The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 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
September 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.
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.
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 September 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 September 30, 2020, and December 31, 2019, the Company had $0 and $11,436, respectively,
in excess over the FDIC insurance limit.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
Inventory
Inventory consists of finished goods that
are valued at lower of cost or market using the weighted average method. As of September 30, 2020, and December 31, 2019,
the Company had inventory totaling $4,084 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 $1,027 and $985 for the nine months ended September 30,
2020 and 2019, respectively. Depreciation expense was $345 for the three months ended September 30, 2020 and 2019.
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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
The Company recognizes revenue from the
sale of NeuroCaps, as well as revenue from the sale of goods purchased through manufacturers of medical devices. All revenue for
the nine months ended September 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 nine months ended September 30, 2020 and 2019 were $208,026 and $91,911, respectively. Research and development costs recognized
in the statement of operations for the three months ended September 30, 2020 and 2019 were $64,681 and $41,845 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 September 30,
2020 and 2019 were $38,418 and $21,670, respectively. Advertising and marketing costs recognized in the statement of operations
for the nine months ended September 30, 2020 and 2019 were $126,587 and $81,468, 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 nine months ended September 30, 2020, 6,096,540 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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
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 September 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 September 30, 2020.
Liabilities
|
|
Amounts at Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability – conversion feature
|
|
$
|
299,455
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
299,455
|
|
Derivative liability - warrants
|
|
|
2,168,364
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,168,364
|
|
Total
|
|
$
|
2,467,819
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,467,819
|
|
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 September 30, 2020 and December 31, 2019, the Company had no
unrecognized uncertain income tax positions.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
On December 22, 2017, the passage of legislation
commonly referred to as the Tax Cuts and Jobs Act (“TCJA”) was enacted and significantly revised the U.S. income tax
law. The TCJA includes changes, which reduce the corporate income tax rate from 34% to 21% for years beginning after December 31,
2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued and allows a company to recognize
provisional amounts when it does not have the necessary information available, prepared or analyzed, including computations, in
reasonable detail to complete its accounting for the change in tax law. SAB 118 provides for a measurement of up to one year from
the date of enactment.
Recent Issued Accounting Pronouncements
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standard Board (“FASB”) or other standard setting bodies that the Company adopts
as of the specified effective date. Unless otherwise discussed, the Company does not believe that the impact of recently issued
standards that are not yet effective will have a material impact on the Company’s financial position or results of operations
upon adoption.
In June 2016, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Measurement of
Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses at the point
a loss is probable to occur, rather than expected to occur, which will generally result in earlier recognition of allowances for
credit losses. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. The Company adopted ASU 2016-13 in the first quarter of 2020 and the adoption did not have a material
impact on its condensed consolidated financial statements.
NOTE 3 – GOING CONCERN
The accompanying financial statements have
been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern for a period of one
year from the issuance of these financial statements. For the nine months ended September 30, 2020, the Company had $365,265 in
revenues, a net loss of $3,712,882 and had net cash used in operations of $688,341. Additionally, as of September 30, 2020, the
Company had working capital deficit, stockholders’ deficit and accumulated deficit of $4,408,167, $4,449,896 and $7,384,959,
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.
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. On July 29, 2020 the Company and the holder of the July 23, 2019 convertible note agreed to extend the
maturity date of July 23, 2020 to February 21, 2021.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
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 $56,537 of accrued
interest and has a total outstanding principal balance of $380,000 as of September 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 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,
as may be extended at the option of the Investor.
On August 5, 2020, the Company entered
into an Allonge to Convertible Note, dated as of August 8, 2020, which amended the Note. The allonge amended the Note by, among
other things, extending the maturity date of the loan until October 31, 2020 (this date was further amended on October 29, 2020,
see Note 11. 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 the investor that were valued at fair market value of $75,000. The Company evaluated
the allonge for debt modification in accordance with ASC 470-50 and concluded that the debt qualified for debt extinguishment as
the 10% cash flow test was met. As a result, the $297,000 of principal and accrued interest was written off and the new debt was
recorded at fair value as of August 5, 2020 in the amount of $324,500. For the nine months ended September 30, 2020, the Company
recorded a net loss on extinguishment of debt in the amount of $176,467. The Company has a total outstanding principal balance
under the Note of $324,500 as of September 30, 2020.
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 of the Note, 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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
The Note contains a price-based anti-dilution
provision, pursuant to which the conversion price of the Note shall be reduced upon the occurrence of certain dilutive issuances
of Company securities as set forth in the Note. The conversion of the Note is also subject to a beneficial ownership limitation
of 4.99% of the number of shares of common stock outstanding immediately after giving effect to such conversion. In the event the
Company, prior to the maturity date of the Note, 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 Note is considered a derivative liability due to the variable market-based conversion
price upon default. The Warrant is 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 Warrant was revalued and recorded as a derivative liability in the amount of $255,899.
On September 30, 2020, the Warrant derivative was valued at $109,102. For the three and nine months ended September 30, 2020, the
Company recorded a gain on the change in fair market value of derivative liabilities in the amount of $53,503 and $146,797, 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 nine months ended September
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 $332,042 was amortized during the nine months ended September
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).
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
Also on April 21, 2020, the Company issued
a Convertible Grid Promissory Note (the “Brown Note”, and together with the Caleca Note, the “Grid Notes”)
to Andrew Brown (“Brown”, and together with Caleca, the “Grid Investors”), an existing stockholder of the
Company, pursuant to which Brown agreed to advance to the Company the aggregate principal amount of $125,000 (the “Brown
Aggregate Advance”, and together with the Caleca Aggregate Advance, the “Aggregate Advance”). The Company also
issued to Brown a common stock purchase warrant (the “Brown Warrant”, and together with the Caleca Warrant, the “2020
Warrants”), granting Brown the right to purchase up to 750,000 shares of the Company’s common stock at a per share
exercise price of $0.80 (subject to adjustment as set forth in the Brown Warrant). The 2020 Warrants are exercisable at any time
commencing on the eighteen-month anniversary of the issuance of the 2020 Warrants (as may be accelerated pursuant to the terms
of the 2020 Warrants) and expiring on the five-year anniversary of the issuance of the 2020 Warrants.
On April 22, 2020, the Grid Investors each
made their first cash advance of $25,000 pursuant to the terms of the Grid Notes, for an aggregate cash advance to the Company
of $50,000 (the “First Advance”). The Grid Investors made additional cash advances to the Company pursuant to the terms
of their Grid Notes. As of September 30, 2020, a total of $250,000 in principal was advanced to the Company. During the nine months
ended September 30, 2020, the Company recorded debt discount of $233,893 related to the Grid Notes. Amortization of the debt discount
is recorded as interest expense and a total of $98,603 was amortized during the nine months ended September 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, unless sooner
converted into shares of the Company’s common stock pursuant to the terms of the Grid Notes. The Company recorded $6,283
of accrued interest and has a total outstanding principal balance of $250,000 as of September 30, 2020.
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 of the Grid Notes
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 of the Grid Notes, 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.
September 1, 2020 Securities Purchase
Agreement
On September 1, 2020 (the “September
1 Issuance Date”), the Company entered into a Securities Purchase Agreement and issued and sold to an investor an 8% Convertible
Redeemable Note in the original principal amount of $157,500 (the “September 1 Note”). The net amount received by the
Company for the sale of the September 1 Note was $142,500 after an original issue discount of $15,000 and after payment of the
investor’s legal fees.
The September 1 Note bears interest commencing
on the September 1 Issuance Date at a fixed rate of 8% per annum on any unpaid principal balance, and will be payable, along with
the principal amount, on September 1, 2021, unless such interest is earlier converted into shares of the Company’s common
stock pursuant to the conversion terms contained in the September 1 Note. During the nine months ended September 30, 2020, the
Company recorded debt discount of 157,500 related to the September 1 Note. Amortization of the debt discount is recorded as interest
expense and a total of $14,671 was amortized during the nine months ended September 30, 2020. The Company recorded $1,093 of accrued
interest and has a total outstanding principal balance of $157,500 as of September 30, 2020.
The unpaid outstanding principal amount
and accrued and unpaid interest under the September 1 Note shall be convertible into shares of common stock at any time on or after
the September 1 Issuance Date at the option of the investor. The conversion price shall be equal to 60% of the lowest closing bid
price for the common stock, subject to certain exceptions and adjustments contained in the September 1 Note, for the fifteen prior
trading day period. From the September 1 Issuance Date until 180 days after the September 1 Issuance Date, upon 3 days’ notice
to the investor, the Company shall have the right to pre-pay the entire remaining principal amount of the September 1 Note, subject
to the pre-payment terms contained in the September 1 Note.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
The conversion of the September 1 Note
is subject to a beneficial ownership limitation of 4.99% (or 9.9% upon notice of the investor) of the number of shares of common
stock outstanding immediately after giving effect to such conversion. The September 1 Note is further subject to a “most-favored
nation” clause in the event the Company offers a more favorable conversion discount, interest rate, look back period or other
more favorable term to another party for any financings while the September 1 Note is in effect, subject to certain exceptions
contained in the September 1 Note.
The September 1 Note contains customary
events of default which entitle the investor, among other things, to accelerate the due date of the unpaid principal amount of,
and all accrued and unpaid interest on, the September 1 Note. Upon an event of default, interest shall accrue at a default interest
rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted
by law. The September 1 Note further contains monetary penalties in the event of certain events of default.
At the investor’s election, if the
Company fails for any reason to deliver to the investor underlying shares upon conversion by the 3rd business day thereafter and
if the investor incurs a Failure to Deliver Loss (as defined in the September 1 Note), then the Company must make the investor
whole in relation to such loss.
Upon certain sale events as specified in
the September 1 Note, the Company shall, upon request of the investor, redeem the September 1 Note in cash for 150% of the principal
amount, plus accrued but unpaid interest through the date of redemption, or at the election of the investor, such Holder may convert
the unpaid principal amount of the September 1 Note (together with the amount of accrued but unpaid interest) into shares of Company
common stock immediately prior to such sale event at the conversion price specified in the September 1 Note.
September 23, 2020 Securities Purchase
Agreement
On September 23, 2020, the Company entered
into a Securities Purchase Agreement (the “September Purchase Agreement”) dated as of September 22, 2020 (the “September
23 Issuance Date”) and issued and sold to an investor a Promissory Note (the “September 23 Note”) in the aggregate
original principal amount of $600,000, of which $100,000 aggregate principal amount was borrowed as of the Issuance Date with the
balance of the principal to be borrowed on October 19, 2020. Also pursuant to the September Purchase Agreement, in connection with
the issuance of the September Note, the Company issued two common stock purchase warrants (separately, “Warrant A”
and “Warrant B”, and together, the “September Warrants”) to the investor, allowing the investor to purchase
an aggregate of 1,411,764 shares of the Company’s common stock, with Warrant A being a commitment fee of 705,882 shares of
common stock, and Warrant B being fully earned upon issuance as an additional commitment fee of 705,882 shares of common stock,
provide that Warrant B is returnable to the Company upon the repayment of the September 23 Note, as an additional incentive for
the repayment of the September 23 Note.
The net amount received by the Company
on September 23, 2020 was approximately $84,000 after payment of certain fees to the investor or on behalf of the investor. Additionally,
on October 19, 2020 $421,000 was received by the Company after payment of certain fees to the investor on behalf of the investor.
In the event the Company breaches any of
the covenants set forth in Section 4 of the Purchase Agreement, and in addition to any other remedies available to the Buyer pursuant
to the Purchase Agreement, it will be considered an Event of Default under the September 23 Note and the Company shall pay to the
Buyer certain liquidated damages as set forth in the September 23 Note in cash or in shares of common stock at the option of the
Buyer. If the Buyer elects to have the Company pay such liquidated damages in shares of common stock, such shares shall be issued
at the conversion price at the time of payment.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
The September 23 Note bears interest commencing
on the September 23 Issuance Date at a fixed rate of 12% per annum on any unpaid principal balance, and will be payable, along
with the principal amount, on September 22, 2021, unless such interest is earlier converted into shares of the common stock pursuant
to the conversion terms contained in the September 23 Note.
A lump-sum interest payment for one year
is due on the September 23 Issuance Date and added to the principal balance and payable on the maturity date of the September 23
Note or upon acceleration or by prepayment or otherwise, notwithstanding the number of days which the principal is outstanding.
Principal payments shall be made in 6 installments each in the amount of $100,000 commencing 180 days following the applicable
Issue Date (as defined in the Note) and continuing thereafter each 30 days for 5 months. During the nine months ended September
30, 2020, the Company recorded debt discount of 112,000 related to the September 1 Note. Amortization of the debt discount is recorded
as interest expense and a total of $2,455 was amortized during the nine months ended September 30, 2020. The Company has a total
outstanding principal balance of $112,000 as of September 30, 2020.
The unpaid outstanding principal amount
and accrued and unpaid interest under the September 23 Note shall be convertible into shares of common stock at any time on or
after the September 23 Issuance Date at the option of the investor. The conversion price shall be equal to the lesser of (subject
to equitable adjustments): (i) the lowest Market Price (as defined in the September 23 Note) during the previous five Trading Day
(as defined in the September 23 Note) period ending on the latest complete Trading Day prior to the September 23 Issuance Date,
and (ii) the Variable Conversion Price (as defined in the September 23 Note). The conversion price shall be adjusted downwards
upon certain events as set forth in the September 23 Note.
The September 23 Note is subject to adjustment
in the event of certain events, including mergers or consolidations of the Company, distributions of assets to holders of common
stock, stock repurchases, and dilutive issuances (other than “Exempt Issuances” as defined in the September 23 Note).
Provided that an event of default under
the September 23 Note has not occurred, the Company may prepay in whole or in part the amounts outstanding under the September
23 Note by making a payment to the investor of an amount in cash equal to the sum of: (w) the then outstanding principal amount
of the September 23 Note plus (x) accrued and unpaid interest on the unpaid principal amount of the September 23 Note plus (y)
default interest, if any.
The conversion of the September 23 Note
and the exercise of the Warrants are subject to a beneficial ownership limitation of 4.99% of the number of shares of common stock
outstanding immediately after giving effect to such conversion or exercise, as the case may be.
The September 23 Note contains customary
events of default which entitle the investor, among other things, to accelerate the due date of the unpaid principal amount of,
and all accrued and unpaid interest on, the September 23 Note. Upon an event of default, interest shall accrue at a default interest
rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted
by law. The September 23 Note further contains monetary penalties in the event of certain events of default or breaches.
The September 23 Note is further subject
to a “most-favored nation” clause in the event the Company issues any security with any term more favorable to the
holder of such security.
The September Warrants each have an exercise
price of $1.28, subject to customary adjustments, and may be exercised at any time until the three year anniversary of the September
Warrants; provided, however, in the event the Company repays the September 23 Note in its entirety on or prior to the maturity
date of the September 23 Note, Warrant B shall automatically expire and may only be exercised in the event it does not so automatically
expire. The September Warrants include a cashless exercise provision as set forth therein.
Derivative Accounting for the Convertible
Notes Payable
The Company evaluated the terms and conditions
of the Note, the Grid Notes, the September 1 Note and the September 23 Note 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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
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 nine months ended September 30, 2020:
|
|
Amount
|
|
Balance on December 31, 2019
|
|
$
|
-
|
|
Issuances to debt discount
|
|
|
679,667
|
|
Issuances to interest expense
|
|
|
2,431,289
|
|
Net extinguishment
|
|
|
73,967
|
|
Change in fair value of derivative liabilities
|
|
|
(479,314
|
)
|
Change in fair value of warrant liabilities
|
|
|
(237,790
|
)
|
Balance on September 30, 2020
|
|
$
|
2,467,819
|
|
The fair value of the derivative conversion
features and warrant liabilities as of September 30, 2020 were calculated using a Monte-Carlo option model valued with the following
assumptions:
|
|
September 30,
2020
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
82% - 100
|
%
|
Risk free interest rate
|
|
|
0.12% - 0.47
|
%
|
Contractual terms (in years)
|
|
|
0.06 – 4.56
|
|
Conversion/Exercise price
|
|
$
|
0.80 - $1.28
|
|
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 was originally to mature
on October 21, 2020, subject to a thirty-day grace period. On November 13, 2020, the Company entered into an allonge with the investor
that extended the maturity date of the note to April 21, 2021 (See Note 11). The Company recorded $1,357 of accrued interest and
has a total outstanding principal balance of $50,000 as of September 30, 2020.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
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 were originally payable
on July 1, 2020. On July 28, 2020 the Company entered into an allonge, effective July 1, 2020, to extend the original maturity
date to February 21, 2021. The Company recorded $867 of accrued interest and has a total outstanding principal balance of $20,000
as of September 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 September
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 September 30, 2020:
Years ended December 31,
|
|
Amount (USD)
|
|
Remainder 2020
|
|
|
4,595
|
|
Total
|
|
$
|
4,595
|
|
NOTE 7 – RELATED PARTY TRANSACTIONS
During the year ended December 31, 2018,
an entity controlled by Mr. Vadim Sakharov, 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 September 30, 2020, and December 31, 2019, the balance was $55,530 and $55,530, respectively.
During the nine months ended September
30, 2020 and 2019, the Company had expenses related to research and development costs of $19,700 and $43,235, 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 September 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 nine months ended September 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 September 30, 2020 and December 31, 2019, the balance was $217,000 and $217,000, respectively.
During the nine months ended September
30, 2020 and 2019, the Company purchased an aggregate of $284,703 and $175,272 of medical devices for resale and distribution from
Neurotech, a company that Mr. Sakharov is a shareholder and executive manager.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
NOTE 8 – 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:
|
●
|
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.
|
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 September 30, 2020 with a third party in Russia. The Company is paying rent at a rate of
12,000 Rubles ($169) 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 nine months ended September 30, 2020
and 2019 was $31,973 and $45,750, respectively.
The Company has one lease agreement with
terms up to 2 years for the lease of office space. The assets and liabilities from operating leases are recognized at the commencement
date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing
rates or implicit rates, when readily determinable. Short-term leases, which have an initial term of 12 months or less, are not
recorded on the balance sheet.
The Company’s operating lease does
not provide an implicit rate that can readily be determined. Therefore, we use a discount rate based on our incremental borrowing
rate, which is determined using the interest rate of our debt as of July 1, 2020.
The Company’s weighted-average remaining
lease term relating to its operating leases is 1.92 years, with a weighted-average discount rate of 12%.
The Company incurred lease expense for
its operating leases of $11,639 and $0 which was included in “General and administrative expenses,” for the nine months
ended September 30, 2020 and 2019, respectively.
The Company had operating cash flows used
in operating leases of $9,016 for the nine months ended September 30, 2020.
The following table presents information
about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of September 30, 2020.
Maturity of Lease Liability
|
|
|
|
Remainder of 2020
|
|
$
|
11,905
|
|
2021
|
|
|
48,334
|
|
2022
|
|
|
32,697
|
|
Total undiscounted operating lease payments
|
|
$
|
92,937
|
|
Less: Imputed interest
|
|
|
10,347
|
|
Present value of operating lease liabilities
|
|
$
|
82,590
|
|
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
NOTE 9 – STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company has authorized 10,000,000 shares
of undesignated preferred stock with a $0.001 par value. As of September 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 September 30, 2020, the Company had 19,478,258 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
9,899 restricted shares under the Company’s equity incentive plan for the services provided during the nine months ended
September 30, 2020 at a weighted average value of $1.52 per share or $15,001. The Company is currently working with the consultant
to negotiate a new agreement, but cannot determine at this time if that agreement will take effect.
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 9,899 restricted shares under the Company’s equity inventive plan for the services provided during the nine months
ended September 30, 2020 at a weighted average value of $1.52 per share or $15,001. The Company is currently working with the consultant
to negotiate a new agreement, but cannot determine at this time if that agreement will take effect.
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 was effective from June 1, 2020 through September 30, 2020. As of September 30,
2020, the Company issued 28,000 restricted shares of common stock under the Company’s equity incentive plan at a weighted
average value of $1.14 per share or $32,025. The Company is currently working with the consultant to negotiate a new agreement,
but cannot determine at this time if that agreement will take effect.
Warrants
The following table summarized the warrant
activity for the nine months ended September 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
|
|
|
2,911,764
|
|
|
|
1.03
|
|
|
|
4.03
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, September 30, 2020
|
|
|
3,414,014
|
|
|
$
|
0.96
|
|
|
|
3.71
|
|
|
$
|
607,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2020
|
|
|
1,914,014
|
|
|
$
|
1.09
|
|
|
|
3.04
|
|
|
$
|
255,429
|
|
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
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 $4,804 was recorded during the nine months ended September 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 $17,276 was recorded during the nine months ended September 30, 2020.
The following table summarized the option
activity for the nine months ended September 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
|
|
|
|
9.34
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, September 30, 2020
|
|
|
1,800,000
|
|
|
$
|
0.75
|
|
|
|
8.76
|
|
|
$
|
513,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2020
|
|
|
1,206,250
|
|
|
$
|
0.75
|
|
|
|
8.56
|
|
|
$
|
343,781
|
|
For future periods, the remaining value
of the stock options totaling approximately $36,357 will be amortized into the statement of operations consistent with the period
for which the services will be rendered.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2020
(unaudited)
NOTE 10 – COMMITMENTS AND CONTINGENCIES
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 September 30, 2020, the Company has granted 1,800,000 options and an aggregate of 47,798
shares of restricted stock (See Note 9), and has 1,652,202 shares authorized under the 2018 Plan (see Note 8).
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.
Allonges to Promissory Notes
As of October 29, 2020, the Company entered
into an Allonge #2 to Convertible Note (the “Allonge #2”), which further amends the Note by extending the maturity
date thereof from ten months from the date of the loan to thirteen months from the date of the loan. As consideration for the Allonge
#2, the original principal amount was increased by an additional ten percent, and the Company agreed to issue 50,000 shares of
its common stock to the holder of the Note.
On November 13, 2020, the Company entered
into an allonge to the October Note, which amends the October Note by extending the maturity date thereof to April 21, 2021.
Consulting Agreement
On November 13 the Company entered into
a 6-month third-party consulting agreement pursuant to which, on or about November 17, 2020, the Company issued 100,000 shares
of its common stock to a third party as partial consideration for certain management consulting, business advisory, shareholder
information and public relations services to be rendered by such third party to the Company.
Restricted Stock Grant
On October 15, 2020, the Company granted
to a newly-hired non-executive officer of the Company 292,174 restricted shares under the Company’s 2018 Equity Incentive
Plan, which vest quarterly in equal amounts commencing January 15, 2021 and ending January 15, 2022.