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BRAIN SCIENTIFIC INC.

Date Filed : Jan 29, 2020

S-11fs12020_brainscientificinc.htmREGISTRATION STATEMENT

AS FILED WITH THE SECURITIES AND EXCHANGECOMMISSION ON JANUARY 29, 2020

REGISTRATION NO. 333-__________

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

 

REGISTRATION STATEMENT UNDER THE SECURITIESACT OF 1933

 

BRAIN SCIENTIFIC INC.

(Exact name of registrant as specified inits charter)

 

Nevada   3841   81-0876714
(State or jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification No.)

 

205 East 42nd Street, 14th Floor

New York, New York 10017

(646) 388-3788

 (Address, including zip code, andtelephone number, including area code, of principal executive offices)

 

Boris Goldstein

205 East 42nd Street, 14th Floor

New York, New York 10017

(646) 388-3788

(Name, address, including zip code, andtelephone number,

including area code, of agent for service)

 

Copies to:

 

Arthur S.Marcus, Esq.

Sichenzia Ross Ference LLP

1185 Avenue of the Americas, 37thFloor

New York, New York 10036

Phone: (212) 930-9700

 

Approximate date of commencement of proposed sale to thepublic: From time to time after the effective date of this registration statement.

 

If any of the securities being registeredon this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check thefollowing box. ☒

 

If this Form is filed to register additionalsecurities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the SecuritiesAct registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendmentfiled pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statementnumber of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendmentfiled pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statementnumber of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitionsof “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

Large accelerated filer  ☐ Accelerated filer  ☐
Non-accelerated filer  ☒ Smaller reporting company  ☒
  Emerging growth company ☒

 

If an emerging growth company, indicateby check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

(COVER CONTINUESON FOLLOWING PAGE)

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Class to be Registered  Amount to be
Registered
  Proposed
Maximum Aggregate
Offering Price
Per Share (2)
   Proposed
Maximum
Aggregate Offering
Price
   Amount of
Registration Fee
 
Common Stock, par value $0.001  6,323,117 shares (1)  $3.00   $18,969,351   $2,462.22 
Total  6,323,117 shares  $    $18,969,351   $2,462.22 

 

(1) Represents shares of Brain Scientific Inc. offered by theselling stockholders.

(2) Calculated in accordance with Rule457(e). Assumes a prices of $3.00 per share.

 

The registrant hereby amends this Registration Statementon such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment whichspecifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the SecuritiesAct of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to saidSection 8(a), may determine.

 

 

 

 

 

 

The informationin this prospectus is not complete and may be changed. The selling stockholders may not sell these securities under thisprospectus until the registration statement of which it is a part and filed with the Securities and Exchange Commission is effective. Thisprospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state wherethe offer or sale is not permitted.

 

PRELIMINARYPROSPECTUS, SUBJECT TO COMPLETION, DATED JANUARY 28, 2020

 

Brain Scientific Inc.

6,323,117 Shares of Common Stock by theSelling Stockholders

 

This prospectus relates to the public offeringof up to 6,323,117 shares of common stock of Brain Scientific, Inc. by the selling stockholders.

 

The selling stockholders will offer their respective sharesat a fixed price of $3.00 per share until our common stock is quoted on the OTCQB, and thereafter, at prevailing market pricesor privately negotiated prices.  

 

We will not receive any of the proceeds from the sale of commonstock by the selling stockholders. We will pay the expenses of registering these shares.

 

Investing in our common stockinvolves a high degree of risk. You should consider carefully the risk factors beginning on page 2 of this prospectusbefore purchasing any of the shares offered by this prospectus.

 

Our common stock is quoted on the OTC Pink under the symbol“BRSF”. There has been no reported trading to date in our common stock.

 

We may amend or supplement this prospectus from time to timeby filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefullybefore you make your investment decision.

 

Neither the Securities and Exchange Commission nor any statesecurities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.Any representation to the contrary is a criminal offense.

 

The date of this prospectus is_________,2020.

 

 

 

 

BRAIN SCIENTIFIC INC.

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 2
Forward-Looking Statements 14
Use of Proceeds 14
Selling Security Holders 15
Plan of Distribution 16
Description of Securities to be Registered 17
Description of Business 18
Description of Property 28
Legal Proceedings 28
Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Market For and Dividends on Registrant’s Common Equity and Related Stockholder Matters 37
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 37
Directors and Executive Officers 38
Executive Compensation 40
Security Ownership of Certain Beneficial Owners and Management 42
Certain Relationships and Related Transactions, and Director Independence 43
Additional Information 44
Indemnification for Securities Act Liabilities 45
Legal Matters 45
Experts 45
Financial Statements F-1 

 

You may only rely on the information containedin this prospectus or that we have referred you to. We have not authorized anyone to provide you with different information. Thisprospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the common stockoffered by this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any commonstock in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any salemade in connection with this prospectus shall, under any circumstances, create any implication that there has been no change inour affairs since the date of this prospectus or that the information contained by reference to this prospectus is correct as ofany time after its date.

 

i

 

 

Prospectus Summary

 

This summary highlights information contained elsewhere in thisprospectus. You should read the entire prospectus carefully, including the section entitled “Risk Factors” before decidingto invest in our common stock.  

 

About Us

 

We are a neurodiagnostic and predictivetechnology platform company seeking to provide a centralized platform for data acquisition and analysis of electroencephalography(“EEG”) data that combines cutting-edge medical device technologies with cloud-based telehealth services. Both ourNeuroCap, a pre-gelled disposable EEG headset, and NeuroEEG, a full-montage standard encephalograph, received FDA clearance tomarket in 2018.

 

On September 21, 2018, we entered into amerger agreement (the “Merger Agreement”) with MemoryMD, Inc. and AFGG Acquisition Corp. to acquire MemoryMD, Inc.(the “Acquisition”). The transactions contemplated by the Merger Agreement were consummated on September 21, 2018 and,pursuant to the terms of the Merger Agreement, all outstanding shares of MemoryMD were exchanged for shares of our common stock.Accordingly, we acquired 100% of Memory MD, Inc. in exchange for the issuance of shares of our common stock and MemoryMD, Inc.became our wholly-owned subsidiary. 

 

Following the Acquisition,the Company is now a neurodiagnostic and predictive technology platform company seeking to provide a centralized platform for dataacquisition and analysis of EEG data that combines cutting-edge medical device technologies with cloud-based telehealth services.The Company is primarily focused on establishing diagnostic protocols to identify pathological risk factors involving the brain,and driving novel insights into cognitive health that support early treatment of neurological disorders.

 

Our principal executiveoffice is located at 205 East 42nd Street, 14th Floor, New York, New York 10017, and our telephonenumber is (646) 388-3788. Our website address is www.brainscientific.com. The information on our website is not part of this prospectus.

 

About This Offering

 

This prospectus relates to the offeringby the selling stockholders of 6,323,117 shares of common stock. The selling stockholders acquired such shares pursuant to theMerger Agreement in exchange for shares of MemoryMd.

 

1

 

 

RISK FACTORS

 

An investment in the Company’s commonstock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described belowand the other information in this prospectus. Our business, operating results and financial condition could be harmed and the valueof our stock could go down as a result of these risks. This means you could lose all or a part of your investment. 

 

Risks Relating to our Business

 

We have incurred significant operatinglosses since inception and cannot assure you that we will ever achieve or sustain profitability. 

 

We have incurred lossessince inception and had an accumulated deficit of $3,534,766 as of September 30, 2019 and had a working capital deficit of $907,940as of September 30, 2019. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeablefuture. To date, we have financed our operations primarily through debt and equity financings. To date, our primary activitieshave been limited to, and our limited resources have been dedicated to, performing business and financial planning, raising capital,recruiting personnel, negotiating with business partners and the licensors of our intellectual property and conducting developmentactivities.

  

We believe that tofully implement our business strategy we need to, among other things, raise approximately $2.0 million. We have never been profitableand do not expect to be profitable in the foreseeable future. Any profitability in the future will be dependent upon the successfuldevelopment of our business model, of which we can give no assurance of success. We expect our expenses to increase significantlyas we pursue our objectives. The extent of our future operating losses and the timing of profitability are highly uncertain, andwe expect to continue incurring significant expenses and operating losses over the next several years. Our prior losses have had,and will continue to have, an adverse effect on our stockholders’ equity and working capital. Any additional operating lossesmay have an adverse effect on our stockholders’ equity, and we cannot assure you that we will ever be able to achieve profitability.Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Ourfailure to become and remain profitable would depress the value of our company and could impair our ability to raise capital,expand our business, maintain our development efforts, obtain regulatory approvals or continue our operations. Accordingly, weare a highly speculative venture involving significant financial risk.

 

We are a development stage companywith a limited operating history, making it difficult for you to evaluate our business and your investment.

 

Our operations aresubject to all of the risks inherent in the establishment of a new business enterprise, including but not limited to the absenceof an operating history, lack of fully-developed or commercialized products, insufficient capital, expected substantial and continuallosses for the foreseeable future, limited experience in dealing with regulatory issues, lack of manufacturing and marketing experience,need to rely on third parties for the development and commercialization of our proposed Products, a competitive environment characterizedby well-established and well-capitalized competitors and reliance on key personnel.

 

We may not be successfulin carrying out our business objectives. The revenue and income potential of our proposed business and operations are unprovenas the lack of operating history makes it difficult to evaluate the future prospects of our business. There is nothing at thistime on which to base an assumption that our business operations will prove to be successful or that we will ever be able to operateprofitably. Accordingly, we have no track record of successful business activities, strategic decision-making by management, fund-raisingability, and other factors that would allow an investor to assess the likelihood that we will be successful in our business. Thereis a substantial risk that we will not be successful in fully implementing our business plan, or if initially successful, in thereaftergenerating material operating revenues or in achieving profitable operations.

 

Since inception, we have not establishedany material revenues or operations that will provide financial stability in the long term, and there can be no assurance thatwe will realize our plans on our projected timetable (or at all) in order to reach sustainable or profitable operations.

 

Investors are subjectto all the risks incident to the creation and development of a new business and each investor should be prepared to withstand acomplete loss of his, her or its investment. Furthermore, the accompanying financial statements have been prepared assuming thatwe will continue as a going concern. We have not emerged from the development stage, and may be unable to raise further equity.These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 

The Company has limitedexperience in medical device development and commercialization. Our ability to become profitable depends primarily on: our abilityto develop our Products, our successful completion of all necessary pre-clinical testing and clinical trials on such Products,our ability to obtain approval for such Products and, if approved, successfully commercialize such Products, our ongoing researchand development efforts, the timing and cost of clinical trials, our ability to identify personnel with the necessary skill setsor enter into favorable alliances with third-parties who can provide substantial capabilities in clinical development, regulatoryaffairs, sales, marketing and distribution and our ability to obtain and maintain necessary intellectual property rights to suchProducts. Our limited experience in medical device development may make it more difficult for us to complete these tasks.

 

Even if we successfullydevelop and market our Products, we may not generate sufficient or sustainable revenue to achieve or sustain profitability, whichcould cause us to cease operations and cause you to lose all of your investment. Because we are subject to these risks, you mayhave a difficult time evaluating our business and your investment in our Company.

 

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Our ability to continue our operationsrequires that we raise additional capital and our operations could be curtailed if we are unable to obtain the additional fundingas or when needed. As a result, our registered public accounting firm has included an explanatory paragraph relating to our abilityto continue as a going concern in its report on our audited financial statements included in this prospectus. We will need to raisesubstantial additional funds in the future, and these funds may not be available on acceptable terms or at all. A failure to obtainthis necessary capital when needed could force us to delay, limit, scale back or cease some or all operations.

 

Upon the completionof the audit of our financial statements for the year ended December 31, 2018, we concluded there was substantial doubt about ourability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatoryparagraph regarding this uncertainty in its report on those financial statements.

 

The continued growthof our business, including the development, regulatory approval and commercialization of our Products, will significantly increaseour expenses going forward, regardless of our revenues. As a result, we are required to seek substantial additional funds to continueour business. Our future capital requirements will depend on many factors, including:

 

the cost of developing our Products;

 

obtaining and maintaining regulatory clearance or approvalfor our Products;

 

the costs associated with commercializing our Products;

 

any change in our development priorities;

 

the revenue generated by sales of our Products, ifapproved;

 

the costs associated with expanding our sales and marketinginfrastructure for commercialization of our Products, if approved;

 

any change in our plans regarding the manner in whichwe choose to commercialize any approved Product in the United States or internationally;

 

the cost of ongoing compliance with regulatory requirements;

 

expenses we incur in connection with potential litigationor governmental investigations;

 

the costs to develop additional intellectual property:

 

anticipated or unanticipated capital expenditures;and

 

unanticipated general and administrative expenses.

 

We believe our existingcash and cash equivalents, without raising generating additional revenues, will be insufficient to fund our operating expensesfor the foreseeable future. We may in the future seek additional capital from public or private offerings of our capital stock,borrowings under credit lines, if available, or other sources.

 

We may not be ableto raise additional capital on terms acceptable to us, or at all. Any failure to raise additional capital could compromise ourability to execute on our business plan, and we may be forced to liquidate our assets. In such a scenario, the values we receivefor our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

 

If we issue equityor debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securitiesmay have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional fundsthrough collaborations, licensing, joint ventures, strategic alliances, partnership arrangements or other similar arrangements,it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies, or grant licenseson terms that are not favorable to us.

  

Medical device development involvesa lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, orultimately be unable to complete, the development and commercialization of any Product.

 

Before obtaining marketingapproval from regulatory authorities for the sale of our Products under development in the United States or elsewhere, we mustcomplete all pre-clinical testing, clinical trials and other regulatory requirements necessitated by the FDA and foreign regulatorybodies and demonstrate the performance and safety of our Products. Clinical testing is expensive, difficult to design and implement,can take many years to complete and is inherently uncertain as to outcome. A failure of one or more clinical trials can occur atany stage of testing. Further, the outcomes of completed clinical trials may not be predictive of the success of later clinicaltrials, and interim results of a clinical trial do not necessarily predict final results. Clinical data is often susceptible tovarying interpretations and analyses, and many companies that have believed their products performed satisfactorily in clinicaltrials have nonetheless failed to obtain marketing approval. We have limited resources to complete the expensive process of medicaldevice development, pre-clinical testing and clinical trials, putting at a disadvantage, particularly compared to some of our largerand established competitors, and we may not have sufficient resources to commercialize our Products under development in a timelyfashion, if ever.

 

3

 

 

We may experience numerousunforeseen events during or as a result of clinical trials that could delay or prevent our ability to receive marketing approvalor commercialize our Products, including:

 

regulators may not authorize us or our investigatorsto commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

the failure to successfully complete pre-clinical testingrequirements required by the FDA and international organizations;

 

we may experience delays in reaching, or fail to reach,agreement on acceptable clinical trial contracts with third parties or clinical trial protocols with prospective trial sites,the terms of which can be subject to extensive negotiation and may vary significantly among different trial sites;

 

clinical trials of our Products may produce negativeor inconclusive results, including failure to demonstrate statistical significance, and we may decide, or regulators may requireus, to conduct additional clinical trials or abandon our development programs;

 

the number of people with brain related disorders requiredfor clinical trials may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate orpeople may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate;

 

our Products may have undesirable side effects or otherunexpected characteristics, causing us or our investigators, regulators or institutional review boards to suspend or terminatethe trials;

 

our third-party contractors conducting the clinicaltrials may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

regulators may require that we or our investigatorssuspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements or a findingthat the participants are being exposed to unacceptable health risks;

 

the cost of clinical trials of our Products may begreater than we anticipate;

 

the supply or quality of our Products or other materialsnecessary to conduct clinical trials of our Products may be insufficient or inadequate; and

 

delays from our suppliers and manufacturers could impactclinical trial completion and impact revenue.

 

If we are requiredto conduct additional clinical trials or other testing of our Products under development beyond those that we contemplate, if weare unable to successfully complete clinical trials of our Products under development or other testing, if the results of thesetrials or tests are not favorable or if there are safety concerns, we may:

 

not obtain marketing approval at all;

 

be delayed in obtaining marketing approval for ourProducts under development in a jurisdiction;

 

be subject to additional post-marketing testing requirements;or

 

have our Products removed from the market after obtainingmarketing approval.

 

Our development costswill also increase if we experience delays in testing or marketing approvals. We do not know whether any of our clinical trialswill begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delaysalso could allow our competitors to bring innovative products to market before we do and impair our ability to successfully commercializeour Products.

 

Current economic and political conditionsmake tax rules in any jurisdiction subject to significant change.

 

We are subject to incometaxes as well as non-income based taxes, in both the U.S. and ultimately various jurisdictions outside the U.S. where we intendto operate. We cannot predict the overall impact that changes or revisions to any such tax laws and regulations, whether in inthe U.S. or in jurisdictions outside the U.S., may have on our business. We may be subject to ongoing tax audits in various jurisdictions,and the tax authorities conducting such audits may disagree with certain taxation positions we have taken and assess additionaltaxes. Although we intend to regularly assess the likely outcomes of these audits in order to determine the appropriateness ofour tax obligations, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomesof these audits could have a material adverse effect on our financial condition and business operations.

 

4

 

 

Recent executive and legislativeactions to amend or impede the implementation of the Affordable Care Act and ongoing efforts to repeal, replace or further modifythe Affordable Care Act may adversely affect our business, financial condition and results of operations.

 

Recent executive andlegislative actions to amend or impede the implementation of the Affordable Care Act and ongoing efforts to repeal, replace orfurther modify the Affordable Care Act may adversely affect our business, financial condition and results of operations.

 

There have been judicialand congressional challenges to certain aspects of the Affordable Care Act, as well as recent efforts by the Trump administrationto repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two ExecutiveOrders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act orotherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Concurrently, Congresshas considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congresshas not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the AffordableCare Act have been signed into law. The Tax Act included a provision which repealed, effective January 1, 2019, the tax-basedshared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifyinghealth coverage for all or part of a year that is commonly referred to as the “individual mandate”. The 2018 AppropriationsResolution delayed the implementation of certain Affordable Care Act-mandated fees, including, without limitation, themedical device excise tax. The Bipartisan Budget Act of 2018, or BBA, among other things, amended the Affordable Care Act,effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”.In July 2018, CMS published a final rule permitting further collections and payments to and from certain Affordable Care Act qualifiedhealth plans and health insurance issuers under the Affordable Care Act risk adjustment program in response to the outcomeof federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018,a Texas U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the“individual mandate” was repealed by Congress as part of the Tax Act. While the Texas U.S. District Court Judge, aswell as the Trump administration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision,it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the Affordable Care Act willimpact the Affordable Care Act and our business.

  

In addition, otherlegislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes includedaggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and, dueto the BBA, will stay in effect through 2027 unless additional Congressional action is taken. In January 2013, President Obamasigned into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to severalproviders, and increased the statute of limitations period for the government to recover overpayments to providers from three tofive years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could negativelyimpact customers for our product candidates, if approved, and, accordingly, our financial operations.

 

We expect that otherhealthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcarefunding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that we receivefor any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reductionin payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us frombeing able to generate revenue, attain profitability, or commercialize our Products.

 

We are subject to costly and complexlaws and governmental regulations and any adverse regulatory action may materially adversely affect our financial condition andbusiness operations.

 

Our medical devicesare subject to regulation by numerous government agencies, including the FDA and comparable agencies outside of the U.S. To varyingdegrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing,labeling, marketing, and distribution of our Products. We cannot guarantee that we will be able to obtain or maintain marketingclearance for our new Products, or enhancements or modifications to existing Products, and the failure to maintain approvals orobtain approval or clearance could have a material adverse effect on the financial condition of our business and our business operations.Even if we are able to obtain such approval or clearance, it may take a significant amount of time, require the expenditure ofsubstantial resources, involve stringent clinical and pre-clinical testing, require increased post-market surveillance, involvemodifications, repairs, or replacements of our Products, and result in limitation on the proposed uses of our Products.

 

Both before and aftera Product or service is commercially released or offered, we have ongoing responsibilities under FDA regulations. Many of our facilitiesand procedures and those of our suppliers are also subject to periodic inspections by the FDA to determine compliance with theFDA’s requirements, including the quality system regulations and medical device reporting regulations. The results of theseinspections can include inspectional observations on FDA’s Form-483, warning letters, or other forms of enforcement. If theFDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices areineffective or pose an unreasonable health risk, the FDA could ban such medical devices, detain or seize adulterated or misbrandedmedical devices, order a recall, repair, replacement, or refund of such devices, refuse to grant pending pre-market approval applicationsor require certificates of non-U.S. governments for exports, and/or require us to notify health professionals and others that thedevices present unreasonable risks of substantial harm to the public health. The FDA may also assess civil or criminal penaltiesagainst us, our officers or employees and impose operating restrictions on a company-wide basis, or enjoin and/or restrain certainconduct resulting in violations of applicable law. The FDA may also recommend prosecution to the U. S. Department of Justice. Governmentalagencies comparable to the FDA which operate in foreign jurisdictions may also require us to comply with regulations similar tothose required by the FDA, and failing to do so may result in material adverse ramifications similar to those caused by a failureto comply with FDA regulations. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively marketingand selling our Products and limit our ability to obtain future pre-market clearances or approvals, and could cause result in asubstantial modification to our business practices and operations.

 

5

 

 

In addition, the FDAhas taken the position that device manufacturers are prohibited from promoting their products other than for the uses and indicationsset forth in the approved product labeling. A number of enforcement actions have been taken against manufacturers that promoteproducts for “off-label” uses, including actions alleging that federal health care program reimbursement of productspromoted for “off-label” uses constitute false and fraudulent claims to the government. The failure to comply with“off-label” promotion restrictions can result in significant civil or criminal exposure, administrative obligationsand costs, and/or other potential penalties from, and/or agreements with, the federal government.

 

Governmental regulationsoutside the U.S. have become increasingly stringent and more common, and we may become subject to more rigorous regulation by governmentalauthorities in the future in the event we determine to conduct business internationally. In the European Union, for example, anew Medical Device Regulation was published in 2017 which, when it enters into full force, will impose significant additional premarketand post-market requirements. Penalties for a company’s non-compliance with governmental regulation could be severe, includingfines and revocation or suspension of a company’s business license, mandatory price reductions and criminal sanctions. Anygovernmental law or regulation imposed in the future may have a material adverse effect on us.

  

We are subject to environmental lawsand regulations and the risk of environmental liabilities, violations and litigation.

 

We are subject to numerousU.S. federal, state, local and non-U.S. environmental, health and safety laws and regulations concerning, among other things, thehealth and safety of our employees, the generation, storage, use and transportation of hazardous materials, emissions or dischargesof substances into the environment, investigation and remediation of hazardous substances or materials at various sites, chemicalconstituents in medical products and end-of-life disposal and take-back programs for medical devices. Our operations involve theuse of substances regulated under such laws and regulations, primarily those used in manufacturing and sterilization processes.If we violate these environmental laws and regulations, we could be fined, criminally charged or otherwise sanctioned by regulators.

 

In addition, certainenvironmental laws assess liability on current or previous owners or operators of real property for the costs of investigation,removal or remediation of hazardous substances or materials at their properties or at properties which they have disposed of hazardoussubstances. Liability for investigative, removal and remedial costs under certain U.S. federal and state laws are retroactive,strict and joint and several. In addition to cleanup actions brought by governmental authorities, private parties could bring personalinjury or other claims due to the presence of, or exposure to, hazardous substances. The ultimate cost of site cleanup and timingof future cash outflows is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretationof applicable laws and regulations, and alternative cleanup methods.

 

We may in the futurebe subject to additional environmental claims for personal injury or cleanup based on our past, present or future business activities(including the past activities of companies we may acquire). The costs of complying with current or future environmental protectionand health and safety laws and regulations, or liabilities arising from past or future releases of, or exposures to, hazardoussubstances, may exceed our estimates, or have a material adverse effect on the financial condition of our business and our businessoperations.

 

Our failure to comply with laws andregulations relating to reimbursement of health care goods and services may subject us to penalties and adversely impact our reputation,financial condition, and business operations.

 

Our Products are expectedto be purchased primarily by medical professionals and organizations that typically bill various third-party payers, such as governmentalprograms (e.g., Medicare, Medicaid and comparable non-U.S. programs), private insurance plans and managed care plans, for the healthcareservices provided to their patients. The ability of our customers to obtain appropriate reimbursement for products from third-partypayers is critical because it affects which products customers purchase and the prices they are willing to pay for such products.As a result, our Products are subject to regulation regarding quality and cost by the U.S. Department of Health and Human Services,including the Centers for Medicare & Medicaid Services (“CMS”) as well as comparable state and non-U.S. agenciesresponsible for reimbursement and regulation of health care goods and services. The principal U.S. federal laws implicated includethose that prohibit (i) the filing of false or improper claims for federal payment, known as the false claims laws, (ii) unlawfulinducements for the referral of business reimbursable under federally-funded health care programs, known as the anti-kickback laws,and (iii) health care service providers from seeking reimbursement for providing certain services to a patient who was referredby a physician who has certain types of direct or indirect financial relationships with the service provider, known as the StarkLaw. Many states have similar laws that apply to reimbursement by state Medicaid and other funded programs as well as in some casesto all payers. Insurance companies can also bring a private cause of action claiming treble damages against a manufacturer forcausing a false claim to be filed under the federal Racketeer Influenced and Corrupt Organizations Act. In addition, if we wereto become a manufacturer of FDA-approved devices reimbursable by federal healthcare programs, we would be subject to the PhysicianPayments Sunshine Act, which would require us to annually report certain payments and other transfers of value we make to U.S.-licensedphysicians or U.S. teaching hospitals.

 

Our anticipated domesticand international operations may be subject to risks relating to changes in government and private medical reimbursement programsand policies, and changes in legal regulatory requirements in the U.S. and around the world. Implementation of further legislativeor administrative reforms to the reimbursement system in the U.S. and outside of the U.S., or adverse decisions relating to ourProducts or services by administrators of these systems in coverage or reimbursement, could significantly reduce reimbursementor result in the denial of coverage, which could have an impact on the acceptance of and demand for our Products and the pricesthat our customers are willing to pay for them.

 

The laws and regulationsof healthcare related products that are applicable to us, including those described herein, are subject to evolving interpretationsand enforcement discretion. If a governmental authority were to conclude that we are not in compliance with applicable laws andregulations, we and our officers and employees could be subject to severe criminal and civil penalties, including, for example,exclusion from participation as a supplier of products or services to beneficiaries covered by CMS. Any failure to comply withlaws and regulations relating to reimbursement and healthcare products could adversely affect our financial condition and businessoperations.

 

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We are subject to federal, stateand foreign healthcare regulations related to anti-bribery and anti-corruption laws, and could face substantial penalties if wefail to fully comply with such regulations and laws. 

 

The relationships thatwe and our potential distributors and others that market or may market our Products have with healthcare professionals, such asphysicians and hospitals, are subject to scrutiny under various federal, state, foreign laws often referred to collectively ashealthcare fraud and abuse laws. In addition, U.S. and foreign government regulators have increased the enforcement of the ForeignCorrupt Practices Act and other anti-bribery laws. We also must comply with a variety of other laws that protect the privacy ofindividually identifiable healthcare information and impose extensive tracking and reporting related to all transfers of valueprovided to certain healthcare professionals. These laws and regulations are broad in scope and are subject to evolving interpretationand we could be required to incur substantial costs to monitor compliance or to alter our practices if we are found not to be incompliance. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonmentof current or former employees and exclusion from participation in governmental healthcare programs, all of which could have amaterial adverse effect on our financial condition and business operations.

 

Quality problems with, and productliability claims in connection with our Products could lead to recalls or safety alerts, harm to our reputation, or adverseverdicts or costly settlements, and could have a material adverse effect on our financial condition and business operations.

 

Quality is extremelyimportant to us and our customers due to the serious and costly consequences of Product failure and our business exposes us topotential product liability risks that are inherent in the design, manufacture, and marketing of medical devices and services.In addition, our products may be used in intensive care settings with seriously ill patients. Component failures, manufacturingdefects, design flaws, off-label use, or inadequate disclosure of product-related risks or product-related information with respectto our products, could result in an unsafe condition or injury to, or death of, a patient or other user of our products. Theseproblems could lead to the recall of, or issuance of a safety alert relating to, our Products, and could result in unfavorablejudicial decisions or settlements arising out of product liability claims and lawsuits, including class actions, which could negativelyaffect our financial condition and business operations. In particular, a material adverse event involving one of our products couldresult in reduced market acceptance and demand for all products offered under our brand, and could harm our reputation and abilityto market products in the future.

 

High quality productsare critical to the success of our business. If we fail to meet the high standards we set for ourselves and which our customersexpect, and our products are the subject of recalls, safety alerts, or other material adverse events, our reputation could be damaged,we could lose customers, and our revenue and results of operations could decline. Our success also depends generally on our abilityto manufacture to exact tolerances precision-engineered components, subassemblies, and finished devices from multiple materials.If our components fail to meet these standards or fail to adapt to evolving standards, our reputation, competitive advantage andmarket share could be negatively impacted. In certain situations, we may undertake a voluntary recall of products or temporarilyshut down product production lines if we determine, based on performance relative to our own internal safety and quality monitoringand testing data, that we have or may be in danger of failing to meet the high quality standards we have set for ourselves andwhich our customers expect. Such recalls or cessation of services or product manufacturing may also negatively impact our business.

 

Any product liabilityclaim brought against us, with or without merit, could be costly to defend and resolve. Any of the foregoing problems, includingproduct liability claims or product recalls in the future, regardless of their ultimate outcome, could harm our reputation andhave a material adverse effect on our financial condition and business operations.

 

We are substantially dependent onpatent and other proprietary rights and failing to protect such rights or to be successful in litigation related to our rightsor the rights of others may result in our payment of significant monetary damages and/or royalty payments, negatively impact ourability to sell current or future Products, or prohibit us from enforcing our patent and other proprietary rights againstothers.

 

We are and will continueto be materially dependent on a combination of patents, trade secrets, and trademarks, non-disclosure and non-competition agreements,and other intellectual property protections which will enable us to maintain our proprietary competitiveness. We also operate inan industry characterized by extensive patent litigation. Patent litigation against us can result in significant damage awardsand injunctions that could prevent our manufacture and sale of affected Products or require us to pay significant royalties inorder to continue to manufacture or sell affected Products. At any given time, we could potentially be involved as a plaintiffand/or as a defendant in a number of patent infringement and/or other contractual or intellectual property related actions, theoutcomes of which may not be known for prolonged periods of time. While it is not possible to predict the outcome of such litigation,we acknowledge the possibility that any such litigation could result in our payment of significant monetary damages and/or royaltypayments, negatively impact our ability to sell current or future Products, or prohibit us from enforcing our patent and proprietaryrights against others, which would have a material adverse effect on the financial condition of our business and on our businessoperations.

 

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While we intend todefend against any threats to our intellectual property, including our patents, trade secrets, and trademarks, and while we intendto defend against any actual or threatened breaches of our non-disclosure and non-competition agreements, may not adequately protectour intellectual property or enforce such agreements. Further, patent or trademark applications currently pending that are ownedby us may not result in patents or trademarks being issued to us, patents or trademarks issued to or licensed by us in the pastor in the future may be challenged or circumvented by competitors and such patents or trademarks may be found invalid, unenforceableor insufficiently broad to protect our proprietary advantages.

 

In addition, the lawsof certain countries in which we market, or intend to market, some or all of our Products do not protect our intellectual propertyrights to the same extent as the laws of the U.S., which could make it easier for competitors to capture market position in suchcountries by utilizing technologies and other intellectual property that are similar to those developed or licensed by us. Competitorsmay also harm our sales by designing products or offering services that mirror the capabilities of our Products, or the technologycontained therein, without infringing our intellectual property rights. If we are unable to protect our intellectual property inthese countries, it could have a material adverse effect on our financial condition and business operations.

 

If we experience decreasing pricesfor our Products and we are unable to reduce our expenses, our financial condition and business operations may suffer.

 

We may experience decreasingprices for our Products due to pricing pressure experienced by our customers from managed care organizations and other third-partypayers, increased market power of our customers as the medical device industry consolidates, and increased competition among medicalengineering and manufacturing service providers. If the prices for our Products decrease and we are unable to reduce our expenses,our results of operations will be adversely affected.

 

Our research and development effortsrely upon investments and investment collaborations, and we cannot guarantee that any previous or future investments or investmentcollaborations will be successful. 

 

Our commercializationstrategy requires a wide variety of technologically advanced and capable Products. The rapid pace of technological developmentin the MedTech industry and the specialized expertise required in different areas of medicine make it difficult for one companyalone to develop a broad portfolio of technological solutions. In addition to internally generated growth through our researchand development efforts, we anticipate the need to rely upon investments and investment collaborations to provide us access tonew technologies both in areas served by our contemplated businesses as well as in new areas. A failure to establish such collaborationsmay harm our financial condition and business operations.

 

Going forward, we expectto make future investments where we believe that we can stimulate the development or acquisition of new technologies, Productsto further our strategic objectives and strengthen our existing business ventures. Investments and investment collaborations inand with medical technology companies are inherently risky, and we cannot guarantee that any of our previous or future investmentsor investment collaborations will be successful or will not have a materially adverse effect our financial condition and businessoperations.

 

The ability to offer our planned Products,and the continuing development of new Products, depends upon us maintaining strong relationships with health care professionals.

 

If we fail to maintainour working relationships with health care professionals, many of our Products may not be developed and offered in line with theneeds and expectations of the professionals who use and support our Products, which could cause a decline in our earnings and profitability.The research, development, marketing, and sales of our Products is expected to be dependent upon our maintaining working relationshipswith such health care professionals, and the use of our Products is expected to often require the participation of health careprofessionals. In addition, health care professionals are the primary customer groups we expect to market and sell our Productsdirectly to, further highlighting the importance of our relationship with such health care professionals. If we are unable to maintainour relationships with these professionals, we may lose our primary customer base, our Products may not be utilized correctly orto their full potential, and our ability to develop, manufacture, and market future Products may be significantly stunted.

 

Economic and political instabilityaround the world could adversely affect our financial condition and business operations.

 

Economic and politicalinstability around the world may adversely affect our ability to develop, manufacture, market, and sell our Products. Our customersand suppliers may experience financial difficulties or be unable to borrow money to fund their operations which may adversely impacttheir ability to purchase our Products or services or to pay for our Products on a timely basis, if at all. As with our customersand suppliers, these economic conditions make it more difficult for us to accurately forecast and plan our future business activities.In addition, a significant amount of our trade receivables are with national health care systems in the U.S. and in many foreigncountries. Repayment of these receivables is dependent upon the political and financial stability of those countries. In lightof domestic and global economic fluctuations, we continue to monitor the creditworthiness of customers located both inside andoutside the U.S. Failure to receive payment of all or a significant portion of these receivables could adversely affect our financialcondition and business operations.

 

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Laws and regulations governing theexport of our Products could adversely impact our business.

 

The U.S. Departmentof the Treasury’s Office of Foreign Assets Control and the Bureau of Industry and Security at the U.S. Department of Commerceadminister certain laws and regulations that restrict U.S. persons and, in some instances, non-U.S. persons, in conducting activities,transacting business with or making investments in certain countries, governments, entities and individuals subject to U.S. economicsanctions. Due to our planned international operations, we expect to be subject to such laws and regulations, which are complex,could restrict our business dealings with certain countries and individuals, and are constantly changing. Further restrictionsmay be enacted, amended, enforced or interpreted in a manner that adversely impacts our financial condition and business operations.

 

Consolidation in the health careindustry may cause a material adverse effect on our financial health and business operations.

 

In response to a varietyof actions by legislators, regulators, and third-party payers to reduce the perceived rise in healthcare costs, many health careindustry companies, including health care systems, are consolidating to create new companies with greater market power. As thehealth care industry consolidates, competition to provide goods and services to industry participants will become more intense.These industry participants may try to use their market power to negotiate price concessions or reductions our products which priceconcessions may be unanticipated and adversely affect our financial condition and business operations.

 

We operate in a highly competitiveindustry and we may be unable to compete effectively.

 

We expect to competedomestically and internationally in the neurology and diagnostic imaging MedTech markets. These markets are characterized by rapidchange resulting from technological advances and scientific discoveries. In the product lines and offered services in which wecompete, we face a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturersthat offer a limited selection of niche products. Development by other companies of new or improved products, processes, technologies,or the introduction of reprocessed products or generic versions when our proprietary Products lose their patent protection maymake our Products or proposed Products less competitive. In addition, we face competition from providers of alternative medicaltherapies such as pharmaceutical companies. Competitive factors include product reliability, product performance, product technology,product quality, breadth of product lines, product services, customer support, price, and reimbursement approval from health careinsurance providers.

 

We also face competitionfor marketing, distribution, and collaborative development agreements, for establishing relationships health care professionals,medical associations, and academic and research institutions, and for licenses to intellectual property. In addition, academicinstitutions, governmental agencies and other public and private research organizations also may conduct research, seek patientprotection and establish collaborative arrangements for discovery, research, clinical development and marketing of products similarto ours. These companies, professionals, and institutions compete with us in recruiting and retaining qualified scientific andmanagement personnel, as well as in acquiring necessary product technologies.

 

A reduction or interruption in oursupply of raw materials coupled with an inability to develop alternative sources for such raw materials, and other similar supplychain management difficulties, may adversely affect our ability to manufacture our Products.

 

The manufacture ofour Products require the timely delivery of sufficient amounts of quality components and materials and is highly exacting and complex,due in part to strict regulatory requirements, and we cannot guarantee that our efforts to secure quality components and materialsin a timely, cost effective manner will be successful. Other problems in the manufacturing process, including equipment malfunction,failure to follow specific protocols and procedures, defective raw materials and environmental factors, could lead to launch delays,product shortage, unanticipated costs, lost revenues and damage to our reputation. A failure to identify and address manufacturingproblems prior to the release of Products to our customers may also result in quality or safety issues.

  

The Company’s operating resultscould be negatively impacted if it is unable to capitalize on research and development spending.

 

The Company has andintends to continue to spend a significant amount of time and resources on research and development projects in order to developand validate new and innovative products. The Company believes these projects will result in the commercialization of new productsand will create additional future sales. However, factors including regulatory delays, safety concerns or patent disputes coulddelay the introduction or marketing of new products. Additionally, unanticipated issues may arise in connection with current andfuture clinical studies that could delay or terminate a product’s development prior to regulatory approval. The Company mayexperience an unfavorable impact on its financial condition and business operations if we are unable to capitalize on those effortsby attaining the proper FDA approval or to successfully market new products.

 

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We may be unable to attract and retainkey employees.

 

Our sales, technicaland other key personnel play an integral role in the development, marketing and selling of our Products. If we are unable to recruit,hire, develop and retain a talented, competitive work force, we may not be able to meet our strategic business objectives.

 

Risks Related to our Common Stock

 

There is not now, and there may neverbe, an active market for our common stock and we cannot assure you that our common stock will become liquid or that it will belisted on a securities exchange.

 

There currently isno liquid market for our common stock. An investor may find it difficult to obtain accurate quotations as to the market value ofthe common stock and trading of our common stock may be extremely sporadic. For example, several days may pass before any sharesmay be traded. A more active market for our common stock may never develop. In addition, if we failed to meet the criteria setforth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons otherthan established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommendingor selling the common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additionalcapital.

 

Our shares may not become eligible to be traded electronicallywhich could result in brokerage firms being unwilling to trade them.

 

Our shares of commonstock are eligible to be quoted on the OTC Pink Market. However, our shares are not eligible with Depository Trust Company (DTC)to trade electronically. Because we are not DTC eligible, our shares cannot be electronically transferred between brokerageaccounts, the practical effect of which means that our shares will not trade much, if at all, on the OTC Pink Market. In orderfor our shares to trade on the OTC Pink Market, our shares would need to be traded manually between broker dealers and their accounts,which is time consuming, costly and cumbersome. We cannot guaranty that our shares will ever become DTC eligible or how long itwill take to become eligible.

 

The price of our common stock mightfluctuate significantly, and you could lose all or part of your investment.

 

Volatility in the marketprice of our common stock may prevent you from being able to sell your shares of our common stock at or above the price you paidfor your shares. The trading price of our common stock may be volatile and subject to wide price fluctuations in response to variousfactors, including:

 

actual or anticipated fluctuations in our quarterlyfinancial and operating results;

 

our progress toward developing our Products;

 

the commencement, enrollment and results of our futureclinical trials;

 

adverse results from, delays in or termination of ourclinical trials;

 

adverse regulatory decisions, including failure toreceive regulatory approval;

 

publication of research reports about us or our industryor positive or negative recommendations or withdrawal of research coverage by securities analysts, if any;

  

perceptions about the market acceptance of our Productsand the recognition of our brand;

 

adverse publicity about our Products or industry ingeneral;

 

overall performance of the equity markets;

 

introduction of Products, or announcements of significantcontracts, licenses or acquisitions, by us or our competitors;

 

legislative, political or regulatory developments;

 

additions or departures of key personnel;

 

threatened or actual litigation and government investigations;

 

sale of shares of our common stock by us or membersof our management; and

 

general economic conditions.

 

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These and other factorsmight cause the market price of our common stock to fluctuate substantially, which may negatively affect the liquidity of our commonstock. In addition, from time to time, the stock market experiences price and volume fluctuations, some of which may be significant.This volatility has had a significant impact on the market price of securities issued by many companies across many industries.The changes frequently appear to occur without regard to the operating performance of the affected companies. Accordingly, theprice of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuationscould materially reduce our share price.

 

Securities class actionlitigation has often been instituted against companies following periods of volatility in the overall market and in the marketprice of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’sattention and resources, and harm our business, operating results and financial condition.

  

Our common stock is subject to the“penny stock” rules of the SEC, which makes transactions in our stock cumbersome and may reduce the value of an investmentin our stock.

 

The SEC has adoptedregulations which generally define a “penny stock” as an equity security that has a market price of less than $5.00 pershare, subject to specific exemptions. The SEC’s penny stock rules require a broker-dealer, before a transaction in a penny stocknot otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocksand the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotationsfor the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statementsshowing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally requirethat before a transaction in a penny stock occurs, the broker-dealer must make a special written determination that the penny stockis a suitable investment for the purchaser and receive the purchaser’s agreement to the transaction. If applicable in the future,these rules may restrict the ability of brokers-dealers to sell our common stock and may affect the ability of investors to selltheir shares, until our common stock no longer is considered a penny stock.

 

Concentration of ownership of ourcommon stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencingsignificant corporate decisions.

 

Our executive officers,directors and their affiliates, in the aggregate, beneficially own approximately 48% of our outstanding common stock as of January 17, 2020. As a result, these persons, acting together, would be able to significantly influence all matters requiring stockholderapproval, including the election and removal of directors, any merger, consolidation, sale of all or substantially all of our assets,or other significant corporate transactions.

 

Some of these personsor entities may have interests different than yours. For example, they may be more interested in selling our company to an acquirerthan other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.

 

We intend to issue more shares toraise capital, which will result in substantial dilution.

 

Our certificate ofincorporation authorizes the issuance of a maximum of 200,000,000 shares of common stock and 10,000,000 shares of “blankcheck” preferred stock. Any additional financings effected by us may result in the issuance of additional securities withoutstockholder approval and the substantial dilution in the percentage of common stock held by our then existing stockholders. Moreover,the securities issued in any such transaction may be valued on an arbitrary or non-arm’s-length basis by our management, resultingin an additional reduction in the percentage of common stock held by our current stockholders on an as converted, fully-dilutedbasis. Our board of directors has the power to issue any or all of such authorized but unissued shares without stockholder approval.To the extent that additional shares of common stock or other securities convertible into or exchangeable for common stock areissued in connection with a financing, dilution to the interests of our stockholders will occur and the rights of the holder ofcommon stock might be materially and adversely affected.

 

Anti-takeover provisions that maybe in our charter and bylaws may prevent or frustrate attempts by stockholders to change the board of directors or current managementand could make a third-party acquisition of us difficult.

 

Our certificate ofincorporation and bylaws may contain provisions that may discourage, delay or prevent a merger, acquisition or other change incontrol that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premiumfor their shares. These provisions could limit the price that investors might be willing to pay in the future for shares of ourcommon stock.

 

We do not intend to pay cash dividendsin the foreseeable future.

 

We have never declaredor paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for usein the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Accordingly,you may have to sell some or all of your shares of our common stock in order to generate cash flow from your investment. You maynot receive a gain on your investment when you sell shares and you may lose the entire amount of the investment.

 

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We expect to incur increased costsand demands upon management as a result of being a public company.

 

As a public companyin the United States, we expect to incur significant additional legal, accounting and other costs. These additional costs couldnegatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governanceand public disclosure, including regulations implemented by the SEC and the stock exchange on which we may list our common stock,may increase legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standardsare subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance isprovided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards,and this investment may result in increased general and administrative expenses and a diversion of management’s time and attentionfrom revenue-generating activities to compliance activities. If, notwithstanding our efforts to comply with new laws, regulationsand standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

 

Failure to comply withthese rules might also make it more difficult for us to obtain some types of insurance, including director and officer liabilityinsurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain thesame or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified personsto serve on our board of directors, on committees of our board of directors or as members of senior management.

 

Failure to establish and maintainan effective system of internal controls could result in material misstatements of our financial statements or cause us to failto meet our reporting obligations or fail to prevent fraud in which case, our stockholders could lose confidence in our financialreporting, which would harm our business and could negatively impact the price of our stock. Furthermore, our management andour independent auditors have identified certain internal control deficiencies, which management and our independent auditors believeconstitute material weaknesses.

 

Prior to the Acquisition,Memory MD, Inc. was a private company with limited accounting personnel and other resources with which to address our internalcontrols and procedures. Following the Acquisition, we must review and update our internal controls, disclosure controls and procedures,and corporate governance policies as our Company continues to evolve. In addition, in connection with the Acquisition and becominga company that files reports with the SEC, we are required to comply with the internal control evaluation and certification requirementsof Section 404 of SOX and management is required to report annually on our internal control over financial reporting. Our independentregistered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financialreporting pursuant to Section 404 of SOX until the date we are no longer a “smaller reporting company” as defined byapplicable SEC rules.

 

Any ineffective internalcontrol regarding our financial reporting could have an adverse effect on our business and financial results and the price of ourcommon stock could be negatively affected once we become a registrant required to file registration statements with the SEC. Thisreporting requirement could also make it more difficult or more costly for us to obtain certain types of insurance, including directorand officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially highercosts to obtain the same or similar coverage. Any system of internal controls, however well designed and operated, is based inpart on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.Any failure or circumvention of the controls and procedures or failure to comply with regulation concerning control and procedurescould have a material effect on our business, results of operation and financial condition. Any of these events could result inan adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements,which ultimately could negatively affect the market price of our shares, increase the volatility of our stock price and adverselyaffect our ability to raise additional funding. The effect of these events could also make it more difficult for us to attractand retain qualified persons to serve on our board of directors and as executive officers.

 

Our management’sevaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2018 concluded that our controlswere not effective, due to material weaknesses resulting from:

 

Management did not maintain effective internal controlsrelating to the accounting closing and financial reporting process pertaining to certain stock transactions and complicated convertibledebt instruments;

 

The Company has insufficient internal personnel resourcesand technical accounting and reporting expertise within the Company’s financial closing and reporting functions; and

 

Due to our small size, the Company did not maintaineffective internal controls to assure proper segregation of duties as the same employee was responsible for initiating and recordingof transactions, thereby creating a segregation of duties weakness.

 

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Management believesthere is a reasonable possibility that these control deficiencies, if uncorrected, could result in material misstatements in theannual or interim financial statements that would not be prevented or detected in a timely manner. Accordingly, we have determinedthat these control deficiencies constitute material weaknesses. Although the Company is taking steps to remediate the materialweaknesses, there can be no assurance that similar incidents can be prevented in the future if the internal controls are not followedby senior management and our Board of Directors.

 

We will need to evaluateour existing internal controls over financial reporting against the criteria set forth in Internal Control – Integrated Framework(2013) (the “Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission. During thecourse of our ongoing evaluation of the internal controls, we may identify other areas requiring improvement, and may have to designenhanced processes and controls to address issues identified through this review. Remediating any deficiencies, significant deficienciesor material weaknesses that we or our independent registered public accounting firm may identify may require us to incur significantcosts and expend significant time and management resources. We cannot assure you that any of the measures we implement to remedyany such deficiencies will effectively mitigate or remedy such deficiencies. The existence of one or more material weaknesses couldaffect the accuracy and timing of our financial reporting. Investors could lose confidence in our financial reports, and the valueof our common stock may be harmed, if our internal controls over financial reporting are found not to be effective by managementor by an independent registered public accounting firm or if we make disclosure of existing or potential material weaknesses inthose controls.

  

Even if we concludethat our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements.Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operatingresults or cause us to fail to meet our future reporting obligations.

 

Our reporting obligationsas a public company will place a significant strain on our management, operational and financial resources and systems for theforeseeable future. If we fail to timely achieve and maintain the adequacy of our internal control over financial reporting, wemay not be able to produce reliable financial reports or help prevent fraud. Our failure to achieve and maintain effective internalcontrol over financial reporting could prevent us from filing our periodic reports on a timely basis which could result in theloss of investor confidence in the reliability of our financial statements, harm our business and negatively impact the tradingprice of our common stock.

 

If securities or industry analystsdo not publish research or reports, or publish unfavorable research or reports, about us, our business or our market, our stockprice and trading volume could decline.

 

The trading marketfor our common stock will be influenced by the research and reports that securities or industry analysts publish about us and ourbusiness. Securities or industry analysts may elect not to provide coverage of our common stock, and such lack of coverage mayadversely affect the market price of our common stock. In the event we do not secure additional securities or industry analystcoverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of ourstock could decline if one or more securities or industry analysts downgrade our stock or issue other unfavorable commentary orresearch. If one or more securities or industry analysts ceases coverage of our company or fails to publish reports on us regularly,demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

 

We may be subject to unknown risks andliabilities which could harm our business, financial condition and results of operations.

 

Before the Acquisition,MemoryMD conducted due diligence on, among other things, the business and financial conditions of All Soft Gels that it believedwas customary and appropriate for a transaction such as the Acquisition. However, the due diligence process may not have revealedall material liabilities of the Company then existing or which may be asserted in the future against us relating to the Company’sactivities before the consummation of the Acquisition. In addition, the agreement with the Company contains representations withrespect to the absence of any liabilities. However, there can be no assurance that the Company had no liabilities upon the closingof the Acquisition. Any such liabilities of the Company that survive the Acquisition Transaction could harm our revenues, business,prospects, financial condition and results of operations.

 

In addition, in connectionwith the Acquisition, the known liabilities existing in All Soft Gels at the time of the Acquisition were cancelled or paid byus, as required by the Merger Agreement. Despite this requirement and the representations and warranties of All Soft Gels in theMerger Agreement, there may be unknown liabilities, or liabilities that were known but believed to be immaterial, related to thebusiness of All Soft Gels that may become material liabilities we are subject to in the future. If we are subject to material liabilityas a result of the conduct of All Soft Gels, we may have limited recourse for such liabilities, which could have a material impacton our business and stock price.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus containsforward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principallyin the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identifyforward-looking statements by the words “may,” “might,” “will,” “could,” “would,”“should,” “expect,” “intend,” “plan,” “objective,” “anticipate,”“believe,” “estimate,” “predict,” “project,” “potential,” “target,”“seek,” “contemplate,” “continue” and “ongoing,” or the negative of these terms,or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks,uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materiallydifferent from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonablebasis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combinationof facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-lookingstatements include statements about:

 

our plans to develop and commercialize our proposedand developing products, technologies, and services (“Products”).

 

our plans for and our expectations regarding the pre-clinicaltesting and clinical trials of our Products that will be required by the U.S. Food and Drug Administration (“FDA”)or foreign regulatory bodies;

 

the timing and availability of data from pre-clinicaltests or clinical trials;

 

the timing of our planned regulatory filings;

 

the timing of and our ability to obtain and maintainregulatory approval of our Products;

 

our expectations regarding international opportunitiesfor commercializing our Products under development;

 

the clinical utility of our Products under development;

 

our ability to develop our Products with the benefitswe hope to offer as compared to existing technology, or at all;

 

our ability to develop future generations of our Products;

 

our future development priorities;

 

our ability to obtain reimbursement coverage for ourProducts;

 

our expectations about the willingness of healthcareproviders to recommend our Products to their patients;

 

our future commercialization, marketing and manufacturingcapabilities and strategy;

 

our ability to comply with applicable regulatory requirements;and

 

our ability to maintain our intellectual propertyposition;

 

Forward-looking statementsare based on management’s current expectations, estimates, forecasts and projections about our business and the industry in whichwe operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve knownand unknown risks, uncertainties and other factors that are in some cases beyond our control. You should refer to the “RiskFactors” section of this prospectus for a discussion of important factors that may cause our actual results to differ materiallyfrom those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that theforward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove tobe inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, youshould not regard these statements as a representation or warranty by us or any other person that we will achieve our objectivesand plans in any specified time frame, or at all.

 

These forward-lookingstatements speak only as of the date of this prospectus. Except as required by law, we assume no obligation to update or revisethese forward-looking statements for any reason, even if new information becomes available in the future. You should, however,review the factors and risks and other information we describe in the reports we will file from time to time with the SEC afterthe date of this prospectus.

 

USE OF PROCEEDS

 

We will receive no proceeds from the saleof shares of common stock offered by the selling stockholders.

 

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SELLING SECURITY HOLDERS

 

This prospectus relatesto the offering by the selling stockholders of up to 6,323,117 shares of common stock offered by the selling stockholders.

 

The following tablesets forth, based on information provided to us by the selling stockholders or known to us, the name of each selling stockholder,and the number of shares of our common stock beneficially owned by the stockholder before this offering. The number of sharesowned are those beneficially owned, as determined under the rules of the SEC, and the information is not necessarily indicativeof beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares of common stockas to which a person has sole or shared voting power or investment power and any shares of common stock which the person has theright to acquire within 60 days through the exercise of any option, warrant or right, through conversion of any security or pursuantto the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement. Noneof the selling stockholders is a broker-dealer or an affiliate of a broker-dealer. None of the selling stockholders has had a materialrelationship, within the past three years, with us or with any of our predecessors or affiliates.

 

We have assumed allshares of common stock reflected on the table will be sold from time to time in the offering covered by this prospectus. Becausethe selling stockholders may offer all or any portions of the shares of common stock listed in the table below, no estimate canbe given as to the amount of those shares of common stock covered by this prospectus that will be held by the selling stockholdersupon the termination of the offering.

 

Selling Stockholder  Number of Shares
Beneficially Owned
Before Offering
   Number of Shares
Being Offered
   Number of Shares
Beneficially Owned
After Offering
   Percentage of Shares
Beneficially Owned
After Offering
 
Ken Branner   8,437    8,437           0          0 
Success Ultra Holding(1)   506,175    506,175    0    0 
Andrew Brown   1,709,063    1,709,063    0    0 
Alexandre Gofman   25,238    25,238    0    0 
Thomas J. Caleca   1,552,878    1,552,878    0    0 
Oleg Evdokimenko   136,655    136,655    0    0 
Peritimos Investment(2)   506,175    506,175    0    0 
Richard Prati   63,500    63,500    0    0 
David M. Siwicki   68,303    68,303    0    0 
Stu Bernstein   10,135    10,135    0    0 
Faina Stolina   337,450    337,450    0    0 
Barry Presman   547,878    547,878    0    0 
Andrew Malakhov   50,618    50,618    0    0 
Khurram Sindhu   252,388    252,388    0    0 
Yuri Lubomirski   25,200    25,200    0    0 
William Corbett   5,000    5,000    0    0 
Richard Clausing   5,000    5,000    0    0 
Nicholas Febres   33,745    33,745    0    0 
Denis Serikov   16,873    16,873    0    0 
Maks Vasilevski   337,450    337,450    0    0 
David Poiman   33,745    33,745    0    0 
Irina Kondakova   3,375    3,375    0    0 
John Gaitanis   26,668    26,668    0    0 
John Hixson   26,668    26,668    0    0 
James F. Carter   10,000    10,000    0    0 
Greg Juffer   7,500    7,500    0    0 
Bradley Fischer   4,000    4,000    0    0 
Stuart Bernstein   13,000    13,000    0    0 

 

(1)Alexsander Surikovs has voting and investment power overthe securities of the Company held by the selling stockholder.
(2)Mikhael Spektr has voting and investment power over thesecurities of the Company held by the selling stockholder.

 

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PLAN OF DISTRIBUTION

 

This prospectus includes 6,323,117 sharesof common stock offered by the selling stockholders.

 

Our common stock iseligible for quotation on the OTC Pink. There has been no reported trading to date in our common stock. The price reflected inthis prospectus of $3.00 per share is the initial offering price of the shares of common stock upon the effectiveness of the registrationstatement of which this prospectus forms a part. The selling stockholders may, from time to time, sell any or all of their sharesof common stock covered by this prospectus in private transactions at a price of $3.00 per share or on any stock exchange, marketor trading facility on which the shares may then be traded. If our shares are quoted on the OTCQB, the selling stockholders maysell any or all of their shares at prevailing market prices or privately negotiated prices. A selling stockholder may use any oneor more of the following methods when selling shares:

 

ordinary brokerage transactions and transactions inwhich the broker-dealer solicits purchasers;

 

block trades in which the broker-dealer will attemptto sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

purchases by a broker-dealer as principal and resaleby the broker-dealer for its account;

 

an exchange distribution in accordance with the rulesof the applicable exchange;

 

privately negotiated transactions;

 

settlement of short sales entered into after the effectivedate of the registration statement of which this prospectus is a part;

 

broker-dealers may agree with the selling stockholdersto sell a specified number of such shares at a stipulated price per share;

 

Through the writing or settlement of options or otherhedging transactions, whether through an options exchange or otherwise;

 

a combination of any such methods of sale; or

 

any other method permitted pursuant to applicable law.

 

The $3.00 per shareoffering price of the shares of common stock being sold under this prospectus has been arbitrarily set. The price does not bearany relationship to our assets, book value, earnings or net worth and it is not an indication of actual value. Additionally, theoffering price of our shares exceeds the per share value of our net tangible assets. Therefore, if you purchase shares in thisoffering, you will experience immediate and substantial dilution. Investors should be aware of the risk of judging the real orpotential future market value, if any, of our common stock by comparison to the offering price.

 

The selling stockholders may also sell sharesunder Rule 144 under the Securities Act, if available, rather than under this prospectus.

 

In addition, the selling stockholders maytransfer the shares of common stock by other means not described in this prospectus. If the selling stockholders effect such transactionsby selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agentsmay receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions frompurchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts,concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the typesof transactions involved). In connection with sales of the shares of common stock or otherwise, the selling stockholders may enterinto hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the courseof hedging in positions they assume. The selling stockholders may also sell shares of common stock short and deliver shares ofcommon stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such shortsales. The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

 

The selling stockholders may pledge or granta security interest in some or all of the shares of common stock owned by them and, if they default in the performance of theirsecured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant tothis prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending,if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholdersunder this prospectus. The selling stockholders also may transfer and donate the shares of common stock in other circumstancesin which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposesof this prospectus.

 

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To the extent required by the SecuritiesAct and the rules and regulations thereunder, the selling stockholders and any broker-dealer participating in the distributionof the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and anycommission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissionsor discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a prospectus supplement,if required, will be distributed, which will set forth the aggregate amount of shares of common stock being offered and the termsof the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constitutingcompensation from the selling stockholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.

 

There can be no assurance that any sellingstockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which thisprospectus forms a part.

 

The selling stockholders and any other personparticipating in such distribution will be subject to applicable provisions of the Exchange Act, and the rules and regulationsthereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which may limit the timingof purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person. Tothe extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the shares of commonstock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketabilityof the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to theshares of common stock.

 

We will pay all expenses of the registrationof the shares of common stock.

 

Once sold under the registration statement,of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than ouraffiliates.

 

DESCRIPTION OF SECURITIES TO BE REGISTERED

 

This prospectus relatesto the public offering of up to 6,323,117 shares of common stock by the selling stockholders. The following is a summary of therights of holders of our common stock and some of the provisions of our articles of incorporation and bylaws and of the NRS. Thissummary is not complete. For more detailed information, please see our articles of incorporation and bylaws, which are filed asexhibits to the registration statement of which this prospectus is a part, as well as the relevant provisions of the NRS.

 

General

 

Our authorized capitalstock consists of 200,000,000 shares of common stock, with a par value of $0.001 per share, and 10,000,000 shares of preferredstock, with a par value of $0.001 per share.

 

Common Stock

 

Each holder of commonstock is entitled to one vote for each share of common stock held of record by such holder with respect to all matters to be votedon or consented to by our stockholders, except as may otherwise be required by applicable Nevada law. A vote by the holders ofa majority of the Company’s outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation,merger or an amendment to the Company’s certificate of incorporation. Holders of the Company’s common stock are entitledto share in all dividends that the board of directors, in its discretion, declares from legally available funds. In the event ofa liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets thatremain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.The Company’s common stock has no pre-emptive rights, no conversion rights and there are no redemption provisions applicableto the Company’s common stock.

 

Blank-Check Preferred Stock

 

The Company’s articles of incorporationauthorize the issuance of up to 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share, inone or more series, subject to any limitations prescribed by law, without further vote or action by the stockholders. Eachsuch series of preferred stock shall have such number of shares, designations, preferences, voting powers, qualifications, andspecial or relative rights or privileges as shall be determined by our board of directors, which may include, among others, dividendrights, voting rights, liquidation preferences, conversion rights and preemptive rights.  

 

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DESCRIPTION OF BUSINESS

 

The Company

 

We were initially organizedon November 18, 2013 as a Nevada limited liability company under the name Global Energy Express LLC by the filing of articles oforganization with the Secretary of State of the State of Nevada. On December 18, 2015, the Company converted from a Nevada limitedliability company under the name Global Energy Express LLC to a Nevada corporation under the name All Soft Gels Inc. by the filingof articles of conversion and articles of incorporation with the Secretary of State of the State of Nevada in accordance with NevadaRevised Statutes (“NRS”) 92A.205 and NRS Chapter 78. Prior to the Acquisition, on September 18, 2018, the Company changedits name from All Soft Gels Inc. to Brain Scientific Inc. and changed its ticker symbol on the OTC Pink market to “BRSF”.

 

Prior to the Acquisition,the Company was engaged in marketing the sale of a soft gel liquid capsule named All Soft Gels Kre-Alkalyn Liquid Gels. As of immediatelyprior to the closing of the Acquisition, we entered into an Assignment and Assumption Agreement with Chromium 24 LLC, pursuantto which Chromium 24 LLC assumed all of our remaining assets and liabilities through the closing of the Acquisition. Accordingly,as of the closing of the Acquisition, we had no assets or liabilities. Following the Acquisition, the Company is now a neurodiagnosticand predictive technology platform company seeking to provide a centralized platform for data acquisition and analysis of electroencephalography(“EEG”) data that combines cutting-edge medical device technologies with cloud-based telehealth services. The Companyis primarily focused on establishing diagnostic protocols to identify pathological risk factors involving the brain, and drivingnovel insights into cognitive health that support early treatment of neurological disorders.

 

Our principal executiveoffice is located at 205 East 42nd Street, 14th Floor, New York, New York 10017, and our telephonenumber is (646) 388-3788. Our website address is www.brainscientific.com. The information on our website is not part of this prospectus.

 

Product and Services Pipeline

 

The Company’sprimary Products, which are in various stages of development, are as follows:

 

NeuroEEG

 

The NeuroEEG isa 16 channel, portable, data acquisition platform for EEG activity which acquires, displays, and securely stores the electricalactivity of a patient’s brain on a computer in a non-invasive manner. This wireless system digitizes and records electrophysiologicalactivity at 500Hz. The generated data then serves as a clinical assessment aid for the diagnosis of neurological disease. Key featuresof the NeuroEEG include its small size and weight, its portability, its wireless Bluetooth connectivity, and its real-time dataprocessing and transmission.

 

The software utilizedby the NeuroEEG is designed to provide analytics capabilities for health practitioners to better manage EEG data acquisition andanalysis. It allows the EEG signal to be recorded and displayed on a computer screen in accordance with the selected protocol scheme.The system also allows the user to annotate events, such as exhibited patient behavior, or unique occurrences, such as muscle contractions,involuntary patient movement, falls, and other events, while the EEG test is running. In addition, in-depth EEG assessment functionsare expected to be available, including spectrum and correlation analysis, topographic mapping, pathological activity search bysegments and video monitoring.

 

The Company commenceddelivery of its first purchase order of this product in the fourth quarter of 2018.

 

NeuroCap

 

The NeuroCap, to beused in conjunction with the NeuroEEG, is a 19 channel, 22 electrode disposable cap with fixed electrodes along the headpiece toensure consistent placement. Key benefits of the NeuroCap include the elimination of the need for an EEG technician, rapid set-up(under five minutes) compared to existing products on the market, as well as superior infection control.

 

We received our firstpurchaser order for the NeuroCap from a distributor of medical supplies for testing purposes and commenced shipping product inthe fourth quarter of 2018 to several hospitals and other customers.

 

TeleNeurology Infrastructure

 

The Company is developinga HIPAA-compliant data storage and patient management cloud infrastructure to provide teleneurology services. The infrastructureis being designed so neurologists will be able to remotely access patient EEG and clinical data to evaluate patient conditions.We believe that such an infrastructure removes the need for direct contact with the patient, opening up underserved geographiclocations with an undersupply of physicians to meet growing demand for neurological care as aging patient populations continuesto grow.

 

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Board-Certified Neurologist Network

 

The Company is in theprocess of establishing a pool of state-licensed, board-certified neurologists who would be available at all times, to make anindependent diagnosis, based on the data generated by the NeuroEEG and NeuroCap. This network is being designed to provide nationalcoverage to the United States covering all 50 states.

 

Intellectual Property

 

Protection of our intellectualproperty is a strategic priority for our business. We rely on a combination of patents, trademarks, copyrights, trade secrets aswell as nondisclosure and assignment of invention agreements, material transfer agreements, confidentiality agreements and othermeasures to protect our intellectual property and other proprietary rights.

 

Patents and trademarksare significant to our business to the extent that a Product or an attribute of a Product represents a unique design or process.Patent protection of our Products restricts competitors from duplicating these unique designs and features. To protect our proprietarysecrets and competitive technologies, we have obtained and are seeking to further obtain patent, trade secret, trademark and otherintellectual property protection on our Products whenever appropriate. As of the date of this filing, the Company has applied forone U.S. nonprovisional patent titled “Apparatus And Method For Conducting Electroencephalography” (Application No.:15/898,611), one Chinese patent titled “Apparatus and Method for Conducting Electroencephalography” (Application No.:201880002338.7), one European patent titled “Apparatus And Method For Conducting Electroencephalography” (ApplicationNo.: 18757492.6).

 

We also own two registeredtrademarks (Neuro EEG and NeuroCap) and have pending applications for two additional trademark registrations (Brain Scientificand Memory MD). (

 

We have granted toMedical Computer Systems Ltd., an unaffiliated entity who also provides manufacturing services to us, a limited, royalty-free,fully paid-up, worldwide, nonexclusive license (without the right to sublicense or assign), to the patent, to practice, make anduse the inventions, ideas and information embodied therein, and to make, use, offer to sell, sell, lease or import products, services,processes, methods and materials embodying or deriving from the inventions, ideas and information from the patent and any activitiesderived directly therefrom; provided, however, that if and upon FDA approval of a Product, Medical Computer Systems’ aforementionedrights shall be limited to manufacturing and sales solely to our Company or on our behalf provided that we purchase from MedicalComputer Systems (and Medical Computer Systems makes available for sale) a minimum of 20,000 units of Products per calendar yearon reasonable terms and conditions to be determined by the parties in good faith; provided further, however, that Medical ComputerSystems can without any limitation sell products embodying or deriving from the inventions, ideas and information from the patentin (i) the territories that made up the former USSR (excluding the Baltic countries) and (ii) Japan. In furtherance of the foregoingfirst proviso, in the event we fail to purchase the annual minimum order for a particular calendar year, Medical Computer Systems’limitation to manufacture and sell Products only to our Company pursuant to this proviso shall be suspended for the next calendaryear.

 

Industry Overview

 

MedTech Industry

 

The Company competes within the domestic and global medicaldevice industry, referred to as the “MedTech” industry, which industry, on a global scale, is expected to grow fromits worldwide sales of $386.8 billion in 2016 to $521.9 billion in 2022. The MedTech industry is characterized by rapid changeresulting from technological advances and scientific discoveries. U.S. medical device companies are highly regarded on a globalscale for their innovations and high-technology products, which innovations and products are produced due to a significant investmentin research and development. US sales are expected to grow from about $164 billion in 2018 to $208 billion in 2023, according toFitch.

 

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The Company’s Specific SubSection in the MedTechIndustry

 

The Company seeks tooperate within subsectors of the MedTech industry recognized as the diagnostic imagining subsector and the neurology subsector,which subsectors rank 3rd and 14th, respectively, of the top 15 MedTech subsectors measured by globalsales. By 2022, the subsectors of the MedTech industry which the Company expects to operate in, along with its anticipated directcompetitors, the diagnostic imaging and the neurology subsectors, are expected to make up 11.4% of the entire MedTech industrywhich, by 2022, is expected to reach $521.9 billion in sales.

 

The Global Telemedicine Market/Industry

 

In addition to theMedTech industry, we are also seeking to participate within the rapidly expanding global telemedicine industry/market. This industryfocuses on the delivery of healthcare services, consultations and advice to patients wherever they are through the means of technology,software mediated video and data portals. We believe that there is and will continue to be significant demand for such servicesgiven the need to match physicians with patients in remote areas or without having patients travel long distances to access thecare they need. We also believe that there is a major need within this industry to also provide point of care diagnostic, whichwe are seeking to develop as a niche, especially within neurology.

 

The globaltelemedicine market is anticipated to grow at a compound annual growth rate ofof 14.8% from 2017-2024, according to areport by Research Nester, which also estimates that market of telemedicine was valued at $20.54bBillion in 2016 and is projectedto garner $61.99 billion by the end of 2024. Factor such as, rising emergency medical incidents and ageing world population areanticipated to drive such growth. North America is anticipated to account for a significant portion of market share, and the .U.S. is expected to be the largest telemedicine market in North America over this period. The Europe telemedicine market is alsoexpected to grow substantially, due to factors such as rising cost of healthcare and rising prevalence of chronic diseases, whileAsia-Pacific is projected to record the fastest growth over such period.

 

Competition

 

Our Products face amixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers offering a limitedselection of products and services. Many of the competitors whom we directly compete with include companies who develop or intendto develop medical EEG products with FDA clearance to support clinical diagnosis of brain disorders. Our indirect competitors offersimilar products and services, but target audiences in the clinical research and consumer solutions markets, as opposed to themedical solution market the Company targets. These indirect competitors are largely focused on the development of EEG productsfor research, consumer, and athletic application.

 

Major shifts in industrymarket share have occurred in connection with product problems, physician advisories, safety alerts, and publications about MedTechproducts, reflecting the importance of product quality, product efficacy, and quality systems in the medical device industry. Inaddition, in the current environment of managed care, economically motivated customers, consolidation among health care providers,increased competition, and declining reimbursement rates, the Company anticipates an increasing need to compete on the basis ofprice and quality. In order to continue to compete effectively, we must continue to create or acquire advanced technology, incorporatethis technology into our current and future proprietary Products, obtain regulatory approvals in a timely manner, maintain high-qualitymanufacturing processes, and successfully market these Products. Some of these initiatives include, but are not limited to, creatingintegrated cloud solutions that connect specialists with generalists for simple data transfer and analysis, streamlining clinicaldiagnoses with new medical devices, and opening up revenue streams from secondary healthcare markets, such as primary care medicalprofessionals who utilize EEG analyses in their practices.

 

The major U.S. medicaldevice companies who we deem as competitors include Baxter, Beckman Coulter, Becton Dickinson, Boston Scientific, GE HealthcareTechnologies, Johnson & Johnson, St. Jude, Stryker Corporation, and Medtronic. Many of the companies against which we may competein the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinicaltesting, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitionsin the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated among a smallernumber of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly throughcollaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retainingqualified scientific and management personnel and establishing clinical trial sites and subject registration for clinical trials,as well as in acquiring technologies complementary to, or necessary for, our development.

 

Sales and Marketing

 

Our marketing and salesstrategy is focused on rapid, cost-effective delivery of high-quality products into the U.S. and international healthcare market.The sales strategy is based on penetrating the neurology and diagnostic imaging subsectors of the MedTech industry market and expandinginto nursing homes and primary care practices. Included amongst the customers whom we intend to market and sell our Products toare individual physicians, medical practices, urgent care facilities, physician associations, and other medical professionals andmedical professional groups, hospitals, health clinics, nursing homes, physical rehabilitation centers, addiction rehabilitationcenters and other medical institutions, athletic organizations, and colleges, universities, and other academic institutions.

 

We intend for our Products’initial entry into the market would be at emergency departments, ICU’s and other acute care settings in the United States.

 

We have enteredinto several non-exclusive distributor agreements with distributors who can independently implement the sale, marketing, shipping,support, demonstration and training of our Products to their clients and end-users in the applicable market.

 

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We will also be lookingat forming partnerships with national and global telemedicine and teleneurology companies in order to leverage their relationships,to access our target end-users. This would allow our initial entry into the rapidly growing global telemedicine and teleneurologymarkets.

 

As we grow, we intendto expand to global distributors, Group Purchasing Organizations (GPOs) of medical supplies, and Independent Physician Associations(IPAs) to scale business operations.

 

We do not at this timehave plans to have direct sales or hire a direct sales force.

 

Reimbursement

 

Coverage in the United States

 

Reimbursement fromprivate third-party healthcare payors and, to a lesser extent, Medicare will be an important element of our success. Although theCenters for Medicare and Medicaid, or CMS, and third-party payors have adopted coverage policies for our targeted indications,there is no guarantee this will continue at the same levels or at all in the future.

 

Regarding ICD-10 codes,the International Classification of Diseases, Tenth Edition (ICD-10) is a clinical cataloging system that went into effect forthe U.S. healthcare industry on Oct. 1, 2015, after a series of lengthy delays. Accounting for modern advances in clinical treatmentand medical devices, ICD-10 codes offer many more classification options compared to those found in its predecessor, ICD-9. Withinthe healthcare industry, providers, coders, IT professionals, insurance carriers, government agencies and others use ICD codesto properly note diseases on health records, to track epidemiological trends and to assist in medical reimbursement decisions.

 

We believe that manyof the indications we are pursuing with our technologies are currently reimbursed on a widespread basis by Medicare, Medicaid andprivate insurance companies.

 

Medicare, Medicaid,health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limitingboth coverage and the level of reimbursement of new medical devices, and, as a result, their coverage policies may be restrictive,or they may not cover or provide adequate payment for our Products. In order to obtain reimbursement arrangements, we may haveto agree to a net sales price lower than the net sales price we might charge in other sales channels. Our revenue may be limitedby the continuing efforts of government and third-party payors to contain or reduce the costs of healthcare through various increasinglysophisticated means, such as requiring prospective reimbursement and second opinions, purchasing in groups, or redesigning benefits.Our future dependence on the commercial success of our technologies makes us particularly susceptible to any cost containment orreduction efforts. Accordingly, unless government and other third-party payors provide adequate coverage and reimbursement forour Products and the related insertion and removal procedures, our financial performance may be limited.

 

Coverage Outside the United States

 

If we seek to commercializeour Products in countries outside the United States, coverage may be available from certain governmental authorities, private healthinsurance plans, and labor unions. Coverage systems in international markets vary significantly by country and, within some countries,by region. If we seek to commercialize our technology, if approved, outside the U.S., coverage approvals must be obtained on acountry-by-country, region-by-region or, in some instances, a case-by case basis. Based on our ongoing evaluation, certain countriesreimburse more highly than others.

 

Manufacturing, Supply and Quality Assurance

 

We currently outsourcethe supply and manufacture of all components of our NeuroEEG and NeuroCap. We plan to continue with an outsourced manufacturingarrangement for the foreseeable future. We expect that our third-party manufacturers will be competent to manufacture our Productsand have quality systems established that meet FDA requirements. We believe the manufacturers we currently utilize or that we mayutilize in the future have sufficient capacity to meet our launch requirements if our technology under development is approvedin the future and are able to scale up their capacity relatively quickly with minimal capital investment. We believe that, as weincrease our demand in the future, our per unit costs will decrease materially. We have also identified capable second source manufacturersand suppliers in the event of disruption from any of our primary vendors.

 

Our suppliers meetISO 13485:2003 certification, which includes design control requirements. As a medical device developer, the facilities of oursterilization and other critical suppliers are subject to periodic inspection by the FDA and corresponding state and foreign agencies.We plan to audit our suppliers periodically to ensure conformity with the specifications, policies and procedures for our devices.

 

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Research and Development

 

Our research and developmentprograms are generally pursued by engineers and scientists employed by us on a full-time basis or hired as per diem consultantsor through partnerships with industry leaders in manufacturing and design and researchers and academia. We are also working withsubcontractors in developing specific components of our technologies.

 

The primary objectiveof our research and development program is to advance the development of our existing and proposed Products, to enhance the commercialvalue of such Products.

 

We incurred researchand development costs of $210,206 for the year ended December 31, 2018 and $289,586 for the year ended December 31, 2017.

 

We also have formeda Medical Advisory Board. The current members are Dr. John Gaitanis,MD, Tufts Medical Center; and Dr. John Hixson, MD, Associate Professor of Neurology, University of California San Francisco. Wegrant to such members from time to time equity for the services they provide to us.

 

Government Regulation

 

Our NeuroEEG and NeuroCapare each a medical device subject to extensive and ongoing regulation by the FDA, the U.S. Centers for Medicare & MedicaidServices, or CMS, the European Commission, and regulatory bodies in other countries. Regulations cover virtually every criticalaspect of a medical device company’s business operations, including research activities, product development, quality and riskmanagement, contracting, reimbursement, medical communications, and sales and marketing. In the United States, the Federal Food,Drug and Cosmetic Act, or FDCA, and the implementing regulations of the FDA govern product design and development, pre-clinicaland clinical testing, premarket clearance or approval, product manufacturing, quality systems, import and export, product labeling,product storage, recalls and field safety corrective actions, advertising and promotion, product sales and distribution, and post-marketclinical surveillance. Our business is subject to federal, state, local, and foreign regulations, such as ISO 13485, ISO 14971,FDA’s Quality System Regulation, or QSR, contained in 21 CFR Part 820, and the European Commission’s Directive 93/42/EEC concerningmedical devices and its amendments.

 

U.S. Regulation

 

The FDA characterizesmedical devices into one of three classes. Devices that are considered by the FDA to pose lower risk are classified as Class Ior II. Class I devices and are subject to controls for labeling, pre-market notification and adherence to the FDA’s QSR. This pertainsto manufacturers’ methods and documentation of the design, testing, production, control quality assurance, labeling, packaging,sterilization, storage and shipping of products, but are usually exempt from premarket notification requirements. Class II devicesare subject to the same general controls but may be subject to special controls such as performance standards, post-market surveillance,FDA guidelines, or particularized labeling, and may also require clinical testing prior to clearance or approval. Class III devicesare those for which insufficient information exists to assure safety and effectiveness solely through general or special controls,including devices that support or sustain human life, are of substantial importance in preventing impairment of human health, orwhich present a potential, unreasonable risk of illness or injury.

 

Some Class I and ClassII devices are exempted by regulation from the pre-market notification requirement under Section 510(k) of the FDCA, also referredto as a 510(k) clearance, and the requirement of compliance with substantially all of the QSR. However, a pre-market approval,or PMA application, is required for devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supportingor certain implantable devices, or those that are “not substantially equivalent” either to a device previously clearedthrough the 510(k) process or to a “preamendment” Class III device in commercial distribution before May 28, 1976 whenPMA applications were not required. The PMA approval process is more comprehensive than the 510(k) clearance process and typicallytakes several years to complete. Based on FDA definitions, we believe our NeuroEEG and NeuroCap each will be categorized by theFDA as a Class II device that does not require clinical testing and can be filed as a 510(k), similar to existing competitive technology.While the 510(k) process is typically shorter than a PMA process, both the 510(k) clearance and PMA processes can be expensiveand lengthy.

 

FDA review of a PMAapplication generally takes between one and three years, but may take significantly longer. The FDA can delay, limit or deny approvalof a PMA application for many reasons, including:

 

the device may not be safe, effective, reliable oraccurate to the FDA’s satisfaction;

 

the data from pre-clinical studies and clinical trialsmay be insufficient to support approval;

 

the manufacturing process or facilities may not meetapplicable requirements; and

 

changes in FDA approval policies or adoption of newregulations may require additional data.

 

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If an FDA evaluationof a PMA application is favorable, the FDA will either issue an approval letter, or approvable letter, which usually contains anumber of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilledto the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of a device, subjectto the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA applicationor manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA alsomay determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for severalmonths or years while the trials are conducted and data is submitted in an amendment to the PMA. The PMA process can be expensive,uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approvedby the FDA for marketing.

 

New PMA applicationsor PMA supplements may be required for modifications to the manufacturing process, labeling, device specifications, materials ordesign of a device that has been approved through the PMA process. PMA supplements often require submission of the same type ofinformation as an initial PMA application, except that the supplement is limited to information needed to support any changes fromthe device covered by the approved PMA application and may or may not require as extensive technical or clinical data or the conveningof an advisory panel.

 

Clinical trials aretypically required to support a PMA application and are sometimes required for a 510(k) clearance. These trials generally requiresubmission of an application for an IDE, to the FDA. The IDE application must be supported by appropriate data, such as animaland laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientificallysound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemeda non-significant risk device and eligible for abbreviated IDE requirements. Generally, clinical trials for a significant riskdevice may begin once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriateinstitutional review boards at the clinical trial sites. The FDA’s approval of an IDE allows clinical testing to go forward, butit does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if thetrial meets its intended success criteria. All clinical trials must be conducted in accordance with the FDA’s IDE regulations thatgovern investigational device labeling, prohibit promotion, and specify an array of recordkeeping, reporting and monitoring responsibilitiesof study sponsors and study investigators. Clinical trials must further comply with the FDA’s regulations for institutional reviewboard approval and for informed consent and other human subject protections. Required records and reports are subject to inspectionby the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and efficacy success criteria areachieved, may not be considered sufficient for the FDA to grant approval or clearance of a product. Clinical trials must be enteredinto the clinical trials registry at clintrials.gov.

 

The commencement orcompletion of any clinical trial may be delayed or halted, or be inadequate to support approval of a PMA application, for numerousreasons, including, but not limited to, the following:

 

the FDA or other regulatory authorities do not approvea clinical trial protocol or a clinical trial, or place a clinical trial on hold;

 

patients do not enroll in clinical trials at the rateexpected;

 

patients, sponsor or study sites do not comply withtrial protocols;

 

patient follow-up is not at the rate expected;

 

patients experience adverse side effects;

 

patients die during a clinical trial, even though theirdeath may not be related to the products that are part of our trial;

 

institutional review boards and third-party clinicalinvestigators may delay or reject the trial protocol;

 

third-party clinical investigators decline to participatein a trial or do not perform a trial on the anticipated schedule or consistent with the clinical trial protocol, good clinicalpractices or other FDA requirements;

 

the sponsor or third-party organizations do not performdata collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol or investigationalor statistical plans;

 

third-party clinical investigators have significantfinancial interests related to the sponsor or the study that the FDA deems to make the study results unreliable, or the companyor investigators fail to disclose such interests;

 

regulatory inspections of our clinical trials or manufacturingfacilities, which may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials;

 

changes in governmental regulations or administrativeactions;

 

the interim or final results of the clinical trialare inconclusive or unfavorable as to safety or efficacy; and

 

the FDA concludes that our trial design is inadequateto demonstrate safety and efficacy.

 

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International Regulation

 

International salesof medical devices are subject to local government regulations, which may vary substantially from country to country. The timerequired to obtain approval in another country may be longer or shorter than that required for FDA approval, and the requirementsmay differ. There is a trend towards harmonization of quality system standards among the European Union, United States, Canadaand various other industrialized countries.

 

The primary regulatorybody in Europe is that of the European Union, the European Commission, which includes most of the major countries in Europe. Othercountries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respectto medical devices. The European Union has adopted numerous directives and standards regulating the design, manufacture, clinicaltrials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of these relevant directiveswill be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicabledirectives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies dependingon the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third party assessmentby a “Notified Body.” This third-party assessment may consist of an audit of the manufacturer’s quality system and specifictesting of the manufacturer’s product. An assessment by a Notified Body of one country within the European Union is required inorder for a manufacturer to commercially distribute the product throughout the European Union. Additional local requirements mayapply on a country-by-country basis. Outside of the European Union, regulatory approval would need to be sought on a country-by-countrybasis in order for us to market our Products.

 

Medical devices inEurope are classified into four primary categories. They are as follows:

 

Non-invasive devices

 

Invasive medical devices

 

Active medical devices

 

Special Rules (including contraceptive, disinfectant,and radiological diagnostic medical devices)

 

Devices are furthersegmented into the classes noted below. In Vitro Diagnostic devices (IVDs) have their own classification scheme and while activeimplantable devices do not follow the same classification system as provided by the Medical Device Directive (MDD), they are subjectto similar requirements as Class III devices:

 

Class I – Provided non-sterile or do not havea measuring function (low risk)

 

Class I – Provided sterile and/or have a measuringfunction (low/medium risk)

 

Class IIa (medium risk)

 

Class IIb (medium/high risk)

 

Class III (high risk)

 

We have established a wholly-owned subsidiary in Russia and are seeking to establish a wholly-owned subsidiary in Europe (Poland)for product distribution and certification.

 

Other Regulatory Requirements

 

Even after a devicereceives clearance or approval and is placed in commercial distribution, numerous regulatory requirements apply. These include:

 

establishment registration and device listing;

 

QSR, which requires manufacturers, including thirdparty manufacturers, to follow stringent design, testing, risk management, production, control, supplier/contractor selection,complaint handling, documentation and other quality assurance procedures during all aspects of the manufacturing process;

  

labeling regulations that prohibit the promotion ofproducts for uncleared, unapproved or “off-label” uses, and impose other restrictions on labeling, advertising andpromotion;

 

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MDR regulations, which require that manufacturers reportto the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likelycause or contribute to a death or serious injury if the malfunction were to recur;

 

voluntary and mandatory device recalls to address problemswhen a device is defective and could be a risk to health; and

 

corrections and removals reporting regulations, whichrequire that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a riskto health posed by the device or to remedy a violation of the FDCA that may present a risk to health.

 

Also, the FDA may requireus to conduct post-market surveillance studies or establish and maintain a system for tracking our Products through the chain ofdistribution to the patient level. The FDA enforces regulatory requirements by conducting periodic, unannounced inspections andmarket surveillance. Inspections may include the manufacturing facilities of our subcontractors.

 

Failure to comply withapplicable regulatory requirements can result in enforcement actions by the FDA and other regulatory agencies. These may includeany of the following sanctions or consequences:

 

warning letters or untitled letters that require correctiveaction;

 

fines and civil penalties;

 

unanticipated expenditures;

 

delays in approving or refusal to approve future products;

 

FDA refusal to issue certificates to foreign governmentsneeded to export products for sale in other countries;

 

suspension or withdrawal of FDA clearance or approval;

 

product recall or seizure;

 

interruption of production;

 

operating restrictions;

 

injunctions; and

 

criminal prosecution.

 

Our contract manufacturers,specification developers and some suppliers of components or device accessories, also are required to manufacture our Productsin compliance with current good manufacturing practice requirements set forth in the QSR. The QSR requires a quality system forthe design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and it includes extensiverequirements with respect to quality management and organization, device design, buildings, equipment, purchase and handling ofcomponents or services, production and process controls, packaging and labeling controls, device evaluation, distribution, installation,complaint handling, servicing, and record keeping. The FDA evaluates compliance with the QSR through periodic unannounced inspectionsthat may include the manufacturing facilities of our subcontractors. If the FDA believes that any of our contract manufacturersor regulated suppliers are not in compliance with these requirements, it can shut down such manufacturing operations, require recallof our Products, refuse to approve new marketing applications, institute legal proceedings to detain or seize products, enjoinfuture violations or assess civil and criminal penalties against us or our officers or other employees.

 

Health Insurance Portability andAccountability Act of 1996 and Similar Foreign and State Laws and Regulations Affecting the Transmission, Security and Privacyof Health Information

 

We may also be subjectto data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA,as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their respective implementingregulations, imposes specified requirements relating to the privacy, security and transmission of individually identifiable healthinformation. Among other things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined asservice providers of covered entities that create, receive, maintain or transmit protected health information in connection withproviding a service for or on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties and gavestate attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federalHIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, many state laws governthe privacy and security of health information in certain circumstances, many of which differ from HIPAA and each other in significantways and may not have the same effect.

 

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Foreign data privacyregulations, such as the EU Data Protection Directive (Directive 95/46/EC), the country-specific regulations that implement Directive95/46/EC, and the EU General Data Protection Regulation (GDPR) also govern the processing of personally identifiable data, andmay be stricter than U.S. laws.

 

Fraud and Abuse Laws

 

In addition to FDArestrictions, there are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickbacklaws and physician self-referral laws. Our relationships with healthcare providers and other third parties are subject to scrutinyunder these laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonmentand exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administrationhealth programs.

 

Federal Anti-Kickback and Self-ReferralLaws

 

The federal Anti-KickbackStatute prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration (including anykickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce either the referral of an individual, or thefurnishing, recommending, or arranging of a good or service, for which payment may be made under a federal healthcare program suchas Medicare and Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted toinclude anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, credit arrangements,waiver of payments and providing anything at less than its fair market value. Although there are a number of statutory exceptionsand regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly.Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations maybe subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particularapplicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute.Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a review of all its relevant factsand circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangementinvolving remuneration is to induce referrals of (or purchases, or recommendations related to) federal healthcare covered business,the Anti-Kickback Statute has been implicated and potentially violated.

 

The penalties for violatingthe federal Anti-Kickback Statute include imprisonment for up to five years, fines of up to $25,000 per violation and possibleexclusion from federal healthcare programs such as Medicare and Medicaid. Many states have adopted prohibitions similar to thefederal Anti-Kickback Statute, some of which do not have the same exceptions and apply to the referral of patients for healthcareservices reimbursed by any source, not only by the Medicare and Medicaid programs. Further, the Anti-Kickback Statute was amendedby the Patient Protection and Affordable Care Act, or PPACA. Specifically, as noted above, under the Anti-Kickback Statute, thegovernment must prove the defendant acted “knowingly” to prove a violation occurred. The PPACA added a provision to clarifythat with respect to violations of the Anti-Kickback Statute, “a person need not have actual knowledge” of the statuteor specific intent to commit a violation of the statute. This change effectively overturns case law interpretations that set ahigher standard under which prosecutors had to prove the specific intent to violate the law. In addition, the PPACA codified caselaw that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a falseor fraudulent claim for purposes of the federal civil False Claims Act.

 

We plan to providethe initial training to providers and patients necessary for appropriate use of our technology either through our own educatorsor by contracting with outside educators that have completed an appropriate training course. Outside educators are reimbursed fortheir services at fair market value.

 

Noncompliance withthe federal anti-kickback legislation could result in our exclusion from Medicare, Medicaid or other governmental programs, restrictionson our ability to operate in certain jurisdictions, and civil and criminal penalties.

 

Federal law also includesa provision commonly known as the “Stark Law,” which prohibits a physician from referring Medicare or Medicaid patientsto an entity providing “designated health services,” including a company that furnishes durable medical equipment, inwhich the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement.Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant arrangement,civil penalties, and exclusion from Medicare, Medicaid or other governmental programs. We believe that we have structured our providerarrangements to comply with current Stark Law requirements.

 

Nevertheless, a determinationof liability under such laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.

 

Additionally, as someof these laws are still evolving, we lack definitive guidance as to the application of certain key aspects of these laws as theyrelate to our arrangements with providers with respect to patient training. We cannot predict the final form that these regulationswill take or the effect that the final regulations will have on us. As a result, our provider and training arrangements may ultimatelybe found to be not in compliance with applicable federal law.

 

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Federal False Claims Act

 

The Federal False ClaimsAct provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented,or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statementor used a false record to get a claim approved. In addition, amendments in 1986 to the Federal False Claims Act have made it easierfor private parties to bring “qui tam” whistleblower lawsuits against companies under the Federal False Claims Act. Penaltiesinclude fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages that the federal governmentsustained because of the act of that person. Qui tam actions have increased significantly in recent years, causing greater numbersof healthcare companies to have to defend a false claim action, pay fines or be excluded from Medicare, Medicaid or other federalor state healthcare programs as a result of an investigation arising out of such action.

 

There are other federalanti-fraud laws that that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a schemeto defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealingfrom a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfullyfalsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connectionwith the delivery of or payment for healthcare benefits, items or services.

 

Additionally, HIPAAestablished two federal crimes in the healthcare fraud and false statements relating to healthcare matters. The healthcare fraudstatute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors.A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs.The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or makingany materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits,items or services. A violation of this statute is a felony and may result in fines or imprisonment.

 

Civil Monetary Penalties Law

 

In addition to theAnti-Kickback Statute and the civil and criminal False Claims Acts, the federal government has the authority to seek civil monetarypenalties, or CMPs, assessments, and exclusion against an individual or entity based on a wide variety of prohibited conduct. Forexample, the Civil Monetary Penalties Law authorizes the imposition of substantial CMPs against an entity that engages in activitiesincluding, but not limited to: (1) knowingly presenting or causing to be presented, a claim for services not provided as claimedor which is otherwise false or fraudulent in any way; (2) knowingly giving or causing to be given false or misleading informationreasonably expected to influence the decision to discharge a patient; (3) offering or giving remuneration to any beneficiary ofa federal health care program likely to influence the receipt of reimbursable items or services; (4) arranging for reimbursableservices with an entity which is excluded from participation from a federal health care program; (5) knowingly or willfully solicitingor receiving remuneration for a referral of a federal health care program beneficiary; or (6) using a payment intended for a federalhealth care program beneficiary for another use. Noncompliance can result in civil money penalties of up to $10,000 for each wrongfulact, assessment of three times the amount claimed for each item or service and exclusion from the federal healthcare programs.

 

State Fraud and Abuse Provisions

 

Many states have alsoadopted some form of anti-kickback and anti-referral laws and a false claims act. We believe that we are in conformance to suchlaws. Nevertheless, a determination of liability under such laws could result in fines and penalties and restrictions on our abilityto operate in these jurisdictions.

 

Physician Payment Sunshine Act

 

Transparency laws regardingpayments or other items of value provided to healthcare providers and teaching hospitals may also impact our business practices.The federal Physician Payment Sunshine Act requires most medical device manufacturers to report annually to the Secretary of HumanHealth Services financial arrangements, payments, or other transfers of value made by that entity to physicians and teaching hospitals.The payment information is made publicly available in a searchable format on a CMS website. Over the next several years, we willneed to dedicate significant resources to establish and maintain systems and processes in order to comply with these regulations.Failure to comply with the reporting requirements can result in significant civil monetary penalties. Similar laws have been enactedor are under consideration in foreign jurisdictions.

 

U.S. Foreign Corrupt Practices Act

 

The U.S. Foreign CorruptPractices Act, or FCPA, prohibits U.S. corporations and their representatives from offering, promising, authorizing or making corruptpayments, gifts or transfers to any foreign government official, government staff member, political party or political candidatein an attempt to obtain or retain business abroad. The FCPA also obligates companies whose securities are listed in the UnitedStates to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflectall transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internalaccounting controls for international operations. Activities that violate the FCPA, even if they occur wholly outside the UnitedStates, can result in criminal and civil fines, imprisonment, disgorgement, oversight, and debarment from government contracts.

 

Employees

 

As of January 18, 2020,we had seven consultants. None of our employees are represented by a labor union or covered by a collective bargaining agreement.We consider our relationship with our employees to be satisfactory.

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DESCRIPTION OF PROPERTY

 

Our principalexecutive office is located in leased co-working premises of approximately 50 square feet at 205 East 42nd Street, 14th Floor,New York, New York. We also lease space in Brooklyn, New York of approximately 1,100 square feet which we use for warehousing purposes.We are a subtenant under the lease for the Brooklyn tenancy, which is generally shared equally with an affiliate of Boris Goldstein,our Chairman of the Board, and Executive Vice President. We believe that these facilities are adequate for our needs, includingproviding the space and infrastructure to accommodate our development work based on our current operating plan. We do not own anyreal estate.

 

LEGAL PROCEEDINGS

 

We are not party to, and our property isthe subject of, any material legal proceedings.

 

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MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussionand analysis of financial condition and results of operations of Memory MD Inc. together with our financial statementsand the related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysisor set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includesforward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of thisprospectus for a discussion of important factors that could cause actual results to differ materially from the results describedin or implied by the forward-looking statements contained in the following discussion and analysis.

 

Forward Looking Statements

 

The following discussionshould be read in conjunction with our unaudited financial statements and related notes included in this prospectus. Certain informationcontained in this MD&A includes “forward-looking statements.” Statements which are not historical reflect our currentexpectations and projections about our future results, performance, liquidity, financial condition and results of operations, prospectsand opportunities and are based upon information currently available to us and our management and their interpretation of whatis believed to be significant factors affecting our existing and proposed business, including many assumptions regarding futureevents. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities coulddiffer materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a resultof various risks, uncertainties and other factors, including those risks described in detail in the section entitled “RiskFactors” of this prospectus.

 

Forward-looking statements,which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of thewords “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 theserisks and uncertainties, and especially given the nature of our existing and proposed business, there can be no assurance thatthe forward-looking statements contained in this section and elsewhere in this prospectus will in fact occur.Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federalsecurities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of newinformation, future events, changed circumstances or any other reason.

 

Overview

 

We are a neurodiagnosticand predictive technology platform company seeking to provide a centralized platform for data acquisition and analysis of EEG datathat combines cutting-edge medical device technologies with cloud-based telehealth services. Both our NeuroCap, a pre-gelled disposableEEG headset, and NeuroEEG, a full-montage standard encephalograph, received FDA clearance to market in 2018.

 

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On September 21, 2018,we entered into a merger agreement (the “Merger Agreement”) with MemoryMD, Inc. and AFGG Acquisition Corp. to acquireMemoryMD, Inc. (the “Acquisition”). The transactions contemplated by the Merger Agreement were consummated on September21, 2018 and, pursuant to the terms of the Merger Agreement, all outstanding shares of MemoryMD were exchanged for shares of ourcommon stock. Accordingly, we acquired 100% of Memory MD, Inc. in exchange for the issuance of shares of our common stock and MemoryMD,Inc. became our wholly-owned subsidiary. We issued an additional 4,083,252 shares of our common stock upon the automatic conversionat the closing of an aggregate of $1,507,000 principal amount plus accrued interest of outstanding convertible promissory notesissued by MemoryMD Inc., and we further issued an additional 1,604,378 shares of our common stock upon the automatic conversionimmediately subsequent to the closing of an aggregate of $640,000 principal amount plus accrued interest of outstanding convertiblepromissory notes issued by MemoryMD Inc.

 

As of immediately priorto the closing of the Acquisition, we entered into an Assignment and Assumption Agreement with Chromium 24 LLC, pursuant to whichChromium 24 LLC assumed all of our remaining assets and liabilities through the closing of the Acquisition. Accordingly, as ofthe closing of the Acquisition, we had no assets or liabilities.

 

Our sole business sincethe Acquisition is the business of MemoryMD. Our management’s discussion and analysis below is based on the financial resultsof MemoryMD. Except as otherwise indicated herein, all share and per share information in this “Management’s Discussionand Analysis of Financial Condition and Results of Operations” section gives retroactive effect to the exchange of MemoryMDShares for shares of our common stock in the Acquisition. The following discussion and analysis provides information which we believeto be relevant to an assessment and understanding of the results of operations and financial condition of MemoryMD, Inc.

 

We have very limitedresources. To date, our primary activities have been limited to, and our limited resources have been dedicated to, performing businessand financial planning, raising capital, recruiting personnel, negotiating with business partners and the licensors of our intellectualproperty and conducting development activities. Our first product, the NeuroCap, is ready for commercialization and sale and wehave commenced some initial sales. Our other products are still being tested or are still under development.

 

We have incurred lossessince inception and had an accumulated deficit of $3,534,766 as of September 30, 2019, primarily as a result of expenses incurredin connection with our research and development programs and from general and administrative expenses associated with our operationsand the Acquisition. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeablefuture.

 

Historically, our primarysource of cash has been proceeds from the sale of convertible promissory notes and other borrowings. For the nine months endedSeptember 30, 2019 and the year ended December 31, 2018, we issued convertible promissory notes for aggregate gross proceeds of$380,000 and $1,059,500, respectively, to fund our operations. Additionally, we borrowed an aggregate of $270,000 from an affiliateof Nickolay Kukekov, a director of the Company, in the nine months ended September 30, 2019. Additionally, we borrowed an aggregateof $40,000 from an affiliate of Boris Goldstein, the Company’s Chairman of the Board in the nine months ended September 30,2019. Additionally, on October 23, 2019, an investor of the Company subscribed for a non-convertible promissory note and loanedthe Company $50,000.

 

We need to obtain substantialadditional funding in connection with our continuing operations through public or private equity or debt financings or other sources,which may include collaborations with third parties. However, we may be unable to raise additional funds when needed on favorableterms or at all. Our failure to raise such capital as and when needed would have a negative impact on our financial condition andour ability to develop and commercialize our products and future products and our ability to pursue our business strategy. See“–Liquidity and Capital Requirements” below.

 

Financial Overview

 

Revenue

 

From inception to September30, 2019, we have generated approximately $294,898 of revenue with respect to the sale of our NeuroCap product and our electrodes,along with data analysis services. We do not expect to generate recurring, material revenue unless or until we successfully commercializeour products. If we fail to successfully commercialize our developed products or fail to complete the development of any otherproduct candidate we may pursue in the future, in a timely manner, or fail to obtain regulatory approval, we may not be able togenerate any further revenue.

 

General and Administrative

 

General and administrativeexpenses consist primarily of personnel-related costs for personnel in functions not directly associated with research and developmentactivities. Other significant costs include legal fees relating to corporate matters, intellectual property costs, professionalfees for consultants assisting with regulatory, clinical, product development and financial matters, and product costs. We anticipatethat our general and administrative expenses will significantly increase in the future to support our continued research and developmentactivities, commercialization of our products and the increased costs of operating as a public company. These increases will includeincreased costs related to the hiring of additional personnel and fees for legal and professional services, as well as other public-companyrelated costs.

 

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Research and Development

 

Research and developmentexpenses consist of expenses incurred in performing research and development activities in developing our products. Research anddevelopment expenses include compensation and benefits for research and development employees, overhead expenses, cost of laboratorysupplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to consultants,and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensedas the contracted work is performed.

 

We expect our researchand development expenses to remain substantially the same for the next six to nine months as we continue to develop and commercializeour products.  As we develop our cloud-based computing system, we expect our research and development expenses to significantlyincrease.

 

Interest Expense

 

Interest expense primarilyconsists of amortized note issuance costs and interest costs related to the convertible notes we issued in 2019. The convertiblenotes bear interest at a fixed rate of 10% per annum.

 

Results of Operations

 

The following tablesets forth the results of operations of the Company for the three and nine months ended September 30, 2019 and 2018.

 

   Three Months Ended
September 30,
   Period to Period   Nine Months Ended
September 30,
   Period to Period 
   2019   2018   Change   2019   2018   Change 
Revenue  $159,159   $-   $159,159   $236,785   $-   $236,785 
Cost of goods sold  $128,390   $-   $128,390   $175,432   $-   $175,432 
Research and development  $41,845   $56,110   $(14,265)  $91,911   $119,328   $(27,417)
Professional fees  $74,569   $87,775   $(13,186)  $225,744   $207,473   $18,271 
Sales and marketing expenses  $21,670   $38,193   $(16,523)  $81,468   $69,268   $12,200 
General and administrative  $108,977   $177,616   $(68,639)  $430,504   $440,841   $(10,337)
Interest expense  $13,765   $74,076   $(60,311)  $32,789   $158,367   $(125,578)

 

Three Months Ended September 30,2019 vs. September 30, 2018

 

Revenue and cost of goods sold

 

Revenue for the threemonths ended September 30, 2019 was $159,159, compared to $0 for the three months ended September 30, 2018, related to data analysisof the EEG software and hardware and the sale of electrodes. Cost of goods sold for the three months ended September 30, 2019 was$128,390, compared to $0 in the three months ended September 30, 2018.

 

Research and development expenses

 

Research and developmentexpenses were $41,845 for the three months ended September 30, 2019, compared to $56,110 for the nine months ended September 30,2018. The decrease was primarily due to a decrease in development activities and a focus on growth of the operations of the Company.

 

Professional fees

 

Professional fees were$74,569 for the three months ended September 30, 2019, compared to $87,775 for the three months ended September 30, 2018. The decreasewas primarily due to a reduction in legal fees in the current year.

 

General and administrative expenses

 

General and administrativeexpenses were $108,977 for the three months ended September 30, 2019, compared to $177,616 for the three months ended September30, 2018. The decrease is primarily due to the decrease in consulting expense in the 3 months ended September 30, 2019.

 

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Interest expense

 

Interest expense forthe three months ended September 30, 2019 was $13,765, consisting of interest expense of $8,581 and amortization of debt issuancecosts of $4,638 related to the Company’s convertible promissory notes totaling $380,000, as well as interest expense relatedto a lease of $546.

 

Nine Months Ended September 30, 2019vs. September 30, 2018

 

Revenue and cost of goods sold

 

Revenue for the ninemonths ended September 30, 2019 was $236,785, compared to $0 for the nine months ended September 30, 2018 related to data analysisof the EEG software and hardware and the sale of electrodes. Cost of goods sold for the nine months ended September 30, 2019 was$175,432, compared to $0 in the nine months ended September 30, 2018.

 

Research and development expenses

 

Research and developmentexpenses were $91,911 for the nine months ended September 30, 2019, compared to $119,328 for the nine months ended September 30,2018. The decrease was primarily due to a decrease in development activities and a focus on growth of the operations of the Company.

 

Professional fees

 

Professional fees were$225,744 for the nine months ended September 30, 2019, compared to $207,473 for the nine months ended September 30, 2018. The increasewas primarily due an increase in accounting fees offset by a decrease in legal fees.

 

Sales and marketing expenses

 

Sales and marketingexpenses were $81,468 for the nine months ended September 30, 2019, compared to $69,268 in the nine months ended September 30,2018. The increase was primarily due to a decrease in development activities and an increased focus on marketing and sales.

 

General and administrative expenses

 

General and administrativeexpenses were $430,504 for the nine months ended September 30, 2019, compared to $440,841 for the nine months ended September 30,2018. The over-all expenses were in line for the comparative quarters although in the current year to date we relied less on consultantsand saw an increase in payroll costs.

 

Interest expense

 

Interest expense forthe nine months ended September 30, 2019 was $32,789, consisting of interest expense of $18,545 and amortization of debt issuancecosts of $12,342 related to the Company’s convertible promissory notes totaling $380,000, as well as interest expense relatedto a lease of $1,902.

 

Comparison of the Years Ended December31, 2018 and 2017

 

The following tablesets forth the results of operations of the Company for the years Ended December 31, 2018 and December 31, 2017.

 

   Years Ended December 31,   Period to
Period
 
   2018   2017   Change 
             
Revenues  $58,113   $-   $58,113 
General and administrative  $675,882   $395,838   $280,044 
Research and development  $210,206   $289,586   $(79,380)
Professional fees  $271,718   $57,404   $214,314 
Interest expense  $159,165   $97,687   $61,478 
Other income  $18,186   $47,205   $(29,109)

 

Revenues

 

Revenue for the fiscalyear ended December 31, 2018 was $58,113, compared to Nil for the fiscal year ended December 31, 2017, resulting from finalizingdevelopment of our NeuroCap product and commencement of sales in 2018.

 

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General and administrative expenses

 

General and administrativeexpenses were $675,882 for the fiscal year ended December 31, 2018, compared to $395,838 for the fiscal year ended December 31,2017. In the fiscal year ended December 31, 2018, general and administrative expenses were primarily related to approximately $430,000in consulting and compensation expense, approximately $54,000 in travel costs and approximately $40,000 in software developmentcosts and approximately $30,000 in insurance expense. In the fiscal year ended December 31, 2017, general and administrative costswere primarily related to an aggregate total of approximately $200,000 in compensation and consulting costs, approximately $63,000in business development costs and approximately $35,000 in testing costs. The increase in spending in the fiscal year ended December31, 2018 was primarily attributable to the Company shifting focus from research and development to the growth and establishmentphase in the marketplace.

 

Research and development expenses

 

Research and developmentexpenses were $210,206 for the fiscal year ended December 31, 2018, compared to $289,586 for the fiscal year ended December 31,2017. The decrease was primarily due to a decrease in development activities and a focus on growth of the operations of the Company.

 

Interest expense

 

Interest expense, forthe fiscal year ended December 31, 2018 was $159,165, consisting of interest expense and amortization of debt issuance costs ofapproximately $156,000 related to the Company’s convertible promissory notes and interest expense related to the Ichor leaseof approximately $3,600.

 

Other income

 

Other income for thefiscal year ended December 31, 2018 was $18,186 compared to $47,205 in the fiscal year ended December 31, 2017. This decrease isprimarily related to a decrease of gain on sale of accessories provided for research and development testing of approximately $23,000and income related to the sublease of warehouse space to a related party of approximately $5,000.

 

Liquidity and Capital Resources

 

While we have commencedgenerating revenue in 2019, we anticipate that we will continue to incur losses for the foreseeable future. We anticipate thatour expenses will increase substantially as we develop our products and pursue pre-clinical testing and clinical trials, seek anyfurther regulatory approvals, contract to manufacture any products, establish our own sales, marketing and distribution infrastructureto commercialize our products, hire additional staff, add operational, financial and management systems and operate as a publiccompany.

 

Historically, ourprimary source of cash has been proceeds from the sale of convertible promissory notes. Through November 12, 2019, we sold anaggregate principal amount of approximately $2.655 million in multiple tranches of convertible promissory notes, of which$380,000 remains outstanding and unconverted. We have also from time to time issued shares of our common stock toindividuals and entities as payment for services rendered to us in lieu of cash. During the nine months ended September 30,2019 and through September 26, 2019, an affiliate of Nickolay Kukekov, a director of the Company, provided an aggregate of$207,000 in non-interest-bearing, no-term loans to the Company. Additionally, in April 2019 and September 2019, an affiliateof Boris Goldstein, the Company’s Chairman of the Board, provided an aggregate total of $40,000, innon-interest-bearing, no-term loans to the Company.

 

All of our then-outstandingconvertible promissory notes, in the aggregate principal amount plus interest through September 21, 2018 of $2,275,050, convertedinto aggregate of 5,687,630 shares of our common stock upon or immediately after the closing of the Acquisition.

 

In connection withthe private placement of the convertible promissory notes, we paid the placement agent a cash fee of $117,880, in addition to equitycompensation in the form of common stock purchase warrants.

 

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While we have commencedgenerating revenue in 2019, we do not expect to continue to generate material, recurring revenue to cover our expenses and sustainour activities as presently conducted until, and unless, we successfully commercialize and sell our products. Until such time,if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity anddebt financings as well as collaborations, strategic alliances and licensing arrangements. We do not have any committed externalsource of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, theownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferencesthat adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenantslimiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures ordeclaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third-partypartners, we may have to relinquish valuable rights to our technologies, future revenue streams or grant licenses on terms thatmay 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 productdevelopment, future commercialization efforts, or grant rights to develop and market our technology that we would otherwise preferto develop and market ourselves.

 

Our independent registeredpublic accounting firm included an explanatory paragraph in its report on our financial statements as of and for the years endedDecember 31, 2018 and 2017, noting the existence of substantial doubt about our ability to continue as a going concern. This uncertaintyarose from management’s review of our results of operations and financial condition and its conclusion that, based on ouroperating plans, we did not have sufficient existing working capital to sustain operations for a period of twelve months from thedate of the issuance of these financial statements.

 

We believe our existingcash and cash equivalents, without raising additional funds or generating revenues, will be insufficient to fund our operatingexpenses for the foreseeable future. We need to raise additional capital to fund our operating expenses; however, we cannot giveany assurance at this time that we will successfully raise all or some of such capital or any other capital.

 

In January 2019, wecommenced a convertible note offering for up to $500,000, of which we have raised $380,000 through November 12, 2019. In October2019, we borrowed $50,000 from an investor evidenced by a non-convertible promissory note. We are also seeking to obtain additionalfinancing of up to approximately $1,000,000 through the issuance of our common stock, through other equity or debt financings orthrough collaborations or partnerships with other companies, which if successful will enable us to continue operations based onour current burn rate for at least another six to nine months. However, we may not be able to raise such additional capital onterms acceptable to us, or at all, and any failure to raise capital as and when needed could compromise our ability to executeon our business plan.

 

The development ofour products is subject to numerous uncertainties, and we have based these estimates on assumptions that may prove to be substantiallydifferent than we currently anticipate and could use our cash resources sooner than we expect. Additionally, the process of developingmedical devices is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfullytransition to profitability will be dependent upon achieving a level of product sales adequate to support our cost structure. Wecannot 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 operatingactivities was $767,211 for the nine months ended September 30, 2019 compared to $727,002 for the nine months ended September 30,2018. This fluctuation is primarily due to a decrease in net loss of approximately $155,000 along with a decrease in amortizationof debt discount of approximately $66,000 and a decrease in the change in accounts payable of approximately $123,000.

 

Net cash used in operatingactivities was $1,112,690 for the year ended December 31, 2018 compared to $873,643 for the year ended December 31, 2017. Thisfluctuation is primarily due to an increase in net loss of $467,820 in fiscal 2018 along with an increase in the amortization ofdebt discount of approximately $33,000 and an increase in accounts payable of approximately $170,000 in the year ended December31, 2018.

 

Net cash used in investing activities

 

Net cash used in investingactivities was $1,005 for the nine months ended September 30, 2019, compared to $0 for the nine months ended September 30, 2018.The increase is due to the purchase of fixed assets.

 

Net cash used in investingactivities was $1,143 for the year ended December 31, 2018, which consisted of the purchase of property and equipment.

 

Net cash used in investingactivities was $1,957 for the year ended December 31, 2017.

 

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Net cash provided by financing activities

 

Net cash provided byfinancing activities was $627,154 for the nine months ended September 30, 2019, which consisted of the sale of the Company’sconvertible promissory notes for aggregate gross proceeds of $380,000 as well as proceeds from related party loans of $247,000.

 

Net cash provided byfinancing activities was $979,868 for the nine months ended September 30, 2018, which primarily consisted of the sale of the Company’sconvertible promissory notes for aggregate gross proceeds of $964,120, along with proceeds from related party loans of $50,000offset by the payment of related party loans in the amount of $34,252.

 

Net cash provided byfinancing activities was $979,868 for the year ended December 31, 2018, which primarily consisted of the sale of the Company’sconvertible promissory notes for aggregate gross proceeds of $964,120.

 

Net cash provided byfinancing activities was $1,130,347 for the year ended December 31, 2017, which primarily consisted of the sale of the Company’sconvertible promissory notes for aggregate gross proceeds of $1,015,000.

 

Critical Accounting Policies and SignificantJudgments and Estimates

 

Our management’sdiscussion and analysis of our financial condition and results of operations is based on our financial statements, which have beenprepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparationof these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assetsand liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amountsof revenue and expenses during the reporting periods. In accordance with GAAP, we base our estimates on historical experience andon various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actualresults may differ materially from our estimates and judgments under different assumptions or conditions. We periodically reviewour estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflectedin our financial statements prospectively from the date of the change in estimate.

 

While our significantaccounting policies are more fully described in the notes to our financial statements appearing elsewhere in this Report, we believethe following are the critical accounting policies used in the preparation of our financial statements that require significantestimates and judgments.

 

Use of Estimates: Thepreparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the estimatesof useful lives for depreciation.

 

Fair Value of FinancialInstruments: 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 givesthe highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservableinputs. 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 instrumentsconsist of cash and cash equivalents, accounts receivable, accounts payable and borrowings. The fair value of current financialassets and current financial liabilities approximates their carrying value because of the short-term maturity of these financialinstruments.

 

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Income Taxes. TheCompany 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 todifferences 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 expectedto apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactmentdate.

 

Stock Based Compensation. TheCompany 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 accountsfor non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 505-50 “Equity-BasedPayments to Non-Employees.”

 

Recent Accounting Pronouncements

 

In May 2014, the FASBissued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended,which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requiresa company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration thatthe Company expects to receive for those goods or services. The standard will be effective for fiscal years and interim periodswithin those years beginning after December 15, 2017. The Company has adopted Topic 606 with no material effect on its financialstatements.

 

In November 2016, FASBissue ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash (ASU 2016-18), requiring restricted cash and cash equivalentsto be included with cash and cash equivalents of the statement of cash flows. The new standard is effective for fiscal years, andinterim periods within that year, beginning December 15, 2017, with early adoption permitted. The Company adopted this new ASUat January 1, 2018 and it has had no material impact on its financial statements.

 

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 correspondinglease liability. Lessor accounting under the standard is substantially unchanged. Additional qualitative and quantitative disclosuresare also required. The Company adopted the standard effective January 1, 2019 using the cumulative-effect adjustment transitionmethod, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented.The Company adopted the following practical expedients and elected the following accounting policies related to this standard update:

 

●             The option to not reassess priorconclusions related to the identification, classification and accounting for initial direct costs for leases that commenced priorto January 1, 2019.

 

●             Short-term lease accounting policyelection 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 leaseand non-lease components for certain equipment lease asset categories such as freight car, vehicles and work equipment.

 

●              The package of practical expedientsapplied to all of its leases, including (i) not reassessing whether any expired or existing contracts are or contain leases, (ii)not reassessing the lease classification for any expired or existing leases, and (iii) not reassessing initial direct costs forany existing leases.

 

The Company has inventoriedall 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 thenew guidance. The Company’s lease population comprises lease for corporate office space and a warehouse that are year-to-yearbasis with monthly rent ranging from approximately $200 to $3,200 and qualify under the practical expedient of short-term leases.The Company does not have exclusive rights of control to any assets in the customer and vendor contracts reviews and does not haveany financing leases as of the date of adoption of ASC 842.

 

As a result of the above,the adoption of ASC 842 did not have a material effect on the consolidated financial statements. The Company will review for theexistence of embedded leases in future agreements

 

In June 2018, the FinancialAccounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation– Stock Compensation (Topic 718). This update is intended to reduce cost and complexity and to improve financial reportingfor share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). TheASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based paymentsissued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accountingfor share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financialstatements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption ofthe standard is permitted. The adoption of this ASU had no material impact on the Company’s consolidated financial statements.

 

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Off-Balance Sheet Arrangements

 

We have no off-balancesheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

MARKET FOR AND DIVIDENDS ON REGISTRANT’SCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

There has been no tradingmarket for our common stock since inception. There can be no assurance that a trading market will ever develop or, if such a marketdoes develop, that it will continue. Our common stock is currently eligible for quotation on the OTC Pink Market under the tickersymbol BRSF.

 

Holders

 

As of January 17, 2020,there were approximately 66 holders of record of our common stock.

 

Dividends

 

We have never declaredor paid any cash dividend. We do not anticipate that we will declare or pay any dividends in the foreseeable future. Our currentpolicy is to retain earnings, if any, to fund operations, and the development and growth of our business. Any future determinationto pay cash dividends will be at the discretion of our Board and will be dependent upon our financial condition, operation results,capital requirements, applicable contractual restrictions, restrictions in our organizational documents, and any other factorsthat our Board deems relevant.

 

Securities Authorized for Issuance underEquity Compensation Plans

 

In August 2018, ourboard of directors adopted and stockholders approved the 2018 Equity Incentive Plan.

 

Under the 2018 EquityIncentive Plan, we may grant equity based incentive awards, including options, restricted stock, and other stock-based awards,to any directors, employees, advisers, and consultants that provide services to us or any of our subsidiaries on terms and conditionsthat are from time to time determined by us. An aggregate of up to 3,500,000 of our common stock are reserved for issuance underthe 2018 Plan. The purpose of the 2018 Plan is to providefinancial incentives for selected directors, employees, advisers, and consultants of the Company and/or its subsidiaries, therebypromoting the long-term growth and financial success of the Company. The board of directors believes that the 2018 Plan will servea critical role in attracting and retaining high caliber employees, consultants and directors essential to our success and in motivatingthese individuals to strive to meet our goals.

 

The table below setsforth information as of December 31, 2019 with respect to compensation plans under which our common stock is authorized for issuance.

 

   (a)   (b)   (c) 
Plan Category  Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and rights
   Weighted-average
exercise price
of outstanding
options,
warrants and rights
   Number of securities
remaining available
for future
issuance under equity
compensation plans
(excluding securities
reflected in
column (a))
 
             
Equity compensation plans approved by security holders   1,000,000   $           0.75    2,500,000 
                
Equity compensation plans not approved by security holders            
                
Total   1,000,000         2,500,000 

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

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DIRECTORS AND EXECUTIVE OFFICERS

 

Our executive officers and directors areas follows:

 

Name   Age   Position
Boris (Baruch) Goldstein   55   Chairman of the Board, Secretary and Executive Vice President
Vadim Sakharov   45   President, Chief Technology Officer and Director
Nickolay Kukekov   45   Director
Mark Corrao   61   Chief Financial Officer

 

Boris (Baruch)Goldstein, Chairman of the Board, Secretary and Executive Vice President. Dr. Goldstein is the founder and has been Chairmanof the Board of MemoryMD since its inception, and has been the executive Chairman of the Board of the Company since the Closingof the Acquisition and Executive Vice President since January 2019. Dr. Goldstein is a serial entrepreneur, having foundedor co-founded over a dozen private companies over the past 10 years alone. Since February 2014, he is the founder and Chairmanof Potbotics Inc., a private data aggregation and technology company focused on the global medical cannabis market. Since April2015, he is the founder, Dr. Goldstein is also since July 2016 the founder and the Chairman of the Board of Nano Graphene Inc.,a private, commercial scale graphene and graphene based materials producer and supply company. Dr. Goldstein is the founder inNovember 2016 and the president of High Technology Capital Fund and High Technology Capital Management LLC, and is a partner inHigh Accelerator, which helps build and support next generation technologies.

 

Dr. Goldstein receivedhis B.A., MBA and Ph.D. in Applied Mathematics from Latvian Technical University.

 

The Company believesthat Dr. Goldstein is qualified to serve as Chairman of the Board due to his extensive experience as a founder and operator ofnumerous start-up and other companies, and due his role as a founder of MemoryMD.

 

Vadim Sakharov,President, Chief Technology Officer and Director. Mr. Sakharov has been Chief Executive Officer of MemoryMD since February2015 and was Chief Executive Officer of the Company from September 2018 until January 25, 2019, at which time he was appointedas President and Chief Technology Officer. He has also been the Chairman of the Board and general manager of Neurotech, a medicaldevice company, since February 1992.

 

The Company believesthat Mr. Sakharov is qualified to serve as a director of the Company because of his experience as an executive at medical devicecompanies.

 

Nickolay V. Kukekov,Director. Dr. Kukekov has been a member of MemoryMD’s Board of Directors since September 2017, and a member of theBoard of the Company since the Closing of the Acquisition. Dr. Kukekov currently serves as the managing director of HRA Capital(formerly Highline Research Advisors), a division of Corinthian Partners L.L.C. Prior to forming Highline Research Advisors in2012, Dr. Kukekov was the Managing Director of Healthcare Investment Banking at Summer Street Research from October 2010 to August2012. In September 2009, Dr. Kukekov was a co-founder of the Healthcare Investment Banking group at Gilford Securities. From December2007 to July 2009, Dr. Kukekov served as the managing director of Paramount BioCapital, where he ran the advisory, M&A andcapital raising services for in-house private and public portfolio companies. Dr. Kukekov holds a Bachelor of Science degree inMolecular, Cellular and Developmental Biology from the University of Colorado at Boulder and a Ph.D. in Neuroscience from ColumbiaUniversity, College of Physicians and Surgeons in New York.

 

The Company believesthat Dr. Kukekov is qualified to serve as a member of the Board of Directors due to his extensive experience in healthcare andmedical device investment banking.

 

Mark Corrao,Chief Financial Officer. Mr. Corrao has been the part-time chief financial officer of MemoryMD since August 2018 and ChiefFinancial Officer of the Company since November 2018. He is a Managing Director for the CFO Squad, an accounting firm that specializesin pre-audit accounting for public and private companies, which provides those services to the Company. Additionally, Mr. Corraois currently the Chief Financial Officer for Generex Biotechnology Corporation and Kannalife Sciences, Inc. Mr. Corrao was formerlya founder and Chief Financial Officer of Strikeforce Technologies, Inc., a publicly traded software development and services companyspecializing in the development of a suite of integrated computer network security products. In addition to the ten years of hisservice at Strikeforce, Mr. Corrao has spent numerous years in the public accounting arena specializing in certified auditing,SEC accounting, corporate taxation and financial planning. Mr. Corrao’s background also includes numerous years on Wall Streetwith Merrill Lynch, Spear Leeds & Kellogg and Greenfield Arbitrage Partners. While on Wall Street Mr. Corrao was involved inseveral IPO’s and has been a guiding influence in several start-up companies. Prior to joining StrikeForce, he was a Directorat Applied Digital Solutions from December 2000 through December 2001. Mr. Corrao was a Vice President and Chief Financial Officerat Advanced Communications Sciences from March 1997 through December 2000. Mr. Corrao has a B.S. in Accounting from CUNY.

 

There are no familyrelationships between any of our officers and directors.

 

38

 

 

Structure and Operation of the Board

 

We do not have standingaudit, compensation or nominating committees of our Board. However, the full Board performs all of the functions of a standingaudit committee, compensation committee and nominating committee. The Board currently consists of three directors: Dr. Goldstein(Chairman) and Messrs. Sakharov and Kukekov. The following is a brief description of these functions of the Board:

  

Nomination of Directors

 

The Board does notcurrently have a standing nominating committee, and thus we do not have a nominating committee charter. Due to our small size andlimited operations to date, the Board determined that it was appropriate for the entire Board to act as the nominating committee.The full Board currently has the responsibility of selecting individuals to be nominated for election to the Board. Board candidatesare typically identified by existing directors or members of management. The Board will consider director candidates recommendedby stockholders. Any such candidates will be evaluated on the same basis as other candidates being evaluated by the Board. Informationwith respect to such candidates should be sent to Brain Scientific Inc., c/o CEO, 205 East 42nd Street, 14th Floor,New York, New York 10017. The Board considers the needs for the Board as a whole when identifying and evaluating nominees and,among other things, considers diversity in background, age, experience, qualifications, attributes and skills in identifying nominees,although it does not have a formal policy regarding the consideration of diversity.

 

Audit Committee Related Function

 

We do not have a standingaudit committee, and thus we do not have an audit committee charter. Due to our small size and limited operations to date, theBoard determined that it was appropriate for the entire Board to act as the audit committee. The Board intends to review with managementand the Company’s independent public accountants the Company’s financial statements, the accounting principles appliedin their preparation, the scope of the audit, any comments made by the independent accountants upon the financial condition ofthe Company and its accounting controls and procedures and such other matters as the Board deems appropriate. Because the Company’scommon stock is traded on the OTC Pink market, the Company is not subject to the listing requirements of any securities exchangeregarding audit committee related matters.

 

Audit Committee Financial Expert

 

We do not have an auditcommittee financial expert, because we do not have an audit committee.

 

Risk Oversight

 

The Board’s riskoversight is administered primarily through the following:

 

review and approval of an annual business plan;

 

review of a summary of risks and opportunities at meetingsof the Board;

 

review of business developments, business plan implementationand financial results;

 

oversight of internal controls over financial reporting;and

 

review of employee compensation and its relationshipto our business plans.

 

Due to the small sizeand early stage of the Company, we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positionsshould be separate or combined.

 

Compensation Committee Related Function

 

The Board does notcurrently have a standing compensation committee, and thus we do not have a compensation committee charter. Due to our small sizeand limited operations to date, the Board determined that it was appropriate for the entire Board to act as the compensation committee.The full Board currently has the responsibility for reviewing and establishing compensation for executive officers and making policydecisions concerning salaries and incentive compensation for executive officers of the Company.

 

The Company’sexecutive compensation program is administered by the Board, which determines the compensation of the Chief Executive Officer andother executive officers of the Company. In reviewing the compensation of the individual executive officers (other than the ChiefExecutive Officer), the Board considers the recommendations of the Chief Executive Officer, published compensation surveys andcurrent market conditions.

 

39

 

 

Involvement in Certain Legal Proceedings

 

To our knowledge, our directors and executiveofficers have not been involved in any of the following events during the past ten years:

 

  1. any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
     
  2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
     
  3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; 
     
  4. being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
     
  5. being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
     
  6. being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

EXECUTIVE COMPENSATION

 

Compensation of Executive Officers

 

The following tablesets forth information regarding each element of compensation that was paid or awarded to the named executive officers of the Companyfor the periods indicated.

 

Name and Principal Position  Year  Salary
($)
   Bonus
($)
   Stock Awards
($)
   Option Awards
($)
   Non-Equity
Incentive Plan
Compensation
($)
   All Other
Compensation
($)
   Total
($)
 
Boris (Baruch) Goldstein  2019   32,000    -    -    13,689(5)   -    -    45,689 
Chairman and Executive Vice President  2018   93,000    -    -    -    -    -    93,000 
                                       
Jesse W. Crowne (1)  2019   53,333    -    -    2,366(6)   -    -    55,699 
Former Chief Executive Officer  2018   -    -    -    -    -    -    - 
                                       
Vadim Sakharov (2)  2019   -    -    -    3,422(7)   -    -    3,432 
President and  2018   83,000    -    -    -    -    -    83,000 
Chief Technology Officer                                      
                                       
Mark Corrao (3)  2019   18,000    -    -    -    -    -    18,000 
Chief Financial Officer  2018   7,500    -    -    -    -    -    7,500 
                                       
Amer Samad (4)  2019   -    -    -    -    -    -    - 
   2018   -    -    -    -    -    -    - 

 

 

(1) Mr. Crowne was appointed as the Company’s Chief Executive Officer on January 25, 2019 and resigned as Chief Executive Officer on May 31, 2019.
(2) Mr. Sakhavov also previously served as Chief Executive Officer. He resigned as Chief Executive Officer on January 25, 2019.
(3) Mr. Corrao commenced his position as an at-will, part-time CFO of the Company in August 2018. He is paid a monthly fee for his services of $1,500.
(4) Mr. Samad was the President, CEO, CFO and Secretary of All Soft Gels from November 27, 2017 until his resignation on September 21, 2018.
(5)Represents grant date fair value computed in accordancewith FASB ASC Topic 718. The following assumptions were used in the valuation: (i) expected life 10 years, (ii) volatility of77%, (iii) risk free rate of 2.71% (iv) dividend rate of zero, (v) stock price of $0.042, and (vi) exercise price of $0.75.
(6)Represents grant date fair value computed in accordancewith FASB ASC Topic 718. The following assumptions were used in the valuation: (i) expected life 10 years, (ii) volatility of77%, (iii) risk free rate of 2.71% (iv) dividend rate of zero, (v) stock price of $0.042, and (vi) exercise price of $0.75.
(7)Represents grant date fair value computed in accordancewith FASB ASC Topic 718. The following assumptions were used in the valuation: (i) expected life 10 years, (ii) volatility of77%, (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.

 

 

40

 

 

Outstanding Equity Awards at Fiscal Year-End

 

There were 1,000,000 outstandingequity awards held by the named executive officers as of the end of the fiscal year ended December 31, 2019.

 

Director Compensation

 

There were no amountspaid or stock awards made to our non-employee directors during the fiscal year ended December 31, 2019.

 

Messrs.Goldstein, Crowne and Sakharov received compensation for their services to the Company as set forth under the summaryexecution compensation table above. In 2019, our directors were entitled to reimbursement for expenses incurred by them inconnection with attending board meetings. Our directors also were eligible for stock option grants and other equitygrants.

 

Employment Agreements

 

Jesse W. Crowne

 

The Company and Mr.Crowne entered into an employment agreement, effective as of January 25, 2019. Under the employment agreement, Mr. Crowne was toreceive an initial annual base salary of $160,000, which would be increased to $175,000 per annum in the event the Company is successfulin raising at least $1,000,000 (the “Capital Raise”) from the date of the employment agreement. In addition, Mr. Crownecould receive an annual cash bonus of up to $40,000 based on Mr. Crowne’s performance as determined by the Company’sCompensation Committee of the Board of Directors, and would receive a $30,000 sign-on bonus payable in two tranches. Mr. Crownewas also entitled to participate in the Company’s long-term incentive compensation plans generally made available to seniorexecutives of the Company, pursuant to which the Company issued to Mr. Crowne options to purchase 800,000 (or 1,000,000 in theevent of a Capital Raise) shares of the Company’s common stock at an exercise price of $0.75 per share, of which 200,000(or 250,000 in the event of a Capital Raise) shares shall vest on the one year anniversary of the date of grant, and 600,000 (or750,000 in the event of a Capital Raise) shall vest ratably on a quarterly basis over the following two years.

 

In the event Mr. Crowne’semployment were terminated as a result of death during or disability, Mr. Crowne or his beneficiaries or legal representativeswould be provided any earned base salary and all benefits payable under any employee benefit plan applicable at the time or termination(the “Unconditional Entitlements”).

 

In the event of theMr. Crowne’s termination for cause or termination by Mr. Crowne other than for a good reason, Mr. Crowne would be providedthe Unconditional Entitlements.

 

In the event of a terminationby Mr. Crowne for good reason or by the Company without cause, Mr. Crowne would be provided the Unconditional Entitlements andthe Company would provide Mr. Crowne his base salary then in effect for a period of 12 months after the date of termination (providedthat the Company is successful in raising at least $2,000,000 from the date of the employment agreement), 100% of the cost of premiumsfor COBRA for a period of 12 months from the date of termination, acceleration of the vesting his stock options, and continuedvesting of any restricted stock or other equity awards subject to vesting.

 

The employment agreementcontained customary non-competition and non-solicitation provisions in favor of the Company. Mr. Crowne also agreed to customaryterms regarding confidentiality and ownership of intellectual property.

 

As noted above,Mr. Crowne resigned as Chief Executive Officer on May 31, 2019. He resigned as a director of the Company on November 14,2019. His options were forfeited.

 

41

 

 

Limits on Liability and Indemnification

 

We provide directorsand officers insurance for our current directors and officers.

 

Our certificate ofincorporation eliminates the personal liability of our directors to the fullest extent permitted by law. The certificate of incorporationfurther provides that the Company will indemnify its officers and directors to the fullest extent permitted by law. We believethat this indemnification covers at least negligence on the part of the indemnified parties. Insofar as indemnification for liabilitiesunder the Securities Act may be permitted to our directors, officers, and controlling persons under the foregoing provisions orotherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against publicpolicy as expressed in the Securities Act of 1933 and is therefore unenforceable.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT

 

The following tableshows the beneficial ownership of our common stock as of January 17, 2020 held by (i) each person known to us to be the beneficialowner of more than five percent (5%) of our common stock; (ii) each director; (iii) each executive officer; and (iv) all directorsand executive officers as a group.

 

Beneficial ownershipis determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respectto the securities held. Shares of common stock subject to options and warrants currently exercisable or which may become exercisablewithin 60 days of January 17, 2020 are deemed outstanding and beneficially owned by the person holding such options or warrantsfor purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstandingfor purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table,the persons or entities named have sole voting and investment power with respect to all shares of our common stock shown as beneficiallyowned by them.

 

The following tableis based on 19,342,126 shares are issued and outstanding as of January 17, 2020. Unless otherwise indicated, the address of eachbeneficial holder of our common stock is our corporate address.

 

Name of Beneficial Owner  Shares of Common
Stock
Beneficially
Owned
   % of Shares
of Common
Stock
Beneficially Owned
 
Greater Than 5% Stockholders        
High Technology Capital Fund LP(1)   6,749,000    34.7%
Lifestyle Healthcare LLC(2)   1,384,980    7.1%
Andrew Brown(3)   1,709,063    8.8%
           
Named Executive Officers and Directors          
Boris (Baruch) Goldstein(1)(4)   7,424,575    38.1%
Vadim Sakharov   337,450    1.7%
Nickolay Kukekov(5)   1,484,980    7.6%
Mark Corrao   -    - 
All Directors and Officers as a Group (4 persons)   9,247,005    47.8%

 

 

(1)Dr. Goldstein is the manager of High Technology CapitalManagement LLC (“LLC”), the general partner of High Technology Capital Fund LP (“LP”). As the managerof the LLC, Dr. Goldstein has voting and dispositive control over the shares owned by the LP. Dr. Goldstein disclaims beneficialownership of such shares except to the extent of his pecuniary interest therein.
(2)The address of Lifestyle Healthcare is 4524 Westway Avenue,Dallas, TX 75205. Nickolay Kukekov has voting and dispositive power over the shares. Dr. Kukekov disclaims beneficial ownershipof these shares except to the extent of his pecuniary interest therein.
(3)The address of Mr. Brown is 300 Prospect Avenue, Hackensack,NJ 07601.
(4)Of such shares, 6,749,000 are held of record by High TechnologyCapital Fund LP and 337,450 are held of record by Irina Migalina, Dr. Goldstein’s wife. Dr. Goldstein disclaims beneficialownership of such shares except to the extent of his pecuniary interest therein.
(5)Includes 1,384,980 held by Lifestyle Healthcare LLC and100,000 shares of our common stock underlying warrants issued to Mr. Kukekov. Mr. Kukekov disclaims beneficial ownership of theshares held by Lifestyle except to the extent of his pecuniary interest therein.

 

*Less than 1%

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR INDEPENDENCE

 

Certain Relationships and Related Transactions

 

During the year endedDecember 31, 2017, an entity controlled by Vadim Sakharov, the Company’s then CEO and current President and CTO, provideda non-interest-bearing, no-term loan to the Company. The Company repaid that loan in full during the year ended December 31, 2018.During the year ended December 31, 2018, an entity controlled by Mr. Sakharov provided a $50,000 non-interest-bearing, no-termloan to the Company. As of December 31, 2018, and December 31, 2017, the balance to related parties was $50,000 and $34,252, respectively.As of September 30, 2019, loans payable to related party was $297,000.

 

On May 9, 2017, MemoryMD entered into asublease agreement with Nano Graphene Inc., a company controlled by Dr. Goldstein (the Company’s chairman) and his affiliates.In the years ended December 31, 2018 and 2017 Nano Graphene paid rent, of $10,626 and $15,939, respectively, for warehouse spacein the facility.

 

During the years ended December 31, 2018and 2017, the Company had expenses related to research and development costs of $59,788 and $62,700, respectively, to an entitycontrolled by Mr. Sakharov.

 

During the years ended December 31, 2018and 2017, the Company had expenses related to marketing and sales costs of $15,000 and $38,347, respectively, to entities controlledby the Company’s Chairman.

 

During the years ended December 31, 2018and 2017, the Company had expenses related to consulting fees of $83,377 and $0, respectively, to Mr. Sakharov.

 

Nickolay Kukekov, a director of the Company,is a Partner of HRA Capital. HRA Capital, through Corinthian Partners, LLC, acted as placement agent for MemoryMD’s convertiblenote offerings pursuant to which Corinthian received aggregate fees of $117,880 and warrants to purchase an estimated 291,740 sharesof Company common stock. We expect to pay to Corinthian additional fees which are being negotiated.

 

In May 2018, we entered into a Patent Assignmentand License Back Agreement with Boris Goldstein, Dmitriy Prilutskiy, Stanislav Zabodaev and Medical Computer Systems Ltd. Pursuantto the agreement, among other things, Messrs. Goldstein, Prilutskiy and Zabodaev assigned all of their rights to a patent entitled“Apparatus And Method For Conducting Electroencephalography” (Application No.: 15/898,611), to our Company, and inreturn, we granted to Medical Computer Systems Ltd., an unaffiliated entity that also provides manufacturing services to us, alimited, royalty-free, fully paid-up, worldwide, nonexclusive license (without the right to sublicense or assign), to the patent,to practice, make and use the inventions, ideas and information embodied therein, and to make, use, offer to sell, sell, leaseor import products, services, processes, methods and materials embodying or deriving from the inventions, ideas and informationfrom the patent and any activities derived directly therefrom; provided, however, that if and upon FDA approval of a Product, MedicalComputer Systems’ aforementioned rights will be limited to manufacturing and sales solely to our Company or on our behalfprovided that we purchase from Medical Computer Systems (and Medical Computer Systems makes available for sale) a minimum of 20,000units of Products per calendar year on reasonable terms and conditions to be determined by the parties in good faith; providedfurther, however, that Medical Computer Systems can without any limitation sell products embodying or deriving from the inventions,ideas and information from the patent in (i) the territories that made up the former USSR (excluding the Baltic countries) and(ii) Japan. In the event we fail to purchase the annual minimum order for a particular calendar year, Medical Computer Systems’limitation to manufacture and sell Products only to our Company pursuant to this proviso will be suspended for the next calendaryear.

 

On September 1, 2018, the Company enteredinto a sublease agreement with a company controlled by the Company’s Chairman, whereby the Company makes payments to therelated party for shared office space. For the year ended December 31, 2018, the Company has made $6,202 in rent payments to therelated party.

 

On March 12, 2019 and March 13, 2019, LifestyleHealthcare LLC, which is managed by Nickolay Kukekov, a director of the Company, loaned to the Company an aggregate of $75,000.The loans are non-interest bearing and have no maturity date, and are not evidenced by written documentation.

 

On April 8, 2019, LifestyleHealthcare LLC, loaned to the Company $20,000. The loan is non-interest bearing and has no maturity date, and is not evidencedby written documentation.

 

On April 22, 2019, High Technology CapitalFund LP (“High Technology”) loaned to the Company $25,000. Boris Goldstein, the Chairman of the Board of Directors,Secretary and Executive Vice President of the Company, is the managing partner of High Technology. The loan is non-interest bearingand has no maturity date, and is not evidenced by written documentation.

 

On April 23,2019, Lifestyle Healthcare LLC. loaned to the Company $35,000. The Loan is non-interest bearing and has no maturity date, andis not evidenced by written documentation.

 

43

 

 

On May 24, 2019, Lifestyle Healthcare LLC,loaned to the Company $30,000. The loan is non-interest bearing and has no maturity date, and is not evidenced by written documentation.

 

On June 24, 2019, Lifestyle Healthcare LLCloaned to the Company $30,000. The loan is non-interest bearing and has no maturity date, and is not evidenced by written documentation.

 

On September 11, 2019, High Technology CapitalFund LP (“High Technology”) loaned to the Company $15,000. Boris Goldstein, the Chairman of the Board of Directors,Secretary and Executive Vice President of the Company, is the managing partner of High Technology. The loan is non-interest bearingand has no maturity date, and is not evidenced by written documentation.

 

On September 26, 2019, Lifestyle HealthcareLLC, loaned to the Company $17,000. The loan is non-interest bearing and has no maturity date, and is not evidenced by writtendocumentation.

 

On November 15, 2019, High Technology loanedto the Company $10,000. The loan is non-interest bearing and has no maturity date, and is not evidenced by written documentation.

 

On November 27, 2019, Lifestyle HealthcareLLC loaned to the Company $10,000. The loan is non-interest bearing and has no maturity date, and is not evidenced by written documentation.

 

The Acquisition

 

Pursuant to the Merger Agreement for theAcquisition whereby Memory MD, Inc. became a wholly-owned subsidiary of the Company, each holder of MemoryMD Shares outstandingimmediately prior to the Closing received shares of our common stock in exchange therefore based on the Exchange Ratio, with allfractional shares rounded up to the nearest whole share. Accordingly, we issued 675,575 and 337,450 shares of our common stockto Messrs. Goldstein (and his wife) and Sakharov, respectively and 6,749,000 shares of our common stock to High Technology CapitalFund LP, an affiliate of Dr. Goldstein. Furthermore, as of the Closing, Mr. Amer Samad, the sole director and executive officerof All Soft Gels, committed to tender for cancellation 6,495,000 shares of our common stock as part of the conditions to Closing,of which 6,375,000 shares have been subsequently cancelled and of which 120,000 shares are expected to be tendered to us for cancellationas soon as practicable. The Merger Agreement also provided that Drs. Goldstein and Kukekov be appointed as a director of the Companyupon the Closing of the Acquisition.

 

Related Person Transaction Policy

 

The Board reviews, approves and overseesany transaction between us and any related person and any other potential conflict of interest situations on an ongoing basis,in accordance with our policies and procedures, and develops policies and procedures for the approval of related party transactions.Prior to consideration of a transaction with a related person, the material facts as to the related person’s relationship or interestin the transaction are disclosed to the disinterested directors. The transaction is not approved unless a majority of the membersof the Board who are not interested in the transaction approve the transaction. The Board takes into account, among other factorsthat it deems appropriate, whether the related person transaction is on terms no less favorable to us than terms generally availablein a transaction with an unrelated third-party under the same or similar circumstances and the extent of the related person’s interestin the related person transaction. Our current policy with respect to approval of related person transactions is not set forthin writing.

 

Director Independence

 

None of our directors is independent asthat term is defined under the Nasdaq Marketplace Rules.

 

ADDITIONAL INFORMATION

 

Federal securities laws require us to fileinformation with the SEC concerning our business and operations. Accordingly, we file annual, quarterly, and special reports, andother information with the SEC. Such reports and other information that we file with the SEC are available at the SEC’s website at www.sec.gov.

 

We have filed withthe SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock being offered hereby. Aspermitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registrationstatement and the exhibits and schedules thereto. For further information with respect to the Company and the common stock offeredhereby, reference is made to the registration statement, and such exhibits and schedules. A copy of the registration statement,and the exhibits and schedules thereto, may be accessed at the SEC’s web site.

44

 

 

DISCLOSURE OF COMMISSION POSITION ONINDEMNIFICATION FOR SECURITIES ACT LIABILITIES

 

Our Articles of Incorporation and Bylawsprovide that, we will indemnify our officers, directors and agents to the extent permitted under the Nevada Revised Statute (“NRS”),provided that, we will not be obligated to indemnify any person in connection with any proceeding:

 

(i) for which payment has actually been made to or on behalfof such person under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyondthe amount paid;

 

(ii) for an accounting or disgorgement of profits pursuant toSection 16(b) of the Exchange Act, or similar provisions of federal, state or local statutory law or common law, if such personis held liable therefor (including pursuant to any settlement arrangements);

 

(iii) for any reimbursement of the Company by such person ofany bonus or other incentive-based or equity-based compensation or of any profits realized by such person from the sale of securitiesof the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accountingrestatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), orthe payment to the Company of profits arising from the purchase and sale by such person of securities in violation of Section 306of the Sarbanes-Oxley Act), if such person is held liable therefor (including pursuant to any settlement arrangements);

 

(iv) initiated by such person, including any proceeding initiatedby such person against the Company or its directors, officers, employees, agents or other indemnitees, unless (a) the Board authorizedthe proceeding prior to its initiation, (b) the Company provides the indemnification, in its sole discretion, pursuant to the powersvested in the Corporation under applicable law, (c) otherwise required to be made under the Bylaws or (d) otherwise required byapplicable law; or

 

(v) if prohibited by applicable law.

 

NRS Section 78.7502 provides that a corporationshall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys’ fees, actuallyand reasonably incurred by him in connection with any the defense to the extent that a director, officer, employee or agent ofa corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to Section 78.7502(1)or 78.7502(2), or in defense of any claim, issue or matter therein.

 

NRS 78.7502(1) provides that a corporationmay indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action,suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation,by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at therequest of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trustor other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually andreasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable pursuant to NRS 78.138; or(b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation,and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

 

NRS Section 78.7502(2) provides that a corporationmay indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed actionor suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director,officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employeeor agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paidin settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement of the actionor suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believedto be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matteras to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, tobe liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the courtin which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of allthe circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

 

NRS Section 78.747 provides that exceptas otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt or liabilityof the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter of law mustdetermine the question of whether a director or officer acts as the alter ego of a corporation.

 

Insofar as indemnification for liabilitiesarising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions,we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the SecuritiesAct and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the paymentby the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successfuldefense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securitiesbeing registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit toa court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed herebyin the Securities Act and we will be governed by the final adjudication of such issue.

 

LEGAL MATTERS

 

The validity of the shares offered herebywill be passed upon for us by Sichenzia Ross Ference LLP, New York, New York.

 

EXPERTS

 

The consolidated financialstatements of the Company as of and for the years ended December 31, 2018 and December 31, 2017, included in this registrationstatement on Form S-1 have been so included in reliance on the report of Sadler, Gibb & Associates, LLC, an independentregistered public accounting firm, given upon their authority as experts in accounting and auditing.

45

 

 

INDEX TO FINANCIAL STATEMENTS

 

  Page
Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 F-2
   
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited) F-3
   
Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Nine Months Ended as of September 30, 2019 and September 30, 2018 (unaudited) F-4
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited) F-5
   
Notes to Condensed Consolidated Financial Statements F-6

  

Report of Independent Registered Public Accounting Firm F-17
   
Consolidated Balance Sheets as of December 31, 2018 and 2017 F-18
   
Consolidated Statements of Operations for the years ended December 31, 2018 and 2017 F-19
   
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2018 and 2017 F-20
   
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 F-21
   
Notes to Consolidated Financial Statements F-22

 

F-1

 

 

BrainScientific Inc. and Subsidiaries

CONDENSEDCONSOLIDATED BALANCE SHEETS

 

   September 30,
2019
   December 31,
2018
 
   (Unaudited)     
ASSETS        
CURRENT ASSETS:        
Cash  $22,472   $163,563 
Accounts receivable   6,939    - 
Prepaid expenses and other current assets   22,420    14,552 
           
TOTAL CURRENT ASSETS   51,831    178,115 
           
Property and equipment, net   2,019    1,999 
           
TOTAL ASSETS  $53,850   $180,114 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES:          
Accounts payable and accrued expenses  $263,787   $139,637 
Accounts payable and accrued expenses - related party   18,400    31,900 
Convertible notes payable, net   373,942    - 
Other liabilities - short term   6,642    5,454 
Loans payable - related party   297,000    50,000 
TOTAL CURRENT LIABILITIES:   959,771    226,991 
           
Other liabilities   1,416    7,095 
           
TOTAL LIABILITIES   961,187    234,086 
           
Commitments and contingencies   -    - 
           
STOCKHOLDERS’ DEFICIT          
           
Preferred stock, $0.001 par value; 10,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively   -    - 
Common stock, $0.001 par value; 200,000,000 shares authorized, 19,250,626 and 19,205,624 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively   19,251    19,206 
Additional paid in capital   2,608,207    2,595,034 
Accumulated deficit   (3,534,766)   (2,668,212)
Accumulated other comprehensive income   (29)   - 
TOTAL STOCKHOLDERS’ DEFICIT   (907,337)   (53,972)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $53,850   $180,114 

 

Theaccompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-2

 

 

BrainScientific Inc. and Subsidiaries

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
                 
                 
REVENUE  $159,159   $-   $236,785   $- 
                     
COST OF GOODS SOLD   128,390    -    175,432    - 
                     
GROSS PROFIT   30,769    -    61,353    - 
                     
SELLING, GENERAL AND ADMINISTRATIVE                    
Research and development   41,845    56,110    91,911    119,328 
Professional fees   74,569    87,755    225,744    207,473 
Sales and marketing expenses   21,670    38,193    81,468    69,268 
Occupancy expenses   19,018    8,151    64,768    44,477 
General and administrative expenses   108,977    177,616    430,504    440,841 
TOTAL SELLING, GENERAL AND ADMINISTRATIVE   266,079    367,825    894,395    881,387 
                     
LOSS FROM OPERATIONS   (235,310)   (367,825)   (833,042)   (881,387)
                     
OTHER INCOME (EXPENSE):                    
Interest expense   (13,765)   (74,076)   (32,789)   (158,367)
Other income   -    -    -    18,186 
Other expense   (596)   -    (596)   - 
Foreign currency transaction loss   (127)   -    (127)   - 
TOTAL OTHER EXPENSE   (14,488)   (74,076)   (33,512)   (140,181)
                     
LOSS BEFORE INCOME TAXES   (249,798)   (441,901)   (866,554)   (1,021,568)
                     
PROVISION FOR INCOME TAXES   -    -    -    - 
                     
NET LOSS   (249,798)   (441,901)   (866,554)   (1,021,568)
                     
OTHER COMPREHENSIVE LOSS                    
Foreign currency translation adjustment   (345)   -    (29)   - 
TOTAL COMPREHENSIVE LOSS  $(250,143)  $(441,901)  $(866,583)  $(1,021,568)
                     
NET LOSS PER COMMON SHARE                    
Basic and diluted  $(0.01)  $(0.04)  $(0.05)  $(0.10)
                     
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                    
Basic and diluted   19,232,292    10,908,049    19,212,328    10,210,154 

 

Theaccompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-3

 

 

BrainScientific Inc. and Subsidiaries

CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

                   Accumulated     
           Additional       Other     
   Common Stock   Paid-in   Accumulated   Comprehensive     
   Shares   Amount   Capital   Deficit   Income   Total 
                         
Balance at December 31, 2017   9,906,526   $9,907   $321,522   $(1,242,110)  $          -   $(910,681)
Fair value of warrants issued in connection with convertible debt   -    -    277    -    -    277 
Net loss   -    -    -    (313,424)   -    (313,424)
Balances at March 31, 2018   9,906,526    9,907    321,799    (1,555,534)   -    (1,223,828)
Fair value of warrants issued in connection with convertible debt   -    -    513    -    -    513 
Net loss   -    -    -    (266,243)   -    (266,243)
Balances at June 30, 2018   9,906,526    9,907    322,312    (1,821,777)   -    (1,489,558)
Conversion of convertible notes and accrued interest to common stock   5,687,630    5,688    2,269,362    -    -    2,275,050 
Fair value of warrants issued in connection with convertible debt   -    -    1,814    -    -    1,814 
Issuance of common stock for services   83,384    83    2,118    -    -    2,201 
Effect of reverse recapitalization   3,505,000    3,505    (3,496)   -    -    9 
Net loss   -    -    -    (441,901)   -    (441,901)
Balances at September 30, 2018   19,182,540   $19,183   $2,592,110   $(2,263,678)  $-   $347,615 

 

                   Accumulated     
           Additional       Other     
   Common Stock   Paid-in   Accumulated   Comprehensive     
   Shares   Amount   Capital   Deficit   Income   Total 
                         
Balance at December 31, 2018   19,205,624   $19,206   $2,595,034   $(2,668,212)  $          -   $(53,972)
Fair value of stock options vested   -    -    4,334    -    -    4,334 
Issuance of common stock for services   13,334    13    547    -    -    560 
Net loss   -    -    -    (410,259)        (410,259)
Balances at March 31, 2019   19,218,958    19,219    2,599,915    (3,078,471)   -    (459,337)
Fair value of stock options vested   -    -    4,874    -    -    4,874 
Issuance of common stock for services   13,334    13    547    -    -    560 
Capital contribution - related party   -    -    153    -    -    153 
Foreign currency translation adjustment   -    -    -    -    316    316 
Net loss   -    -    -    (206,497)   -    (206,497)
Balances at June 30, 2019   19,232,292    19,232    2,605,489    (3,284,968)   316    (659,931)
Fair value of stock options vested   -    -    1,976    -    -    1,976 
Issuance of common stock for services   18,334    19    742    -    -    761 
Foreign currency translation adjustment   -    -    -    -    (345)   (345)
Net loss   -    -    -    (249,798)   -    (249,798)
Balances at September 30, 2019   19,250,626   $19,251   $2,608,207   $(3,534,766)  $(29)  $(907,337)

 

Theaccompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-4

 

 

BrainScientific Inc. and Subsidiaries

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended
September 30,
 
   2019   2018 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(866,554)  $(1,021,568)
Change in net loss to net cash used in operating activities:          
Depreciation and amortization expense   985    488 
Amortization of debt discount   12,342    77,889 
Fair value of stock options vested   11,184    - 
Common stock issued for services   1,880    2,201 
Changes in operating assets and liabilities:          
Accounts receivable   (6,939)     
Inventory   -    (26,650)
Other liabilities   (4,491)   (11,157)
Prepaid expenses and other current assets   (7,868)   4,524 
Accounts payable and accrued expenses   124,150    247,271 
Accounts payable - related party   (31,900)   - 
NET CASH USED IN OPERATING ACTIVITIES  $(767,211)  $(727,002)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment  $(1,005)  $- 
NET CASH USED IN INVESTING ACTIVITIES  $(1,005)  $- 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from convertible notes payable  $380,000   $964,120 
Proceeds from related party loans   247,000    50,000 
Payments of related party loans   -    (34,252)
Capital contribution - related party   154    - 
NET CASH PROVIDED BY FINANCING ACTIVITIES  $627,154   $979,868 
           
Effect of exchange rate changes on cash   (29)   - 
           
NET CHANGE IN CASH   (141,091)   252,866 
           
CASH AT BEGINNING OF THE PERIOD   163,563    297,528 
CASH AT END OF THE PERIOD  $22,472   $550,394 
           
Supplemental Disclosure of Cash Flow Information          
           
Cash paid for interest  $-   $- 
Cash paid for taxes  $-   $- 
           
Supplemental Disclosure of Non-Cash Investing and Financing Activities          
           
Discounts related to warrants issued in connection with convertible debentures  $-   $2,604 
Conversion of convertible notes and accrued interest to common stock       $2,275,050 
Financing fees payable to a related party related to the issuance of convertible debentures  $18,400   $- 

 

Theaccompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-5

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

NOTE1 – ORGANIZATION AND NATURE OF OPERATIONS

 

BrainScientific Inc. (the “Company”), was incorporated under the laws of the state of Nevada on November 18, 2013 underthe name All Soft Gels Inc. The Company on September 21, 2018 acquired MemoryMD, Inc. (“MemoryMD”), a privately heldDelaware corporation formed in February 2015. Upon completion of the acquisition, MemoryMD is treated as the surviving entityand accounting acquirer although the Company was the legal acquirer. Accordingly, the Company’s historical financial statementsare those of MemoryMD, the surviving entity and accounting acquirer. MemoryMD is a cloud computing, data analytics and medicaldevice technology company in the NeuroTech and brain monitoring industries seeking to commercialize its EEG devices and caps.The Company is headquartered in New York, New York.

 

Reverse Merger and Corporate Restructure

 

OnSeptember 21, 2018, the Company entered into a merger agreement (the “Merger Agreement”) with MemoryMD and AFGG AcquisitionCorp. to acquire MemoryMD (the “Acquisition”). The transactions contemplated by the Merger Agreement were consummatedon September 21, 2018 and, pursuant to the terms of the Merger Agreement, all outstanding shares of MemoryMD were exchanged forshares of the Company’s common stock. Accordingly, the Company acquired 100% of MemoryMD in exchange for the issuance ofshares of the Company’s common stock and MemoryMD became the Company’s wholly owned subsidiary. The Company issuedan additional 4,083,252 shares of its common stock upon the automatic conversion at the closing of an aggregate of $1,507,000principal amount plus accrued interest of outstanding convertible promissory notes issued by MemoryMD, and it further issued anadditional 1,604,378 shares of its common stock upon the automatic conversion immediately subsequent to the closing of anaggregate 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, committedto tender for cancellation 6,495,000 shares of the Company’s common stock as part of the conditions to closing, of which6,375,000 have been cancelled at December 31, 2018 and 120,000 are expected to be cancelled as soon as practicable. Total sharesissued as a result of the Acquisition was 13,421,752.

 

TheAcquisition has been accounted for as a reverse recapitalization of Brain Scientific by MemoryMD, but in substance as a capitaltransaction, rather than a business combination since Brain Scientific had nominal or no operations and assets prior to and asof the closing of the Acquisition. The transaction is deemed a reverse recapitalization and the accounting is similar to thatresulting 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.

 

Allreferences to common stock, share and per share amounts have been retroactively restated to reflect the reverse recapitalizationas if the transaction had taken place as of the beginning of the earliest period presented.

 

Assignmentand Assumption Agreement

 

Asof immediately prior to the closing of the Acquisition, the Company entered into an Assignment and Assumption Agreement with Chromium24 LLC, pursuant to which Chromium 24 LLC assumed all of the Company’s remaining assets and liabilities through the closingof the Acquisition. Accordingly, as of the closing of the Acquisition, Brain Scientific had no assets or liabilities other thanthe shares of MemoryMD acquired in the Acquisition.

 

NameChange and Increase in Authorized Shares

 

OnSeptember 18, 2018, the Company filed an amendment to its certificate of incorporation with the Nevada Secretary of State to changeits 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 50,000,000to 200,000,000 and created and authorized 10,000,000 shares of undesignated preferred stock.

 

F-6

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

UnauditedInterim Financial Information

 

TheCompany has prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securitiesand Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unauditedand, in the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessaryfor a fair presentation of its balance sheets, operating results, and cash flows for the periods presented. Operating resultsfor the periods presented are not necessarily indicative of the results that may be expected for 2019. Certain informationand footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principlesgenerally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations ofthe SEC. These consolidated financial statements should be read in conjunction with the audited financial statements and accompanyingnotes.

 

NOTE2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basisof Presentation

 

Theaccompanying consolidated financial statements have been prepared in accordance with GAAP.

 

Principlesof Consolidation

 

TheCompany evaluates the need to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”).

 

Theconsolidated financial statements include the accounts of the Company and its subsidiaries, MemoryMD and MemoryMD - Russia. Theoperations of the newly formed 100% wholly owned subsidiary, MemoryMD – Russia, are included beginning April 1, 2019. Allsignificant consolidated transactions and balances have been eliminated in consolidation.

 

Reclassificationsto Prior Period Financial Statements and Adjustments

 

Certainreclassifications have been made in the Company’s financial statements of the prior year to conform to the current yearpresentation. $11,000 and $30,000 in professional fees in the three and nine months ended September 30, 2019, respectively, werereclassified from general and administrative expenses to professional fees. These reclassifications have no impact on previouslyreported net income.

 

Useof Estimates

 

Thepreparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from thoseestimates. Significant estimates include the useful life of property and equipment and assumptions used in the valuation of optionsand warrants.

 

Cashand Cash Equivalents

 

TheCompany considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.At September 30, 2019 and December 31, 2018, the Company had no cash equivalents.

 

TheCompany’s cash is held with financial institutions, and the account balances may, at times, exceed the Federal Deposit InsuranceCorporation (FDIC) insurance limit. Accounts are insured by the FDIC up to $250,000 per financial institution. The Company hasnot experienced any losses in such accounts with these financial institutions. As of September 30, 2019 and December 31, 2018,the Company had $0 and $0, respectively, in excess over the FDIC insurance limit.

 

Inventory

 

Inventoryconsists of finished goods that are valued at lower of cost or market.  As of September 30, 2019 and December 31, 2018, theCompany had inventory totaling $0 and $0, respectively.

 

F-7

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

Property,Equipment and Depreciation

 

Propertyand equipment are recorded at cost, less depreciation. Depreciation is computed using the straight-line method over the estimateduseful lives of the assets. Expenditures for repair and maintenance are charged to operations as incurred. Property and equipmentconsisted of computer equipment, with an estimated useful life of three years. Depreciation expense was $985 and $488 for thenine months ended September 30, 2019 and 2018, respectively.

 

ConvertibleNotes Payable

 

TheCompany has issued convertible notes, which contain variable conversion features, whereby the outstanding principal and accruedinterest automatically convert into common shares at a fixed price which may be at a discount to the common stock at the timeof conversion. The conversion features of these notes are contingent upon future events, whereby, the holder agreed not to convertuntil the contingent future event has occurred.

 

RevenueRecognition

 

OnJanuary 1, 2018, the Company adopted ASC Topic 606 Revenue from Contracts with Customers. This guidance requires an entity torecognize revenue by applying the following steps:  (1) identify the contract with a customer; (2) identify the performanceobligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligationin the contract; and (5) recognize revenue when each performance obligation is satisfied. Once the steps are met, revenue is recognized,generally upon delivery of the product. There has been no material effect on the Company’s financial statements as a resultof adopting Topic 606.

 

TheCompany recognizes revenue from the sale of its NeuroCaps, Universal Cables, electrodes and its proprietary software connectedto its cloud-based computing system that that can assist in diagnosis by assessing pathology, abnormalities, and other factors.

 

Researchand Development Costs

 

TheCompany expenses all research and development costs as they are incurred. Research and development includes expenditures in connectionwith 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 researchand development of the cloud infrastructure, data imaging, and proprietary products and technology. Research and development costsrecognized in the statement of operations for the nine months ended September 30, 2019 and 2018 were $91,911 and $119,328, respectively.

 

Salesand Marketing

 

Advertisingand marketing costs are expensed as incurred. Advertising and marketing costs recognized in the statement of operations for thenine months ended September 30, 2019 and 2018 were $81,468 and $69,268, respectively.

 

Stock-basedCompensation

 

TheCompany 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 byour stock price as well as by assumptions regarding a number of subjective variables. These variables include, but are not limitedto, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

 

Basicand Diluted Net Loss Per Common Share

 

Basicnet loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during theperiod. Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common sharesoutstanding for the period and, if dilutive, potential common shares outstanding during the period. Potentially dilutive securitiesconsist of the incremental common shares issuable upon exercise of common stock equivalents such as stock options, warrants andconvertible debt instruments. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.As a result, the basic and diluted per share amounts for all periods presented are identical. In the nine months ended September30, 2019, 1,402,250 anti-dilutive securities were excluded from the computation.

 

F-8

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

FairValue of Financial Instruments

 

TheCompany’s financial instruments are measured and recorded at fair value based on inputs and assumptions that market participantswould use in pricing an asset or a liability. Fair value is defined as the price that would be received from selling an assetor paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determiningfair value, management considers the principal or most advantageous market in which the Company would transact, and also considersassumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions,and risk of nonperformance.

 

Fairvalue is determined for assets and liabilities using a three-tiered value hierarchy into which these assets and liabilities aregrouped based upon significant inputs as follows:

 

Level1 - Quoted prices in active markets for identical assets or liabilities.

 

Level2 - 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 observableor can be corroborated by observable market data.

 

Level3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assetsor liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significantunobservable inputs. When a determination is made to classify a financial instrument within Level 3, the determination is basedupon the lack of significance of the observable parameters to the overall fair value measurement. However, the fair value determinationfor Level 3 financial instruments may consider some observable market inputs.

 

Thelowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The carryingvalues of cash, prepaid expenses and other current assets, convertible notes, accounts payable, loans payable and due to othersapproximate fair value due to the short-term nature of these items.

 

TheCompany did not have any other Level 1, Level 2 or Level 3 assets or liabilities as of September 30, 2019 and December 31, 2018.

  

IncomeTaxes

 

TheCompany 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 financialstatement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income inthe years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assetsand liabilities of a change in tax rate is recognized in the period that includes the enactment date. A valuation allowance isrecorded if it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized in future periods.

 

TheCompany follows the guidance in ASC Topic 740-10 in assessing uncertain tax positions. The standard applies to all tax positionsand clarifies the recognition of tax benefits in the financial statements by providing for a two-step approach of recognitionand measurement. The first step involves assessing whether the tax position is more-likely-than-not to be sustained upon examinationbased upon its technical merits. The second step involves measurement of the amount to be recognized. Tax positions that meetthe more-likely-than-not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of beingrealized upon ultimate finalization with the taxing authority. The Company recognizes the impact of an uncertain income tax positionin the financial statements if it believes that the position is more likely than not to be sustained by the relevant taxing authority.The Company will recognize interest and penalties related to tax positions in income tax expense. As of September 30, 2019 andDecember 31, 2018, the Company had no unrecognized uncertain income tax positions.

 

OnDecember 22, 2017, the passage of legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”) was enactedand significantly revised the U.S. income tax law. The TCJA includes changes, which reduce the corporate income tax rate from34% 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, preparedor analyzed, including computations, in reasonable detail to complete its accounting for the change in tax law. SAB 118 providesfor a measurement of up to one year from the date of enactment.

 

F-9

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

RecentIssued Accounting Pronouncements

 

Fromtime to time, new accounting pronouncements are issued by the Financial Accounting Standard Board (“FASB”) or otherstandard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company doesnot believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’sfinancial position or results of operations upon adoption.

 

InFebruary 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balancesheets 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, 2019using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date withoutadjusting the comparative periods presented. The Company adopted the following practical expedients and elected the followingaccounting policies related to this standard update:

 

Theoption to not reassess prior conclusions related to the identification, classification and accounting for initial direct costsfor leases that commenced prior to January 1, 2019.

 

Short-termlease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a termof 12 months or less.

 

Theoption to not separate lease and non-lease components for certain equipment lease asset categories such as freight car, vehiclesand work equipment.

 

Thepackage of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing contractsare or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii) not reassessinginitial direct costs for any existing leases.

 

TheCompany has inventoried all leases where the Company is a lessee as of the initial date of application and has examined othercontracts with suppliers, vendors, customers and other outside parties to identify whether such contracts contain an embeddedlease as defined under the new guidance. The Company’s lease population comprises lease for corporate office space and awarehouse that are year-to-year basis with monthly rent ranging from approximately $200 to $3,200 and qualify under the practicalexpedient of short-term leases. The Company does not have exclusive rights of control to any assets in the customer and vendorcontracts reviews and does not have any financing leases as of the date of adoption of ASC 842.

 

Asa result of the above, the adoption of ASC 842 did not have a material effect on the consolidated financial statements. The Companywill review for the existence of embedded leases in future agreements

 

InJune 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)2018-07, Compensation – Stock Compensation (Topic 718). This update is intended to reduce cost and complexity and to improvefinancial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel,suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includesshare-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services.Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standardwill be effective for financial statements issued by public companies for the annual and interim periods beginning after December15, 2018. Early adoption of the standard is permitted. The adoption of this ASU did not have a material effect on the Company’sconsolidated financial statements.

 

NOTE3 – GOING CONCERN

 

Theaccompanying financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Companyas a going concern for a period of one year from the issuance of these financial statements. For the nine months ended September30, 2019, the Company had $236,785 in revenues, a net loss of $866,554 and had net cash used in operations of $767,211. Additionally,as of September 30, 2019, the Company had working capital deficit, stockholders’ deficit and accumulated deficit of $907,940,$907,337 and $3,534,766 respectively. It is management’s opinion that these conditions raise substantial doubt about theCompany’s ability to continue as a going concern for a period of twelve months from the date of the issuance of these financialstatements.

 

F-10

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

Thefinancial statements do not include any adjustments to reflect the possible future effect on the recoverability and classificationof assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty.

 

Successfulcompletion of the Company’s development program and, ultimately, the attainment of profitable operations are dependent uponfuture events, including obtaining adequate financing to fulfill its development activities, acceptance of the Company’spatent 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 saleslevel.

 

NOTE4 – CONVERTIBLE NOTES PAYABLE

 

InJanuary 2019, the Company commenced an offering of up to $500,000 pursuant to which the Company will issue convertible notes toinvestors. On January 18, 2019, February 5, 2019 and July 23, 2019, the Company issued three such convertible notes payable tothree investors for $100,000, $130,000 and $150,000, respectively. The notes bear interest at a fixed rate of 10% per annum, computedbased 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-linkedround of financing of the Company in excess of $1,000,000 (“Qualified Financing”) or other event pursuant to whichconversion shares are to be issued pursuant to the terms of the note.

 

Thenotes are convertible into common stock of the Company following events on the following terms: with no action on the part ofthe note holder upon the consummation of a Qualified Financing, the debt will be converted to new round stock based on the productof the outstanding principal and accrued interest multiplied by 1.35, then divided by the accrual per share price of the new roundcommon stock. If a change of control occurs or if the Company completes a firmly underwritten public offering of its common stockprior to the Qualified Financing the notes would, at the election of the holders of a majority of the outstanding principal ofthe 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 priceper share equal to the lesser of the per share value of the common stock as determined by the Company’s Board of Directorsor 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 beneficialconversion feature. If conversion of the debt occurs, the Company will recognize an expense related to the intrinsic value. TheCompany recorded $18,545 of accrued interest and has a total outstanding principal balance of $380,000 as of September 30, 2019.

 

Inthe event that the Company consummates a financing prior to the Maturity Date, other than a Qualified Financing, and the economicterms thereof are more favorable to the investors in such financing than the terms of the note, the note shall automatically beamended to reflect such more favorable economic terms.

 

TheCompany recorded a total debt discount of $18,400 related to the above convertible notes. Amortization of the debt discount isrecorded as interest expense and a total of $6,058 was amortized during the nine months ended September 30, 2019.

 

NOTE5 – OTHER LIABILITIES

 

In2016, the Company recorded a liability in connection with the sale of two Electroencephalograms (“EEG”) machines asit provided a guarantee to the customer’s financing company (See Note 2). In June 2017, the customer defaulted on its paymentsand an additional $19,107 was booked as a liability and recognized as a loss on the sale of the assets for interest and some taxesrelated to the transaction. As of September, 30, 2019 and December 31, 2018, total liability to the financing company reflectedin Other Liabilities is $8,058 and $12,549, respectively.

 

Futureminimum commitments related to the EEG liability consisted of the following at September 30, 2019:

 

Years ended December 31,  Amount (USD) 
Remainder 2019   1,500 
2020   6,558 
Total  $8,058 

 

F-11

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

NOTE6 – RELATED PARTY TRANSACTIONS

 

Duringthe year ended December 31, 2018, an entity controlled by Mr. Vadim Sakharov, former CEO of the Company and current director andexecutive officer, provided a $50,000 non-interest-bearing, no-term loan to the Company. As of September 30, 2019, and December31, 2018, the balance was $50,000 and $50,000, respectively.

 

Duringthe nine months ended September 30, 2019 and 2018, the Company had expenses related to consulting fees of $0 and $67,877, respectively,to Mr. Sakharov.

 

Duringthe nine months ended September 30, 2019 and 2018, the Company had expenses related to research and development costs of $43,235and $0, respectively, to an entity controlled by Mr. Sakharov.

 

InApril 2019 and September 2019, an affiliate of Boris Goldstein, the Company’s Chairman of the Board, provided $25,000 and$15,000, respectively, in a non-interest-bearing, no-term loan to the Company. As of September, 30, 2019, the balance was $40,000.

 

OnSeptember 1, 2018, the Company entered into a sublease agreement with a company controlled by the Company’s Chairman, wherebythe Company makes payments to the related party for shared office space. This lease was terminated on March 31, 2019. For thenine months ended September 30, 2019, the Company has made approximately $4,900 in rent payments to the related party.

 

Duringthe nine months ended September 30, 2019, an affiliate of Nickolay Kukekov, a director of the Company, provided an aggregate totalof $207,000 in non-interest-bearing, no-term loans to the Company. As of September, 30, 2019, the balance was $207,000.

  

Duringthe nine months ended September 30, 2019 and 2018, the Company had expenses related to marketing and sales costs of $0 and $15,000,respectively, to entities controlled by the Company’s Chairman.

 

NOTE7 – STOCKHOLDERS’ DEFICIT

 

PreferredStock

 

TheCompany has authorized 10,000,000 shares of undesignated preferred stock with a $0.001 par value. As of September 30, 2019, nopreferred shares have been issued and these shares are considered blank check preferred shares with no terms, limitations, orrights associated with them.

 

CommonStock

 

TheCompany has authorized 200,000,000 shares of common stock with a $0.001 par value per share. The holders of common stock are entitledto one vote for each share of common stock held at the time of vote. As of September 30, 2019, the Company had 19,250,626 sharesoutstanding or deemed outstanding.

  

SharesIssued for Services

 

OnAugust 8, 2018, the Company entered into a one-year agreement with an advisor for consulting services. Pursuant to the agreement,as amended, the Company has the right to pay $5,000 or issue the advisor a maximum of 6,667 shares of common stock on a quarterlybasis, beginning the quarter ended December 31, 2018. The Company elected to issue 20,001 shares for the services provided duringthe nine months ended September 30, 2019 at a value of $0.04 per share or $840.

 

OnAugust 28, 2018, the Company entered into a one-year agreement with an advisor for consulting services. Pursuant to the agreement,as amended, the Company has the right to pay $5,000 or issue the advisor a maximum of 6,667 shares of common stock on a quarterlybasis, beginning the quarter ended December 31, 2018. The Company elected to issue 20,001 shares for the services provided duringthe nine months ended September 30, 2019 at a value of $0.04 per share or $840.

 

OnSeptember 1, 2019, the Company entered into a four-month agreement with an advisor for consulting services. Pursuant to the agreement,the Company shall pay the advisor 5,000 shares of common stock a month. As of September 30, 2019, the Company has issued 5,000shares for services provided by the advisor at a value of $0.04 per share or $200.

 

F-12

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

Warrants

 

Thefollowing table summarized the warrant activity for the nine months ended September 30, 2019:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Contractual   Intrinsic 
Warrants  Shares   Price   Term   Value 
Balance Outstanding, December 31, 2018   402,250   $0.40    4.72   $      - 
Granted   -    -    -    - 
Forfeited   -    -    -    - 
Exercised   -    -    -    - 
Expired   -    -    -    - 
Balance Outstanding, September 30, 2019   402,250   $0.40    3.98   $- 
                     
Exercisable, September 30, 2019   402,250   $0.40    3.98   $- 

 

Options

 

OnJanuary 14, 2019, the Board of Directors approved the issuance of options to purchase an aggregate of 800,000 and 200,000 shareof common stock to Boris Goldstein and Vadim Sakharov, respectively. The options have an exercise price of $0.75 per share whichwill vest over a 24-month period as follows: 25% (or 200,000 and 50,000, respectively) shall vest six months after the grant datewith the remaining options will vest on a monthly basis at a rate of 1/24th per month. The options will expire on January14, 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 priceof $0.042, and (vi) exercise price of $0.75. The expense will be amortized over the vesting period and a total of $8,819 was recordedduring the nine months ended September 30, 2019.

 

OnJanuary 25, 2019, the Company appointed Jesse W. Crowne as the Company’s new Chief Executive Officer. In connection withthis appointment, the Company and Mr. Crowne entered into an employment agreement effective as of January 25, 2019. As part ofhis compensation, Mr. Crowne received options to purchase 800,000 shares of the Company’s common stock at an exercise priceof $0.75 per share, of which 200,000 vest on the one year anniversary of the date of grant and the remaining 600,000 shares vestratably on a quarterly basis over the following two years. The options will expire January 25, 2029. Under certain circumstances,the Company would be obligated to grant options to purchase an additional 200,000 shares at substantially similar terms. The fairvalue of $13,714 was calculated using the Black-Scholes pricing model with the following assumptions: (i) expected life 10 years,(ii) volatility of 77%, (iii) risk free rate of 2.76% (iv) dividend rate of zero, (v) stock price of $0.042, and (vi) exerciseprice of $0.75. On May 31, 2019, Mr. Crowne resigned as Chief Executive Officer, but remains as a director on the Company’sBoard. As a result of his resignation, his options were cancelled. The fair value of the stock option expense was amortized overthe vesting period and a total of $2,366 was recorded through May 31, 2019.

 

Thefollowing table summarized the option activity for the nine months ended September 30, 2019:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Contractual   Intrinsic 
Options  Shares   Price   Term   Value 
Balance Outstanding, December 31, 2018   -   $-    -   $      - 
Granted   1,800,000    0.75    10    - 
Forfeited   (800,000)   -    -    - 
Exercised   -    -    -    - 
Expired   -    -    -    - 
Balance Outstanding, September 30, 2019   1,000,000   $0.75    9.30   $- 
                     
Exercisable, September 30, 2019   375,000   $0.75    9.30   $- 

 

Forfuture periods, the remaining value of the stock options totaling approximately $5,927 will be amortized into the statement ofoperations consistent with the period for which the services will be rendered.  

 

F-13

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

NOTE8 – COMMITMENTS AND CONTINGENCIES

 

FinancialAdvisory Agreement

 

OnFebruary 1, 2017, the Company entered into a one-year agreement with a third party to act as the Company’s exclusive financialadvisor (the “Financial Advisor”). In consideration for services, the Company will pay a cash fee equal to 8% of thetotal amount of capital received by the Company from institutions and 10% of the total amount of capital received by the Companyfrom retail. With the exception of the Bridge Private Placement Transaction, the Company will also pay a cash amount, representinga non-accountable expense allowance payable immediately upon closing of a financing equal to 3% of the aggregate gross proceedsraised in the transactions from retail. In addition to the cash consideration, the Company will also issue warrants to purchasecommon stock to the Financial Advisor in an amount equal to 10% of the number of shares of common stock purchased by the investorsand that the investors obtain a right to acquire through purchase, conversion or exercise of convertible securities issued bythe Company. Those warrants will be immediately exercisable at the price per share at which the investor can acquire the commonstock. 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.

  

OperatingLeases

 

InFebruary 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balancesheets 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, 2019using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date withoutadjusting the comparative periods presented. The Company adopted the following practical expedients and elected the followingaccounting policies related to this standard update:

 

Theoption to not reassess prior conclusions related to the identification, classification and accounting for initial direct costsfor leases that commenced prior to January 1, 2019.

 

Short-termlease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a termof 12 months or less.

 

Theoption to not separate lease and non-lease components for certain equipment lease asset categories such as freight car, vehiclesand work equipment.

 

Thepackage of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing contractsare or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii) not reassessinginitial direct costs for any existing leases.

 

Asa result of the above, the adoption of ASC 842 did not have a material effect on the consolidated financial statements. The Companywill review for the existence of embedded leases in future agreements.

 

TheCompany has inventoried all leases where the Company is a lessee as of the initial date of application and has examined othercontracts with suppliers, vendors, customers and other outside parties to identify whether such contracts contain an embeddedlease as defined under the new guidance. The Company’s lease population comprises lease for corporate office space and awarehouse that are year-to-year basis with monthly rent ranging from approximately $200 to $3,200 and qualify under the practicalexpedient of short-term leases. The Company does not have exclusive rights of control to any assets in the customer and vendorcontracts reviews and does not have any financing leases as of the date of adoption of ASC 842.

 

TheCompany conducts its U.S. operations from one office located in New York, NY. Beginning September 1, 2018, the Company enteredinto a six-month agreement from September 1, 2018 through February 28, 2019 at $1,598 per month. The Company continues to rentthis location on a month to month basis at a rate of $1,700 per month. In March 2019, the Company rented an additional officeat this location at a rate of $1,700 per month, which was terminated on June 30, 2019.

 

BeginningSeptember 1, 2018, the Company entered into a one-year lease agreement with a related party (see Note 5). The Company is payingthe related party one half of the $3,000 monthly rent or $1,500 per month, plus expenses. This lease was terminated on March 31,2019.

 

BeginningJanuary 2, 2019, the Company entered into a 12-month lease agreement ending December 31, 2019, with a third party in Russia. TheCompany is paying rent at a rate of 17,200 Rubles ($272) per month.

 

F-14

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

September 30, 2019

(unaudited)

 

BeginningJune 1, 2019, the Company entered into a 10-month lease agreement ending March 31, 2020 with a third party in Russia. The Companyis paying rent at a rate of 12,000 Rubles ($190) per month.

 

Additionally,the Company also rents a warehouse. Beginning December 1, 2018, the Company entered into a 6-month warehouse rental agreementfor $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.

 

Totalrent expense for the nine months ended September 30, 2019 and 2018 was $64,768 and $44,477 respectively.

 

EquityIncentive Plan

 

Asof 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 anniversaryof its adoption by the Board. Under the 2018 Plan, the Company may grant equity-based incentive awards, including options, restrictedstock, 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 theCompany’s common stock are reserved for issuance under the 2018 Plan. As of September 30, 2019, the Company has granted1,800,000 options and has 1,000,000 options outstanding under the 2018 Plan (see Note 7).

 

NOTE9 – SUBSEQUENT EVENTS

 

Inaccordance with ASC 855 “Subsequent Events,” Company management reviewed all material events through the date thisreport was issued, and the following subsequent events took place.

 

Issuanceof a Non-Convertible Promissory Note

 

OnOctober 23, 2019, an investor (the “Lender”) of the Company subscribed for a non-convertible promissory note (the“Note”) and loaned to the Company $50,000 (the “Loan”).

 

TheNote bears interest at a fixed rate of 14% per annum, computed based on a 360-day year of twelve 30-day months, which interestwill be payable quarterly until the Maturity Date. The principal amount and any accrued and unpaid interest due under the Noteis payable on October 21, 2020 (the “Maturity Date”).

 

TheNote contains customary events of default, which, if uncured, entitle the Lender to accelerate the due date of the unpaid principalamount of, and all accrued and unpaid interest on, its Note.

 

ConsultingAgreements

 

OnOctober 1, 2019, the Company entered into a three-month agreement with an advisor for consulting services. Pursuant to the agreement,the Company shall pay the advisor 4,000 shares of common stock a month.

 

OnOctober 7, 2019, the Company entered into a three-month agreement with an advisor for consulting services. Pursuant to the agreement,the Company shall pay the advisor 7,500 shares of common stock a month.

 

F-15

 

 

INDEX TO FINANCIAL STATEMENTS

 

  Page
Report of Independent Registered Public Accounting Firm F-17
   
Consolidated Balance Sheets as of December 31, 2018 and 2017 F-18
   
Consolidated Statements of Operations for the years ended December 31, 2018 and 2017 F-19
   
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2018 and 2017 F-20
   
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 F-21
   
Notes to Consolidated Financial Statements F-22

 

F-16

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders of Brain Scientific Inc.:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Brain Scientific Inc. (“the Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2018 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph Regarding Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Sadler, Gibb & Associates, LLC

 

We have served as the Company’s auditor since 2018.

 

Salt Lake City, UT

April 1, 2019 

 

 

F-17

 

 

Brain Scientific Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

 

   December 31, 2018   December 31, 2017 
ASSETS        
CURRENT ASSETS:        
Cash  $163,563   $297,528 
Prepaid expenses and other current assets   14,552    10,972 
           
TOTAL CURRENT ASSETS   178,115    308,500 
           
Property and equipment, net   1,999    1,512 
           
TOTAL ASSETS  $180,114   $310,012 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES:          
Accounts payable and accrued expenses  $139,637   $53,704 
Accounts payable and accrued expenses - related party   31,900    - 
Convertible notes payable, net of discount   -    1,057,595 
Other liabilities - short term   5,454    62,522 
Loans payable - related party   50,000    34,252 
TOTAL CURRENT LIABILITIES:   226,991    1,208,073 
           
Other liabilities   7,095    12,620 
           
TOTAL LIABILITIES   234,086    1,220,693 
           
Commitments and contingencies   -    - 
           
STOCKHOLDERS’ DEFICIT          
           
Preferred stock, $0.001 par value; 10,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively   -    - 
Common stock, $0.001 par value; 200,000,000 shares authorized, 19,205,624 and 9,906,526 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively   19,206    9,907 
Additional paid in capital   2,595,034    321,522 
Accumulated deficit   (2,668,212)   (1,242,110)
           
TOTAL STOCKHOLDERS’ DEFICIT   (53,972)   (910,681)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $180,114   $310,012 

 

The accompanying notes arean integral part of these consolidated financial statements.

 

F-18

 

 

Brain Scientific Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Years Ended December 31, 
   2018   2017 
         
         
REVENUE  $58,113   $- 
           
COST OF GOODS SOLD   33,939    - 
           
GROSS PROFIT   24,174    - 
           
SELLING, GENERAL AND ADMINISTRATIVE:          
Research and development   210,206    289,586 
Professional fees   271,718    57,404 
Sales and marketing expenses   93,190    88,532 
Occupancy expenses   58,301    73,840 
General and administrative expenses   675,882    395,838 
TOTAL SELLING, GENERAL AND ADMINISTRATIVE   1,309,297    905,200 
           
LOSS FROM OPERATIONS   (1,285,123)   (905,200)
           
OTHER INCOME (EXPENSE):          
Interest expense   (159,165)   (97,687)
Other income   18,186    47,205 
Other expense   -    (2,600)
TOTAL OTHER INCOME (EXPENSE)   (140,979)   (53,082)
           
LOSS BEFORE INCOME TAXES   (1,426,102)   (958,282)
           
INCOME TAX EXPENSE   -    - 
           
NET LOSS  $(1,426,102)  $(958,282)
           
NET LOSS PER COMMON SHARE          
Basic and diluted  $(0.11)  $(0.08)
           
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING          
Basic and diluted   12,471,618    12,240,144 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-19

 

 

Brain Scientific Inc. and Subsidiary

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

                   Additional         
   Preferred Stock   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Shares   Amount   Capital   (Deficit)   Total 
                             
Balance at December 31, 2016   -   $-    3,157,526   $3,158   $226,140   $(283,828)  $(54,530)
                                    
Issuance of common stock for cash   -    -    6,749,000    6,749    93,251    -    100,000 
Fair value of warrants issued in connection with convertible debt   -    -    -    -    2,131    -    2,131 
Net loss   -    -    -    -    -    (958,282)   (958,282)
Balance at December 31, 2017        -   $       -    9,906,526   $9,907   $321,522   $(1,242,110)  $(910,681)
                                    
Conversion of convertible notes and accrued interest to common stock   -    -    5,687,630    5,688    2,269,362    -    2,275,050 
Fair value of warrants issued in connection with convertible debt   -    -    -    -    2,604    -    2,604 
Issuance of common stock for services   -    -    106,468    106    5,042    -    5,148 
Effect of reverse recapitalization   -    -    3,505,000    3,505    (3,496)   -    9 
Net loss   -    -    -    -    -    (1,426,102)   (1,426,102)
Balances at December 31, 2018   -   $-    19,205,624   $19,206   $2,595,034   $(2,668,212)  $(53,972)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-20

 

 

Brain Scientific Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Years Ended December 31, 
   2018   2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(1,426,102)  $(958,282)
Change in net loss to net cash used in operating activities:          
Depreciation and amortization expense   656    445 
Amortization of debt discount   77,889    44,726 
Common stock issued for services   5,148    - 
Changes in operating assets and liabilities:          
Other liabilities   (12,593)   6,494 
Prepaid expenses and other current assets   (3,570)   (10,972)
Accounts payable and accrued expenses   213,982    43,946 
Accounts payable - related party   31,900    - 
NET CASH USED IN OPERATING ACTIVITIES  $(1,112,690)  $(873,643)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of fixed assets  $(1,143)  $(1,957)
NET CASH USED IN INVESTING ACTIVITIES  $(1,143)  $(1,957)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from convertible notes payable  $964,120   $1,015,000 
Proceeds from related party loans   50,000    - 
Payments of related party loans   (34,252)   (34,653)
Proceeds from the sale of common stock for cash   -    100,000 
Advance on notes payable   -    50,000 
NET CASH PROVIDED BY FINANCING ACTIVITIES  $979,868   $1,130,347 
           
NET INCREASE IN CASH   (133,965)   254,747 
           
CASH AT BEGINNING OF THE YEAR   297,528    42,781 
CASH AT END OF THE YEAR  $163,563   $297,528 
           
Supplemental Disclosure of Cash Flow Information          
           
Cash paid for interest  $3,615   $2,591 
Cash paid for taxes  $-   $- 
           
Supplemental Disclosure of Non-Cash Investing and Financing Activities          
           
Discounts related to warrants issued in connection with convertible debentures  $2,604   $2,131 
Conversion of convertible notes and accrued interest to common stock  $2,275,050   $- 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-21

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Brain Scientific Inc. (the “Company”), was incorporated under the laws of the state of Nevada on November 18, 2013 under the name All Soft Gels Inc. The Company on September 21, 2018 acquired MemoryMD, Inc. (“MemoryMD”), a privately held Delaware corporation formed in February 2015. Upon completion of the acquisition, MemoryMD is treated as the surviving entity and accounting acquirer although the Company was the legal acquirer. Accordingly, the Company’s historical financial statements are those of MemoryMD, the surviving entity and accounting acquirer. MemoryMD is a cloud computing, data analytics and medical device technology company in the NeuroTech and brain monitoring industries seeking to commercialize its EEG devices and caps. The Company is headquartered in New York, New York.

 

Reverse Merger and Corporate Restructure

 

On September 21, 2018, the Company entered into a merger agreement (the “Merger Agreement”) with MemoryMD and AFGG Acquisition Corp. to acquire MemoryMD (the “Acquisition”). The transactions contemplated by the Merger Agreement were consummated on September 21, 2018 and, pursuant to the terms of the Merger Agreement, all outstanding shares of MemoryMD were exchanged for shares of the Company’s common stock. Accordingly, the Company acquired 100% of MemoryMD in exchange for the issuance of shares of the Company’s common stock and MemoryMD became the Company’s wholly-owned subsidiary. The Company issued an additional 4,083,252 shares of its common stock upon the automatic conversion at the closing of an aggregate of $1,507,000 principal amount plus accrued interest of outstanding convertible promissory notes issued by MemoryMD, and it further issued an additional 1,604,378 shares of its common stock upon the automatic conversion immediately subsequent to the closing of an aggregate of $640,000 principal amount plus accrued interest of outstanding convertible promissory notes issued by MemoryMD. Furthermore, as of the closing, Mr. Amer Samad, the sole director and executive officer until the consummation of the Acquisition, committed to tender for cancellation 6,495,000 shares of the Company’s common stock as part of the conditions to closing, of which 6,375,000 have been cancelled at December 31, 2018 and 120,000 are expected to be cancelled as soon as practicable. Total shares issued as a result of the Acquisition was 13,421,752.

 

The Acquisition has been accounted for as a reverse recapitalization of Brain Scientific by MemoryMD, but in substance as a capital transaction, rather than a business combination since Brain Scientific had nominal or no operations and assets prior to and as of the closing of the Acquisition. The transaction is deemed a reverse recapitalization and the accounting is similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets should be recorded. For accounting purposes, MemoryMD is treated as the surviving entity and accounting acquirer although Brain Scientific was the legal acquirer. Accordingly, the Company’s historical financial statements are those of MemoryMD.

 

All references to common stock, share and per share amounts have been retroactively restated to reflect the reverse recapitalization as if the transaction had taken place as of the beginning of the earliest period presented.

 

Assignment and Assumption Agreement

 

As of immediately prior to the closing of the Acquisition, the Company entered into an Assignment and Assumption Agreement with Chromium 24 LLC, pursuant to which Chromium 24 LLC assumed all of the Company’s remaining assets and liabilities through the closing of the Acquisition. Accordingly, as of the closing of the Acquisition, Brain Scientific had no assets or liabilities other than the shares of MemoryMD acquired in the Acquisition.

 

Name Change and Increase in Authorized Shares

 

On September 18, 2018, the Company filed an amendment to its certificate of incorporation with the Nevada Secretary of State to change its name to Brain Scientific Inc. On September 18, 2018, FINRA approved of the name change as well as a ticker symbol change, which was effective as of September 19, 2018. In addition, the Company increased its authorized shares of common stock from 50,000,000 to 200,000,000 and created and authorized 10,000,000 shares of undesignated preferred stock.

 

F-22

 

 

BRAIN SCIENTIFICINC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

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 subsidiary, MemoryMD. All significant consolidated transactions and balances have been eliminated in consolidation.

 

Reclassifications to Prior Period Financial Statements and Adjustments

 

Certain reclassifications have been made in the Company’s financial statements of the prior year to conform to the current year presentation. $26,775 in accounting fees in the year ended December 31, 2017 were reclassified from general and administrative expenses to professional fees. These reclassifications have no impact on previously reported net income.

 

Use of Estimates

 

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the useful life of property and equipment and assumptions used in the valuation of options and warrants.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At December 31, 2018 and December 31, 2017, the Company had no cash equivalents.

 

The Company’s cash is held with financial institutions, and the account balances may, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit. Accounts are insured by the FDIC up to $250,000 per financial institution. The Company has not experienced any losses in such accounts with these financial institutions. As of December 31, 2018 and December 31, 2017, the Company had $0 and $47,528, respectively, in excess over the FDIC insurance limit.

 

Inventory

 

Inventory consists of finished goods that are valued at lower of cost or market.  As of December 31, 2018 and 2017 the Company had inventory totaling $0.

 

Property, Equipment and Depreciation

 

Property and equipment are recorded at cost. 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, purchased in April 2017 and December 2018 with an original cost of $1,957 and $1,143, respectively. Depreciation expense was $656 and $445 for the years ended December 31, 2018 and 2017, respectively. Accumulated depreciation at December 31, 2018 and 2017 was $1,101 and $445, respectively. As of December 31, 2018 and December 31, 2017, property and equipment, net was $1,999 and $1,512, respectively.

 

F-23

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

Convertible Notes Payable

 

The Company has issued convertible notes, which contain variable conversion features, whereby the outstanding principal and accrued interest automatically convert into common shares at a fixed price which may be a discount to the common stock at the time of conversion. The conversion features of these notes are contingent upon future events, whereby, the holder agreed not to convert until the contingent future event has occurred. On September 21, 2018, the Company completed the Acquisition and all convertible notes and related accrued interest were converted into common stock of the Company.

 

Revenue

 

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 delivery of the product. There has been no material effect on the Company’s financial statements as a result of adopting Topic 606.

 

The Company recognizes revenue from the sale of NeuroCaps, Universal Cables and its proprietary software connected to its cloud-based computing system that that can assist in diagnosis by assessing pathology, abnormalities, and other factors.

 

In November 2016, the Company sold two machines loaded with their proprietary software, but provided a guarantee to the customer’s financing company. As a result of the guarantee, a liability was booked against the payment received in the transactions and gains on the sale of the machine were expected to be recognized ratably over the financing period to coincide with the reduction in the amount guaranteed. The Company’s software was still in the testing phase and $0 and $1,241 related to the sale were recognized as other income for the years ended December 31, 2018 and 2017. In June 2017, the customer defaulted on their financing agreement and the Company became liable for the lease payments. (See Note 5). Total other income for the years ended December 31, 2018 and 2017 related to the sale of accessories provided for research and development testing was $7,560 and $30,025, respectively.

 

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 years ended December 31, 2018 and 2017 were $210,206 and $289,586, respectively.

 

Sales and Marketing

 

Advertising and marketing costs are expensed as incurred. Advertising and marketing costs recognized in the statement of operations for the years ended December 31, 2018 and 2017 were $93,190 and $88,532, 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.

 

F-24

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

Basic and Diluted Net Loss Per Common Share

 

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period and, if dilutive, potential common shares outstanding during the period. Potentially dilutive securities consist of the incremental common shares issuable upon exercise of common stock equivalents such as stock options, warrants and convertible debt instruments. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. As a result, the basic and diluted per share amounts for all periods presented are identical. In the years ended December 31, 2018 and 2017, 402,250 and 234,375, respectively, of anti-dilutive securities were excluded from the computation.

 

Fair Value of Financial Instruments

 

The Company's financial instruments are measured and recorded at fair value based on inputs and assumptions that market participants would use in pricing an asset or a liability. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, management considers the principal or most advantageous market in which the Company would transact, and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

 

Fair value is determined for assets and liabilities using a three-tiered value hierarchy into which these assets and liabilities are grouped based upon significant inputs as follows:

 

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2 - Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the lack of significance of the observable parameters to the overall fair value measurement. However, the fair value determination for Level 3 financial instruments may consider some observable market inputs.

 

The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The carrying values of cash, prepaid expenses and other current assets, convertible notes, accounts payable, loans payable and due to others approximate fair value due to the short-term nature of these items.

 

The Company did not have any other Level 1, Level 2 or Level 3 assets or liabilities as of December 31, 2018 and December 31, 2017.

  

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 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 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.

 

F-25

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

The Company follows the guidance in ASC Topic 740-10 in assessing uncertain tax positions. The standard applies to all tax positions and clarifies the recognition of tax benefits in the financial statements by providing for a two-step approach of recognition and measurement. The first step involves assessing whether the tax position is more-likely-than-not to be sustained upon examination based upon its technical merits. The second step involves measurement of the amount to be recognized. Tax positions that meet the more-likely-than-not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate finalization with the taxing authority. The Company recognizes the impact of an uncertain income tax position in the financial statements if it believes that the position is more likely than not to be sustained by the relevant taxing authority. The Company will recognize interest and penalties related to tax positions in income tax expense. As of December 31, 2018, the Company had no unrecognized uncertain income tax positions.

 

On December 22, 2017, the passage of legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”) was enacted and significantly revised the U.S. income tax law. The TCJA includes changes, which reduce the corporate income tax rate from 34% to 21% for years beginning after December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued and allows a company to recognize provisional amounts when it does not have the necessary information available, prepared or analyzed, including computations, in reasonable detail to complete its accounting for the change in tax law. SAB 118 provides for a measurement of up to one year from the date of enactment.

 

Recent Issued Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board (“FASB”) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company's financial position or results of operations upon adoption.

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the Company expects to receive for those goods or services. The standard will be effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company adopted this standard on January 1, 2018.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. The new standard will be effective for the Company on January 1, 2019. The Company is currently evaluating the method of adoption and the potential impact that this standard may have on its financial position and results of operations.

 

In June 2018, the FinancialAccounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation– Stock Compensation (Topic 718). This update is intended to reduce cost and complexity and to improve financial reportingfor share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). TheASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based paymentsissued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accountingfor share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financialstatements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption ofthe standard is permitted. The standard will be applied in a retrospective approach for each period presented. Management currentlydoes not plan to early adopt this guidance and is evaluating the potential impact of this guidance on the Company’s consolidatedfinancial statements as well as transition methods.

 

F-26

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

NOTE 3 – GOING CONCERN

 

The accompanying financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern for a period of one year from the issuance of these financial statements. For the year ended December 31, 2018, the Company had $58,113 in revenues, a net loss of $1,426,102 and had net cash used in operations of $1,112,690. Additionally, as of December 31, 2018, the Company had working capital deficit, stockholders’ deficit and accumulated deficit of $48,876, $53,972 and $2,668,212, 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

 

During the year ended December 31, 2017, the Company commenced a private offering (the “Bridge Financing Transaction”) of up to $1,000,000, which was amended on September 19, 2017 to a maximum offering amount of $1,100,000 and amended again on April 4, 2018 to $1,500,000, pursuant to which the Company issued convertible notes totaling $1,087,500. The notes all have a maturity date of one year from the date of issuance and accrue interest at a rate of 8% per annum. In a qualified financing, reverse merger, change of control or an initial public offering (“Conversion Event”), the notes, including interest thereon, will automatically convert at $0.40 per share. Based on the terms of the conversion, the holders may receive a discount and is considered a contingent beneficial conversion feature. At the closing of the Conversion Event, the Company will recognize an expense related to the intrinsic value. The Company recorded $50,389 of accrued interest and has a total outstanding principal balance of $1,087,500 as of December 31, 2017.

 

In January 2018 the Company issued an additional $97,000 convertible note payable to a third party. The funding of the note was comprised of the $50,000 loaned to the Company on December 28, 2017, plus additional cash proceeds of $47,000 on January 3, 2018.

 

On April 24, 2018, the Company extended the maturity dates of all convertible notes issued during the year ended December 31, 2017 to the earlier of April 30, 2019 or the consummation of a qualified financing or other event pursuant to which the Conversion shares are to be issued.

 

The Company issued 12 additional convertible notes payable to third parties in the aggregate principal amount of $962,500 from February through September 2018. The terms of the convertible note are substantially the same as the notes issued during the year ended December 31, 2017. On September 21, 2018 the outstanding principal balances of all of the convertible notes in the amount of $2,147,000 and $128,050 in accrued interest was converted into shares of the Company’s common stock (see Note 8).

 

The Company recorded a total debt discount of $122,615 related to all the above convertible notes. Amortization of the debt discount, which is recorded as interest expense, was $77,889 and $44,726 for the years ended December 31, 2018 and 2017, respectively. The discount related to the convertible notes was fully amortized on September 21, 2018 in relation to the conversion of the convertible notes to shares of the Company’s common stock.

 

NOTE 5 – OTHER LIABILITIES

 

In 2016, the Company recordeda liability in connection with the sale of two EEG machines as it provided a guarantee to the customer’s financing company(See Note 2). In June 2017, the customer defaulted on its payments and an additional $19,107 was booked as a liability and recognizedas a loss on the sale of the assets for interest and some taxes related to the transaction. As of December 31, 2018 and December31, 2017, total liability to the financing company reflected in Other Liabilities is $12,549 and $17,582, respectively.

 

F-27

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

Future minimum commitments related to the EEG liability consisted of the following at December 31, 2018:

 

Years ended December 31,  Amount (USD) 
2019   5,454 
2020   7,095 
Total  $12,549 

 

On December 28, 2017, the Company borrowed $50,000 from a third party (the “Lender”). The loan was non-interest bearing and had no maturity date. As of December 31, 2017, the Company had an outstanding balance of $50,000. In January 2018, the Company issued a $97,000 convertible note payable to the Lender, which was funded by the $50,000 borrowed on December 28, 2017 plus additional proceeds of $47,000 (See Note 4).

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

During the year ended December 31, 2017, an entity controlled by Vadim Sakharov, the Company’s then CEO and current President and CTO, provided a non-interest-bearing, no-term loan to the Company. The Company repaid that loan in full during the year ended December 31, 2018. During the year ended December 31, 2018, an entity controlled by Mr. Sakharov provided a $50,000 non-interest-bearing, no-term loan to the Company. As of December 31, 2018, and December 31, 2017, the balance to related parties was $50,000 and $34,252, respectively.

 

On May 9, 2017, the Company entered into a sublease agreement with Nano Graphene Inc., a company controlled by the Company’s chairman and his affiliates. In the years ended December 31, 2018 and 2017 Nano Graphene paid rent of $10,626 and $15,939, respectively, for warehouse space the Company rents from a third party. The Company has recorded the payments as other income.

 

On September 1, 2018, the Company entered into a sublease agreement with a company controlled by the Company’s Chairman, whereby the Company makes payments to the related party for shared office space. For the year ended December 31, 2018, the Company has made $6,202 in rent payments to the related party.

 

During the years ended December 31, 2018 and 2017, the Company had expenses related to research and development costs of $59,788 and $62,700, respectively, to an entity controlled by Mr. Sakharov.

 

During the years ended December 31, 2018 and 2017, the Company had expenses related to marketing and sales costs of $15,000 and $38,347, respectively, to entities controlled by the Company’s Chairman.

 

During the years ended December 31, 2018 and 2017, the Company had expenses related to consulting fees of $83,377 and $0, respectively, to Mr. Sakharov.

 

NOTE 7 - INCOME TAXES

 

The Company files corporate income tax returns in the United States (federal) and New York. The Company is subject to federal, state and local income tax examinations by tax authorities through inception.

 

As of December 31, 2018 and 2017, the Company had federal and state net operating loss carry forwards of $2,655,000 and $1,234,000, respectively that may be offset against future taxable income which will begin to expire in 2035 through 2038.

 

   For the Years Ended December 31, 
   2018   2017 
Net operating loss carry forwards  $746,028   $326,330 
Depreciation   (41)   - 
Valuation allowance   (745,987)   (326,330)
Net Deferred Tax Asset  $-   $- 

 

F-28

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Deferred tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred tax assets because of the uncertainty regarding its realizability.

 

Reconciliation of the statutory federal income tax to the Company's effective tax:

 

   For the Years Ended 
   December 31, 
   2018   2017 
   %   % 
Statutory federal tax rate   21.00%   21.00%
State taxes, net of federal benefit   8.40%   5.61%
Valuation allowance   -29.40%   -26.61%
           
Provision for income taxes   0.00%   0.00%

  

The Company’s policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes in the statement of operations. As of December 31, 2018 and 2017 the Company had no unrecognized tax benefits. There were no changes in the Company’s unrecognized tax benefits during the years ended December 31, 2018 and 2017. The Company did not recognize any interest or penalties during fiscal 2018 or 2017 related to unrecognized tax benefits.

 

All tax years remain open to examination for federal income tax purposes and by other major taxing jurisdictions to which the Company is subject.

 

NOTE 8 – STOCKHOLDERS’ DEFICIT

 

Preferred Stock

 

The Company has authorized 10,000,000 shares of undesignated preferred stock with a $0.001 par value. As of December 31, 2018, no preferred shares have been issued and these shares are considered blank check preferred shares with no terms, limitations, or rights associated with them.

 

Common Stock

 

The Company has authorized 200,000,000 shares of common stock with a $0.001 par value per share. The holders of common stock are entitled to one vote for each share of common stock held at the time of vote. As of December 31, 2018, the Company has deemed 19,205,624 shares outstanding or deemed outstanding.

 

Shares Issued for Services

 

On May 5, 2018, the Company entered into an agreement with a third-party consultant to provide services to the Company over an indefinite period until either party provides written notice of termination with thirty days notice. As compensation for such services, the Company has agreed to pay the consultant $75 an hour in cash and $75 an hour in shares of common stock with a monthly cap of $6,500 in cash and $6,500 a month in shares of common stock. The Company has additionally agreed to pay the consultant 1.5% of the gross revenue during the term of the agreement and six months after. On September 17, 2018, the agreement was amended related to services performed from July 1, 2018 through August 31, 2018. The Company has agreed to pay 10,134 shares of common stock for services performed during such time. The shares were valued at $0.05 per share or $734. No shares were earned prior to July 1, 2018. Commencing September 1, 2018, the May 5, 2018 consulting agreement shall be in accordance with the terms stated above and from September through December 31, 2018, the Company issued an additional 13,000 shares to the consultant at an average fair market value of $0.04 per share or $562.

 

F-29

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

For services rendered from July 2018 through September 2018, the Company agreed to issue 70,000 shares of common stock to a consultant pursuant to an agreement dated October 10, 2018. The Company valued the shares at $0.04 per share based on fair market value or $3,290. No further compensation is due to this consultant.

 

On August 8, 2018, the Company entered into a one-year agreement with an advisor for consulting services. Pursuant to the agreement, as amended, the Company has the right to pay $5,000 or issue the advisor a maximum of 6,667 shares of common stock on a quarterly basis, beginning the quarter ended December 31, 2018. The Company elected to issue 6,667 shares for the services provided in the quarter ended December 31, 2018 at a value of $0.04 per share or $280.

 

On August 28, 2018, the Company entered into a one-year agreement with an advisor for consulting services. Pursuant to the agreement, as amended, the Company has the right to pay $5,000 or issue the advisor a maximum of 6,667 shares of common stock on a quarterly basis, beginning the quarter ended December 31, 2018. The Company elected to issue 6,667 shares for the services provided in the quarter ended December 31, 2018 at a value of $0.04 per share or $280.

 

Shares issued for conversion of convertible debt

 

During the year ended December 31, 2018, the Company issued 5,687,630 shares of its common stock at a conversion price of $0.40 as a result of the conversion of principal and interest in the aggregate amount of $2,275,050 underlying the outstanding convertible notes converted during the period.

 

Warrants

 

During the year ended December 31, 2018, cash consideration of $45,380 was paid and 167,875 warrants were issued to a third party on September 20, 2018 for services rendered in connection with the issuance of the convertible notes related to the Bridge Financing Transaction. During the year ended December 31, 2017 a total of 234,375 warrants were issued. The warrants are immediately exercisable upon issuance at a per share price of $0.40 and expire on September 20, 2023. The Company calculated the fair value of the warrants and recorded a total debt discount in the amount of $4,735 which was amortized through September 21, 2018, the date of the reverse merger. The fair value was calculated using the Black-Scholes pricing model with the following assumptions: (i) expected life 5 years, (ii) volatility of 78% - 86%, (iii) risk free rate of 2.27% - 2.90%, (iv) dividend rate of zero, (v) stock price of $0.05, and (vi) exercise price of $0.40.

 

The following table summarized the warrant activity for the year ended December 31, 2018:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Contractual   Intrinsic 
Warrants  Shares   Price   Term   Value 
Balance Outstanding, December 31, 2017   234,375   $0.40    5.00   $         - 
Granted   167,875   $0.40    5.00    - 
Forfeited   -    -    -    - 
Exercised   -    -    -    - 
Expired   -    -    -    - 
Balance Outstanding, December 31, 2018   402,250   $0.40    4.72   $- 
                     
Exercisable, December 31, 2018   402,250   $0.40    4.72   $- 

 

F-30

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

NOTE 9 – 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 (see Note 3), the Company will also pay a cash amount, representing a non-accountable expense allowance payable immediately upon closing of a financing equal to 3% of the aggregate gross proceeds raised in the transactions from retail. In addition to the cash consideration, the Company will also issue warrants to purchase common stock to the Financial Advisor in an amount equal to 10% of the number of shares of common stock purchased by the investors and that the investors obtain a right to acquire through purchase, conversion or exercise of convertible securities issued by the Company. Those warrants will be immediately exercisable at the price per share at which the investor can acquire the common stock. On February 5, 2018, the agreement was amended to extend the exclusivity period another 12 months through February 1, 2019, all other terms and conditions of the agreement remained the same.

  

Operating Leases

 

The Company conducts its operations from one office located in New York, NY. Beginning June 1, 2017, the Company entered into a one-year lease agreement at $1,320 per month. The Company then extended the lease of the same office for six months from September 1, 2018 through February 28, 2019 at $1,598 per month.

 

Beginning September 1, 2018, the Company entered into a one-year lease agreement with a related party (see Note 6). The Company is paying the related party one half of the $3,000 monthly rent or $1,500 per month, plus expenses.

 

Additionally, the Company also rents a warehouse. Beginning May 15, 2017, the Company entered into a one-year lease agreement for $5,313 per month. Beginning December 1, 2018, the Company entered into a 6-month warehouse rental agreement for $2,980 per month.

 

Total rent expense for the years ended December 31, 2018 and 2017 was $58,301 and $73,840, respectively.

 

Equity Incentive Plan

 

As of September 21, 2018, the Company’s board of directors adopted, and stockholders approved the 2018 Equity Incentive Plan. The 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 Equity Incentive 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. No grants under the 2018 Plan are outstanding as of December 31, 2018.

 

NOTE 10 – 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.

 

Issuance of Options

 

On January 14, 2019, the Board of Directors approved the issuance of options to purchase an aggregate of 800,000 and 200,000 share of common stock to Boris Goldstein and Vadim Sakharov, respectively. The options have an exercise price of $0.75 per share which will vest over a 24-month period as follows: 25% (or 200,000 and 50,000, respectively) shall vest six months after the grant date with the remaining options will vest on a monthly basis at a rate of 1/24th per month. The options will expire on January 14, 2029.

 

F-31

 

 

BRAIN SCIENTIFIC INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

 

Appointment of new Chief Executive Officer and Issuance of Options

 

On January 25, 2019, the Company appointed Jesse W. Crowne as the Company’s new Chief Executive Officer. In connection with this appointment, the Company and Mr. Crowne entered into an employment agreement effective as of January 25, 2019. As part of his compensation, Mr. Crowne received options to purchase 800,000 shares of the Company’s common stock at an exercise price of $0.75 per share of which, 200,000 vest on the one year anniversary of the date of grand ant the remaining 600,000 shares vest ratably on a quarterly basis over the following two years. The options will expire January 25, 2029. Under certain circumstances, the Company would be obligated to grant options to purchase an additional 200,000 shares at substantially similar terms.

 

Issuance of Convertible Debt under New Debt Offering

 

In January 2019, the Company commenced an offering of up to $500,000 pursuant to which the Company will issue convertible notes to investors. On January 18, 2019 and February 5, 2019, the Company issued two such convertible notes payable to two investors for $130,000 and $100,000, 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 $1,000,0000 (“Qualified Financing”) or other event pursuant to which conversion shares are to be issued pursuant to the terms of the note.

 

The notes are convertible into equity 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 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 wither payable on demand as of the closing of such change of control or 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 par 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.

 

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.

 

F-32

 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13.   Other Expenses of Issuance and Distribution.

 

We will pay all expenses in connection withthe registration and sale of the common stock by the selling shareholders.  The estimated expenses of issuance and distributionare set forth below.

 

SEC filing fee   $ 2,462  
Legal expenses   $ 100,000
Accounting expenses   $ 50,000
Miscellaneous   $ 5,000 *
Total   $ 157,462 *

 

*Estimate

 

Item 14.   Indemnification of Directors and Officers.

 

Our Articles of Incorporation and Bylawsprovide that, we will indemnify our officers, directors and agents to the extent permitted under the Nevada Revised Statute (“NRS”),provided that, we will not be obligated to indemnify any person in connection with any proceeding:

 

(i) for which payment has actually been made to or on behalfof such person under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyondthe amount paid;

 

(ii) for an accounting or disgorgement of profits pursuant toSection 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or similar provisions of federal,state or local statutory law or common law, if such person is held liable therefor (including pursuant to any settlement arrangements);

 

(iii) for any reimbursement of the Company by such person ofany bonus or other incentive-based or equity-based compensation or of any profits realized by such person from the sale of securitiesof the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accountingrestatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), orthe payment to the Company of profits arising from the purchase and sale by such person of securities in violation of Section 306of the Sarbanes-Oxley Act), if such person is held liable therefor (including pursuant to any settlement arrangements);

 

(iv) initiated by such person, including any proceeding initiatedby such person against the Company or its directors, officers, employees, agents or other indemnitees, unless (a) the Board authorizedthe proceeding prior to its initiation, (b) the Company provides the indemnification, in its sole discretion, pursuant to the powersvested in the Corporation under applicable law, (c) otherwise required to be made under the Bylaws or (d) otherwise required byapplicable law; or

 

(v) if prohibited by applicable law.

 

NRS Section 78.7502 provides that a corporationshall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys’ fees, actuallyand reasonably incurred by him in connection with any the defense to the extent that a director, officer, employee or agent ofa corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to Section 78.7502(1)or 78.7502(2), or in defense of any claim, issue or matter therein.

 

NRS 78.7502(1) provides that a corporationmay indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action,suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation,by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at therequest of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trustor other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually andreasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable pursuant to NRS 78.138; or(b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation,and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

 

NRS Section 78.7502(2) provides that a corporationmay indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed actionor suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director,officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employeeor agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paidin settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement of the actionor suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believedto be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matteras to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, tobe liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the courtin which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of allthe circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

 

II-1

 

 

NRS Section 78.747 provides that exceptas otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt or liabilityof the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter of law mustdetermine the question of whether a director or officer acts as the alter ego of a corporation.

 

Insofar as indemnificationfor liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant tothe foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policyas expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against suchliabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling personof the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controllingperson in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settledby controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is againstpublic policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.

 

Item 15.    Recent Sales of UnregisteredSecurities.

 

On March 27, 2017, the Company issued 10,000,000shares of common stock to an entity controlled by Dr. Boris Goldstein for $100,000 cash proceeds.

 

During the year ended December 31, 2017,the Company issued convertible notes with an aggregate principal amount of $1,087,500.

 

From January 1, 2018 through September 21,2018, the Company issued convertible notes with an aggregate principal amount of $1,059,500.

 

On September 21, 2018, pursuant to the mergeragreement with Memory MD, Inc. and AFGG Acquisition Corp. (see “Prospectus Summary”) we issued an aggregate of approximately9,916,752 shares of our common stock for all of the then-outstanding shares of MemoryMD, Inc. We issued an additional 4,083,248shares of our common stock upon the automatic conversion at the closing of an aggregate of $1,507,000 principal amount of outstandingconvertible promissory notes issued by MemoryMD Inc., and we further issued an additional 1,604,378 shares of our common stockupon the automatic conversion immediately subsequent to the closing of an aggregate of $640,000 principal amount of outstandingconvertible promissory notes issued by MemoryMD Inc. At the closing, the Company was obligated to issue 5-year warrants to purchasean estimated 291,740 shares of common stock, at an exercise price of $0.40 per share, as partial compensation for services renderedby Corinthian.

 

On January 18, 2019, an investor subscribedfor a convertible promissory note and loaned to the Company an aggregate of $100,000. The loan represents the first tranche borrowedpursuant to an up to $500,000 convertible note offering.

 

On February 5, 2019, an investor subscribedfor a convertible promissory note and loaned to the Company an aggregate of $130,000. The loan represents the second tranche borrowedpursuant to an up to $500,000 convertible note offering, for total borrowed principal through February 5, 2019 of $230,000.

 

On July 23, 2019, an investor subscribedfor a convertible promissory note and loaned to the Company $150,000. The loan represents an additional tranche borrowed pursuantto an up to $500,000 convertible note offering, for total borrowed principal through July 23, 2019 of $380,000.

 

In connection with the foregoing, we reliedupon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactionsnot involving a public offering.

 

II-2

 

 

Item 16.   Exhibits.

 

Exhibit Number   Description
2.1   Agreement and Plan of Merger and Reorganization by and among Brain Scientific Inc., ASGI Acquisition Company and Memory MD, Inc. dated as of September 21, 2018 (Incorporated by reference to Form 8-K filed on September 27, 2018)
3.1   Amended and Restated Certificate of Incorporation of Brain Scientific Inc. (Incorporated by reference to Form 8-K filed on September 24, 2018)
3.2   Amended and Restated By-Laws of Brain Scientific Inc. (Incorporated by reference to Form 8-K filed on September 27, 2018)
5.1   Opinion of Sichenzia Ross Ference LLP*
10.1   Patent Assignment and License Back Agreement, dated May 2018, by and among Boris Goldstein, Dmitriy Prilutskiy, Stanislav Zabodaev, Memory MD, Inc. and (c) Medical Computer Systems Ltd. (Incorporated by Form 8-K filed on September 27, 2018)
10.2   Agreement, dated as of September 21, 2018, between Brain Scientific Inc. and Amer Samad (Incorporated by reference to Form 8-K filed on September 27, 2018)
10.3   Sublease Agreement dated as of May 9, 2017 by and between Memory MD, Inc. and Nano Graphene Inc. (Incorporated by reference to Form 8-K filed on September 27, 2018)
10.4   2018 Equity Incentive Plan (Incorporated by reference to Form 8-K filed on September 27, 2018)
10.5   Form of Stock Option Award Agreement pursuant to 2018 Equity Incentive Plan (Incorporated by reference to Form 8-K filed on September 27, 2018)
10.6   Assignment and Assumption Agreement (Incorporated by reference to Form 8-K filed on September 27, 2018)
10.7   Jesse W. Crowne Employment Agreement (Incorporated by reference to Form 8-K filed on January 30, 2019)
10.8   Form of Subscription Agreement (Incorporated by reference to Form 8-K filed on February 11, 2019)
10.9   Form of Note (Incorporated by reference to Form 8-K filed on February 11, 2019)
10.10   Form of Placement Agent Warrant (incorporated by reference to Form 10-K filed April 1, 2019)
10.11   Form of Subscription Agreement (incorporated by reference to Form 8-K filed October 25, 2019)
10.12   Form of Note (incorporated by reference to Form 8-K filed October 25, 2019)
21   Subsidiaries: MemoryMD, Inc. (Delaware),Memory MD Russia Ltd and Memory MD Europe Ltd.___________
23.1   Consent of Sadler, Gibb & Associates, LLC
23.2   Consent of Sichenzia Ross Ference LLP (included in Exhibit 5.1)*
101.INS   XBRL Instance.
101.SCH   XBRL Taxonomy Extension Schema.
101.CAL   XBRL Taxonomy Extension Calculation.
101.DEF   XBRL Taxonomy Extension Definition.
101.LAB   XBRL Taxonomy Extension Labels.
101.PRE   XBRL Taxonomy Extension Presentation.

 

* To be filed by amendment.

 

II-3

 

 

Item 17.   Undertakings.

 

(a) The undersigned registrant hereby undertakes:

 

(1) To file, duringany period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include anyprospectus required by section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);

 

(ii) To reflect inthe prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effectiveamendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in theregistration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollarvalue of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimatedmaximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in theaggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forthin the “Calculation of Registration Fee” table in the effective registration statement; and

 

(iii) To include anymaterial information with respect to the plan of distribution not previously disclosed in the registration statement or any materialchange to such information in the registration statement.

 

(2) That, for the purposesof determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registrationstatement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be theinitial bona fide offering thereof.

 

(3) To remove fromregistration by means of a post-effective amendment any of the securities being registered which remain unsold at the terminationof the offering.

 

(4) That, for the purposeof determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of aregistration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectusesfiled in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is firstused after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of theregistration statement or made in a document incorporated or deemed incorporated by reference into the registration statement orprospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such firstuse, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registrationstatement or made in any such document immediately prior to such date of first use.

 

II-4

 

 

(5) For the purposeof determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of thesecurities in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardlessof the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaserby means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be consideredto offer or sell such securities to such purchaser:

 

(i) Any preliminaryprospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

(ii) Any free writingprospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersignedregistrant;

 

(iii) The portion ofany other free writing prospectus relating to the offering containing material information about the undersigned registrant orits securities provided by or on behalf of the undersigned registrant; and

 

(iv) Any other communicationthat is an offer in the offering made by the undersigned registrant to the purchaser.

 

(b) Insofar as indemnificationfor liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrantpursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and ExchangeCommission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Inthe event that a claim for indemnification against such liabilities, other than the payment by the registrant of expenses incurredand paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding,is asserted by such director, officer or controlling person in connection with the securities being registered hereby, the registrantwill, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriatejurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and willbe governed by the final adjudication of such issue.

 

(c) The undersignedRegistrant hereby undertakes that it will:

 

(1) for determining anyliability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registrationstatement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1), or (4)or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective.

 

(2) for determiningany liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registrationstatement for the securities offered in the registration statement, and that offering of the securities at that time as the initialbona fide offering of those securities.

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesAct of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereuntoduly authorized in the City of New York, State of New York, on January 29, 2020.

 

  Brain Scientific Inc.
   
  By: /s/ Boris Goldstein
  Name:  Boris Goldstein
  Title: Chairman of the Board and
Executive Vice President
(interim Principal Executive Officer)

 

Each person whose signature appears belowconstitutes and appoints Boris Goldstein his true and lawful attorney in fact and agent, with full power of substitution and resubstitution,for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post effective amendments)to the Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statementthat is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and all post effectiveamendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securitiesand Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and everyact and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she mightor could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, each acting alone, or his or hersubstitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933,this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

/s/ Boris Goldstein   January 29, 2020  
Boris Goldstein      
Chairman of the Board and Executive Vice President (interim Principal Executive Officer)      
       
/s/ Mark Corrao   January 29, 2020  
Mark Corrao      
Chief Financial Officer      
(Principal Financial and Accounting Officer)      
       
/s/ Vadim Sakharov   January 29, 2020  
Vadim Sakharov      
Director      
       
/s/ Nickolay Kukekov   January 29, 2020  
Nickolay Kukekov      
Director      

 

 

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