The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2021
(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 were cancelled subsequent to June 30, 2021. 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.
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 2021. 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.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2021
(unaudited)
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. 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 June 30, 2021 and December 31, 2020, 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, 2021, and December 31, 2020, the Company had $0 and $22,856,
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, 2021, and
December 31, 2020, the Company had inventory totaling $1,814 and $1,461, 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 $302 and $682 for the six months ended
June 30, 2021 and 2020, respectively.
Convertible
Notes Payable
The
Company has issued convertible notes, which contain variable conversion features, whereby the outstanding principal and accrued interest
automatically convert into common shares at a fixed price which may be at a discount to the common stock at the time of conversion. 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.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2021
(unaudited)
The
Company utilizes the Monte Carlo method that values the liability of the debt conversion feature, derivative financial instruments and
derivative warrants in cases where 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. The Monte Carlo method applied generates many possible (but random) price paths for the underlying (or
underlyings) via simulation, and then calculates the associated payment value of the derivative features. The price of the underlying
common stock is modeled such that it follows a geometric Brownian motion with constant drift, and constant volatility. The stock price
is determined by a random sampling from a normal distribution. Since the underlying random process is the same, for enough price paths,
the value of derivative is derived from path dependent scenarios and outcomes.
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.
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.
|
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, as well as revenue from the sale of goods purchased through manufacturers of medical
devices. Primarily all revenue for the six months ended June 30, 2021 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, 2021 and 2020 were $232,113 and $143,345, respectively.
Sales
and Marketing
Advertising
and marketing costs are expensed as incurred. Advertising and marketing costs recognized in the statement of operations for the six months
ended June 30, 2021 and 2020 were $124,039 and $88,169, 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, 2021
(unaudited)
Basic and Diluted Net Income (Loss) Per
Common Share
Basic net income (loss) per share is computed
by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (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 the six months ended June 30, 2021, and the three and six months ended June 30, 2020, are identical. In the six months ended June
30, 2021, 10,210,930 anti-dilutive securities were excluded from the computation. In the three months ended June 30, 2021, 6,566,350 anti-dilutive
securities were excluded from the computation.
|
|
Three months
ended
June 30,
|
|
|
Three months
ended
June 30,
|
|
|
Six months
ended
June 30,
|
|
|
Six months
ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
980,747
|
|
|
|
(1,815,671
|
)
|
|
|
(2,217,131
|
)
|
|
|
(2,767,525
|
)
|
Convertible note interest
|
|
|
7,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of debt discounts
|
|
|
98,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss on settlement of debt
|
|
|
(9,005
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change of fair value of derivatives
|
|
|
(1,717,813
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjusted net income (loss)
|
|
$
|
(640,571
|
)
|
|
|
(1,815,671
|
)
|
|
|
(2,217,131
|
)
|
|
|
(2,767,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: Weighted average shares outstanding used in computing net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,939,736
|
|
|
|
19,383,794
|
|
|
|
19,814,703
|
|
|
|
19,382,127
|
|
Effect of dilutive stock options
|
|
|
262,859
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Effect of dilutive warrants
|
|
|
369,897
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Effect of convertible note weighted shares
|
|
|
612,967
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
20,701,521
|
|
|
|
19,383,794
|
|
|
|
19,814,703
|
|
|
|
19,382,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share applicable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
|
(0.09
|
)
|
|
|
(0.11
|
)
|
|
|
(0.14
|
)
|
Diluted
|
|
$
|
(0.03
|
)
|
|
|
(0.09
|
)
|
|
|
(0.11
|
)
|
|
|
(0.14
|
)
|
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.
|
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2021
(unaudited)
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, 2021 and December 31, 2020.
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, 2021.
Liabilities
|
|
Amounts
at Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability – conversion feature
|
|
$
|
453,450
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
453,450
|
|
Derivative liability - warrants
|
|
|
1,822,634
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,822,634
|
|
Total
|
|
$
|
2,276,084
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,276,084
|
|
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 June 30, 2021, and December 31, 2020, 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.
Recently
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2021
(unaudited)
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, 2021, the Company
had $341,892 in revenues, a net loss of $2,217,131 and had net cash used in operations of $888,492. Additionally, as of June 30, 2021,
the Company had working capital deficit, stockholders’ deficit and accumulated deficit of $6,319,267, $6,327,321 and $10,173,993,
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. 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, which was further extended to January 18, 2022. 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, which was further extended to January 18, 2022. The Company and the holder of the July 23, 2019 convertible note agreed
to extend the maturity date of the July 23, 2020 convertible note to February 21, 2021, which was further extended to February 21, 2022.
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 $85,031 of accrued interest and has a total outstanding principal balance of $380,000 as of June 30, 2021.
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 the 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. 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, new debt was recorded at fair value as of August 5, 2020 in the amount of $324,500
and the Company recorded a net loss on extinguishment of debt in the amount of $176,467.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2021
(unaudited)
On
October 29, 2020, the Company entered into a second Allonge to the Convertible Note which amended the Note. The allonge amended the Note
by, among other things, extending the maturity date of the loan until January 31, 2021. 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 $324,500 of principal and
accrued interest was written off, new debt was recorded at fair value as of October 29, 2020 in the amount of $359,370 and the Company
recorded a net loss on extinguishment of debt in the amount of $115,524.
On
December 28, 2020, the Company issued a non-convertible promissory note with interest terms that were more favorable than the terms of
the Convertible Note. As a result of that issuance, certain abovementioned terms of the Convertible Note were triggered which reset the
interest rate of the Convertible Note to 12%. The effect of the interest rate reset resulted in increases of $2,310 to the balance of
the Convertible Note, $11,000 of accrued interest, $11,000 of interest expense and $2,310 of loss on extinguishment of debt. For the
year ended December 31, 2020, the Company recorded a net loss on extinguishment of debt in the amount of $294,301. The Company has a
total outstanding principal balance under the Note of $339,680 and $33,000 of accrued interest as of December 31, 2020.
On
February 8, 2021, the Company entered into a third Allonge to the Convertible Note which amended the Note. The allonge amended the Note
by, among other things, extending the maturity date of the loan until May 1, 2021. 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 $372,680 of principal and accrued
interest was written off, new debt was recorded at fair value as of February 8, 2021 in the amount of $409,948 and the Company recorded
a net loss on extinguishment of debt in the amount of $165,442.
On
May 4, 2021, the Company entered into a fourth Allonge to the Convertible Note which amended the Note. The allonge amended the Note by,
among other things, extending the maturity date of the loan until August 1, 2021. 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 $52,500. 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 $409,948 of principal and accrued
interest was written off, new debt was recorded at fair value as of May 4, 2021 in the amount of $450,943 and the Company recorded a
net loss on extinguishment of debt in the amount of $155,313.
On
August 4, 2021, the maturity date of the Convertible Note was extended until November 1, 2021. (See Note 13)
The
Company recorded a total debt discount of $332,042 related to the above convertible notes. Amortization of the debt discount was recorded
as interest expense and a total of $332,042 was fully amortized during the year ended December 31, 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 Note. 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.
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.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2021
(unaudited)
The
Warrant has an exercise price of $1.25 per share (the “Exercise Price”), subject to adjustments as provided in the Warrant,
and has an original term of five years. On May 4, 2021, relating to a loan extension, the warrant expiration date was extended to December
31, 2027. 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.
Due
to the conversion of an outstanding convertible loan, certain anti-dilution provisions were triggered, resulting in the reset of the
warrant amounts from 125,000 to 594,389, warrant exercise price from $1.00 to $0.21 and the conversion price was capped at $0.21.
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 “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). The Grid Warrants are exercisable at any
time commencing on October 21, 2022 (extended from the eighteen-month anniversary of the issuance of the Grid Warrants (as may be accelerated
pursuant to the terms of the Grid Warrants)) and expiring on the five-year anniversary of the issuance of the Grid 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 December 31, 2020, a total of $250,000 in principal was advanced to the Company. 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 $73,976 was amortized during the six months ended June 30, 2021, and the debt discount is fully amortized as of June 30,
2021.
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. On April 20, 2021,
the maturity date was extended to April 21, 2022. The Company recorded $13,032 of accrued interest and has a total outstanding principal
balance of $250,000 as of June 30, 2021.
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.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2021
(unaudited)
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. The Company recorded debt discount
of $157,500 related to the September 1 Note. During the six months ended June 30, 2021, the September 1 Note and all accrued interest
was fully converted into 633,400 shares of common stock.
September
22, 2020 Securities Purchase Agreement
On
September 22, 2020, the Company entered into a Securities Purchase Agreement (the “September Purchase Agreement”) dated as
of September 22, 2020 (the “September 22 Issuance Date”) and issued and sold to an investor a Promissory Note (the “September
22 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 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, provided that
Warrant B is returnable to the Company upon the repayment of the September 22 Note, as an additional incentive for the repayment of the
September 22 Note.
The
net amount received by the Company during the year ended December 31, 2020 was approximately $505,000 after payment of certain fees to
the investor or 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 22 Note and
the Company shall pay to the Buyer certain liquidated damages as set forth in the September 22 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.
The
September 22 Note bears interest commencing on the September 22 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 22 Note.
A lump-sum interest payment for one year is due
on the September 22 Issuance Date and added to the principal balance and payable on the maturity date of the September 22 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. The Company recorded debt discount of $600,000 related to the September
22 Note. Amortization of the debt discount is recorded as interest expense and a total of $202,601 was amortized during the six months
ended June 30, 2021. On March 21, 2021, the Company repaid $100,000 of the outstanding principal. On April 27, 2021, the Company repaid
an additional $100,000. On May 21, 2021, the Company entered into an allonge that extended the maturity date to July 9, 2021 and waived
all requirements for monthly principal payments until the new maturity date.
BRAIN
SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(unaudited)
The unpaid outstanding principal amount and accrued
and unpaid interest under the September 22 Note shall be convertible into shares of common stock at any time on or after the September
22 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 22 Note) during the previous five Trading Day (as defined in the September 22
Note) period ending on the latest complete Trading Day prior to the September 22 Issuance Date, and (ii) the Variable Conversion Price
(as defined in the September 22 Note). The conversion price shall be adjusted downwards upon certain events as set forth in the September
22 Note.
The September 22 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 22 Note).
Provided that an event of default under the September
22 Note has not occurred, the Company may prepay in whole or in part the amounts outstanding under the September 22 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 22 Note
plus (x) accrued and unpaid interest on the unpaid principal amount of the September 22 Note plus (y) default interest, if any.
The conversion of the September 22 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 22 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 22 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
22 Note further contains monetary penalties in the event of certain events of default or breaches.
The September 22 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 22 Note in its entirety on or prior to the maturity date of
the September 22 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.
On December 28, 2020, the Company issued the
December Warrants (as defined in Note 5 below) with an exercise price that was lower than the exercise price of the September Warrants.
Accordingly, the amount of shares under the September Warrants was reset to 1,505,882 with an exercise price per share of $1.20.
February 8, 2021 Loan
On February 8, 2021, the Company signed a loan
agreement in the amount of $500,000 (the “February 8 Loan”) pursuant to which the Company would enter into a business combination
with the lender subject to the terms and conditions defined in the agreement. The loan bears interest of 10% and matures upon the earlier
of 6 months or the date that the business combination becomes effective. In the case of a business combination becoming effective, the
loan shall convert immediately into or be credited towards such transaction.
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 22 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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(unaudited)
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. As a result, the conversion terms of the Note, the Grid Notes, the September 1 Note, and the September 22 Note are
treated as a derivative liability. (see Note 6)
NOTE 5 – NOTES PAYABLE
October 21, 2019 Note
On October 21, 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, which was further extended until October 21, 2021. During the six months ended June 30, 2020 the
Company recorded $3,498 of interest expense and has a total outstanding principal balance of $50,000 and accrued interest of $4,854 as
of June 30, 2021.
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, which was further extended until February 21, 2022. The Company recorded $2,393 of accrued interest and has a total outstanding
principal balance of $20,000 as of June 30, 2021.
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.
December 28, 2020 Note
On December 28, 2020, the Company entered into
a Securities Purchase Agreement (the “December Purchase Agreement”) dated as of December 28, 2020 (the “December 28
Issuance Date”) and issued and sold to an investor a Promissory Note (the “December 28 Note”) in the aggregate principal
amount of $300,000. Pursuant to the December Purchase Agreement, in connection with the issuance of the December 28 Note, the Company
issued two common stock purchase warrants (separately, “Warrant A” and “Warrant B”, and together, the “December
Warrants”) to the investor, allowing the investor to purchase an aggregate of 500,000 shares of the Company’s common stock,
with Warrant A being a commitment fee of 250,000 shares of common stock, and Warrant B being fully earned upon issuance as an additional
commitment fee of 250,000 shares of common stock, provide that Warrant B is returnable to the Company upon the repayment of the December
28 Note, as an additional incentive for the repayment of the December 28 Note.
The net amount received by the Company during
the year ended December 31, 2020 was approximately $265,000 after payment of certain fees to the investor or on behalf of the investor.
The December 28 Note bears interest commencing
on the December 28 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 December 28, 2021.
A lump-sum interest payment for one year is due
on the December 28 Issuance Date and added to the principal balance and payable on the maturity date of the December 28 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 $56,000 commencing 180 days following the Issue Date (as defined in the Note) and
continuing thereafter each 30 days for 5 months. The Company recorded debt discount of $300,000 related to the December 28 Note. Amortization
of the debt discount is recorded as interest expense and a total of $148,767 was amortized during the six months ended June 30, 2021.
The Company has a total outstanding principal balance of $300,000 as of June 30, 2021.
Provided that an event of default under the December
28 Note has not occurred, the Company may prepay in whole or in part the amounts outstanding under the December 28 Note without a prepayment
penalty.
The December 28 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 December 28 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 December 28
Note further contains monetary penalties in the event of certain events of default or breaches.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(unaudited)
The December Warrants each have an exercise price
of $1.20, subject to customary adjustments, and may be exercised at any time until the three-year anniversary of the December Warrants;
provided, however, in the event the Company repays the December 28 Note in its entirety on or prior to the maturity date of the December
28 Note, Warrant B shall automatically expire and may only be exercised in the event it does not so automatically expire. The December
Warrants include a cashless exercise provision as set forth therein.
April 27, 2021 Note
On April 27, 2021, the Company signed a loan
agreement in the amount of $100,000 (the “April 2021 Note”). The April 2021 Note bears interest at a fixed rate of 10% per
annum, which will be payable on the maturity date of October 27, 2021. The Company recorded $1,726 of accrued interest and has a total
outstanding principal balance of $100,000 as of June 30, 2021.
The April 2021 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 April 2021 Note.
May 6, 2021 Note
On May 6, 2021, the Company signed a loan agreement
in the amount of $150,000, (the “May 2021 Note”). The May 2021 Note bears interest at a fixed rate of 10% per annum, which
will be payable on the maturity date of November 6, 2021. The Company recorded $2,260 of accrued interest and has a total outstanding
principal balance of $150,000 as of June 30, 2021.
The May 2021 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 May 2021 Note.
June 22, 2021 Note
On June 22, 2021, a third party loaned the Company
$70,000, evidenced by a non-convertible promissory note (the “June 2021 Note”). The June 2021 Note does not bear interest
and is payable on the maturity date of September 30, 2021.
The June 2021 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 June 2021 Note.
Derivative Accounting for the December
28, 2020 Note
The Company evaluated the terms and conditions
of the December 28, 2020 Note and the accompanying December Warrants under the guidance of ASC 815. Certain of the Company’s 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. As a result,
the December Warrants are treated as a derivative liability. (see Note 6)
NOTE 6 – DERIVATIVE LIABILITIES
The Company evaluated the terms and conditions
of the Notes and Convertible Notes Payable (see Notes 4 and 5) and pursuant to ASC 815-15 Embedded Derivatives, certain conversion options
and outstanding warrants were recorded as derivative liabilities on the issuance date and revalued at each reporting period.
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 31, 2021:
|
|
Amount
|
|
Balance on December 31, 2020
|
|
$
|
2,562,942
|
|
Issuances to Additional paid in capital
|
|
|
1,230
|
|
Settlement upon note conversion/repayment
|
|
|
(137,580
|
)
|
Net extinguishment
|
|
|
(1,446
|
)
|
Change in fair value of derivative liabilities
|
|
|
246,768
|
|
Change in fair value of warrant liabilities
|
|
|
(395,830
|
)
|
Balance on June 30, 2020
|
|
$
|
2,276,084
|
|
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(unaudited)
The fair value of the derivative conversion features
and warrant liabilities as of June 30, 2021 were calculated using a Monte-Carlo option model valued with the following assumptions:
|
|
June 30,
2021
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
42.2% - 91.6
|
%
|
Risk free interest rate
|
|
|
0.07% - 0.67
|
%
|
Contractual terms (in years)
|
|
|
0.09 - 4.87
|
|
Conversion/Exercise price
|
|
$
|
0.21 - $1.20
|
|
NOTE 7 – 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, 2021, and December
31, 2020, total liability to the financing company reflected in Other Liabilities is $4,595 and $4,595, 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.
NOTE 8 – RELATED PARTY TRANSACTIONS
During the year ended December 31, 2018, an entity
controlled by Mr. Vadim Sakharov, a former director and executive officer of the Company, 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, 2021, and December 31, 2020, the balance was $55,530 and $55,530, respectively.
During the six months ended June 30, 2021 and
2020, the Company purchased an aggregate of $225,341 and $167,659, respectively, of medical devices for resale and distribution from
Neurotech, a company that Mr. Sakharov, a former director and executive officer of the Company, is a shareholder and executive manager.
During the six months ended June 30, 2021 and
2020, the Company had expenses related to research and development costs of $97,599 and $12,800, respectively, to an entity controlled
by Boris Goldstein, the Company’s Chairman of the Board.
During the six months ended June 30, 2021 and
2020, the Company had expenses related to sales and marketing costs of $23,298 and $7,259, respectively, to an entity controlled by Mr.
Sakharov, a former director and executive officer of the Company.
During the six months ended June 30, 2021 and
2020, the Company had expenses related to general and administrative costs of $25,469 and $20,375, respectively, to an entity controlled
by Mr. Sakharov, a former director and executive officer of the Company.
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. During the six months ended June 30, 2021, the affiliate provided an additional $50,000 of non-interest-bearing,
no-term loans to the Company. As of June 30, 2021 and December 31, 2020, the balance was $100,000 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, 2021 and December 31, 2020, the balance was $217,000 and $217,000, respectively.
NOTE 9 – 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 of leases 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.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(unaudited)
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 ($240) 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. The Company leased the warehouse for an additional
three months and left the premises in the third quarter of 2020.
Total rent expense for the six months ended June
30, 2021 and 2020 was $7,862 and $22,630, 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 1.17 years, with a weighted-average discount rate of 12%.
The Company incurred lease expense for its operating
leases of $23,278 and $0 which was included in “General and administrative expenses,” for the six months ended June 30, 2021
and 2020, respectively.
The Company had operating cash flows used in
operating leases of $532 for the six months ended June 30, 2021.
The following table presents information about
the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of June 30, 2021.
Maturity of Lease Liability
|
|
|
|
2021
|
|
|
24,524
|
|
2022
|
|
|
32,699
|
|
Total undiscounted operating lease payments
|
|
$
|
57,223
|
|
Less: Imputed interest
|
|
|
(4,073
|
)
|
Total operating lease liabilities
|
|
|
53,150
|
|
Less: Current portion of operating lease
|
|
|
(45,096
|
)
|
Long-term portion of operating lease
|
|
$
|
8,054
|
|
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(unaudited)
At December 31, 2020, the operating lease right
of use asset was $69,632. Supplemental balance sheet information related to the lease as of June 30, 2021 was:
Operating lease right-of-use asset
|
|
$
|
50,245
|
|
|
|
|
|
|
Lease liability, current portion
|
|
|
45,096
|
|
Lease liability, long-term
|
|
|
8,054
|
|
Total operating lease liability
|
|
$
|
53,150
|
|
|
|
|
|
|
Weighted average remaining lease term (months)
|
|
|
14
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
12
|
%
|
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 June 30, 2021, 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, 2021, the Company had 20,443,885 shares outstanding or deemed outstanding.
Share Offering
The Company is currently involved in a Regulation
A+ share offering pursuant to which the Company is offering up to a maximum of 1,111,111 units, with each unit consisting of five shares
of common stock, par value $0.001, and a warrant to purchase one share of common stock, par value $0.001, at an offering price of $9.00
per unit or $1.80 per share of common stock, for a maximum aggregate offering of $10,000,000. During the six months ended June 30, 2021,
the Company issued 17,300 shares of common stock and 3,460 warrants in respect of this offering.
Shares Issued for Services
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. The shares were valued as of the date of the
grant at a fair value of $1.67 per share or $487,931, which will be amortized over the vesting period. During the six months ended June
30, 2021, 64,927 shares had vested and the Company recognized $107,440 of stock-based compensation.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(unaudited)
Warrants
The following table summarized the warrant activity
for the six months ended June 30, 2021:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Warrants
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Balance Outstanding, December 31, 2020
|
|
|
4,033,132
|
|
|
$
|
0.97
|
|
|
|
3.14
|
|
|
$
|
1,350,113
|
|
Granted
|
|
|
472,849
|
|
|
|
0.02
|
|
|
|
3.89
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, June 30, 2021
|
|
|
4,505,981
|
|
|
$
|
0.87
|
|
|
|
2.95
|
|
|
$
|
106,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2021
|
|
|
3,005,981
|
|
|
$
|
0.90
|
|
|
|
2.53
|
|
|
$
|
106,940
|
|
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, 2021, the Company has granted and has 1,941,779 options outstanding, as well as 333,972 shares of restricted common
stock issued under the 2018 Plan.
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
(a former director and executive officer of the Company), 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 full amount was expensed as of December 31, 2020.
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(unaudited)
On January 30, 2020, the Board of Directors approved
the issuance of options to purchase an aggregate of 800,000 shares of common stock to Boris Goldstein. The options have an exercise price
of $0.75 per share which will vest ratably on a quarterly basis over a two year period. The options will expire on January 30, 2029.
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 and a total of $12,815 was recorded during the six months ended
June 30, 2021.
On January 26, 2021, the Board of Directors approved
the issuance of options to purchase an aggregate of 16,779 shares of common stock to Nickolay Kukekov. The options have an exercise price
of $1.49 per share and fully vested on the initial grant date. The options will expire on January 26, 2031. The aggregate fair value
of $20,817 was calculated using the Black-Scholes pricing model with the following assumptions: (i) expected life 10 years, (ii) volatility
of 85.5%, (iii) risk free rate of 1.05% (iv) dividend rate of zero, (v) stock price of $1.49, and (vi) exercise price of $1.49. The expense
was recognized in full on the initial grant date.
On February 11, 2021, the Board of Directors
approved the issuance of options to purchase an aggregate of 125,000 shares of common stock, 50,000 to Irina Nazarova, and 25,000 each
to Denis Serikov, Olesia Sukhaporova and Roman Bondarenko. The options have an exercise price of $1.50 per share which will vest over
a 30-month period as follows: 25% (or 12,500 and 6,250, 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 February 11, 2031. The aggregate fair
value of $156,655 was calculated using the Black-Scholes pricing model with the following assumptions: (i) expected life 10 years, (ii)
volatility of 85.9%, (iii) risk free rate of 1.16% (iv) dividend rate of zero, (v) stock price of $1.50, and (vi) exercise price of $1.50.
The expense will be amortized over the vesting period and a total of $23,902 was recorded during the six months ended June 30, 2021.
The following table summarized the option activity
for the six months ended June 30, 2021:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Balance Outstanding, December 31, 2020
|
|
|
1,800,000
|
|
|
$
|
0.75
|
|
|
|
8.51
|
|
|
$
|
270,000
|
|
Granted
|
|
|
141,779
|
|
|
|
1.50
|
|
|
|
9.62
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, June 30, 2021
|
|
|
1,941,779
|
|
|
$
|
0.80
|
|
|
|
8.13
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2021
|
|
|
1,516,779
|
|
|
$
|
0.76
|
|
|
|
7.96
|
|
|
$
|
-
|
|
For future periods, the remaining value of the
stock options totaling approximately $147,904 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
June 30, 2021
(unaudited)
NOTE 11 – 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.
NOTE 12 – MERGER
On June 11, 2021, the Company entered into an
Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Piezo Motion Corp., a Delaware corporation
(“Piezo”), and BRSF Acquisition Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger
Sub”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and
into Piezo, Merger Sub will cease to exist and Piezo will survive as a wholly-owned subsidiary of the Company (the “Merger”).
At the effective time of the Merger (the “Effective
Time”), each outstanding share of Piezo capital stock will be automatically converted into the right to receive that number of
shares of Company common stock equal to 100% of the issued and outstanding shares of Company common stock on a “fully diluted basis”
(as defined in the Merger Agreement) calculated as of the Effective Time (the “Exchange Ratio”). Following the consummation
of the Merger, former stockholders of Piezo are expected to own approximately 50% of the Company and current stockholders of the Company
are expected to own approximately 50% of the Company, in each case based on the fully diluted shares of the Company prior to the consummation
of the Merger. The Exchange Ratio and the actual number of shares of Company common stock to be issued to the Piezo stockholders is not
yet determinable and will be based on, in part, whether and to what extent the Company’s existing indebtedness is converted into
Company common stock or repaid in cash at or prior to the Effective Time, and is expected to result in the former Piezo stockholders
owning a majority of the Company’s issued and outstanding shares of common stock as of immediately after the Effective Time. The
completion of the Merger is subject to various customary conditions, as well as the closing of a capital raise by the Company of at least
$5.0 million (the “Offering”), including any interim bridge financing raised by either Company or Piezo that is convertible
into the Offering. Pursuant to the terms of the Merger Agreement, the Company is obligated to issue to certain affiliates and non-affiliates
of the Company, options and warrants to purchase an aggregate number of shares equal to 20% of the issued and outstanding shares of Company
common stock immediately after the Effective Time.
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.
Allonges to Promissory Notes
On August 23, 2021, the Company entered into an Allonge
to the September 22 Note, which extended the maturity date of the September 22 Note to October 31, 2021, and further modified the repayment
terms of the principal and accrued and unpaid interest so the Company pays $173,067 on each of August 31, 2021, September 30, 2021 and
October 31, 2021.
On August 23, 2021 but effective as of August
4, 2021, the Company entered into Allonge #5 to the Convertible Note the Company entered into on December 31, 2019 (“Allonge #5”),
which further amends the Note by extending the maturity date until November 1, 2021. As consideration for Allonge #5, 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.
Promissory Notes
On July 8, 2021, the Company signed a promissory
note in favor of Piezo in the amount of $130,000. The note does not bear interest and is due September 30, 2021.
On August 9, 2021, the Company signed a promissory
note in favor of Piezo in the amount of $130,000. The note does not bear interest and is due September 30, 2021.