UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
For the transition period from _____ to _____
Commission
file number:
(Name of Registrant in Its Charter)
| State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit).
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act).
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company | Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
BRAIN SCIENTIFIC INC.
Index
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Brain Scientific Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2022 |
December 31, 2021 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Advances to officers | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Operating lease right-of-use asset | ||||||||
| Other long-term assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accounts payable and accrued expenses - related party | ||||||||
| Accrued interest | ||||||||
| Convertible notes payable, net | ||||||||
| Notes payable | - | |||||||
| Loans payable | ||||||||
| Notes payable - related party | ||||||||
| Derivative liabilities | - | |||||||
| Operating lease liability, current portion | ||||||||
| TOTAL CURRENT LIABILITIES: | ||||||||
| Convertible notes payable, net | - | |||||||
| Operating lease liability, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies– Note 17 | ||||||||
| STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Preferred stock, $ |
||||||||
| Common stock, $ |
||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Accumulated other comprehensive loss | ( |
) | ( |
) | ||||
| TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | ( |
) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
Brain Scientific Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUE | $ | $ | $ | $ | ||||||||||||
| COST OF GOODS SOLD | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| SELLING, GENERAL AND ADMINISTRATIVE | ||||||||||||||||
| Research and development | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| Share based compensation | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| TOTAL SELLING, GENERAL AND ADMINISTRATIVE | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Gain on forgiveness of paycheck protection loan | ||||||||||||||||
| Change in fair market value of derivative liabilities | ||||||||||||||||
| Gain/loss on settlement of derivatives | ||||||||||||||||
| Foreign currency transaction loss | ||||||||||||||||
| TOTAL OTHER EXPENSE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| TOTAL COMPREHENSIVE LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS PER COMMON SHARE | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Brain Scientific Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
| Fair value of stock options vested | - | |||||||||||||||||||||||
| Issuance of common stock for services | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
| Fair value of stock options vested | - | |||||||||||||||||||||||
| Conversion of convertible debt into common shares | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( |
) | ( |
) | |||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||
| Balances at March 31, 2021 | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||
| Balances at June 30, 2021 | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Brain Scientific Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Change in net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Amortization of debt discount and non-cash interest expense | ||||||||
| Change in fair market value of derivative liabilities | ( | ) | - | |||||
| Gain on forgiveness of paycheck protection loan | ( | ) | ||||||
| Gain on settlement of lease | ( | ) | ||||||
| Fair value of stock options vested | ||||||||
| Gain on debt extinguishment | ( | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Advances to officers | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other long-term assets | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accrued interest | ||||||||
| Operating lease liabilities, net | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | $ | ( | ) | $ | ( | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash issued for notes receivable | $ | - | $ | ( | ) | |||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | $ | ( | ) | $ | ( | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from convertible notes payable, net of issuance costs | $ | $ | ||||||
| Repayment of related party loan | ( | ) | ||||||
| Repayment of convertible note payable | ( | ) | ||||||
| Repayment of promissory note and interest | ( | ) | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | $ | $ | ||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| NET CHANGE IN CASH | ||||||||
| CASH AT BEGINNING OF THE PERIOD | ||||||||
| CASH AT END OF THE PERIOD | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Supplemental Disclosure of Non-Cash Investing and Financing Activities | ||||||||
| Accounts payable settled with share issuance | $ | $ | ||||||
| Services received settled with derivative warrants | $ | $ | - | |||||
| Convertible notes payable and accrued interest converted to common shares | $ | $ | - | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
BRAIN SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(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. On October 1, 2021, the Company acquired Piezo Motion Corp (“Piezo”), a privately held Delaware corporation formed in January 2020. Upon completion of the acquisition, Piezo 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 Piezo. The Company has two lines of operations. The MemoryMD subsidiary group is involved in cloud computing, data analytics and medical device technology in the NeuroTech and brain monitoring industries, seeking to commercialize its EEG devices and caps. The Piezo subsidiary group is focused on the ultrasonic standing wave-type piezo motor technology for rotary and linear motion and has experience in the research and development, as well as the manufacturing of piezo motors for high-tech industries across the globe. The Company is headquartered in Sarasota, Florida.
Reverse Merger and Corporate Restructure
On
June 11, 2021, the Company entered into a merger agreement (the “Merger Agreement”) with Piezo and BRSF Acquisition Inc.
to acquire Piezo (the “Acquisition”). The transactions contemplated by the Merger Agreement were consummated on October 1,
2021 and, pursuant to the terms of the Merger Agreement, all outstanding shares of Piezo were exchanged for
The Merger was effected pursuant to the Merger Agreement. The Merger was accounted for as a reverse merger whereby Piezo was the acquirer for accounting purposes. Piezo is considered the acquiring company for accounting purposes as upon completion of the Merger, Piezo’s former stockholders held a majority of the voting interest of the combined company.
Pursuant
to the Merger, the Company issued shares of its common stock to Piezo’s stockholders, at an exchange ratio of
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.
Acquisition Accounting
The fair value of Brain Scientific assets acquired and liabilities assumed was based upon management’s estimates assisted by an independent third-party valuation firm.
The following table summarizes the allocation of purchase price of the acquisition:
| Tangible Assets Acquired: | Allocation | |||
| Net working capital | ( |
) | ||
| Right of use asset | ||||
| Lease liability | ( |
) | ||
| Net Tangible Assets Acquired | $ | ( |
) | |
| Intangible Assets Acquired: | ||||
| Licenses and trademarks | ||||
| Brain Scientific Trade Name | ||||
| MemoryMD Trade Name | ||||
| Neurocap Trade Name | ||||
| Neuro EEG Trade Name | ||||
| Customer relationships | ||||
| Customer Relationships | ( |
) | ||
| Patent products | ||||
| NeuroCap Developed Technology | ||||
| NeuroEEG Developed Technology | ||||
| Total Fair Value of Assets Acquired | $ | |||
| Consideration: | ||||
| Fair value of equity received | ||||
| Liabilities assumed | ||||
| Loans forgiven | ||||
| Goodwill | $ | |||
5
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 2022. 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 U.S. Generally Accepted Accounting Principles (“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, Piezo Motion Corp, Discovery Technology International, Inc., MemoryMD, Inc., MemoryMD – Russia and MemoryMD - Europe. 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, warrants and derivative liabilities.
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, 2022 and December 31, 2021, 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 $
6
I
Inventory consists of raw material, parts and finished goods that are valued at lower of cost or market using the weighted average method.
Property and Equipment
Property,
plant and equipment are carried at cost. Depreciation is provided on the straight-line method over the assets estimated service lives.
Expenditures for maintenance and repairs are charged to expense in the period in which they are incurred, and betterments are capitalized.
The cost of assets sold or abandoned and the related accumulated depreciation are eliminated from the accounts and any gains or losses
are reflected in the accompanying statements of operations of the respective period. The estimated useful lives range from
Intangible assets, net
Intangible assets are measured at cost less accumulated amortization and impairment losses, if any.
Intangible assets are amortized on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. The estimated useful lives, residual values, and amortization methods are reviewed at each year end, and any changes in estimates are accounted for prospectively.
| Patents | |||
| Licenses and trademarks | |||
| Customer relationships |
Amortization expense is included in the consolidated income statement within general and administrative expenses.
The asset is tested for impairment if there is a trigger for impairment.
Goodwill
Goodwill represents the excess of the consideration transferred over the fair value of the net identifiable assets acquired. Goodwill is evaluated for impairment annually or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors (for example, interest rate and foreign exchange rate fluctuations, and loss of key personnel), supply costs, unanticipated competitive activities, and acts by governments and courts.
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.
7
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 revenues for the six months ended June 30, 2022 are from the sale of medical devices purchased from Neurotech,
a related party. Revenues for the six months ended June 30, 2021 of $
Research and Development Costs
The Company expenses all research and development
costs as they are incurred. Research and development includes expenditures in connection with in-house research and development salaries
and staff costs, application and filing for regulatory approval of proposed products, regulatory and scientific consulting fees, as well
as contract research, data collection, and monitoring, related to the research and development of the cloud infrastructure, data imaging,
and proprietary products and technology. Research and development costs recognized in the statement of operations for the three and six
months ended June 30, 2022 were $
Sales and Marketing
Advertising and marketing costs are expensed as
incurred. Advertising and marketing costs recognized in the statement of operations for the three and six months ended June 30, 2022 were
$
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 three months ended June 30, 2022 and 2021,
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.
8
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.
As of June 30, 2022, the Company had a Level 3 financial instrument related to the derivative liabilities related to the issuance of convertible debt and warrants. The Company did not have any other Level 1, Level 2 or Level 3 assets or liabilities as of December 31, 2021.
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, 2022.
| Liabilities | Amounts at Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Derivative liability – conversion feature | $ | $ | $ | $ | ||||||||||||
| Derivative liability – warrants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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
9
Reclassification
Certain prior period balances have been reclassified to conform to current year presentation.
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.
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, 2022, the Company had $
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 – INVENTORY
| June 30, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Parts | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
| June 30, 2022 | December 31, 2021 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Other prepaid expenses | ||||||||
| Lease deposits | ||||||||
| Other assets | ||||||||
| Total | $ | $ | ||||||
As of June
30, 2022 and December 31, 2021, there was a total amount of $
10
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Depreciation
expense was $
NOTE 7 – INTANGIBLE ASSETS, NET
The components of the acquired intangible assets were as follows:
| June 30, 2022 |
December 31, 2021 |
Average Estimated Life | |||||||
| Patent products | $ | |
$ | |
|||||
| Licenses and trademarks | |
|
|||||||
| Customer relationships | ( |
) | ( |
) | |||||
| Intangible assets | $ | $ | |||||||
| Less: Accumulated depreciation | ( |
) | ( |
) | |||||
| Total | $ | $ | |||||||
NOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable as of June 30, 2022 and December 31, 2021 consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| Trade payables | $ | $ | ||||||
| Accrued payroll and related expenses | ||||||||
| Accrued expenses | ||||||||
| Customer deposits | ||||||||
| Total | $ | $ | ||||||
11
NOTE 9 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES – RELATED PARTY
Accounts payable related parties as of June 30,
2022 and December 31, 2021 consists of accrued director’s fees in the amount of $
NOTE 10 – CONVERTIBLE NOTES PAYABLE – SHORT TERM
Assumed convertible debt
As part of the merger, the Company assumed $
2019 Note
On December 31, 2019, the Company entered into
a Securities Purchase Agreement and issued and sold to a third party a Convertible Note in the original principal amount of $
On December 30, 2021,
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 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.
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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.
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 $
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 $
The Grid Notes bear interest on the unpaid balances
at a fixed simple rate of twelve percent (
2022 Notes
On June 13, 2022,
The 2022 Warrants shall be exercisable at any
time on or after the earlier of (i) the maturity date; or (ii) the closing of a registered offering of the Company’s securities
for aggregate gross proceeds to the Company of at least $
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The 2022 Notes contain mandatory and voluntary conversion features as follows:
(a) Mandatory Conversion.
In the event a Qualified Offering is consummated prior to the maturity date of the 2022 Notes, the 2022 Notes automatically convert into shares of Common Stock, immediately upon the occurrence of a Qualified Offering (the “Mandatory Conversion”). The exercise price per share of Common Stock pursuant to the Warrant shall mean, in the case of a Mandatory Conversion, the price of the Common Stock (or unit, if units are offered in the Qualified Offering) in the Qualified Offering.
(b) Voluntary Conversion.
The holders of the 2022 Notes have the right (subject
to the conversion limitations set forth therein) from time following the maturity date and prior to a Mandatory Conversion to convert
all or any part of the outstanding and unpaid principal and interest then due under the 2022 Notes into fully paid and non-assessable
shares of Common Stock (the “Voluntary Conversion”). The exercise price per share of Common Stock pursuant to the Warrant
shall mean, in the case of a Voluntary Conversion, the lower of (i) $
In connection with the Offering, each of Piezo Motion Corp., and Memory MD, Inc., (the “Company Subsidiaries”) agreed to execute, in favor of the holders of the 2022 Notes, a guarantee to jointly and severally, unconditionally and irrevocably, guarantee to the holders the prompt and complete payment and performance when due of the Company’s obligations pursuant to the SPA.
In connection with the Offering, the Company entered into a security agreement by and among the Company, each of the holders and the Company Subsidiaries, whereby the Company agreed to grant each of the holders a security interest in all of the assets of the Company, to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the 2022 Notes and the Company Subsidiaries’ obligations under the Guarantee.
The Company evaluated the terms and conditions
of the 2022 Notes under the guidance of ASC 815. The conversion terms of the convertible notes are variable based on certain factors,
such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future
price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate.
Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity
environment is tainted, and all additional convertible debentures and warrants are included in the value of the derivative liabilities.
Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion options and warrants and shares to be issued were
recorded as derivative liabilities on the issuance date and revalued at each reporting period. The Company evaluated the fair value of
the derivatives utilizing the “with and without scenario” using options pricing models and Monte Carlo simulation, and a probability
weighted value. The variables used were remaining life of
NOTE 11 – NOTES PAYABLE
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 $
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A lump-sum interest payment for
On December 28, 2021, the December 28 Note was
amended to add $
The December Warrants each have an exercise price
of $
NOTE 12 – CONVERTIBLE NOTES PAYABLE
2021 Notes
In conjunction with the
closing of the Merger on October 1, 2021, the Company conducted an initial closing under a private offering (the “Offering”)
of
On December 21, 2021, the Company consummated
the second closing of the Offering whereby the Company entered into a Securities Purchase Agreement (the “SPA”) with three
accredited investors, pursuant to which the investors purchased from the Company, 2021 Notes in the principal amount of $
During the six months ended June 30, 2022, the
Company consummated additional closings of the Offering whereby the Company entered into a Securities Purchase Agreement (the “SPA”)
with additional investors, pursuant to which the investors purchased from the Company, 2021 Notes in the principal amount of $
As of December 31, 2021, the total amount of 2021
Notes principal outstanding was $
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NOTE 13 – NOTES PAYABLE – RELATED PARTY
As part of the October
1, 2021 merger with Piezo Motion Corp. and BRSF Acquisition Corp., the Company assumed $
NOTE 14 – LEASES
The Company has two leases that are accounted for under ASC 842.
The Company entered into a lease agreement for
office space located in Sarasota, Florida.
The Company had a lease agreement with terms up
to
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 used at the date closest to lease inception.
The Company’s weighted-average remaining
lease term relating to its operating leases is
The Company incurred lease expense for its operating
leases of $
The following table presents information about the amount and timing of liabilities arising from the Company’s operating lease as of June 30, 2022:
| Maturity of operating lease liabilities for the following fiscal years: | ||||
| 2022 | $ | |||
| 2023 | | |||
| 2024 | | |||
| Total undiscounted finance lease payments | ||||
| Less: Imputed interest | ||||
| Present value of finance lease liabilities | $ | |||
At June 30, 2022, the operating lease right of
use assets was $
| Operating lease right-of-use asset | $ | |||
| Lease liability, current portion | ||||
| Lease liability, long-term | ||||
| Total operating lease liability | $ |
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NOTE 15 – STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company has authorized
Common Stock
The Company has authorized
In June 2022, as part of the issuance of the 2022
Notes, prior convertible debt and accrued interest was converted into
Shares Issued for Services
In January 2022, the Company issued
Warrants
The following table summarized the warrant activity for the six months ended June 30, 2022:
| Number of | Weighted Average Exercise | Weighted Average Remaining Contractual | Aggregate Intrinsic | |||||||||||||
| Warrants | Shares | Price | Term | Value | ||||||||||||
| Balance Outstanding, December 31, 2021 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Forfeited | ( | ) | - | |||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Expired | - | - | - | - | ||||||||||||
| Balance Outstanding, June 30, 2022 | $ | $ | ||||||||||||||
| Exercisable, June 30, 2022 | $ | $ | ||||||||||||||
Equity Incentive Plan
As of September 21, 2018,
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On October 1, 2021,
On October 21, 2021,
On December 10, 2021,
On November 15, 2021,
On May 19, 2022,
The following table summarized the option activity for the six months ended June 30, 2022:
| Number of | Weighted Average Exercise | Weighted Average Remaining Contractual | Aggregate Intrinsic | |||||||||||||
| Options | Shares | Price | Term | Value | ||||||||||||
| Balance Outstanding, December 31, 2021 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Forfeited | ( | ) | - | |||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Expired | - | - | - | - | ||||||||||||
| Balance Outstanding, June 30, 2022 | $ | $ | ||||||||||||||
| Exercisable, June 30, 2022 | $ | $ | ||||||||||||||
For future periods, the remaining value of the
stock options totaling approximately $
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NOTE 16 – RELATED PARTY TRANSACTIONS
The Company rents office space from a company
in which Hassan Kotob, CEO, has an ownership. For the three and six months ended June 30, 2022 and 2021, the Company incurred rental expense
of $
On November 12, 2021, the Company entered into
a Representation Agreement with LOK Corporation International Inc. (“LOK”), a corporation in which Daniel Cloutier, a director,
serves as the chief executive officer. Under the Representation Agreement, LOK acts as the worldwide sales manager for our NeuroCap, NeuroEEG
and their accessories. LOK is responsible for the evaluation of regional distribution, development, recruitment and training of the distribution
network and provide in-country customer support. Fees for the services are
NOTE 17 – COMMITMENTS AND CONTINGENCIES
On February 18, 2022,
NOTE 18 – 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.
In August 2022, the Company’s shareholders approved an increase in the number of authorized shares of the Company from 200,000,000 to 750,000,000.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
The following discussion should be read in conjunction with our unaudited financial statements and related notes included in Item 1, “Financial Statements,” of this Quarterly Report on Form 10-Q. Certain information contained in this MD&A includes “forward-looking statements.” Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition and results of operations, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our existing and proposed business, including many assumptions regarding future events. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including those risks described in detail in the section entitled “Risk Factors” of this Quarterly Report on Form 10-Q.
Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “will,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology.
In light of these risks and uncertainties, and especially given the nature of our existing and proposed business, there can be no assurance that the forward-looking statements contained in this section and elsewhere in this Quarterly Report on Form 10-Q will in fact occur. Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Overview
We are a MedTech company with two innovative product lines: neurology and motion products. Since October 1, 2021, we have had two direct subsidiaries, each of which is focused on one of our complimentary product lines.
The products of our subsidiary Memory MD, Inc., hereinafter referred to as the Neurology Products, are medical devices designed for the neurology market. The products of our subsidiary Piezo Motion Corp., hereinafter referred to as the Motion Products, are small piezoelectric motors which are designed for and expected to have valuable and beneficial uses as motors within medical devices and devices outside of the MedTech industry
Since the merger between Brain Scientific Inc. and Piezo Motion Corp., we have focused on building an experienced team and platform to grow revenues from existing products and introduce new technologies to the market while leveraging our store of intellectual property.
Historically, we have financed our operations principally through the issuance of convertible debt. Based on our current operating plan, substantial doubt about our ability to continue as a going concern for a period of at least one year from the date that the financial statements included in this prospectus are issued exists. Our ability to continue as a going concern depends on our ability to raise additional capital, through the sale of equity or debt securities, to support our future operations. If we are unable to secure additional capital, we will be required to curtail our operations and take additional measures to reduce costs. We have provided additional disclosure in Note 1 to the condensed consolidated financial statements and under Liquidity below.
Our financial statements are based upon the Piezo Motion Corp. financials up until the Piezo Acquisition. The combined company financials are provided inclusive of the operations of the Company unrelated to Piezo Motion Corp. for the fourth quarter of 2021. The accounting is based upon reverse merger accounting due to the majority of outstanding shares after the Piezo Acquisition were with the Piezo shareholders.
The majority of our revenue in 2021 was from 4th quarter sales from our subsidiary which operates as a distributor of third-party medical devices in Russia (except for $38,309 from Piezo Motion Corp. sales and $6,194 of sales from Memory MD in the U.S.). The Russian invasion of Ukraine on February 24, 2022 has impacted our Russian operations for the foreseeable future. With the uncertainty raised due to the continued Russian invasion of Ukraine, we do not anticipate having continued sales in Russia in the foreseeable future. No decision has been made as to winding down operations.
We have limited resources. To date, our primary activities have been limited to, and our limited resources have been dedicated to, commercializing our piezoelectric motors, NeuroCap™ and NeuroEEG™, performing business and financial planning, raising capital, recruiting personnel, and conducting development activities, although we have acted as a distributor of third-party medical devices in Russia (which has generated revenue for us in 2021 and 2022). Both our Neurology Products and Motion Products are production ready for manufacture and sale. For all our products we have commenced some non-recurring, initial sales.
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Corporate History
We were initially organized on November 18, 2013 as a Nevada limited liability company under the name Global Energy Express LLC. On December 18, 2015, we converted from a Nevada limited liability company under the name Global Energy Express LLC to a Nevada corporation under the name All Soft Gels Inc. On September 18, 2018, we changed our name from All Soft Gels Inc. to Brain Scientific Inc. and changed our ticker symbol on the OTC Market to “BRSF”.
On September 21, 2018, we entered into a merger agreement (the “Merger Agreement”) with MemoryMD, Inc. and AFGG Acquisition Corp. to acquire MemoryMD, Inc. (the “Acquisition”). The transactions contemplated by the Merger Agreement were consummated on September 21, 2018 and, pursuant to the terms of the Merger Agreement, all outstanding shares of MemoryMD were exchanged for shares of our common stock. Accordingly, we acquired 100% of MemoryMD, Inc. in exchange for the issuance of shares of our common stock and MemoryMD, Inc. became our wholly-owned subsidiary. In conjunction with the Acquisition, we ceased all direct operations and assigned all of our assets and liabilities from prior to the Acquisition, and assumed and commenced the business of MemoryMD as our sole business.
On June 11, 2021, we entered into a merger agreement (the “Piezo Merger Agreement”) with Piezo Motion Corp. and BRSF Acquisition Corp. to acquire Piezo Motion. (the “Piezo Acquisition”). The transactions contemplated by the Piezo Merger Agreement were consummated on October 1, 2021. Pursuant to the terms of the Piezo Merger Agreement, all outstanding shares of Piezo Motion were exchanged for shares of our common stock. Accordingly, we acquired 100% of Piezo Motion in exchange for the issuance of shares of common stock and Piezo Motion became our wholly-owned subsidiary.
Financial Overview
Revenue
Revenues for the six months ended June 30, 2022 were generated primarily from the Russian subsidiary for distributing third-party medical devices in Russia (including those purchased from a company affiliated with one of our former officers and directors), while we continue to commercialize our products. The revenue for the three months ended June 30, 2022 proportionally saw an increase in our sales of Neurology and Motion Products, with $9,102 and $4,312, respectively. While we intend to continue generating revenues through the sale of third-party medical devices, we do not intend for it to be our primary source of revenue in the long-term. Sales for piezoelectric motors decreased from 2021 as the Company focused on the final commercialization of the Blue Series of motors. Revenues for the six months ended June 30, 2021 of $9,207 related to the sales of evaluation kits. We do not expect to generate recurring, material revenue from our products unless or until we successfully commercialize our products. If we fail to successfully commercialize our developed products or fail to complete the development of any other product candidate we may pursue in the future, in a timely manner, or fail to obtain regulatory approval, we may not be able to solely rely on generating substantial and material revenue from the distribution of third-party medical devices.
General and Administrative
General and administrative expenses consist primarily of personnel-related costs for administration, product management, engineering and for personnel in functions not directly associated with sales and marketing or research and development activities. Other significant costs include rent, travel, legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, product development and financial matters, and product costs. We anticipate that our general and administrative expenses will be steady in the near to support our continued commercialization of our Products and maintaining the infrastructure for a public company.
Research and Development
Research and development expenses consist of expenses incurred in performing research and development activities in developing our Products. Research and development expenses include compensation and benefits for research and development employees, overhead expenses, cost of laboratory supplies, costs related to regulatory operations, fees paid to consultants, and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed.
We expect our research and development expenses to be maintained at the current level until we begin generating revenue from our existing Neurology and Motion Products. We anticipate it will then begin to increase as we exploit additional patents in our Motion Products and develop our Neurology Products, including conducting preclinical testing and clinical trials.
Interest Expense
Interest expense primarily consists of costs and interest costs related to the convertible notes we issued in 2022 and 2021. The convertible notes bear interest at fixed rate of 10% per annum.
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Results of Operations
The following table sets forth the results of operations of the Company for the six months ended June 30, 2022 and 2021.
| Three Months Ended June 30, | Period to Period | |||||||||||
| 2022 | 2021 | change | ||||||||||
| Revenue | $ | 38,464 | $ | 7,732 | $ | 30,732 | ||||||
| Cost of goods sold | $ | 37,968 | $ | 3,122 | $ | 34,846 | ||||||
| Research and development | $ | 83,004 | $ | 27,979 | $ | 55,025 | ||||||
| Professional fees | $ | 256,408 | $ | 208,979 | $ | 47,429 | ||||||
| Sales and marketing expenses | $ | 213,781 | $ | 281,271 | $ | (67,490 | ) | |||||
| General and administrative | $ | 1,359,103 | $ | 551,691 | $ | 807,412 | ||||||
| Share based compensation | $ | 280,510 | $ | - | $ | 280,510 | ||||||
| Interest expense | $ | 1,614,335 | $ | 55,432 | $ | 1,558,903 | ||||||
Three Months Ended June 30, 2022 vs. Three Months Ended June 30, 2022
Revenues
Revenue for the three months ended June 30, 2022 was $38,464, compared to $7,732 for the three months ended June 30, 2021. In the three months ended June 30, 2022, we generated our revenue primarily through our Russian subsidiary acquired in the merger, acting as a distributor of third-party medical devices in Russia (including those purchased from a company affiliated with one of our former officers and directors). Revenues for the three months ended June 30, 2021 of $7,732 related to the sales of evaluation kits.
General and administrative expenses
General and administrative expenses were $1,359,103 for the three months ended June 30, 2022, compared to $551,691 for the three months ended June 30, 2021. The increase in general and administrative expenses was primarily due to an increase in payroll and related expenses, expenses associated with a combined company post-merger and being a public entity, and amortization of intangible assets.
Research and development expenses
Research and development expenses were $83,004 for the three months ended June 30, 2022, compared to $27,979 for the three months ended June 30, 2021. The increase in research and development expenses were primarily due to increased activities in our Ukrainian office as well as payroll expenses.
Professional fees
Professional fees were $256,408 for the three months ended June 30, 2022, compared to $208,979 for the three months ended June 30, 2021. The increase was primarily due to an increase in legal, accounting and consulting fees in the current quarter relating to the Company being publicly traded.
Interest expense
Interest expense for the three months ended June 30, 2022 was $1,614,335 consisting of interest expense of $291,571 and amortization of debt issuance costs and discounts of approximately $1,322,764 related to the Company’s convertible and non-convertible promissory notes. Interest expense for the three months ended June 30, 2021 consisted of interest expense relating to convertible notes payable.
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| Six Months Ended June 30, | Period to Period | |||||||||||
| 2022 | 2021 | change | ||||||||||
| Revenue | $ | 198,052 | $ | 9,207 | $ | 188,845 | ||||||
| Cost of goods sold | $ | 144,643 | $ | 3,697 | $ | 140,946 | ||||||
| Research and development | $ | 167,721 | $ | 83,144 | $ | 84,577 | ||||||
| Professional fees | $ | 444,174 | $ | 325,886 | $ | 118,288 | ||||||
| Sales and marketing expenses | $ | 405,252 | $ | 325,044 | $ | 80,208 | ||||||
| General and administrative | $ | 2,544,559 | $ | 1,044,303 | $ | 1,500,256 | ||||||
| Share based compensation | $ | 578,811 | $ | - | $ | 578,811 | ||||||
| Interest expense | $ | 1,886,254 | $ | 114,217 | $ | 1,772,037 | ||||||
Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2022
Revenues
Revenue for the six months ended June 30, 2022 was $198,052, compared to $9,207 for the six months ended June 30, 2021. In the six months ended June 30, 2022, we generated our revenue primarily through our Russian subsidiary acquired in the merger, acting as a distributor of third-party medical devices in Russia (including those purchased from a company affiliated with one of our former officers and directors). Revenues for the six months ended June 30, 2021 related to the sales of evaluation kits.
General and administrative expenses
General and administrative expenses were $2,544,559 for the six months ended June 30, 2022, compared to $1,044,303 for the six months ended June 30, 2021. The increase in general and administrative expenses was primarily due to an increase in payroll and related expenses, expenses associated with a combined company post-merger and being a public entity and amortization of intangible assets.
Research and development expenses
Research and development expenses were $167,721 for the six months ended June 30, 2022, compared to $83,144 for the six months ended June 30, 2021. The increase in research and development expenses were primarily due to increased activities in our Ukrainian office as well as payroll expenses.
Professional fees
Professional fees were $444,174 for the six months ended June 30, 2022, compared to $325,886 for the six months ended June 30, 2021. The increase was primarily due to an increase in legal, accounting and consulting fees in the current period relating to the Company being publicly traded.
Interest expense
Interest expense for the six months ended June 30, 2022 was $1,886,254 consisting of interest expense of $547,037 and amortization of debt issuance costs and discounts of approximately $1,339,217 related to the Company’s convertible and non-convertible promissory notes. Interest expense for the three months ended June 30, 2021 consisted of interest expense relating to convertible notes payable.
Liquidity and Capital Resources
While we have generated revenue in 2022 and 2021, we anticipate that we will continue to incur losses for the foreseeable future. Furthermore, substantially all of such revenue was generated through acting as a distributor of third-party medical devices in Russia, and we did not have significant sales of our products. We anticipate that our expenses will increase substantially as we develop additional products and pursue pre-clinical testing and clinical trials, seek any further regulatory approvals, contract to manufacture any products, establish our own sales, marketing and distribution infrastructure to commercialize our products, hire additional staff, add operational, financial and management systems and operate as a public company.
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Historically, our primary source of cash has been proceeds from the sale of convertible promissory notes and related party loans. We have also from time to time issued shares of our common stock to individuals and entities as payment for services rendered to us in lieu of cash.
We have no current substantial source of revenue to sustain our present activities other than as acting as a distributor of medical devices in Russia (including those purchased from a company affiliated with one of our offices and directors), which is not our primary business goal, and we do not expect to generate material revenue, from our products until, and unless we successfully expand our sales efforts for our current products, the FDA or other regulatory authorities approve our products under development, and we successfully commercialize our products. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through our distributorship revenue, a combination of equity (preferred stock or common stock) and debt financings as well as collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third-party partners, we may have to relinquish valuable rights to our technologies, future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or through collaborations, strategic alliances or licensing arrangements when needed, we may be required to delay, limit, reduce or terminate our Product development, future commercialization efforts, or grant rights to develop and market our cortical strip, grid electrode and depth electrode technology that we would otherwise prefer to develop and market ourselves.
Our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the years ended December 31, 2021 and 2020, noting the existence of substantial doubt about our ability to continue as a going concern. This uncertainty arose from management’s review of our results of operations and financial condition and its conclusion that, based on our operating plans, we did not have sufficient existing working capital to sustain operations for a period of twelve months from the date of the issuance of these financial statements.
We will require additional funds and/or generate revenues, to continue to fund operations of the company.
During the six months ended June 30, 2022, we issued convertible promissory notes in the amount of $7,659,500. We may obtain additional financing in the future through the issuance of our common stock, through other equity or debt financings or through collaborations or partnerships with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could compromise our ability to execute on our business plan.
The development of our products is subject to numerous uncertainties, and we have based these estimates on assumptions that may prove to be substantially different than we currently anticipate and could use our cash resources sooner than we expect. Additionally, the process of developing medical devices is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.
Net cash used in operating activities
Net cash used in operating activities was $3,272,138 for the six months ended June 30, 2022 compared to $1,591,077 for the six months ended June 30, 2021. This fluctuation is primarily due to an increase in net loss of $2,898,861, change in fair market value of derivative liabilities of $1,090,759, gain on debt extinguishment of $210,099 and a gain on lease settlement of $1,660, partially offset by increases in amortization of debt discount of $1,339,218, share based compensation expenses of $578,811, depreciation and amortization expenses of $389,906, and decreases in gain on forgiveness of paycheck protection loan of $112,338 and in cash used in working capital of $91,045.
Net cash used in investing activities
Net cash used in investing activities was $7,471 for the six months ended June 30, 2022, compared to $98,618 for the six months ended June 30, 2021. The decrease was due primarily to a decrease in purchases of property and equipment.
Net cash provided by financing activities
Net cash provided by financing activities was $6,038,610 for the six months ended June 30, 2022, which primarily consisted of the issuances of convertible promissory notes, net of issuance costs for aggregate gross proceeds of $6,421,610, offset by the partial repayments of non-convertible promissory notes and accrued interest in the amount of $383,000.
Net cash provided by financing activities was $2,819,982 for the six months ended June 30, 2021, which consisted of proceeds from the issuances of convertible promissory notes.
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Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our financial statements prospectively from the date of the change in estimate.
While our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments.
Use of Estimates: The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the estimates of useful lives for depreciation, the valuation of stock options, and the valuation of derivative liabilities.
Fair Value of Financial Instruments: Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
| ● | Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| ● | Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. |
| ● | Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. |
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and borrowings. The fair value of current financial assets and current financial liabilities approximates their carrying value because of the short-term maturity of these financial instruments.
Income Taxes. The Company accounts for income taxes under the asset and liability method, as required by the accounting standard for income taxes, ASC 740. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
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Stock Based Compensation. The Company accounts for the grant of restricted stock awards in accordance with ASC 718, “Compensation-Stock Compensation.” ASC 718 requires companies to recognize in the statement of operations the grant-date fair value of equity-based compensation. The expense is recognized over the period during which the employee is required to provide service in exchange for the compensation. Any remaining unrecognized balance will be recognized ratably over the life of the vesting period and is a reduction of stockholders’ equity.
The Company accounts for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 505-50 “Equity-Based Payments to Non-Employees.”
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements, other than those disclosed below.
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have on its financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for smaller reporting companies.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). As required by Rule 13a-15(b) under the Exchange Act, management of the Company, under the direction of our Board of Directors and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2022. Based on that review and evaluation, the Board of Directors and Chief Financial Officer, along with the management of the Company, have determined that as of June 30, 2022, the disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were not effective to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Specifically, we have identified the following material weakness in our disclosure controls: (i) insufficient written policies and procedures to ensure timely filing of reports that the Company files or submits under the Exchange Act, and (ii) a lack of full-time executive management, including a lack of a full-time chief executive officer and chief financial officer, and other members of management who would otherwise oversee the Company’s disclosure controls and procedures.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business.
We are not currently a party in any legal proceeding or governmental regulatory proceeding nor are we currently aware of any pending or potential legal proceeding or governmental regulatory proceeding proposed to be initiated against us that would have a material adverse effect on us or our business.
Item 1A. Risk Factors.
Not required for a Smaller Reporting Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In June 2022, the Company issued 54,823,855 shares of common stock as part of the conversion of $13,634,144 outstanding convertible debt including principal and accrued interest.
The previously mentioned securities were issued in reliance on the exemptions from registration under the Securities Act in Section 4(a)(2) of the Securities Act and/or Regulation D thereunder.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
The exhibits listed below are hereby furnished to the SEC as part of this report:
| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
| BRAIN SCIENTIFIC INC. | ||
| Dated: August 15, 2022 | By: | /s/ Hassan Kotob |
| Name: | Hassan Kotob | |
| Title: | Chief Executive Officer | |
| By: | /s/ Bonnie-Jeanne Gerety | |
| Name: | Bonnie-Jeanne Gerety | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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