pursuant to any settlement arrangements);
(iv) initiated by such
person, including any proceeding initiated by such person against the Company or its directors, officers, employees, agents or
other indemnitees, unless (a) the Board authorized the proceeding prior to its initiation, (b) the Company provides the indemnification,
in its sole discretion, pursuant to the powers vested in the Corporation under applicable law, (c) otherwise required to be made
under the Bylaws or (d) otherwise required by applicable law; or
(v) if prohibited by
applicable law.
NRS Section 78.7502 provides
that a corporation shall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys’
fees, actually and reasonably incurred by him in connection with any the defense to the extent that a director, officer, employee
or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred
to Section 78.7502(1) or 78.7502(2), or in defense of any claim, issue or matter therein.
NRS 78.7502(1) provides
that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the
right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable
pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
NRS Section 78.7502(2)
provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection
with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith
and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification
may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
NRS Section 78.747 provides
that except as otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt
or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter
of law must determine the question of whether a director or officer acts as the alter ego of a corporation.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person
of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against
public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities.
During the year ended
December 31, 2017, the Company issued convertible notes with an aggregate principal amount of $1,087,500.
From January 1, 2018 through
September 21, 2018, the Company issued convertible notes with an aggregate principal amount of $1,059,500.
On September 21, 2018,
pursuant to the merger agreement with Memory MD, Inc. and AFGG Acquisition Corp. (see “Prospectus Summary”) we issued
an aggregate of approximately 9,916,752 shares of our common stock for all of the then-outstanding shares of MemoryMD, Inc. We
issued an additional 4,083,248 shares of our common stock upon the automatic conversion at the closing of an aggregate of $1,507,000
principal amount of outstanding convertible promissory notes issued by MemoryMD Inc., and we further issued an additional 1,604,378
shares of our common stock upon the automatic conversion immediately subsequent to the closing of an aggregate of $640,000 principal
amount of outstanding convertible promissory notes issued by MemoryMD Inc. At the closing, the Company was obligated to issue
5-year warrants to purchase an estimated 291,740 shares of common stock, at an exercise price of $0.40 per share, as partial compensation
for services rendered by Corinthian.
On January 18, 2019, an
investor subscribed for a convertible promissory note and loaned to the Company an aggregate of $100,000. The loan represents
the first tranche borrowed pursuant to an up to $500,000 convertible note offering.
On February 5, 2019, an
investor subscribed for a convertible promissory note and loaned to the Company an aggregate of $130,000. The loan represents
the second tranche borrowed pursuant to an up to $500,000 convertible note offering, for total borrowed principal through February
5, 2019 of $230,000.
On July 23, 2019, an investor
subscribed for a convertible promissory note and loaned to the Company $150,000. The loan represents an additional tranche borrowed
pursuant to an up to $500,000 convertible note offering, for total borrowed principal through July 23, 2019 of $380,000.
On December 4, 2019, the
Company entered into an agreement with an advisor to memorialize certain services rendered to the Company. Pursuant to the terms
of the agreement, in consideration for those services, On December 12, 2019, the Company issued the advisor 75,000 shares of common
stock.
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).
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 “Grid Aggregate Advance”). The Company
also issued to Brown a common stock purchase warrant (the “Brown Warrant”, and together with the Caleca Warrant, the
“Grid 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).
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 Grid Advance”). The Grid Investors shall make additional cash advances to the
Company pursuant to the terms of their Grid Notes.
The unpaid outstanding
principal amount and accrued and unpaid interest under the Grid Notes are convertible into such number of shares of the Company’s
common stock obtained by dividing the amount so converted by $1.00.
On December 31, 2019,
the Company entered into a securities purchase agreement and issued and sold to a third party a convertible note in the original
principal amount of $275,000, and a warrant to purchase 100,000 shares of the Company’s common stock. The aggregate purchase
price received by the Company was $250,000 after an original issue discount of $25,000. The unpaid outstanding principal amount
and accrued and unpaid interest under the note are convertible into shares of the Company’s common stock at any time at
the option of the investor at a conversion price 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 will be the effective exercise price per share from time to time pursuant to the Warrant.
On August 5, 2020, the
Company issued 50,000 shares of common stock to a noteholder in connection with the extension of their notes.
On September 1, 2020, the
Company sold an 8% convertible redeemable note in the principal amount of $157,000. The Company received $142,500.
On September 30, 2020,
the Company sold a $600,000 convertible promissory note. The company received $100,000 and will receive the balance on October
20, 2020. The Company issued warrants to purchase 1,411,764 shares.
In connection with the
foregoing, we relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended,
for transactions not involving a public offering.
Item 16. Exhibits.
Exhibit Number
|
|
Description
|
2.1*
|
|
Agreement
and Plan of Merger and Reorganization by and among Brain Scientific Inc., ASGI Acquisition Company and Memory MD, Inc. dated
as of September 21, 2018 (Incorporated by reference to Form 8-K filed on September 27, 2018)
|
3.1*
|
|
Amended
and Restated Certificate of Incorporation of Brain Scientific Inc. (Incorporated by reference to Form 8-K filed on September
24, 2018)
|
3.2*
|
|
Amended
and Restated By-Laws of Brain Scientific Inc. (Incorporated by reference to Form 8-K filed on September 27, 2018)
|
5.1*
|
|
Opinion of Sichenzia Ross Ference LLP
|
10.1*
|
|
Patent
Assignment and License Back Agreement, dated May 2018, by and among Boris Goldstein, Dmitriy Prilutskiy, Stanislav Zabodaev,
Memory MD, Inc. and (c) Medical Computer Systems Ltd. (Incorporated by Form 8-K filed on September 27, 2018)
|
10.2*
|
|
Agreement,
dated as of September 21, 2018, between Brain Scientific Inc. and Amer Samad (Incorporated by reference to Form 8-K filed
on September 27, 2018)
|
10.3*
|
|
Sublease
Agreement dated as of May 9, 2017 by and between Memory MD, Inc. and Nano Graphene Inc. (Incorporated by reference to Form
8-K filed on September 27, 2018)
|
10.4*
|
|
2018
Equity Incentive Plan (Incorporated by reference to Form 8-K filed on September 27, 2018)
|
10.5*
|
|
Form
of Stock Option Award Agreement pursuant to 2018 Equity Incentive Plan (Incorporated by reference to Form 8-K filed on September
27, 2018)
|
10.6*
|
|
Assignment
and Assumption Agreement (Incorporated by reference to Form 8-K filed on September 27, 2018)
|
10.7*
|
|
Jesse
W. Crowne Employment Agreement (Incorporated by reference to Form 8-K filed on January 30, 2019)
|
10.8*
|
|
Form
of Subscription Agreement (Incorporated by reference to Form 8-K filed on February 11, 2019)
|
10.9*
|
|
Form
of Note (Incorporated by reference to Form 8-K filed on February 11, 2019)
|
10.10*
|
|
Form
of Placement Agent Warrant (incorporated by reference to Form 10-K filed April 1, 2019)
|
10.11*
|
|
Form
of Subscription Agreement (incorporated by reference to Form 8-K filed October 25, 2019)
|
10.12*
|
|
Form
of Note (incorporated by reference to Form 8-K filed October 25, 2019)
|
10.13*
|
|
Allonge
to Convertible Promissory Note dated February 28, 2020 ($130,000 (incorporated by reference to 8-K filed March 5, 2020)
|
10.14*
|
|
Allonge
to Convertible Promissory Note dated February 28, 2020 ($100,000 (incorporated by reference to 8-K filed March 5, 2020)
|
10.15*
|
|
Employment
Agreement between the Company and Boris Goldstein (incorporated by reference to 10-K filed March 31, 2020)
|
10.16*
|
|
Employment
Agreement between the Company and Vadim Sakharov (incorporated by reference to 10-K filed March 31, 2020)
|
21.1*
|
|
Subsidiaries
(Incorporated by Reference to the Registrant’s Current Report on Form 8-K filed on September 27, 2018)
|
23.1
|
|
Consent of Sadler, Gibb & Associates, LLC
|
23.2*
|
|
Consent of Sichenzia Ross Ference LLP (included in Exhibit 5.1)
|
101.INS
|
|
XBRL Instance.
|
101.SCH
|
|
XBRL Taxonomy Extension Schema.
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation.
|
101.DEF
|
|
XBRL Taxonomy Extension Definition.
|
101.LAB
|
|
XBRL Taxonomy Extension Labels.
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation.
|
* Previously filed.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any
period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus
required by section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);
(ii) To reflect in the
prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price
set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any
material information with respect to the plan of distribution not previously disclosed in the registration statement or any material
change to such information in the registration statement.
(2) That, for the purposes
of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration
by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose
of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part
of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of first use.
(5) For the purpose of
determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities
in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of
the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or
sell such securities to such purchaser:
(i) Any preliminary prospectus
or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing
prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned
registrant;
(iii) The portion of
any other free writing prospectus relating to the offering containing material information about the undersigned registrant or
its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication
that is an offer in the offering made by the undersigned registrant to the purchaser.
(b) Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities, other than the payment by the registrant of expenses incurred
and paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding,
is asserted by such director, officer or controlling person in connection with the securities being registered hereby, the registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
(c) The undersigned Registrant
hereby undertakes that it will:
(1) for determining any
liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1), or (4)
or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective.
(2) for determining any
liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration
statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
SIGNATURES
Pursuant to the requirements
of the Securities Act of 1933, the registrant has duly caused this post-effective amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the City of New York, State of New York, on October 9,
2020.
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Brain Scientific Inc.
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By:
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/s/ Boris Goldstein
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Name:
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Boris Goldstein
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Title:
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Chairman of the Board and
Executive Vice President
(Principal Executive Officer)
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Pursuant to the requirements
of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ Boris Goldstein
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October 9, 2020
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Boris Goldstein
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Chairman of the Board and Executive Vice President (Principal Executive Officer)
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/s/ Mark Corrao
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October 9, 2020
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Mark Corrao
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Chief Financial Officer
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(Principal Financial and Accounting Officer)
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/s/ Vadim Sakharov
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October 9, 2020
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Vadim Sakharov
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Director, President and Chief Technology Officer
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/s/ Nickolay Kukekov
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October 9, 2020
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Nickolay Kukekov
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Director
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II-7
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