Attached files
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EX-10.32 - Emmaus Life Sciences, Inc. | v201168_ex10-32.htm |
EX-10.43 - Emmaus Life Sciences, Inc. | v201168_ex10-43.htm |
EX-10.31 - Emmaus Life Sciences, Inc. | v201168_ex10-31.htm |
EX-10.30 - Emmaus Life Sciences, Inc. | v201168_ex10-30.htm |
EX-23.1 - Emmaus Life Sciences, Inc. | v201168_ex23-1.htm |
As
filed with the Securities and Exchange Commission on November 8,
2010
|
Registration
No. 333-164613
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 3 TO FORM S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES
ACT OF 1933
CNS
RESPONSE, INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
|
8734
(Primary
Standard Industrial Classification Code Number)
|
87-0419387
(I.R.S
Employer
Identification
No.)
|
85
Enterprise, Suite 410
Aliso
Viejo, CA 92656
(714)
545-3288
(Address,
including Zip Code, and Telephone Number, including Area Code, of Registrant’s
Principal Executive Offices)
George
Carpenter, Chief Executive Officer
CNS
Response, Inc.
85
Enterprise, Suite 410
Aliso
Viejo, CA 92656
(714)
545-3288
Copy
to:
Scott
Alderton, Esq.
Stubbs
Alderton & Markiles, LLP
15260
Ventura Boulevard, 20th Floor
Sherman
Oaks, California 91403
(818)
444-4500
|
Jeffrey
A. Baumel, Esq.
Roland
S. Chase, Esq.
SNR
Denton US LLC
Two
World Financial Center
New
York, New York 10281
(212)
768-6700
|
(Name,
Address, including Zip Code, and Telephone Number, including Area Code, of Agent
for Service)
Approximate
date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If any
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
|
Non-Accelerated
Filer o
|
|
(Do
not check if a smaller reporting company
|
REGISTRANT
HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
Subject
to Completion, Dated November 8, 2010
CNS
RESPONSE, INC.
65,879,838
Shares
Common
Stock
This
prospectus relates to the offer and sale from time to time of up to 65,879,838
shares of our common stock that are held by the stockholders named in the
“Selling Stockholders” section of this prospectus. The prices at
which the selling stockholders may sell the shares in this offering will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale
of the shares. We will bear all expenses of registration incurred in
connection with this offering. The selling stockholders whose shares
are being registered will bear all selling and other expenses.
Our
common stock is quoted on the Over-The-Counter Bulletin Board under the symbol
“CNSO.OB.” On November 4, 2010, the last reported sales price of the
common stock on the Over-The-Counter Bulletin Board was $0.50 per
share.
Investing
in our common stock involves risks. See “Risk Factors” beginning on
page 5.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date
of this prospectus is ______________
TABLE
OF CONTENTS
Page
PROSPECTUS
SUMMARY
|
1
|
RISK
FACTORS
|
4
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
18
|
USE
OF PROCEEDS
|
19
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
19
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
20
|
BUSINESS
|
45
|
MANAGEMENT
|
57
|
EXECUTIVE
COMPENSATION
|
62
|
PRINCIPAL
AND SELLING STOCKHOLDERS
|
71
|
RELATED
PARTY TRANSACTIONS
|
88
|
DESCRIPTION
OF CAPITAL STOCK
|
99
|
PLAN
OF DISTRIBUTION
|
103
|
LEGAL
MATTERS
|
106
|
EXPERTS
|
106
|
WHERE
YOU CAN FIND MORE INFORMATION
|
106
|
INDEX
TO FINANCIAL STATEMENTS
|
107
|
You
should rely only on the information contained in this prospectus or any
supplement. We have not authorized anyone to provide information that
is different from that contained in this prospectus. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of our
common stock.
Except as
otherwise indicated, information in this prospectus reflects a one-for-fifty
reverse stock split of our common stock which took effect on January 10,
2007.
PROSPECTUS
SUMMARY
This
summary highlights selected information contained in greater detail elsewhere in
this prospectus. This summary does not contain all the information
you should consider before investing in our common stock. You should
read the entire prospectus carefully before making an investment decision,
including “Risk Factors” and the consolidated financial statements and the
related notes. References in this prospectus to “CNS Response, Inc.,”
the “company,” “we,” “our” and “us” refer to CNS Response, Inc. and our
consolidated subsidiaries.
Our
History
CNS
Response, Inc. was incorporated in Delaware on March 16, 1987, under the name
Age Research, Inc. Prior to January 16, 2007, CNS Response, Inc.
(then called Strativation, Inc.) existed as a “shell company” with nominal
assets whose sole business was to identify, evaluate and investigate various
companies to acquire or with which to merge. On March 7, 2007, we
acquired CNS Response, Inc., a California corporation (“CNS California”) through
a merger of CNS California with a wholly-owned subsidiary that we formed for the
purpose of facilitating this transaction. Upon the closing of this
merger transaction, CNS California became our wholly-owned subsidiary, and we
changed our name from Strativation, Inc. to CNS Response, Inc.
Our
Business
Overview
We are
an online neuroinformatic company that develops reference data and analytic
tools for clinicians and researchers, with two distinct business
segments. Our Neurometric Information Services,
previously called Laboratory Information Services, business operated
by CNS California, which we consider our primary business, is focused on the
commercialization of a patented system that provides clinicians with objective
neurophysiological data based on EEG. This reference data is reported
to reduce Trial and Error pharmacotherapy in patients with behavioral
(psychiatric and/or addictive) disorders. Our Clinical Services
business operated by our wholly-owned subsidiary, Neuro-Therapy Clinic, Inc.
(“NTC”), is a full service psychiatric clinic. The address of our
principal executive office is 85 Enterprise, Suite 410, Aliso Viejo, CA 92656,
and our telephone number is (714) 545-3288.
Neurometric
Information Services
In
connection with our Neurometric Information Services business, we have developed
an extensive proprietary database (the “CNS Database”) consisting of over 17,000
medication trials across more than 2,000 patients who had psychiatric or
addictive problems. For each patient, we have compiled
electroencephalographic (“EEG”) data, symptoms and outcomes, often across
multiple treatments from multiple psychiatrists and physicians. Using
this database, our technology compares a patient’s EEG to the outcomes in the
database and displays statistical results based on the treatment response of
patients with similar neurophysiology.
Trademarked
as Referenced-EEG ® (“rEEG”), this patented technology allows us to create and
provide simple reports (“rEEG Reports”) that offer physicians information on
medication sensitivity based on the patient’s own physiology. The
vast majority of these patients were considered long-term “treatment-resistant”,
the most challenging, high-risk and expensive category to
treat.
rEEG
identifies relevant neurophysiology that is variant from the norm and identifies
medications that have successfully treated database patients having similar
aberrant physiology. It does this by comparing a patient’s standard
digital EEG to an external normative database, which identifies the presence of
abnormalities. The rEEG process then identifies a set of patients
having similar abnormalities as recorded in our CNS Database and reports on
historical relative medication success for this stratified
group. Upon completion, the physician is provided the analysis in a
report detailing response for classes of agents (and specific agents within the
class) among patients with similar abnormalities as measured by
EEG.
Our
business is focused on increasing the demand for our rEEG
services. We believe the key factors that will drive broader adoption
of our rEEG services will be acceptance by healthcare providers of their
clinical benefits, demonstration of the cost-effectiveness of using our test,
reimbursement by the military and third-party payers, expansion of our sales
force and increased marketing efforts.
1
Clinical
Services
In
January 2008, we acquired our largest customer, the Neuro-Therapy Clinic,
Inc. Upon the completion of the transaction, NTC became a
wholly-owned subsidiary of ours. NTC operates one of the largest
psychiatric medication management practices in the state of Colorado, with six
full time and seven part time employees including psychiatrists and clinical
nurse specialists with prescribing privileges. Daniel A. Hoffman,
M.D. is the medical director at NTC, and, after the acquisition, became our
Chief Medical Officer and more recently, our President.
NTC,
having performed a significant number of rEEG’s, serves as an important resource
in our product development, the expansion of our CNS Database, production system
development and implementation, along with the integration of our rEEG services
into a medical practice. Through NTC, we also expect to successfully
develop marketing and patient acquisition strategies for our Neurometric
Information Services business. Specifically, NTC is learning how to
best communicate the advantages of rEEG to patients and referring physicians in
the local market. We will share this knowledge and developed
communication programs learned through NTC with other physicians using our
services, which we believe will help drive market acceptance of our
services. In addition, we plan to use NTC to train practitioners
across the country in the uses of our rEEG technology.
We
view our Clinical Services business as secondary to our Neurometric Information
Services business, and we have no current plans to expand this
business.
Financial
Information
Since
our inception, we have generated significant net losses. As of
September 30, 2009, we had an accumulated deficit of $25.2 million and as of
June 30, 2010 we had an accumulated deficit of $29.9 million. We
incurred net losses of $8.5 million and $5.4 million for the fiscal years ended
September 30, 2009 and 2008, respectively and we incurred net losses of $1.5
million and $4.8 million for the three and nine month periods ending June 30,
2010, respectively. We have not yet achieved profitability and
anticipate that we will continue to incur net losses for the next few
years. We anticipate that a substantial portion of our capital
resources and efforts will be focused on research and development, scale up of
our commercial organization, and other general corporate purposes, including the
payment of legal fees previously incurred in connection with our litigation with
Leonard Brandt, our former Chief Executive Officer and a former director of the
company. Research and development projects include the completion of
more clinical trials which are necessary to further validate the efficacy of our
products and services relating to our rEEG technology across different type of
behavioral disorders, the enhancement of the CNS Database and, to a lesser
extent, the identification of new medication that are often combinations of
approved drugs. As of September 30, 2009 we had approximately $0.99
million in cash and cash equivalents and a working capital deficit of
approximately $1.1 million compared to approximately $2.0 million in cash and
cash equivalents and a working capital balance of approximately $0.83 million at
September 30, 2008. As of June 30, 2010 we had approximately $35,100
in cash and cash equivalents and a working capital deficit of approximately $1.8
million. On July 5, 2010, we issued two promissory notes in the
aggregate principal amount of $250,000 cash to Deerwood Partners LLC and
Deerwood Holdings LLC. On July 25, 2010, we raised $250,000 in cash
from the sale of a promissory note to our director John Pappajohn and on August
20, 2010 we raised an additional $250,000 from the sale of promissory notes to
Deerwood Partners LLC and Deerwood Holdings LLC. In October and
November 2010, a total of nine accredited investors (of which three are
affiliated with one another) invested an aggregate of approximately $1.60
million and converted promissory notes of approximately $1 million plus accrued
interest, in connection with which we issued notes in the aggregate principal
amount of $2,623,938 and warrants to purchase 4,373,223 shares.
As of
June 30, 2010, our current liabilities of approximately $2.0 million exceeded
our current assets of approximately $0.2 million by approximately $1.8
million. Our continued operating losses and limited capital raise
substantial doubt about our ability to continue as a going
concern. We need additional funds immediately to continue our
operations and will need substantial additional funds before we can increase
demand for our rEEG services. We are currently exploring additional
sources of capital; however, we do not know whether additional funding will be
available on acceptable terms, or at all, especially given the economic
conditions that currently prevail. In addition, any additional equity
funding may result in significant dilution to existing stockholders, and, if we
incur additional debt financing, a substantial portion of our operating cash
flow may be dedicated to the payment of principal and interest on such
indebtedness, thus limiting funds available for our business
activities. If adequate funds are not available, it would have a
material adverse effect on our business, financial condition and/or results of
operations, and could ultimately cause us to have to cease
operations.
2
The
Offering
Common
stock offered
|
Up
to 65,879,838 shares by the selling stockholders
|
|
Common
stock outstanding before this offering
|
56,023,921
|
|
Common
stock to be outstanding after this offering
|
Up
to 74,432,936 shares
|
|
Use
of proceeds
|
We
will not receive any of the proceeds from the sale of shares of our common
stock by the selling stockholders. See “Use of
Proceeds.”
|
|
Over-the-Counter
Bulletin Board symbol
|
CNSO.OB
|
|
Risk
Factors
|
See
“Risk Factors” beginning on page 5 for a discussion of factors that you
should consider carefully before deciding to purchase our common
stock.
|
In the
table above, the number of shares to be outstanding after this offering is based
on 56,023,921 shares outstanding as of October 28, 2010, and assumes the
issuance to the selling stockholders of the following additional shares which
are being offered for sale under the prospectus:
|
·
|
18,409,015
shares issuable upon the exercise of outstanding warrants at a weighted
average exercise price of $0.59 per
share.
|
In the
table above, the number of shares to be outstanding after this offering does not
reflect the issuance of the following shares, which are not being offered for
sale under this prospectus:
·
|
30,287,470 shares
of common stock reserved for issuance upon exercise of convertible debt,
warrants and options, as of November 4,
2010.
|
3
RISK
FACTORS
Investing
in CNS Response, Inc. involves a high degree of risk. You should
carefully consider the following risk factors and all other information
contained in this prospectus before purchasing our common stock. The
risks and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties that we are unaware of, or
that we currently deem immaterial, also may become important factors that affect
us. If any of the following risks occur, our business, financial
condition or results of operations could be materially and adversely
affected. In that case, the trading price of our common stock could
decline, and you may lose some or all of your investment.
Risks
Related to Our Company
We
need immediate additional funding to support our operations and capital
expenditures, which may not be available to us and which lack of availability
could have a material adverse effect our business.
We
have not generated significant revenues or become profitable, may never do so,
and may not generate sufficient working capital to cover costs of
operations. Our continued operating losses and limited capital raise
substantial doubt about our ability to continue as a going
concern. Until we can generate a sufficient amount of revenues to
finance our operations and capital expenditures, we have to finance our cash
needs primarily through public or private equity offerings, debt financings,
borrowings or strategic collaborations. As of June 30, 2010, we had
approximately $35,100 in cash and cash equivalents at hand and we have since
then raised approximately $2.4 million through the sale of promissory notes
between July and November 2010. We still need additional funds
immediately to continue our operations and will need substantial additional
funds before we can increase demand for our rEEG services. We are
currently exploring additional sources of capital; however, we do not know
whether additional funding will be available on acceptable terms, or at all,
especially given the economic conditions that currently prevail. In
addition, any additional equity funding may result in significant dilution to
existing stockholders, and, if we incur additional debt financing, a substantial
portion of our operating cash flow may be dedicated to the payment of principal
and interest on such indebtedness, thus limiting funds available for our
business activities. If adequate funds are not available, it would
have a material adverse effect on our business, financial condition and/or
results of operations, and could ultimately cause us to have to cease
operations.
We
have a history of operating losses.
We are
a company with a limited operating history. Since our inception, we
have never earned any profits and we have incurred significant operating
losses. As of June 30, 2010, our accumulated deficit was
approximately $29.9 million. Our future capital requirements will
depend on many factors, such as the risk factors described in this section,
including our ability to maintain our existing cost structure and to execute our
business and strategic plans as currently conceived. Even if we
achieve profitability, we may be unable to maintain or increase profitability on
a quarterly or annual basis.
If
our rEEG reports do not gain widespread market acceptance, our stock price may
be negatively impacted.
We
have developed a methodology that educates clinicians on medication sensitivity
for patients with certain behavioral or addictive disorders based on
physiological traits of the patient’s brain and information contained in a
proprietary database that has been developed over the last twenty
years. We began selling reports, referred to as rEEG Reports, based
on our methodology in 2000. To date, we have not received widespread
market acceptance for our rEEG Reports by clinicians and we currently
rely on a limited number of employees to market and promote our rEEG
Reports. To grow our business, we will need to develop and introduce
new sales and marketing programs and clinical education programs to promote the
use of our rEEG Reports by clinicians and hire additional employees for this
purpose. If we do not implement these new sales and marketing and
education programs in a timely and successful manner, we may not be able to
achieve the level of market awareness and sales required to expand our business,
which could also negatively impact our stock price.
4
Our
rEEG Reports may not be as effective as we believe them to be, which could limit
or prevent us from growing our revenues.
Our
belief in the efficacy of our rEEG technology is based on a limited number of
clinical studies. Such results may not be statistically significant,
and may not be indicative of the long-term future efficacy of the information we
provide. Controlled scientific studies, including those that have
been announced and that are planned for the future, may yield results that are
unfavorable or demonstrate that our services, including our rEEG Reports, are
not clinically useful. While we have not experienced such problems to
date, if the initially indicated results cannot be successfully replicated or
maintained over time, utilization of services based on our rEEG technology,
including the delivery of our rEEG Reports, may not increase as we anticipate,
which would harm our operating results and stock price. In addition,
if we fail to upgrade our CNS Database to account for new medications that are
now available on the market, clinicians may be less inclined to utilize our
services if they believe that our reports only provide information about older
treatment options, which would further harm our operating results and stock
price.
The
United States Food & Drug Administration (FDA) has taken the position that
our rEEG service constitutes a medical device which is subject to regulation by
the FDA. If we continue to market our rEEG service, there is risk
that the FDA will seek enforcement action against us.
Since
April of 2008, we have been responding to inquiries from the FDA with respect to
our rEEG service. The FDA contends that our rEEG service constitutes
a medical device which is subject to regulation by the FDA. On April
10, 2008 we received correspondence from the FDA in which the FDA indicated it
believed, based in part on the combination of certain marketing statements it
read on our website, together with the delivery of our rEEG Reports, that we
were selling a software product to aid in diagnosis, which constituted a
“medical device” requiring pre-market approval or 510(k) clearance by the FDA
pursuant to the Federal Food, Drug and Cosmetic Act (the “Act”). We
responded to the FDA on April 24, 2008 indicating that we believed it had
incorrectly understood our product offering, and clarified that our rEEG
services are not diagnostic and thus for this as well as other reasons, do not
constitute a medical device. On December 14, 2008, the FDA again
contacted us and indicated that, based upon its review of our description of our
intended use of the rEEG Reports on our website, it continued to maintain that
our rEEG service met its definition of medical devices. In response
to the FDA communications, we made a number of changes to our website and other
marketing documents to reflect that rEEG is a service to aid in medication
selection and is not an aid to diagnosis. On September 4, 2009,
through our regulatory counsel, we responded to the December 14, 2008 FDA letter
explaining our position in more detail.
In
December, 2009, the FDA responded by proposing a 510(k) regulatory pathway which
the Company determined was a reasonable route to clearance, and we chose to
submit an application to obtain 510(k) clearance for our rEEG service in April,
2010, without waiving our right to continue to take the position that our
services represent an information service and do not constitute a medical
device. We sought review of our rEEG service based upon its
equivalence to predicate devices that already have FDA clearance which appeared
to represent a sound mechanism to reduce regulatory risks.
On
July 27, 2010 we received a letter (the “NSE Letter”) from the FDA stating that
they determined that our rEEG service was not substantially equivalent to the
predicate devices that had previously been granted 510(k) clearance and that
among other options we could be required to file an approved premarket approval
application (PMA) before the rEEG services could be marketed, unless it is
otherwise reclassified. The Company has filed a request for
reconsideration of the NSE letter.
We
have revised the claims made on our website with respect to the rEEG service and
to persons to whom we market the service and we plan to continue marketing our
service as a non-device internet-based neurometric information service, while
continuing to discuss alternative approaches with the
FDA. Alternative approaches could include submitting a new 510(k)
with revised claims for rEEG and/or additional information about the predicate
devices. If we continue to market our rEEG service and the FDA
determines that we should be subject to FDA regulation, it could seek
enforcement action against the Company based upon its position that our rEEG
services are a medical device.
5
If we
continue to market our rEEG service, the FDA could seek enforcement action
against us. In addition, complying with regulatory requirements
imposed by the FDA will delay our ability to market our rEEG service, will
involve substantial expenditures as well as time and will further reduce our
limited operating capital.
If
government and third-party payers fail to provide coverage and adequate payment
rates for treatments that are guided by our rEEG Reports, our revenue and
prospects for profitability will be harmed.
Our
future revenue growth will depend in part upon the availability of reimbursement
from third-party payers for psychiatrists and physicians who use our rEEG
Reports to guide the treatment of their patients. Such third-party
payers include government health programs such as Medicare and Medicaid, managed
care providers, private health insurers and other
organizations. These third-party payers are increasingly attempting
to contain healthcare costs by demanding price discounts or rebates and limiting
both coverage on which procedures they will pay for and the amounts that they
will pay for new procedures. As a result, they may not cover or
provide adequate payment for treatments that are guided by our rEEG Reports,
which will discourage psychiatrists and physicians from utilizing the
information services we provide. We may need to conduct studies in
addition to those we have already announced to demonstrate the
cost-effectiveness of treatments that are guided by our products and services to
such payers’ satisfaction. Such studies might require us to commit a
significant amount of management time and financial and other
resources. Adequate third-party reimbursement might not be available
to enable us to realize an appropriate return on investment in research and
product development, and the lack of such reimbursement could have a material
adverse effect on our operations and could adversely affect our revenues and
earnings.
Regulations
are constantly changing, and in the future our business may be subject to
additional regulations that increase our compliance costs.
Federal,
state and foreign laws and regulations relating to the sale of our rEEG Reports
are subject to future changes, as are administrative interpretations of
regulatory agencies. If we fail to comply with applicable federal,
state or foreign laws or regulations, we could be subject to enforcement
actions, including injunctions preventing us from conducting our business,
withdrawal of clearances or approvals and civil and criminal
penalties. In the event that federal, state, and foreign laws and
regulations change, we may need to incur additional costs to seek government
approvals, in addition to the clearance we are currently seeking from the FDA
(discussed above), in order to sell and market our rEEG
service. There is no guarantee that we will be able to obtain such
approvals in a timely manner or at all, and as a result, our business would be
significantly harmed.
We
have recently been in litigation with our former Chief Executive Officer and
former director, Leonard Brandt, relating to his attempt to replace the Board of
Directors with his own nominees.
Between
June 2009 and July 2010, we were involved in litigation against Leonard J.
Brandt, a stockholder, former director and our former Chief Executive
Officer. This litigation took place in the Delaware Chancery Court,
the Delaware Supreme Court and in the United States District Court for the
Central District of California. We have expended substantial
resources in connection with this litigation.
As
further described in this prospectus in the “Business” section under the heading
“Legal Proceedings,” on December 2, 2009, following a two day trial before the
Delaware Court of Chancery, we prevailed in certain actions that were pending
between the Company and Mr. Brandt, which were subsequently affirmed by the
Delaware Supreme Court. The litigation in the United States District
Court for the Central District of California was dismissed on July 13,
2010.
We do not
know whether Mr. Brandt may institute new claims against us, and the defense of
any such new claims could involve the expenditure of additional resources by the
Company and make it more difficult for us to raise any additional funds needed
to finance our corporate and working capital needs.
Our
Clinical Services Business generates the majority of our revenue, and adverse
developments in this business could negatively impact our operating
results.
Our
Clinical Services business, which we view as ancillary to our core Neurometric
Information Services business, currently generates the majority of our revenue
and is operated by our wholly-owned subsidiary, NTC. In the event
that NTC is unable to sustain the current demand for its services because, for
instance, the company is unable to maintain favorable and continuing relations
with its clients and referring psychiatrists and physicians or Daniel Hoffman,
the Medical Director at NTC and our Chief Medical Officer and President, is no
longer associated with NTC, our revenues could significantly decline, which
could adversely impact our operating results and our ability to implement our
growth strategy.
6
Our
operating results may fluctuate significantly and our stock price could decline
or fluctuate if our results do not meet the expectation of analysts or
investors.
Management
expects that we will experience substantial variations in our operating results
from quarter to quarter. We believe that the factors which influence
this variability of quarterly results include:
|
·
|
the
use of and demand for rEEG Reports and other products and/or services that
we may offer in the future that are based on our patented
methodology;
|
|
·
|
the
effectiveness of new marketing and sales
programs;
|
|
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turnover
among our employees;
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changes
in management;
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the
introduction of products or services that are viewed in the marketplace as
substitutes for the services we
provide;
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communications
published by industry organizations or other professional entities in the
psychiatric and physician community that are unfavorable to our
business;
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the
introduction of regulations which impose additional costs on or impede our
business; and
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the
timing and amount of our expenses, particularly expenses associated with
the marketing and promotion of our services, the training of physicians
and psychiatrists in the use of our rEEG Reports, and research and
development.
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As a
result of fluctuations in our revenue and operating expenses that may occur,
management believes that period-to-period comparisons of our results of
operations are not a good indication of our future performance. It is
possible that in some future quarter or quarters, our operating results will be
below the expectations of securities analysts or investors. In that
case, our common stock price could fluctuate significantly or
decline.
If
we do not maintain and expand our relationships in the psychiatric and physician
community, our growth will be limited and our business could be
harmed. If psychiatrists and other physicians do not recommend and
endorse our products and services, we may be unable to increase our sales, and
in such instances our profitability would be harmed.
Our
relationships with clinicians, specifically psychiatrists and physicians, are
critical to the growth of our Neurometric Information Services
business. We believe that these relationships are based on the
quality and ease of use of our rEEG Reports, our commitment to the behavioral
health market, our marketing efforts, and our presence at
tradeshows. Any actual or perceived diminution in our reputation or
the quality of our rEEG Reports, or our failure or inability to maintain our
commitment to the behavioral health market and our other marketing and product
promotion efforts could damage our current relationships, or prevent us from
forming new relationships, with psychiatrists and other physicians and cause our
growth to be limited and our business to be harmed.
To sell
our rEEG Reports, psychiatric professionals must recommend and endorse
them. We may not obtain the necessary recommendations or endorsements
from this community. Acceptance of our rEEG Reports depends on
educating psychiatrists and physicians as to the benefits, clinical efficacy,
ease of use, revenue opportunity, and cost-effectiveness of our rEEG Reports and
on training the medical community to properly understand and utilize our rEEG
Reports. If we are not successful in obtaining the recommendations or
endorsements of psychiatrists and other physicians for our rEEG Reports, we may
be unable to increase our sales and profitability.
7
Negative
publicity or unfavorable media coverage could damage our reputation and harm our
operations.
In the
event that the marketplace perceives our rEEG Reports as not offering the
benefits which we believe they offer, we may receive significant negative
publicity. This publicity may result in litigation and increased
regulation and governmental review. If we were to receive such
negative publicity or unfavorable media attention, whether warranted or
unwarranted, our ability to market our rEEG Reports would be adversely affected,
pharmaceutical companies may be reluctant to pursue strategic initiatives with
us relating to the development of new products and services based on our rEEG
technology, we may be required to change our products and services and become
subject to increased regulatory burdens, and we may be required to pay large
judgments or fines and incur significant legal expenses. Any
combination of these factors could further increase our cost of doing business
and adversely affect our financial position, results of operations and cash
flows.
If
we do not successfully generate additional products and services from our
patented methodology and proprietary database, or if such products and services
are developed but not successfully commercialized, then we could lose revenue
opportunities.
Our
primary business is the sale of rEEG Reports to clinicians based on our rEEG
methodology and proprietary database. In the future, we may utilize
our patented methodology and proprietary database to produce pharmaceutical
advancements and developments. For instance, we may use our patented
methodology and proprietary database to identify new medications that are
promising in the treatment of behavioral health disorders, identify new uses of
medications which have been previously approved, and identify new patient
populations that are responsive to medications in clinical trials that have
previously failed to show efficacy in United States Food & Drug
Administration (FDA) approved clinical trials. The development of new
pharmaceutical applications that are based on our patented methodology and
proprietary database will be costly, since we will be subject to additional
regulations, including the need to conduct expensive and time consuming clinical
trials.
In
addition, to successfully monetize our pharmaceutical opportunity, we will need
to enter into strategic alliances with biotechnology or pharmaceutical companies
that have the ability to bring to market a medication, an ability which we
currently do not have. We maintain no pharmaceutical manufacturing,
marketing or sales organization, nor do we plan to build one in the foreseeable
future. Therefore, we are reliant upon approaching and successfully
negotiating attractive terms with a partner who has these
capabilities. No guarantee can be made that we can do this on
attractive terms or at all. If we are unable to find strategic
partners for our pharmaceutical opportunity, our revenues may not grow as
quickly as we desire, which could lower our stock price.
Our
industry is highly competitive, and we may not be able to compete successfully,
which could result in price reductions and decreased demand for our
products.
The
healthcare business in general, and the behavioral health treatment business in
particular, are highly competitive. In the event that we are unable
to convince physicians, psychiatrists and patients of the efficacy of our
products and services, individuals seeking treatment for behavioral health
disorders may seek alternative treatment methods, which could negatively impact
our sales and profitability.
In
the event that we pursue our pharmaceutical opportunities, we or any development
partners that we partner with will likely need to conduct clinical
trials. If such clinical trials are delayed or unsuccessful, it could
have an adverse effect on our business.
We
have limited experience conducting clinical trials of psychiatric medications
and in the event we conduct clinical trials, we will rely on outside parties,
including academic investigators, outside consultants and contract research
organizations to conduct these trials on our behalf. We will rely on
these parties to assist in the recruitment of sites for participation in
clinical trials, to maintain positive relations with these sites, and to ensure
that these sites conduct the trials in accordance with the protocol and our
instructions. If these parties do not honor their obligations to us,
our clinical trials may be delayed or unsuccessful.
8
In
the event we conduct clinical trials, we cannot predict whether we will
encounter problems that will cause us or regulatory authorities to delay or
suspend our clinical trials or delay the analysis of data from our completed or
ongoing clinical trials. In addition, we cannot assure you that we
will be successful in reaching the endpoints in these trials, or if we do, that
the FDA or other regulatory agencies will accept the results.
Any of
the following could delay the completion of clinical trials, or result in a
failure of these trials to support our business, which would have an adverse
effect on our business:
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delays
or the inability to obtain required approvals from institutional review
boards or other governing entities at clinical sites selected for
participation in our clinical
trials;
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delays
in enrolling patients and volunteers into clinical
trials;
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lower
than anticipated retention rates of patients and volunteers in clinical
trials;
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negative
results from clinical trials for any of our potential products;
and
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failure
of our clinical trials to demonstrate the efficacy or clinical utility of
our potential products.
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If we
determine that the costs associated with attaining regulatory approval of a
product exceed the potential financial benefits or if the projected development
timeline is inconsistent with our determination of when we need to get the
product to market, we may chose to stop a clinical trial and/or development of a
product.
We
may fail to successfully manage and maintain the growth of our business, which
could adversely affect our results of operations.
As we
continue expanding our commercial operations, this expansion could place
significant strain on our management, operational, and financial
resources. To manage future growth, we will need to continue to hire,
train, and manage additional employees, particularly a specially trained sales
force to market our rEEG Reports.
In
addition, we have maintained a small financial and accounting staff, and our
reporting obligations as a public company, as well as our need to comply with
the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations
of the SEC, will continue to place significant demands on our financial and
accounting staff, on our financial, accounting and information systems and on
our internal controls. As we grow, we will need to add additional
accounting staff and continue to improve our financial, accounting and
information systems and internal controls in order to fulfill our reporting
responsibilities and to support expected growth in our business. Our
current and planned personnel, systems, procedures and controls may not be
adequate to support our anticipated growth or management may not be able to
effectively hire, train, retain, motivate and manage required
personnel. Our failure to manage growth effectively could limit our
ability to achieve our marketing and commercialization goals or to satisfy our
reporting and other obligations as a public company.
We
may not be able to adequately protect our intellectual property, which is the
core of our business.
We
consider the protection of our intellectual property to be important to our
business prospects. We currently have four issued U.S. patents, as
well as issued patents in Australia and Israel, and we have filed separate
patent applications in multiple foreign jurisdictions.
In the
future, if we fail to file patent applications in a timely manner, or in the
event we elect not to file a patent application because of the costs associated
with patent prosecution, we may lose patent protection that we may have
otherwise obtained. The loss of any proprietary rights which are
obtainable under patent laws may result in the loss of a competitive advantage
over present or potential competitors, with a resulting decrease in revenues and
profitability for us.
With
respect to the applications we have filed, there is no guarantee that the
applications will result in issued patents, and further, any patents that do
issue may be too narrow in scope to adequately protect our intellectual property
and provide us with a competitive advantage. Competitors and others
may design around aspects of our technology, or alternatively may independently
develop similar or more advanced technologies that fall outside the scope of our
claimed subject matter but that can be used in the treatment of behavioral
health disorders.
9
In
addition, even if we are issued additional patents covering our products, we
cannot predict with certainty whether or not we will be able to enforce our
proprietary rights, and whether our patents will provide us with adequate
protection against competitors. We may be forced to engage in costly
and time consuming litigation or reexamination proceedings to protect our
intellectual property rights, and our opponents in such proceedings may have and
be willing to expend, substantially greater resources than we are able
to. In addition, the results of such proceedings may result in our
patents being invalidated or reduced in scope. These developments
could cause a decrease in our operating income and reduce our available cash
flow, which could harm our business and cause our stock price to
decline.
We also
utilize processes and technology that constitute trade secrets, such as our CNS
Database, and we must implement appropriate levels of security for those trade
secrets to secure the protection of applicable laws, which we may not do
effectively. In addition, the laws of many foreign countries do not
protect proprietary rights as fully as the laws of the United
States.
While we
have not had any significant issues to date, the loss of any of our trade
secrets or proprietary rights which may be protected under the foregoing
intellectual property safeguards may result in the loss of our competitive
advantage over present and potential competitors.
Confidentiality
agreements with employees, licensees and others may not adequately prevent
disclosure of trade secrets and other proprietary information.
In order
to protect our proprietary technology and processes, we rely in part on
confidentiality provisions in our agreements with employees, licensees, treating
physicians and psychiatrists and others. These agreements may not
effectively prevent disclosure of confidential information and may not provide
an adequate remedy in the event of unauthorized disclosure of confidential
information. Moreover, policing compliance with our confidentiality
agreements and non-disclosure agreements, and detecting unauthorized use of our
technology is difficult, and we may be unable to determine whether piracy of our
technology has occurred. In addition, others may independently
discover our trade secrets and proprietary information. Costly and
time-consuming litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business
position.
The
liability of our directors and officers is limited.
The
applicable provisions of the Delaware General Corporate Law and our Certificate
of Incorporation limit the liability of our directors to the Company and our
stockholders for monetary damages for breaches of their fiduciary duties, with
certain exceptions, and for other specified acts or omissions of such
persons. In addition, the applicable provisions of the Delaware
General Corporate Law and of our Certificate of Incorporation and Bylaws, as
well as indemnification agreements we have entered into with our directors,
officers and certain other individuals, provide for indemnification of such
persons under certain circumstances. In the event we are required to
indemnify any of our directors or any other person, our financial strength may
be harmed, which may in turn lower our stock price.
If
we do not retain our senior management and other key employees, we may not be
able to successfully implement our business strategy.
Our
future success depends on the ability, experience and performance of our senior
management and our key professional personnel. Our success therefore
depends to a significant extent on retaining the services of George Carpenter,
our Chief Executive Officer, our senior product development and clinical
managers, and others. Because of their ability and experience, if we
lose one or more of the members of our senior management or other key employees,
our ability to successfully implement our business strategy could be seriously
harmed. While we believe our relationships with our executives are
good and do not anticipate any of them leaving in the near future, the loss of
the services of any of our senior management could have a material adverse
effect on our ability to manage our business. We do not carry key man
life insurance on any of our key employees.
10
If
we do not attract and retain skilled personnel, we may not be able to expand our
business.
Our
products and services are based on a complex database of
information. Accordingly, we require skilled medical, scientific and
administrative personnel to sell and support our products and
services. Our future success will depend largely on our ability to
continue to hire, train, retain and motivate additional skilled personnel,
particularly sales representatives who are responsible for customer education
and training and customer support. In the future, if we pursue our
pharmaceutical opportunities, we will also likely need to hire personnel with
experience in clinical testing and matters relating to obtaining regulatory
approvals. If we are not able to attract and retain skilled
personnel, we will not be able to continue our development and commercialization
activities.
In
the future we could be subject to personal injury claims, which could result in
substantial liabilities that may exceed our insurance coverage.
All
significant medical treatments and procedures, including treatment that is
facilitated through the use of our rEEG Reports, involve the risk of serious
injury or death. While we have not been the subject of any personal
injury claims for patients treated by providers using our rEEG Reports, our
business entails an inherent risk of claims for personal injuries, which are
subject to the attendant risk of substantial damage awards. We cannot
control whether individual physicians and psychiatrists will properly select
patients, apply the appropriate standard of care, or conform to our procedures
in determining how to treat their patients. A significant source of
potential liability is negligence or alleged negligence by physicians treating
patients with the aid of the rEEG Reports that we provide. There can
be no assurance that a future claim or claims will not be successful or,
including the cost of legal defense, will not exceed the limits of available
insurance coverage.
We
currently have general liability and medical professional liability insurance
coverage for up to $5 million per year for personal injury claims. We
may not be able to maintain adequate liability insurance, in accordance with
standard industry practice, with appropriate coverage based on the nature and
risks of our business, at acceptable costs and on favorable
terms. Insurance carriers are often reluctant to provide liability
insurance for new healthcare services companies and products due to the limited
claims history for such companies and products. In addition, based on
current insurance markets, we expect that liability insurance will be more
difficult to obtain and that premiums will increase over time and as the volume
of patients treated by physicians that are guided by our rEEG Reports
increases. In the event of litigation, regardless of its merit or
eventual outcome, or an award against us during a time when we have no available
insurance or insufficient insurance, we may sustain significant losses of our
operating capital which may substantially reduce stockholder equity in the
company.
We
are subject to evolving and expensive corporate governance regulations and
requirements. Our failure to adequately adhere to these requirements
or the failure or circumvention of our controls and procedures could seriously
harm our business.
Because
we are a publicly traded company we are subject to certain federal, state and
other rules and regulations, including applicable requirements of the
Sarbanes-Oxley Act of 2002. Compliance with these evolving
regulations is costly and requires a significant diversion of management time
and attention, particularly with regard to our disclosure controls and
procedures and our internal control over financial
reporting. Although we have reviewed our disclosure and internal
controls and procedures in order to determine whether they are effective, our
controls and procedures may not be able to prevent errors or frauds in the
future. Faulty judgments, simple errors or mistakes, or the failure
of our personnel to adhere to established controls and procedures may make it
difficult for us to ensure that the objectives of the control system are
met. A failure of our controls and procedures to detect other than
inconsequential errors or fraud could seriously harm our business and results of
operations.
Our
senior management’s limited recent experience managing a publicly traded company
may divert management’s attention from operations and harm our
business.
Our
management team has relatively limited recent experience managing a publicly
traded company and complying with federal securities laws, including compliance
with recently adopted disclosure requirements on a timely basis. Our
management will be required to design and implement appropriate programs and
policies in responding to increased legal, regulatory compliance and reporting
requirements, and any failure to do so could lead to the imposition of fines and
penalties and harm our business.
11
Risks
Related To Our Industry
The
healthcare industry in which we operate is subject to substantial regulation by
state and federal authorities, which could hinder, delay or prevent us from
commercializing our products and services.
Healthcare
companies are subject to extensive and complex federal, state and local laws,
regulations and judicial decisions governing various matters such as the
licensing and certification of facilities and personnel, the conduct of
operations, billing policies and practices, policies and practices with regard
to patient privacy and confidentiality, and prohibitions on payments for the
referral of business and self-referrals. There are federal and state
laws, regulations and judicial decisions that govern patient referrals,
physician financial relationships, submission of healthcare claims and
inducement to beneficiaries of federal healthcare programs. Many
states prohibit business corporations from practicing medicine, employing or
maintaining control over physicians who practice medicine, or engaging in
certain business practices, such as splitting fees with healthcare
providers. Many healthcare laws and regulations applicable to our
business are complex, applied broadly and subject to interpretation by courts
and government agencies. Our failure, or the failure of physicians
and psychiatrists to whom we sell our rEEG Reports, to comply with these
healthcare laws and regulations could create liability for us and negatively
impact our business.
In
addition, the FDA regulates development, testing, labeling, manufacturing,
marketing, promotion, distribution, record-keeping and reporting requirements
for prescription drugs. Compliance with laws and regulations enforced
by the FDA and other regulatory agencies may be required in relation to future
products or services developed or used by us, in addition to the regulatory
process and dialogue in which we are now engaged with the FDA (please see the
risk factor above for further information). Failure to comply with
applicable laws and regulations may result in various adverse consequences,
including withdrawal of our products and services from the market, or the
imposition of civil or criminal sanctions.
We
believe that this industry will continue to be subject to increasing regulation,
political and legal action and pricing pressures, the scope and effect of which
we cannot predict. Legislation is continuously being proposed,
enacted and interpreted at the federal, state and local levels to regulate
healthcare delivery and relationships between and among participants in the
healthcare industry. Any such changes could prevent us from marketing
some or all of our products and services for a period of time or
permanently.
We
may be subject to regulatory and investigative proceedings, which may find that
our policies and procedures do not fully comply with complex and changing
healthcare regulations.
While we
have established policies and procedures that we believe will be sufficient to
ensure that we operate in substantial compliance with applicable laws,
regulations and requirements, the criteria are often vague and subject to change
and interpretation. We may become the subject of regulatory or other
investigations or proceedings, and our interpretations of applicable laws and
regulations may be challenged. The defense of any such challenge
could result in substantial cost and a diversion of management’s time and
attention. Thus, any such challenge could have a material adverse
effect on our business, regardless of whether it ultimately is
successful. If we fail to comply with any applicable laws, or a
determination is made that we have failed to comply with these laws, our
financial condition and results of operations could be adversely
affected.
Failure
to comply with the Federal Trade Commission Act or similar state laws could
result in sanctions or limit the claims we can make.
The
Company’s promotional activities and materials, including advertising to
consumers and physicians, and materials provided to third parties for their use
in promoting our products and services, are regulated by the Federal Trade
Commission (FTC) under the FTC Act, which prohibits unfair and deceptive acts
and practices, including claims which are false, misleading or inadequately
substantiated. The FTC typically requires competent and reliable
scientific tests or studies to substantiate express or implied claims that a
product or service is effective. If the FTC were to interpret our
promotional materials as making express or implied claims that our products and
services are effective for the treatment of mental illness, it may find that we
do not have adequate substantiation for such claims. Failure to
comply with the FTC Act or similar laws enforced by state attorneys general and
other state and local officials could result in administrative or judicial
orders limiting or eliminating the claims we can make about our products and
services, and other sanctions including fines.
12
Our
business practices may be found to constitute illegal fee-splitting or corporate
practice of medicine, which may lead to penalties and adversely affect our
business.
Many
states, including California, in which our principal executive offices are
located, have laws that prohibit business corporations, such as us, from
practicing medicine, exercising control over medical judgments or decisions of
physicians, or engaging in certain arrangements, such as employment or
fee-splitting, with physicians. Courts, regulatory authorities or
other parties, including physicians, may assert that we are engaged in the
unlawful corporate practice of medicine through our ownership of the
Neuro-Therapy Clinic or by providing administrative and ancillary services in
connection with our rEEG Reports. These parties may also assert that
selling our rEEG Reports for a portion of the patient fees constitutes improper
fee-splitting. If asserted, such claims could subject us to civil and
criminal penalties and substantial legal costs, could result in our contracts
being found legally invalid and unenforceable, in whole or in part, or could
result in us being required to restructure our contractual arrangements, all
with potentially adverse consequences to our business and our
stockholders.
Our
business practices may be found to violate anti-kickback, self-referral or false
claims laws, which may lead to penalties and adversely affect our
business.
The
healthcare industry is subject to extensive federal and state regulation with
respect to financial relationships and “kickbacks” involving healthcare
providers, physician self-referral arrangements, filing of false claims and
other fraud and abuse issues. Federal anti-kickback laws and
regulations prohibit certain offers, payments or receipts of remuneration in
return for (i) referring patients covered by Medicare, Medicaid or other federal
health care program, or (ii) purchasing, leasing, ordering or arranging for or
recommending any service, good, item or facility for which payment may be made
by a federal health care program. In addition, federal physician
self-referral legislation, commonly known as the Stark law, generally prohibits
a physician from ordering certain services reimbursable by Medicare, Medicaid or
other federal healthcare program from any entity with which the physician has a
financial relationship. In addition, many states have similar laws,
some of which are not limited to services reimbursed by federal healthcare
programs. Other federal and state laws govern the submission of
claims for reimbursement, or false claims laws. One of the most
prominent of these laws is the federal False Claims Act, and violations of other
laws, such as the anti-kickback laws or the FDA prohibitions against promotion
of off-label uses of medications, may also be prosecuted as violations of the
False Claims Act.
While we
believe we have structured our relationships to comply with all applicable
requirements, federal or state authorities may claim that our fee arrangements,
agreements and relationships with contractors and physicians violate these
anti-kickback, self-referral or false claims laws and
regulations. These laws are broadly worded and have been broadly
interpreted by courts. It is often difficult to predict how these
laws will be applied, and they potentially subject many typical business
arrangements to government investigation and prosecution, which can be costly
and time consuming. Violations of these laws are punishable by
monetary fines, civil and criminal penalties, exclusion from participation in
government-sponsored health care programs and forfeiture of amounts collected in
violation of such laws. Some states also have similar anti-kickback
and self-referral laws, imposing substantial penalties for
violations. If our business practices are found to violate any of
these provisions, we may be unable to continue with our relationships or
implement our business plans, which would have an adverse effect on our business
and results of operations.
We
may be subject to healthcare anti-fraud initiatives, which may lead to penalties
and adversely affect our business.
State and
federal governments are devoting increased attention and resources to anti-fraud
initiatives against healthcare providers, taking an expansive definition of
fraud that includes receiving fees in connection with a healthcare business that
is found to violate any of the complex regulations described
above. While to our knowledge we have not been the subject of any
anti-fraud investigations, if such a claim were made defending our business
practices could be time consuming and expensive, and an adverse finding could
result in substantial penalties or require us to restructure our operations,
which we may not be able to do successfully.
13
Our
use and disclosure of patient information is subject to privacy and security
regulations, which may result in increased costs.
In
conducting research or providing administrative services to healthcare providers
in connection with the use of our rEEG Reports, as well as in our Clinical
Services business, we may collect, use, maintain and transmit patient
information in ways that will be subject to many of the numerous state, federal
and international laws and regulations governing the collection, dissemination,
use and confidentiality of patient-identifiable health information, including
the federal Health Insurance Portability and Accountability Act (HIPAA) and
related rules. The three rules that were promulgated pursuant to
HIPAA that could most significantly affect our business are the Standards for
Electronic Transactions, or Transactions Rule; the Standards for Privacy of
Individually Identifiable Health Information, or Privacy Rule; and the Health
Insurance Reform: Security Standards, or Security
Rule. HIPAA applies to covered entities, which include most
healthcare facilities and health plans that may contract for the use of our
services. The HIPAA rules require covered entities to bind
contractors like us to compliance with certain burdensome HIPAA rule
requirements.
The HIPAA
Transactions Rule establishes format and data content standards for eight of the
most common healthcare transactions. If we perform billing and
collection services on behalf of psychiatrists and physicians, we may be
engaging in one of more of these standard transactions and will be required to
conduct those transactions in compliance with the required
standards. The HIPAA Privacy Rule restricts the use and disclosure of
patient information, requires entities to safeguard that information and to
provide certain rights to individuals with respect to that
information. The HIPAA Security Rule establishes elaborate
requirements for safeguarding patient information transmitted or stored
electronically. We may be required to make costly system purchases
and modifications to comply with the HIPAA rule requirements that are imposed on
us and our failure to comply may result in liability and adversely affect our
business.
Numerous
other federal and state laws protect the confidentiality of personal and patient
information. These laws in many cases are not preempted by the HIPAA
rules and may be subject to varying interpretations by courts and government
agencies, creating complex compliance issues for us and the psychiatrists and
physicians who purchase our services, and potentially exposing us to additional
expense, adverse publicity and liability.
Risks
Relating To Investment In Our Common Stock
We
have a limited trading volume and shares eligible for future sale by our current
stockholders may adversely affect our stock price.
Bid and
ask prices for shares of our Common Stock are quoted on NASDAQ’s
Over-the-Counter Bulletin Board under the symbol CNSO.OB. There is
currently no broadly followed, established trading market for our Common Stock
and an established trading market for our shares of Common Stock may never
develop or be maintained. Active trading markets generally result in
lower price volatility and more efficient execution of buy and sell
orders. The absence of an active trading market increases price
volatility and reduces the liquidity of our Common Stock. As long as
this condition continues, the sale of a significant number of shares of Common
Stock at any particular time could be difficult to achieve at the market prices
prevailing immediately before such shares are offered. Also, as a
result of this lack of trading activity, the quoted price for our Common Stock
on the Over-the-Counter Bulletin Board is not necessarily a reliable indicator
of its fair market value. If we cease to be quoted, holders would
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, our Common Stock, and the market value of our Common Stock
would likely decline.
If
and when a larger trading market for our Common Stock develops, the market price
of our Common Stock is likely to be highly volatile and subject to wide
fluctuations, and you may be unable to resell your shares at or above the price
at which you acquired them.
The
market price of our Common Stock is likely to be highly volatile and could be
subject to wide fluctuations in response to a number of factors that are beyond
our control, including:
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quarterly
variations in our revenues and operating
expenses;
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developments
in the financial markets and worldwide or regional
economies;
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announcements
of innovations or new products or services by us or our
competitors;
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announcements
by the government relating to regulations that govern our
industry;
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significant
sales of our Common Stock or other securities in the open
market;
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variations
in interest rates;
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changes
in the market valuations of other comparable companies;
and
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changes
in accounting principles.
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In the
past, stockholders have often instituted securities class action litigation
after periods of volatility in the market price of a company’s
securities. If a stockholder were to file any such class action suit
against us, we would incur substantial legal fees and our management’s attention
and resources would be diverted from operating our business to respond to the
litigation, which could harm our business.
Future
sales of our common stock in the public market could cause our stock price to
fall.
The sale
of shares of our common stock which are registered for resale on this prospectus
or other shares eligible for resale pursuant to Rule 144 of the Securities Act
of 1933, as amended, or otherwise, could depress the market price of our Common
Stock. A reduced market price for our Common Stock could make it more
difficult to raise funds through future offering of Common Stock.
The
sale of securities by us in any equity or debt financing could result in
dilution to our existing stockholders and have a material adverse effect on our
earnings.
Any sale
of Common Stock by us in a future private placement or public offering could
result in dilution to our existing stockholders as a direct result of our
issuance of additional shares of our capital stock. In addition, our
business strategy may include expansion through internal growth, by acquiring
complementary businesses, by acquiring or licensing additional products and
services, or by establishing strategic relationships with targeted customers and
suppliers. In order to do so, or to finance the cost of our other
activities, we may issue additional equity securities that could dilute our
stockholders’ stock ownership. We may also assume additional debt and
incur impairment losses related to goodwill and other tangible assets if we
acquire another company and this could negatively impact our earnings and
results of operations.
The
trading of our common stock on the Over-the-Counter Bulletin Board and the
potential designation of our common stock as a “penny stock” could impact the
trading market for our common stock.
Our
securities, as traded on the Over-the-Counter Bulletin Board, may be subject to
SEC rules that impose special sales practice requirements on broker-dealers who
sell these securities to persons other than established customers or accredited
investors. For the purposes of the rule, the phrase “accredited
investors” means, in general terms, institutions with assets in excess of
$5,000,000, or individuals having a net worth in excess of $1,000,000 or having
an annual income that exceeds $200,000 (or that, when combined with a spouse’s
income, exceeds $300,000). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser’s written agreement to the transaction before the
sale. Consequently, the rule may affect the ability of broker-dealers
to sell our securities and also may affect the ability of purchasers to sell
their securities in any market that might develop therefor.
In
addition, the SEC has adopted a number of rules to regulate “penny stock” that
restrict transactions involving these securities. Such rules include
Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under
the Securities and Exchange Act of 1934, as amended. These rules may
have the effect of reducing the liquidity of penny stocks. “Penny
stocks” generally are equity securities with a price of less than $5.00 per
share (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ Stock Market if current price and volume information
with respect to transactions in such securities is provided by the exchange or
system). Because our securities may constitute “penny stock” within
the meaning of the rules, the rules would apply to us and to our
securities. Our stockholders may therefore find it more difficult to
sell their securities.
15
Stockholders
should be aware that, according to SEC, the market for penny stocks has suffered
in recent years from patterns of fraud and abuse. Such patterns
include (i) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) “boiler room” practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differentials and markups
by selling broker-dealers; and (v) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired
level, resulting in investor losses. Our management is aware of the
abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our
securities.
We
have not paid dividends in the past and do not expect to pay dividends for the
foreseeable future, and any return on investment may be limited to potential
future appreciation on the value of our Common Stock.
We
currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. Our payment of any future dividends will be at
the discretion of our Board of Directors after taking into account various
factors, including without limitation, our financial condition, operating
results, cash needs, growth plans and the terms of any credit agreements that we
may be a party to at the time. To the extent we do not pay dividends,
our stock may be less valuable because a return on investment will only occur if
and to the extent our stock price appreciates, which may never
occur. In addition, investors must rely on sales of their Common
Stock after price appreciation as the only way to realize their investment, and
if the price of our stock does not appreciate, then there will be no return on
investment. Investors seeking cash dividends should not purchase our
Common Stock.
Our
officers, directors and principal stockholders can exert significant influence
over us and may make decisions that are not in the best interests of all
stockholders.
Our
officers, directors and principal stockholders (greater than 5% stockholders)
collectively control approximately 44% of our issued and outstanding Common
Stock. As a result, these stockholders are able to affect the outcome
of, or exert significant influence over, all matters requiring stockholder
approval, including the election and removal of directors and any change in
control. In particular, this concentration of ownership of our Common
Stock could have the effect of delaying or preventing a change of control of us
or otherwise discouraging or preventing a potential acquirer from attempting to
obtain control of us. This, in turn, could have a negative effect on
the market price of our Common Stock. It could also prevent our
stockholders from realizing a premium over the market prices for their shares of
Common Stock. Moreover, the interests of this concentration of
ownership may not always coincide with our interests or the interests of other
stockholders, and accordingly, they could cause us to enter into transactions or
agreements that we would not otherwise consider.
Transactions
engaged in by our largest stockholders, our directors or executives involving
our common stock may have an adverse effect on the price of our
stock.
Our
officers, directors and principal stockholders (greater than 5% stockholders)
collectively control approximately 44% of our issued and outstanding Common
Stock. Subsequent sales of our shares by these stockholders could
have the effect of lowering our stock price. The perceived risk
associated with the possible sale of a large number of shares by these
stockholders, or the adoption of significant short positions by hedge funds or
other significant investors, could cause some of our stockholders to sell their
stock, thus causing the price of our stock to decline. In addition,
actual or anticipated downward pressure on our stock price due to actual or
anticipated sales of stock by our directors or officers could cause other
institutions or individuals to engage in short sales of our Common Stock, which
may further cause the price of our stock to decline.
16
From time
to time our directors and executive officers may sell shares of our common stock
on the open market. These sales will be publicly disclosed in filings
made with the SEC. In the future, our directors and executive
officers may sell a significant number of shares for a variety of reasons
unrelated to the performance of our business. Our stockholders may
perceive these sales as a reflection on management’s view of the business and
result in some stockholders selling their shares of our common
stock. These sales could cause the price of our stock to
drop.
Anti-takeover
provisions may limit the ability of another party to acquire us, which could
cause our stock price to decline.
Delaware
law contains provisions that could discourage, delay or prevent a third party
from acquiring us, even if doing so may be beneficial to our stockholders, which
could cause our stock price to decline. In addition, these provisions
could limit the price investors would be willing to pay in the future for shares
of our Common Stock.
17
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus, including the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Business,” contains “forward-looking statements” that include information
relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of
resources. These forward-looking statements include, without
limitation, statements regarding: proposed new products or services;
our statements concerning litigation or other matters; statements concerning
projections, predictions, expectations, estimates or forecasts for our business,
financial and operating results and future economic performance; statements of
management’s goals and objectives; trends affecting our financial condition,
results of operations or future prospects; our financing plans or growth
strategies; and other similar expressions concerning matters that are not
historical facts. Words such as “may,” “will,” “should,” “could,”
“would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,”
“future,” “intends,” “plans,” “believes” and “estimates,” and similar
expressions, as well as statements in future tense, identify forward-looking
statements.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
that performance or those results will be achieved. Forward-looking
statements are based on information available at the time they are made and/or
management’s good faith belief as of that time with respect to future events,
and are subject to risks and uncertainties that could cause actual performance
or results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause these
differences include, but are not limited to:
|
·
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our
inability to raise additional funds to support operations and capital
expenditures;
|
|
·
|
our
inability to achieve greater and broader market acceptance of our products
and services in existing and new market
segments;
|
|
·
|
our
inability to successfully compete against existing and future
competitors;
|
|
·
|
our
inability to manage and maintain the growth of our
business;
|
|
·
|
our
inability to protect our intellectual property rights;
and
|
|
·
|
other
factors discussed under the headings “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
and “Business.”
|
Forward-looking
statements speak only as of the date they are made. You should not
put undue reliance on any forward-looking statements. We assume no
obligation to update forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting forward-looking
information, except to the extent required by applicable securities
laws. If we do update one or more forward-looking statements, no
inference should be drawn that we will make additional updates with respect to
those or other forward-looking statements.
18
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of shares to be offered by the selling
stockholders. The proceeds from the sale of each selling
stockholder’s common stock will belong to that selling stockholder.
MARKET
FOR COMMON EQUITY
AND
RELATED STOCKHOLDER MATTERS
Common
Stock
Our
common stock is currently listed for trading on the OTC Bulletin Board under the
symbol CNSO.OB. The following table sets forth, for the periods
indicated, the high and low bid information for Common Stock as determined from
sporadic quotations on the OTC Bulletin Board. The following
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
High
|
Low
|
|||||||
Year
Ended September 30, 2008
|
||||||||
First
Quarter
|
$ | 0.90 | $ | 0.75 | ||||
Second
Quarter
|
$ | 2.25 | $ | 0.75 | ||||
Third
Quarter
|
$ | 3.00 | $ | 0.55 | ||||
Fourth
Quarter
|
$ | 0.75 | $ | 0.51 | ||||
Year
Ended September 30, 2009
|
||||||||
First
Quarter
|
$ | 1.01 | $ | 0.10 | ||||
Second
Quarter
|
$ | 0.90 | $ | 0.05 | ||||
Third
Quarter
|
$ | 0.69 | $ | 0.15 | ||||
Fourth
Quarter
|
$ | 0.72 | $ | 0.20 | ||||
Year
Ended September 30, 2010
|
||||||||
First
Quarter
|
$ | 1.20 | $ | 0.50 | ||||
Second
Quarter
|
$ | 1.20 | $ | 0.52 | ||||
Third
Quarter
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$ | 1.15 | $ | 0.40 | ||||
Fourth
Quarter
|
$ | 0.95 | $ | 0.05 |
On
November 4, 2010, the closing sales price of our common stock as reported on the
OTC Bulletin Board was $0.50 per share. On October 28, 2010, there were 370
record holders of our common stock. The number of holders of record
is based on the actual number of holders registered on the books of our transfer
agent and does not reflect holders of shares in “street name” or persons,
partnerships, associations, corporations or other entities identified in
security position listings maintained by depository trust
companies.
Dividends
We
have not paid or declared cash distributions or dividends on our common
stock. CNS California has likewise never paid dividends on its common
stock. We do not intend to pay cash dividends on our common stock in
the foreseeable future. We currently intend to retain all earnings,
if and when generated, to finance our operations. The declaration of
cash dividends in the future will be determined by the board of directors based
upon our earnings, financial condition, capital requirements and other relevant
factors.
19
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes provided elsewhere in this
prospectus. This discussion summarizes the significant factors
affecting the condensed consolidated operating results, financial condition and
liquidity and cash flows of CNS Response, Inc. for the fiscal years ended
September 30, 2009 and 2008, and for the three and nine months ended June 30,
2010 and June 30, 2009. Except for historical information, the
matters discussed in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.
Overview
We are
an online neuroinformatic company that develops reference data and analytic
tools for clinicians and researchers, with two distinct business
segments. Our Neurometric Information Services business operated by
CNS California, which we consider our primary business, is focused on the
commercialization of a patented system that provides clinicians with objective
neurophysiological data based on EEG. This reference data is reported
to reduce Trial and Error pharmacotherapy in patients with behavioral
(psychiatric and/or addictive) disorders. Our Clinical Services
business operated by our wholly-owned subsidiary, Neuro-Therapy Clinic, Inc.
(“NTC”), is a full service psychiatric clinic.
Neurometric
Information Services
Traditionally,
prescription of medication for the treatment of behavioral disorders (such as
depression, bipolar disorders, eating disorders, addiction, anxiety disorders,
ADHD and schizophrenia) has been primarily based on symptomatic factors, while
the underlying physiology and pathology of the disorder can rarely be analyzed,
often resulting in multiple ineffective, costly, and often lengthy, courses of
treatment before effective medications are identified. Some patients
never find effective medications.
We
believe that our neurometric information offers an improvement upon traditional
methods because our technology is designed to correlate the success of courses
of medication with the neurophysiological characteristics of a particular
EEG. Our technology provides medical professionals with medication
sensitivity data for a subject patient based upon the identification and
correlation of treatment outcome information from other patients with similar
neurophysiologic characteristics. This treatment outcome information
is contained in a proprietary outcomes database that consists of over 17,000
medication trials for patients with psychiatric or addictive problems (the
“CNS
Database”). For each patient in the CNS Database, we have
compiled electroencephalographic (“EEG”) scans, symptoms and
outcomes often across multiple treatments from multiple
physicians. This patented technology, called “Referenced-EEG®” or
“rEEG®”, compares a patient’s EEG to the outcomes in the database and displays
statistical results based on the treatment response of patients with similar
neurophysiology.
With
rEEG®, physicians order a digital EEG for a patient, which is then evaluated
with reference to the CNS Database. By providing this reference
correlation, an attending physician has the knowledge of how other patients
having similar brain function have previously responded to a myriad of treatment
alternatives. Analysis of this complete data set yielded a platform
of 74 quantitative EEG statistics that have shown utility in characterizing
patient pathophysiology. This platform then allows a new patient to
be characterized, based on these 74 statistics, and the database to be queried
to understand the statistical probability of how patients with similar brain
patterns have previously responded to the medications currently in the
database. This technology allows us to create and provide simple
reports (“rEEG
Reports”) to the prescriber that summarizes historical treatment success
of specific medications for patients with similar brain function. It
provides neither a diagnosis nor specific treatment, but simply offers
objective, evidenced-based information for clinician education and decision
support.
Our
Neurometric Information Services business is focused on increasing the demand
for our rEEG Reports. We believe the key factors that will drive
broader adoption of our rEEG Reports will be acceptance by healthcare providers
and patients of their benefit, demonstration of the cost-effectiveness of using
our technology, reimbursement by third-party payers, expansion of our sales
force and increased marketing efforts.
20
In
addition to its utility in providing clinicians with medication sensitivity
information, rEEG provides us with significant opportunities in the area of
pharmaceutical development. rEEG, in combination with the information
contained in the CNS Database, may be able to identify novel uses for
neuropsychiatric medications currently on the market and in late stages of
clinical development, as well as aid in the identification of neurophysiologic
characteristics of clinical subjects that may be successfully treated with
neuropsychiatric medications in the clinical testing stage. We intend
to enter into relationships with established drug and biotechnology companies to
further explore these opportunities, although no relationships are currently
contemplated. The development of biomarkers as the new method for
identifying the correct patient population to research is being encouraged by
both The National Institute of Mental Health (NIMH) and The Food and Drug
Administration (FDA).
Clinical
Services
In
January 2008, we acquired our then largest customer, the Neuro-Therapy Clinic,
Inc. Upon the completion of the transaction, NTC became a
wholly-owned subsidiary of ours. NTC operates one of the largest
psychiatric medication management practices in the state of Colorado, with six
full time and seven part time employees including psychiatrists and clinical
nurse specialists with prescribing privileges. Daniel A. Hoffman,
M.D. is the medical director at NTC, and, after the acquisition, became our
Chief Medical Officer and more recently, our President.
NTC,
having performed a significant number of rEEG’s, serves as an important resource
in our product development, the expansion of our CNS Database, production system
development and implementation, along with the integration of our rEEG services
into a medical practice. Through NTC, we also expect to develop
marketing and patient acquisition strategies for our Laboratory Information
Services business. Specifically, NTC is learning how to best
communicate the advantages of rEEG to patients and referring physicians in the
local market. We will share this knowledge and developed
communication programs learned through NTC with other physicians using our
services, which we believe will help drive market acceptance of our
services. In addition, we plan to use NTC to train practitioners
across the country in the uses of rEEG technology.
We view
our Clinical Services business as secondary to our Laboratory Information
Services business, and we have no current plans to expand this
business.
Business
Operations
Since our
inception, we have generated significant net losses. As of September
30, 2009, we had an accumulated deficit of $25.2 million. We incurred
net losses of $8.5 million and $5.4 million for the fiscal years ended September
30, 2009 and 2008, respectively. As of June 30, 2010, we had an
accumulated deficit of $29.9 million. We incurred net losses of $4.75
million and $4.50 million for the nine months ended June 30, 2010 and 2009,
respectively. We expect our net losses to continue for at least the
next couple of years. We anticipate that a substantial portion of our
capital resources and efforts will be focused on research and development, scale
up of our commercial organization, and other general corporate purposes,
including the payment of legal fees associated with our
litigation. Research and development projects include the completion
of more clinical trials which are necessary to further validate the efficacy of
our products and services relating to our rEEG technology across different types
of behavioral disorders, the enhancement of the CNS Database and, to a lesser
extent, the identification of new medications that are often combinations of
approved drugs. We anticipate that future research and development
projects will be funded by grants or third-party sponsorship.
As of
June 30, 2010, our current liabilities of approximately $2.01 million exceeded
our current assets of approximately $0.20 million by approximately $1.81 million
and our net losses will continue for the foreseeable future. We will
need additional funds immediately to continue our operations and substantial
additional funds before we can increase demand for our rEEG
services. We are currently exploring additional sources of capital;
however, we do not know whether additional funding will be available on
acceptable terms, or at all, especially given the economic conditions that
currently prevail. In addition, any additional equity funding may
result in significant dilution to existing stockholders, and, if we incur
additional debt financing, a substantial portion of our operating cash flow may
be dedicated to the payment of principal and interest on such indebtedness, thus
limiting funds available for our business activities. If adequate
funds are not available, we may be required to delay or curtail significantly
our development and commercialization activities. This would have a
material adverse effect on our business, financial condition and/or results of
operations, and could ultimately cause us to have to cease
operations.
21
Acquisition
of Neuro-Therapy Clinic
On
January 15, 2008, we acquired all of the outstanding common stock of NTC in
exchange for a non-interest bearing $300,000 note payable in equal monthly
installments over 36 months. The acquisition was accounted under the
purchase method of accounting, and accordingly, the purchase price was allocated
to NTC’s net tangible assets based on their estimated fair values as of January
15, 2008. The excess purchase price over the value of the net
tangible assets was recorded as goodwill. The purchase price and the
allocation thereof are as follows:
Fair
value of note payable issued
|
$
|
265,900
|
||
Direct
transaction costs
|
43,700
|
|||
Purchase
price
|
309,600
|
|||
Allocated
to net tangible liabilities, including cash of $32,100
|
(10,600
|
)
|
||
Allocated
to goodwill
|
$
|
320,200
|
The
acquisition was not material, and accordingly, no pro forma results are
presented. As of September 30, 2009 the goodwill was determined to be
fully impaired and was consequently written off.
Our
Recent Private Placement Transactions
2009
Private Placement Transactions
On August
26, 2009, we received gross proceeds of approximately $2,043,000 in the first
closing of our private placement transaction with six
investors. Pursuant to Subscription Agreements entered into with the
investors, we sold approximately 38 Investment Units at $54,000 per Investment
Unit. Each “Investment Unit” consists of 180,000 shares of our common
stock and a five year non-callable warrant to purchase 90,000 shares of our
common stock at an exercise price of $0.30 per share. After
commissions and expenses, we received net proceeds of approximately $1,792,300
upon the first closing of our private placement. On December 24,
2009, we had a second closing of our private placement in which we received
additional gross proceeds of approximately $2,996,000 from 24
investors. At the second closing, we sold approximately 55 Investment
Units on the same terms and conditions as the Investment Units sold at the first
closing. After commissions and expenses, we received net proceeds of
approximately $2,650,400 in connection with this second closing of our private
placement. On December 31, 2009, we had a third closing of our
private placement in which we received additional gross proceeds of
approximately $432,000 from five investors. At the third closing, we
sold 8 Investment Units on the same terms and conditions as the Investment Units
sold at the first closing. After commissions and expenses, we
received net proceeds of approximately $380,200 in connection with this third
closing of our private placement. On January 4, 2010, the Company
completed its fourth and final closing of its private placement, resulting in
additional gross proceeds to the Company of $108,000 from two
investors. At this fourth closing, we sold 2 Investment Units on the
same terms and conditions as the Investment Units sold at the first
closing. After commissions and expenses, we received net proceeds of
approximately $95,000 in connection with this final closing of our private
placement. These private placement transactions are described in
further detail in “Liquidity and Capital Resources” below and Note 2 to the
unaudited condensed consolidated financial statements.
Prior to
our private placement, we raised aggregate proceeds of $1,700,000 in fiscal year
2009 through the issuance of secured convertible promissory notes on each of
March 30, May 14, and June 12, 2009. Upon the first closing of our
private placement on August 26, 2009, these notes were converted into shares of
our common stock, as more fully described in Note 2 of the unaudited condensed
consolidated financial statements.
2010
Private Placement Transactions
On
June 3, 2010, we entered into a Bridge Note and Warrant Purchase Agreement with
John Pappajohn to purchase two secured promissory notes (each, a “Bridge Note”)
in the aggregate principal amount of $500,000, with each Bridge Note in the
principal amount of $250,000 maturing on December 2, 2010. On June 3,
2010, Mr. Pappajohn loaned the Company $250,000 in exchange for the first Bridge
Note (there were no warrants issued in connection with this first note) and on
July 25, 2010, Mr. Pappajohn loaned us $250,000 in exchange for the second
Bridge Note. In connection with his purchase of the second Bridge
Note, Mr. Pappajohn received a warrant to purchase up to 250,000 shares of our
common stock. The exercise price of the warrant (subject to customary
anti-dilution adjustments) was $0.50 per share.
22
Pursuant
to a separate agreement that we entered into with Mr. Pappajohn on July 25,
2010, we granted him a right to convert his Bridge Notes into shares of our
common stock at a conversion price of $0.50. The conversion price was
subject to customary anti-dilution adjustments, but would never be less than
$0.30.
Each
Bridge Note accrued interest at a rate of 9% per annum which would have been
paid together with the repayment of the principal amount, unless earlier
converted, at the earliest of (i) the maturity date; (ii) prepayment of the
Bridge Note at the option of the Company (iii) closing of a financing in which
the aggregate proceeds to the Company are not less than $3,000,000 or (iv) the
occurrence of an Event of Default (as defined in the Bridge
Note). The Purchase Agreement and each Bridge Note granted the
investor a senior security interest in and to all of the Company’s existing and
future right, title and interest in its tangible and intangible
property.
On
July 5, 2010 and August 20, 2010, we issued unsecured promissory notes (each, a
“Deerwood Note”) in the aggregate principal amount of $500,000 to Deerwood
Partners LLC and Deerwood Holdings LLC, with each investor purchasing two notes
in the aggregate principal amount of $250,000. We received $250,000 in gross
proceeds from the issuance of the first two notes on July 5, 2010 and another
$250,000 in gross proceeds from the issuance of the second two notes on August
20, 2010. In connection with the August 20, 2010 transaction, each of
the two investors also received a warrant to purchase up to 75,000 shares of our
common stock at an exercise price (subject to customary anti-dilution
adjustments) of $0.56 per share.
SAIL
Venture Partners L.P. (“SAIL”), of which our director David Jones is a managing
partner, issued unconditional guaranties to each of the Deerwood investors,
guaranteeing the prompt and complete payment when due of all principal, interest
and other amounts under each Deerwood Note. We entered into an oral
agreement to indemnify SAIL and grant to SAIL a security interest in our assets
in connection with the guaranties. In addition, on August 20, 2010,
we granted SAIL warrants to purchase up to an aggregate of 100,000 shares of
common stock at an exercise price (subject to customary anti-dilution
adjustments) of $0.56 per share.
Each
Deerwood Note was convertible into shares of our common stock at a conversion
price of $0.50. The conversion price was subject to customary
anti-dilution adjustments, but would never be less than $0.30.
On
October 1, 2010, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with John Pappajohn and SAIL as investors, pursuant to
which we issued to the investors secured convertible promissory notes (the
“October Notes”) in the aggregate principal amount of $1,011,688 and warrants to
purchase up to 1,686,144 shares of common stock, as
follows: (a) We received $500,000 in gross proceeds from the
issuance to the investors of October Notes in the aggregate principal amount of
$500,000 and related warrants to purchase up to 833,332 shares. (b)
We also issued October Notes in the aggregate principal amount of $511,688, and
related warrants to purchase up to 852,812 shares, to Mr. Pappajohn in exchange
for the cancellation of the two Bridge Notes originally issued to him on June 3,
2010 and July 25, 2010 in the aggregate principal amount of $500,000 (and
accrued and unpaid interest on those notes) and a warrant to purchase up to
250,000 shares originally issued to him on July 25, 2010. The
transaction closed on October 1, 2010.
On
October 7 and October 12, 2010, a third and fourth investor, respectively,
executed the Purchase Agreement. In connection therewith, we issued
October Notes in the aggregate principal amount of $600,000 and warrants to
purchase up to 999,999 shares of common stock of the Company, to such investors
on those dates. We received $588,000 in net proceeds from these
investors. Monarch Capital Group LLC (“Monarch”) acted as
non-exclusive placement agent with respect to the placement of October Notes in
the aggregate principal amount of $100,000 and related warrants, pursuant to an
engagement agreement, dated September 30, 2010, between us and
Monarch. Under the engagement agreement, in return for its services
as non-exclusive placement agent, Monarch is entitled to receive (a) a cash fee
equal to 10% of the gross proceeds raised from the sale of Notes to investors
introduced to the Company by Monarch; (b) a cash expense allowance equal to 2%
of the gross proceeds raised from the sale of Notes to such investors; and (c)
five-year warrants (the “Placement Agent Warrants”) to purchase common stock of
the Company equal to 10% of the shares issuable upon conversion of Notes issued
to such investors. In connection with the October 12, 2010 closing,
Monarch received a cash fee of $10,000 and a cash expense allowance of $2,000
and, on October 25, 2010, received Placement Agent Warrants to purchase 33,333
shares of the Company’s common stock at an exercise price of $0.33 per
share.
23
On
October 21, 2010 and October 28, a fifth and sixth investor, respectively,
executed the Purchase Agreement. In connection therewith, we issued
October Notes in the aggregate principal amount of $250,000 and warrants to
purchase up to 416,666 shares of common stock to such investors on such
dates. We received approximately $250,000 in net proceeds from the
issuance to these investors.
On
November 3, 2010, three affiliated entities executed the Purchase
Agreement. In connection therewith, we issued October Notes in the
aggregate principal amount of $762,250 and warrants to purchase up to 1,270,414
shares of common stock, as follows: (a) We received
$250,000 in gross proceeds from the issuance to BGN Acquisition Ltd., LP, an
entity controlled by our director George Kallins, of October Notes in the
aggregate principal amount of $250,000 and related warrants to purchase up to
416,666 shares. (b) We also issued October Notes in the
aggregate principal amount of $512,250, and related warrants to purchase up to
512,250 shares, to Deerwood Holdings LLC and Deerwood Partners LLC, two entities
controlled by Mr. Kallins, in exchange for the cancellation of the Deerwood
Notes originally issued on July 5, 2010 and August 20, 2010 in the aggregate
principal amount of $500,000 (and accrued and unpaid interest on those notes)
and warrants to purchase an aggregate of up to 150,000 shares originally issued
on August 20, 2010. The related guaranties and oral indemnification
and security agreement that had been entered into in connection with the
Deerwood Notes were likewise terminated. SAIL, of which our
director David Jones is a managing partner, issued unconditional guaranties to
each of the Deerwood investors, guaranteeing the prompt and complete payment
when due of all principal, interest and other amounts under the October Notes
issued to such investors. The obligations under each guaranty are
independent of our obligations under the October Notes and separate actions may
be brought against the guarantor. In connection with its serving as
guarantor, we granted SAIL warrants to purchase up to an aggregate of 341,498
shares of common stock. The warrants to purchase 100,000 shares of
common stock previously granted to SAIL on August 20, 2010 were canceled.
In
connection with the November 3 transactions, SAIL and the Deerwood investors
entered into a Purchase Option Agreement pursuant to which SAIL has the option,
which is exercisable at any time through March 31, 2011, to purchase any or all
of the October Notes issued to the Deerwood investors in exchange for the
Deerwood Notes from time to time at a price equal to the aggregate principal
amount plus all accrued but unpaid interest.
The
Purchase Agreement provides for the issuance and sale of October Notes, for cash
or in exchange for outstanding convertible notes, in the aggregate principal
amount of up to $3,000,000 plus an amount corresponding to accrued and unpaid
interest on any exchanged notes, and warrants to purchase a number of shares
corresponding to 50% of the number of shares issuable on conversion of the
October Notes. The agreement provides for multiple closings, but
mandates that no closings may occur after January 31, 2011. The
Purchase Agreement also provides that the Company and the holders of the October
Notes will work in
good faith to enter into a registration rights agreement covering the
registration of the resale of the shares underlying the October Notes and the
related warrants.
The
October Notes mature one year from the date of issuance (subject to earlier
conversion or prepayment), earn interest equal to 9% per year with interest
payable at maturity, and are convertible into shares of common stock of the
Company at a conversion price of $0.30. The conversion price is
subject to adjustment upon (1) the subdivision or combination of, or stock
dividends paid on, the common stock; (2) the issuance of cash dividends and
distributions on the common stock; (3) the distribution of other capital stock,
indebtedness or other non-cash assets; and (4) the completion of a financing at
a price below the conversion price then in effect. The October Notes
can be declared due and payable upon an event of default, defined in the October
Notes to occur, among other things, if the Company fails to pay principal and
interest when due, in the case of voluntary or involuntary bankruptcy or if the
Company fails to perform any covenant or agreement as required by the October
Note.
Our
obligations under the terms of the October Notes are secured by a security
interest in the tangible and intangible assets of the Company, pursuant to a
Security Agreement, dated as of October 1, 2010, by and between us and John
Pappajohn, as administrative agent for the holders of the October
Notes. The agreement and corresponding security interest terminate if
and when holders of a majority of the aggregate principal amount of October
Notes issued have converted their October Notes into shares of common
stock.
The
warrants related to the October Notes expire seven years from the date of
issuance and are exercisable for shares of common stock of the Company at an
exercise price of $0.30. Exercise price and number of shares issuable
upon exercise are subject to adjustment (1) upon the subdivision or combination
of, or stock dividends paid on, the common stock; (2) in case of any
reclassification, capital reorganization or change in capital stock and (3) upon
the completion of a financing at a price below the exercise price then in
effect.
24
The
Placement Agent Warrants have an exercise price equal to 110% of the conversion
price of the Notes. The terms of the Placement Agent Warrants, except
for the exercise price and period, are identical to the terms of the warrants
related to the October Notes.
Matters
Involving our Former Chief Executive Officer and Former Director, Leonard
Brandt
On April
10, 2009, our Board of Directors voted to remove Len Brandt as the CEO of the
Company and appointed George Carpenter as our CEO. On the same date,
Mr. Brandt resigned as Chairman of the Board, but retained his seat on the Board
of Directors. On June 19, 2009, Mr. Brandt informed us of his
intention to call a special meeting of Company stockholders in lieu of an annual
meeting, for the purpose of unseating the other members of the Board and
replacing them with his nominees. Subsequently, Mr. Brandt made
multiple mailings to stockholders purporting to give notice of a meeting,
scheduled multiple dates for the meeting and attempted to call and adjourn
meetings on at least six occasions. Mr. Brandt failed to convene a
quorum or take any action at any of these meetings.
Mr.
Brandt finally attempted to call a special meeting of stockholders to be held on
September 4, 2009, and purportedly held a meeting on that date, at which he
claimed to have elected his own slate of directors. Subsequent to
this purported meeting, Mr. Brandt filed an action under Section 225 of the
Delaware General Corporation Law (“DGCL”) seeking to validate the results of
that purported meeting. Mr. Brandt also filed several other actions
in the Delaware Chancery Court. He filed claims for breach of
fiduciary duty in connection with the approval by our Board of the May 14, 2009
and June 18, 2009 bridge loans and the first closing of the private placement on
August 26, 2009, and made a motion to preliminarily enjoin the voting of certain
shares of our common stock and to prevent action by written consent by such
stockholders. Mr. Brandt also sought a permanent injunction against
the voting of these shares and to rescind their issuance. While these
actions were pending, we were operating under what is commonly referred to as a
“status quo” order, which maintained the Board of Directors in place immediately
prior to the purported September 4 meeting (Messrs. Carpenter, Jones, Pappajohn,
Thompson and Brandt, and Drs. Harbin and Vaccaro). The status quo
order also placed certain restrictions on certain corporate actions during the
pendency of the Section 225 action described above.
On
December 2, 2009, following a two day trial, the Delaware Court of Chancery
entered judgment for the Company and its incumbent directors in the Section 225
action and dismissed the action with prejudice. The entry of Judgment
for the Company in the Section 225 action and dismissal of that action
terminated the “status quo” order, including its restrictions on the Company’s
ability to engage in certain corporate actions. The Chancery Court
also denied Brandt’s motion for an injunction that sought to prevent the voting
of shares issued by us in connection with our bridge financings in May and June
of 2009 and the securities offering in August 2009, dismissed Mr. Brandt’s
counterclaims alleging breaches of duties in connection with those transactions,
and dismissed with prejudice another action brought by Mr. Brandt that claimed
he had not been provided information owed to him. Finally, the Court
dismissed our claims against Mr. Brandt without prejudice.
On
January 4, 2010, Mr. Brandt filed an appeal with the Supreme Court of the State
of Delaware from the Chancery Court’s ruling in the Section 225
action. Mr. Brandt also appealed the denial of his requested
injunction and the dismissal of his claims regarding the financings and stock
issuances, but he dismissed this appeal on February 25, 2010, and that ruling
thereby became final and un-appealable. On April 20, 2010 the
Delaware Supreme Court summarily affirmed the ruling of the Chancery Court
dismissing the Section 225 action.
On
September 29, 2009, the company held its first annual meeting of Stockholders at
which each of George Carpenter, Henry Harbin, M.D., David Jones, John Pappajohn,
Jerome Vaccaro, M.D. and Tommy Thompson were elected as directors. On
April 27, 2010, the company held its 2010 annual meeting of Stockholders and
five of the six directors were reelected. The sixth, Tommy Thompson,
had resigned from the board.
We filed
an action in the United States District Court for the Central District of
California against Mr. Brandt and certain others in July 2009 and Mr. Brandt
subsequently counterclaimed. On July 7, 2010 Mr. Brandt moved to
dismiss his counterclaims against the Company and the Company consented to
dismiss its complaint against Mr. Brandt and on July 13, 2010, all of the
Company’s claims and Mr. Brandt’s counterclaims in such action were
dismissed. This resolved all pending actions between the Company and
its former CEO.
25
We have
expended substantial resources to pursue the defense of legal proceedings
initiated by Mr. Brandt. We do not know whether Mr. Brandt will
institute new claims against us and the defense of any such claims could involve
the expenditure of additional resources by the Company.
Publicly
Announced Results of Clinical Trial
On
November 2, 2009, we reported the results of a landmark study presented by
Charles DeBattista, D.M.H, M.D., at the U.S. Psychiatric and Mental Health
Congress. The poster presentation, titled Referenced-EEG® (rEEG)
Efficacy Compared to STAR*D For Patients With Depression Treatment
Failure: First Look At Final Results, highlighted a dramatic
improvement in outcomes for patients with treatment resistant
depression. In this study, our rEEG technology proved effective at
predicting medication response for mostly treatment-resistant patients
approximately 65 percent of the time.
The study
included 114 patients at 12 medical sites, including Harvard, Stanford, Cornell,
UCI and Rush. The 12-week study found that rEEG significantly
outperformed the modified STAR*D treatment algorithm. The difference,
or separation, between rEEG and the control group was 50 and 100 percent for the
study’s two primary endpoints. Typically, separation between a new
treatment and a control group is less than 10 percent in antidepressant
studies.
The
study, the largest in our history, was a randomized, single blinded, controlled,
parallel group, multicenter study. The patients in the study
experienced depression treatment failure of one or more SSRIs and/or had failure
with at least two classes of antidepressants. The patients fell into
two groups: 1) those treated with rEEG medication guidance, and 2)
those treated with the modified STAR*D treatment algorithm.
A paper
with the results of this study has been peer reviewed by the Journal of
Psychiatric Research, has been published on-line at their website as of July 3,
2010 and is awaiting hard-copy publication.
2010
Annual Meeting
On April
27, 2010, the Company held its 2010 annual meeting of stockholders and five of
the six directors originally elected in September 2009 were reelected; the
sixth, Tommy Thompson, had previously resigned from the board. In
addition, the 2006 Stock Incentive Plan was amended to increase the number of
shares reserved for issuance under the plan from 10 million to 20 million shares
of common stock and to increase the maximum number of shares of common stock
subject to awards granted within a calendar year to any eligible employee or
director from 3 million to 4 million shares.
Financial
Operations Overview
Revenues
Our
Neurometric Information Services revenues are derived from the sale of rEEG
Reports to physicians. Physicians are generally billed upon delivery
of a rEEG Report. The list prices of our rEEG Reports to physicians
range from $200 to $800 with $400 being the most frequent
charge.
Patient
service revenue is generated as a result of providing services to patients on an
outpatient basis. Patient service revenue is recorded at our
established billing rates less contractual adjustments. Generally,
collection in full is not expected on our established billing
rates. Contractual adjustments are recorded to state our patient
service revenue at the amount we expect to collect for the services provided
based on amounts due from third-party payors at contractually determined
rates.
Cost
of Revenues
Cost
of revenues are for Neurometric Information Services and represent the cost of
direct labor, costs associated with external processing, analysis and consulting
review necessary to render an individualized test result and miscellaneous
support expenses. Costs associated with performing our tests are
expensed as the tests are performed. We continually evaluate the
feasibility of hiring our own personnel to perform most of the processing and
analysis necessary to render a rEEG Report.
26
Cost of
revenues for Clinical Services are not broken out separately but are included in
general and administrative expenses.
Research
and Development
Research
and development expenses are associated with our Neurometric Information
Services and primarily represent costs incurred to design and conduct clinical
studies, to recruit patients into the studies, to improve rEEG processing, to
add data to the CNS Database, to improve analytical techniques and advance
application of the methodology to additional clinical diagnosis. We
charge all research and development expenses to operations as they are
incurred.
Sales
and Marketing
For
our Neurometric Information Services, our selling and marketing expenses consist
primarily of personnel and media cost to inform consumers of our products and
services. Additional marketing expenses are the costs of educating
physicians, laboratory personnel, other healthcare professionals regarding our
services.
For our
Clinical Services, selling and marketing costs relate to advertising to attract
patients to the clinic.
General
and Administrative
Our
general and administrative expenses consist primarily of personnel, occupancy,
legal, consulting and administrative and support costs for both our Neurometric
Information Services and Clinical Services businesses.
Critical
Accounting Policies and Significant Judgments and Estimates
This
discussion and analysis of our financial condition and results of operations is
based on our financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of
these consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities and
expenses and the disclosure of contingent assets and liabilities at the date of
the financial statements, as well as revenues and expenses during the reporting
periods. We evaluate our estimates and judgments on an ongoing
basis. We base our estimates on historical experience and on various
other factors we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual
results could therefore differ materially from those estimates under different
assumptions or conditions.
Our
significant accounting policies are described in Note 3 to our consolidated
financial statements included elsewhere in this prospectus. We
believe the following critical accounting policies reflect our more significant
estimates and assumptions used in the preparation of our consolidated financial
statements.
Revenue
Recognition
We
have generated limited revenues since our inception. Revenues for our
Neurometric Service product are recognized when an rEEG Report is delivered to a
Client-Physician. For our Clinical Services, revenues are recognized
when the services are performed.
Stock-based
Compensation Expense
Stock-based
compensation expense, which is a non-cash charge, results from stock option
grants. Compensation cost is measured at the grant date based on the
calculated fair value of the award. We recognize stock-based
compensation expense on a straight-line basis over the vesting period of the
underlying option. The amount of stock-based compensation expense
expected to be amortized in future periods may decrease if unvested options are
subsequently cancelled or may increase if future option grants are
made.
27
Results
of Operations for the Years Ended September 30, 2009 and 2008
As
earlier described, we operate in two business segments: Neurometric
Information Services and Clinical Services. Our Neurometric
Information Services business focuses on the delivery of reports (“rEEG
Reports”) that assist physicians with treatment strategies for patients with
behavioral (psychiatric and/or addictive) disorders based on the patient’s own
physiology. Our Clinical Services business operated through NTC
provides full service psychiatric services. For comparative purposes
below, our Clinical Services business which represents the operations of
Neuro-Therapy Clinic are only included since its acquisition on January 15,
2008.
The
following table presents consolidated statement of operations data for each of
the periods indicated as a percentage of revenues.
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
|||||||
Revenues
|
100 | % | 100 | % | ||||
Cost
of revenues
|
19 | 21 | ||||||
Gross
profit
|
81 | 79 | ||||||
Research
and development
|
305 | 271 | ||||||
Sales
and marketing
|
131 | 114 | ||||||
General
and administrative expenses
|
555 | 402 | ||||||
Goodwill
impairment
|
46 | - | ||||||
Operating
loss
|
(956 | ) | (708 | ) | ||||
Other
income (expense), net
|
(261 | ) | 13 | |||||
Net
income (loss)
|
(1,217 | )% | (695 | )% |
Revenues
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
Percent
Change
|
||||||||||
Laboratory
Service Revenues
|
$ | 120,400 | $ | 178,500 | (33 | )% | ||||||
Clinical
Service Revenues
|
579,700 | 595,000 | (3 | )% | ||||||||
Total
Revenues
|
$ | 700,100 | $ | 773,500 | (9 | )% |
With
respect to our Neurometric Information Services business, the number of paid
rEEG Reports delivered during the year ended September 30, 2009 decreased to 321
from 476 in 2008 while the price per report was approximately $375 in both 2009
and 2008. The reduction in revenues from the sale of our rEEG Reports
is partly due to the acquisition of NTC, which was our largest customer prior to
its acquisition in January 2008. Furthermore, the Company diverted
its limited resources to focus on conducting and completing its clinical
trial. The clinical trial was completed in September 2009 with
top-line results announced in November 2009. The Company has entered
into agreements with two payer groups to pilot the use of rEEG
Reports. We expect to drive broader adoption of our rEEG technology
and see our Neurometric Services Revenues increase once the results of our
clinical trial are published. We are also starting to focus on
contracts with insurance payers and the military, which should increase the
number of reports processed. Furthermore, we will also start offering
our services to pharmaceutical companies to assist them with their product
development activities.
On
July 27, 2010 we received a letter from the FDA division that was reviewing our
501(k) submission suggesting that the rEEG service, unless otherwise
reclassified, is a class III device which, as standard procedure, would requires
an approved premarket approval application (PMA) before it can be marketed
legally. We are currently evaluating our alternatives in response to
the FDA letter. We will continue to discuss alternative approaches
with the FDA. During the pendency of these proceedings, we will be
able to continue to market our service as a non-device internet-based
neurometric information service. There is some risk that the FDA will
seek to take enforcement action against rEEG based upon the Agency’s position
that rEEG is a medical device if we continue to market our
service.
28
Our
Clinical Services Revenues are a result of patient billings for psychiatric
services rendered. Revenues fell in 2009 compared to 2008 due to
staff turnover and the focus by key staff members on the clinical
trial. Currently, we anticipate that the Clinical Services business
will become self-sustaining and profitable, however, we do not anticipate a
significant increase in revenues generated by this business
segment.
Cost
of Revenues
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
Percent
Change
|
||||||||||
Cost
of Neurometric Information Services revenues
|
$ | 131,600 | $ | 163,200 | (19 | )% |
Cost
of Neurometric Information Services revenues consists of payroll, consulting,
and other miscellaneous costs. Consulting costs primarily represent
external costs associated with the processing and analysis of rEEG Reports and
range between $75 and $100 per rEEG Report. For the year ended
September 30, 2009, cost of revenues of $131,600 consist primarily of direct
labor and benefit costs of $99,600, which includes stock-based compensation and
consulting fees of $29,200. For the year ended September 30, 2008,
cost of revenues of $163,200 consisted primarily of direct labor and benefit
costs of $108,400, including stock-based compensation and consulting fees of
$48,600. We expect costs of revenues will increase as an absolute
number as more rEEG Reports are processed. However, we expect cost of
revenues to decrease as a percentage of revenues as we improve our operating
efficiency.
Research
and Development
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
Percent
Change
|
||||||||||
Neurometric
Information Services research and development
|
$ | 2,137,200 | $ | 2,097,300 | 2 | % |
Research
and development expenses consist of clinical study patient expenses, payroll and
benefit costs (including stock-based compensation), patents costs, consulting
fees, marketing and recruitment costs, database enhancements and maintenance,
travel and conference and other miscellaneous costs. Research and
development costs for the year ended September 30, 2009 totaled $2,137,200 and
were largely comprised of the following: clinical study patient costs
of $789,300, payroll and benefit costs of $792,100, patent costs of $213,100,
consulting costs of $105,700, marketing and recruiting costs $161,100, database
costs of $16,800 and travel and conference costs of $15,600. For the
year ended September 30, 2008 research and development costs totaled $2,097,300
and were largely comprised of the following: clinical study patient
costs of $579,100, payroll and benefit costs of $855,600, patent costs of
$108,800, consulting costs of $285,000, marketing and recruiting costs $136,200,
database costs of $36,400 and travel and conference costs of
$50,200.
Clinical
study patient costs increased by $210,200 in fiscal 2009 as our clinical trial
was running for twelve months in fiscal 2009 compared to approximately nine
months in fiscal 2008. Patent costs also increased in fiscal 2009 by
$104,300 as a result of filing patent applications in Western Europe and
marketing and recruitment expenses increased by $25,000 in fiscal 2009 as we
accelerated patient enrollment in our clinical study. Conversely,
payroll and benefit costs declined in fiscal 2009 by $63,500 due to changes in
the staff-mix and reduced stock compensation and bonus expenses and consulting
expenses declined by $179,300 as expertise was brought in-house and the clinical
trial moved beyond the design stage which involved the use of
consultants. In fiscal 2009, database costs fell by $19,600 compared
to fiscal 2008 as the company reduced development efforts relating to the CNS
Database.
29
The
Company is applying for grants which, if obtained, will help the Company
accelerate its research and development efforts, and improve the functionality
of its CNS Database.
Sales
and marketing
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
Percent
Change
|
||||||||||
Sales
and Marketing
|
||||||||||||
Neurometric
Information Services
|
$ | 908,500 | $ | 847,600 | 7 | % | ||||||
Clinical
Services
|
7,300 | 33,800 | (78 | )% | ||||||||
Total
Sales and Marketing
|
$ | 915,800 | $ | 881,400 | 4 | % |
Sales
and marketing expenses associated with our Neurometric Information Services
business consist primarily of payroll and benefit costs, consulting fees,
marketing costs, computer services, travel and conference costs and
miscellaneous costs. Sales and marketing expenses for fiscal 2009
were comprised of the following: payroll and benefit costs of
$596,200, consulting fees of $82,400, marketing costs of $147,600, computer
services costs of $31,700, and travel and conference costs of
$40,600. For fiscal 2008 the company incurred: payroll and
benefit costs of $403,000, consulting fees of $221,100, marketing costs of
$18,500, computer services costs of $25,000, and travel and conference costs of
$110,900.
In fiscal
2009, payroll and benefits increased by $193,200 principally as a result of the
hiring of a Vice President for commercial operations and additional sales and
support staff. This increase was partially offset by a reduction in
consulting fees of $138,900 as marketing expertise was brought in
house. Marketing expenses increased in fiscal 2009 by $129,100 in an
effort to advertise our rEEG technology to service providers and
consumers. This was partly offset by a reduction in travel and
conference costs of $70,300.
In
fiscal 2010, we have reduced our sales and marketing expenditure for Neurometric
Information Services pending receipt of our 510(k) clearance from the FDA, after
which we plan to increase our Direct-to-Consumer
marketing. Furthermore, with the successfulpublication of the results
of recent clinical trial, we plan to introduce our rEEG technology to additional
psychiatric providers and medical insurance payers later in fiscal 2010 and in
2011, which will increase our sales and marketing
expenditures. Additionally, we will also start offering our services
to pharmaceutical companies to assist them with their product development
activities.
Clinical
Services sales and marketing expenses consist of advertising in various media so
as to attract patients to our clinic in Denver. We do not anticipate
materially increasing sales and marketing expenses relating to our Clinical
Services business.
General
and administrative
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
Percent
Change
|
||||||||||
General
and administrative
|
||||||||||||
Neurometric
Information Services
|
3,217,800 | $ | 2,349,000 | 35 | % | |||||||
Clinical
Services
|
669,600 | 756,700 | (12 | )% | ||||||||
Total
General and administrative
|
$ | 3,887,400 | $ | 3,105,700 | 25 | % |
General
and administrative expenses for our Neurometric Information Services business
are primarily related to salaries and benefits (including stock-based
compensation), legal and other professional fees, consulting services, general
administration and occupancy costs, dues and fees, marketing and investor
relations, and travel and conferences. For the year ended September
30, 2009 these expenses were as follows: Salaries and benefits
$792,700, legal fees $1,362,000, other professional fees $151,300, consulting
costs $369,700, general administration and occupancy costs $183,000, dues and
fees $80,000, marketing and investor relations $86,500, and travel and
conference costs $69,800. For the year ended September 30, 2008 these
expenses were: Salaries and benefits $1,420,900, legal fees $193,900,
other professional fees $157,800, consulting costs $94,600, general
administration and occupancy costs $189,300, dues and fees $46,300, marketing
and investor relations $112,800, and travel and conference costs of
$78,100.
30
Changes
in general and administrative expenditures in 2009 were as
follows: Salaries and benefit costs decreased by $628,200 as a result
of staff reductions, including the termination of our former CEO Leonard Brandt
in April 2009, a non-recurring bonus expense of $69,900 declared in 2008 that
did not reoccur in 2009 and as a result of stock based compensation charges
falling $214,900 in fiscal 2009 compared to the prior year
period. Partly offsetting the reduction in salaries and benefits was
an increase in consulting fees of $275,100 as a result of the hiring of
consultants to perform functions previous undertaken by salaried
employees. Legal fees increased by $1,168,100 in 2009 principally due
to costs associated with defending against lawsuits brought by our former CEO
and Chairman of the Board, Leonard Brandt, as well as our fund raising
efforts. Dues and fees increased by $33,800 in 2009 as a result of
the payment of Delaware Franchise taxes for 2009, Blue Sky filings necessitated
by our private placement, and increased transfer agent fees associated with the
holding of our annual stockholders’ meeting. Certain other costs
categories decreased in 2009 including marketing and investor relations costs
which decreased by $26,300.
The
company incurred certain miscellaneous charges in 2009 which included Delaware
Franchise Tax assessments for fiscal 2007 and 2008 totaling $74,400;
additionally, the company accrued for a $34,800 payroll tax assessment which was
related to 2006, and a write-off of $22,600 of doubtful debts. In
2008 the company wrote off $56,900 in costs associated with a financing effort
that did not materialize.
General
and administrative expenses for our Clinical Services business for the year
ended September 30, 2009 were $669,600 which includes all costs associated with
running the clinic, including all payroll costs, medical supply costs, occupancy
costs and other general and administrative costs. These costs
declined $87,100 from $756,700 in 2008 primarily due to lower patient
volume.
Goodwill
impairment charges
During
the fiscal year 2009, we conducted a goodwill impairment test and determined
that all of the goodwill related to the NTC acquisition was
impaired. Accordingly, we recorded a goodwill impairment charge of
$320,200 for the year ended September 30, 2009.
Other
income (expense)
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
Percent
Change
|
||||||||||
Neurometric
Information Services (Expense), net
|
$ | (1,822,700 | ) | $ | 104,600 | * | ||||||
Clinical
Services (Expense)
|
(200 | ) | (600 | ) | 33 | % | ||||||
Total
interest income (expense)
|
$ | (1,822,900 | ) | $ | 104,000 | * |
* not meaningful
With
respect to our Neurometric Information Services business, we incurred a $90,000
financing fee in connection with the bridge note issued to Mr. Pappajohn on June
12, 2009 and $20,900 in interest expenses on the bridge notes issued to Mr.
Brandt and Sail Venture Partners. Additionally, $1,058,000 of
expenses associated with the valuation of bridge warrants and $642,000
associated with the value of the beneficial conversion feature of the bridge
notes were written off to interest expense upon conversion of the bridge
notes. Furthermore, $13,300 of interest expense was incurred on
long-term debt issued in connection with our acquisition of
NTC. These expenses were offset by interest income of $9,500 for the
fiscal year ended September 30, 2009 from interest bearing
accounts. For the fiscal year ended September 30, 2008, interest
income of $127,000 was earned on cash in interest bearing
accounts. This was offset by $22,000 of interest expense on long term
debt.
31
Net
Loss
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
Percent
Change
|
||||||||||
Neurometric
Information Services net loss
|
$ | (8,451,300 | ) | $ | (5,166,200 | ) | 64 | % | ||||
Clinical
Services net loss
|
(70,900 | ) | (205,300 | ) | (35 | )% | ||||||
Total
Net Loss
|
$ | (8,522 ,200 | ) | $ | (5,371,500 | ) | 59 | % |
The
increase in net loss for Neurometric Information Services of $3.28 million for
the year ended September 30, 2009 is due primarily to charges associated with
our bridge note financings of $1.83 million, including the discount on bridge
notes and the value of the beneficial conversion features of the notes; and a
$1.17 million increase in legal fees primarily relating to costs incurred in
defending against lawsuits brought by our former CEO and Chairman of the Board,
Leonard Brandt. The impairment write down of goodwill associated with
our acquisition of NTC added a further $320,200 to the loss.
The
decrease in the net loss for Clinical Services of $134,400 for the year ended
September 30, 2009 is primarily due to reduced marketing expenses and reduced
general and administrative expenses.
Results
of Operations for the three months ended June 30, 2010 and 2009
The
following table presents consolidated statement of operations data for each of
the periods indicated as a percentage of revenues.
Three
Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
100 | % | 100 | % | |||||
Cost
of revenues
|
21 | 19 | ||||||
Gross
profit
|
78 | 81 | ||||||
Research
and development
|
190 | 300 | ||||||
Sales
and marketing
|
127 | 101 | ||||||
General
and administrative expenses
|
679 | 541 | ||||||
Operating
loss
|
(917 | ) | (860 | ) | ||||
Other
income (expense), net
|
(26 | ) | (138 | ) | ||||
Net
income (loss)
|
(942 | )% | (998 | )% |
Revenues
Three
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
Percent
Change
|
||||||||||
Neurometric
Information Service Revenues
|
$ | 39,900 | $ | 26,700 | 49 | % | ||||||
Clinical
Services Revenues
|
119,300 | 133,700 | (11 | )% | ||||||||
Total
Revenues
|
$ | 159,200 | $ | 160,400 | (1 | )% |
With
respect to our Neurometric Information Services business, the number of
non-clinical study related paid rEEG Reports delivered increased from 69 for the
quarter ended June 30, 2009 to 101 for the quarter ended June 30, 2010, while
the average revenue per report increased from approximately $387 to $395 for
each respective period. The total number of free rEEG reports, which
were not associated with our clinical trial, increased from 49 for the quarter
ended June 30, 2009 to 67 for the quarter ended June 30, 2010. These
free reports are for training, database-enhancement and compassionate-use
purposes. Now that our multi-site clinical study, which validates the
efficacy of our service, has been published we do anticipate a modest increase
in revenue given that there has, to date, only been limited marketing support
for these revenues. We are also starting to focus on contracts with
insurance payers and the military, which should increase the number of reports
processed. Furthermore, we will also start offering our services to
pharmaceutical companies to assist them with their product development
activities.
32
On
July 27, 2010 we received a letter from the FDA division that was reviewing our
510(k) submission suggesting that the rEEG service, unless otherwise
reclassified, is a class III device which, as standard procedure, would requires
an approved premarket approval application (PMA) before it can be marketed
legally. We are currently evaluating our alternatives in response to
the FDA letter. We will continue to discuss alternative approaches
with the FDA. During the pendency of these proceedings, we will
continue to market our service as a non-device internet-based neurometric
information service. The FDA could seek to take enforcement action
against rEEG based upon the Agency’s position that rEEG is a medical device if
we continue to market our service.
Our
Clinical Services revenue declined by $14,400 for the quarter ended June 30,
2010, as compared to the corresponding prior year period, because of a reduction
in the hours available by the prescribing staff to attend to new
patients. To rectify this, we have recruited a new psychiatrist, who
started working with our Clinical Services at the beginning of August,
2010. We anticipate that new patient volume, and therefore revenues,
will start increasing in the fourth quarter of this calendar year. We
do not plan to materially expand our Clinical Services business beyond its
current potential, and therefore we do not anticipate a significant increase in
revenues generated by this business segment beyond revenues that would permit
this business to remain a self-sustaining, stand-alone clinic.
Cost
of Revenues
Three
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
Percent
Change
|
||||||||||
Cost
of Neurometric Information Services revenues
|
$ | 32,800 | $ | 30,700 | 7 | % |
Cost
of Neurometric Information Services revenues consists of payroll costs,
consulting costs, and other miscellaneous charges. Consulting costs
primarily represent external costs associated with the processing and analysis
of rEEG Reports and range between $75 and $100 per rEEG Report. For
the quarter ended June 30, 2010, cost of revenues consisted primarily of direct
labor and benefit costs (including stock-based compensation costs) of $27,500,
and consulting fees of $6,900. For the quarter ended June 30, 2009,
cost of revenues included direct labor and benefit costs (including stock based
compensation costs) of $24,600, and consulting fees of $5,900. Direct
labor and benefits remained consistent for the two periods; the minor increase
was due to stock-based compensation. Consulting fees increased in
2010 due to the higher number of rEEG Reports delivered. We
ultimately expect cost of revenues to decrease as a percentage of revenues as
operating efficiencies improve with the volume of reports
processed.
Research
and Development
Three
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
Percent
Change
|
||||||||||
Neurometric
Information Services research and development
|
$ | 302,400 | $ | 480,800 | (37 | )% |
Research
and development expenses consist of clinical studies, training of doctors in the
use of our rEEG reports and research studies, consulting fees, payroll costs
(including stock-based compensation costs), expenses related to database
enhancements and maintenance, and other miscellaneous costs. Research
and development costs for the quarter ended June 30, 2010, primarily consisted
of the following: payroll and benefit costs (including stock based
compensation) of $234,200, consultant costs of $42,600, database costs of $9,600
and other miscellaneous costs of $16,000. For the comparable period
for 2009, research and development costs included: payroll and
benefit costs (including stock based compensation) of $198,400, consultant costs
of $33,200, database costs of $3,200 and other miscellaneous costs of
$13,500. Additionally, as the clinical study was in progress for the
2009 quarter only, clinical study patient costs were $204,400 and patient
marketing and recruitment costs were $28,100.
33
Comparing
the three months ended June 30, 2010 with the corresponding period in 2009,
clinical study patient costs and patient marketing and recruitment costs were
eliminated in the 2010 quarter as the study was completed in September
2009. Consequently, the focus of the research and development
department moved from the clinical study to data analysis, the preparation of
scientific papers for publications and the generation of grant applications for
research funding. Additionally, the focus was also moved to enhancing
the rEEG production system and the application for 510(k) clearance with the
FDA. With these shifts in focus, consulting fees increased slightly
by $9,500 with $17,400 being spent on research and $25,500 being spent on
product enhancements. Payroll and benefits increased by $35,800 in
the 2010 quarter primarily due a reassignment of a staff member between
departments and an increase in stock based compensation. The increase
in database costs was as a result of credits to our network of rEEG users for
patient outcome data to enhance our database.
Sales
and marketing
Three
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
Percent
Change
|
||||||||||
Sales
and Marketing
|
||||||||||||
Neurometric
Information Services
|
$ | 187,500 | $ | 159,600 | 17 | % | ||||||
Clinical
Services
|
14,100 | 1,700 | 728 | % | ||||||||
Total
Sales and Marketing
|
$ | 201,600 | $ | 161,300 | 25 | % |
Sales
and marketing expenses associated with our Neurometric Information Services
business consist primarily of payroll and benefit costs, including stock-based
compensation; advertising and marketing; consulting fees and conference and
travel expenses. Sales and marketing expenses for the quarter ended
June 30, 2010 primarily consisted of the following expenses: payroll
and benefits $126,400 advertising and marketing $748, consulting $38,700 and
conferences and travel $11,800. For the comparable period in 2009
expenses were as follows: payroll and benefits $136,900, advertising
and marketing $8,400, consulting $6,600 and conferences and travel
$3,400.
Comparing
the three month period ended June 30, 2010 with the similar quarter in 2009,
payroll and benefits decreased by $10,600 in the 2010 quarter as a result of the
reassignment of staff to another department. Advertising and
marketing expenses decreased by $7,700 as advertising was curtailed while the
Company applied for its 510(k) clearance and marketing efforts were largely
limited to planning and network development. Consulting expenses
increased largely due to the use of a consulting resource to undertake network
development activities. Conference and travel expenses increased by
$8,300 in the 2010 quarter as a result of attendance at the American Psychiatric
Association (APA) annual convention, where the Company first presented its
prototype iPad application which interfaces with the rEEG system user
portal.
The
Clinical Services sales and marketing expenses consists of advertising to
attract patients to the clinic. In the quarter ending June 30, 2010,
Clinical Services also invested in re-launching its updated website and the
development of a new marketing strategy. We anticipate a moderate
increase in marketing expenditure to attract new patients to the clinic as the
capacity to see patients has increased with the addition of a second
psychiatrist.
General
and administrative
Three
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
Percent
Change
|
||||||||||
General
and administrative
|
||||||||||||
Neurometric
Information Services
|
$ | 899,600 | $ | 683,100 | 32 | % | ||||||
Clinical
Services
|
182,100 | 184,400 | (1 | )% | ||||||||
Total
General and administrative
|
$ | 1,081,700 | $ | 867,500 | 25 | % |
General
and administrative expenses for our Neurometric Information Services business
are largely comprised of payroll and benefit costs, including stock based
compensation, legal, patent costs, other professional and consulting fees,
general administrative and occupancy costs, conference and travel and
miscellaneous costs. For the quarter ended June 30, 2010, General and
Administrative costs consisted of salaries and benefit costs of $409,600; legal
fees of $266,500; other professional and consulting fees of $96,600; general
administrative and occupancy costs of $90,300; patent costs $18,200 and
conference and travel costs of $18,200. For the corresponding period
in 2009, General and Administrative costs consisted of the
following: salaries and benefit costs of $171,400; legal fees of
$258,900; other professional and consulting fees of $105,800; general
administrative and occupancy costs of $102,900; patent costs of $23,600 and
conference and travel expenses of $20,400.
34
With
respect to our Neurometric Information Services business, payroll and benefit
expenses increased by a net $238,200 for the quarter ended June 30, 2010
compared to the prior year quarter, due to a change in the staff mix, primarily
because the Chief Financial Officer joined the Company in the 2010
quarter. Additionally stock compensation increased by $160,700 as the
Company expensed the vested options which were granted in March 2010 (as
disclosed in Note 3) to management, directors, advisors and
consultants. Professional and consulting fees decreased by a net
$9,200; part of the decrease was a due to the hiring the CFO, who was formerly a
consultant; this reduction in fees was largely offset by consulting resources
engaged to assist with the Company’s publicity and insurance payer
strategies. Legal fees increased by a net $7,600, consisting of lower
regular legal fees of $55,800, which were more than offset by litigation fees of
$63,400 associated with the Brandt appeal and the wrap up of the litigation in
the California Supreme Court (see Matters Involving our Former Chief Executive
Officer and Former Director, Leonard Brandt). General and
administrative costs decreased by a net $12,600 largely due to a reduction in
bad debt write-downs. Patent expenses and conference and travel costs
did not change substantially quarter over quarter.
General
and administrative expenses for our Clinical Services business include all costs
associated with operating NTC. This includes payroll costs, medical
supplies, occupancy costs and other general and administrative
costs. These costs remained constant for the quarter ended June 30,
2010 compared to the same period in 2009.
Interest
income (expense)
Three
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
Percent
Change
|
||||||||||
Neurometric
Information Services (Expense), net
|
$ | (40,900 | ) | $ | (216,300 | ) | (81 | )% | ||||
Clinical
Services (Expense)
|
- | - | * | |||||||||
Total
interest income (expense)
|
$ | (40,900 | ) | $ | (216,300 | ) | (81 | )% |
*
not
meaningful
With
respect to our Neurometric Information Services business, we earned interest
income of $400 for the quarter ended June 30, 2010 from an interest bearing
account. This was offset by $3,800 of interest expense on promissory
notes. Additionally, the beneficial conversion discount amortization
of the June 3, 2010 Bridge Note was $37,500 for the period and charged to
interest. For the comparable period in 2009, net interest income was
$400, while interest expenses on outstanding promissory notes were
19,200. Additionally, we incurred warrant discount charges of
$107,500 associated with the bridge financings during the quarter ended June 30,
2009. Furthermore, a charge of $90,000 was incurred in the quarter
ended June 30, 2009 as a financing premium in connection with the promissory
note issued to Mr. Pappajohn.
Net
Loss
Three
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
Percent
Change
|
||||||||||
Neurometric
Information Services net loss
|
$ | (1,417,900 | ) | $ | (1,541,400 | ) | (9 | )% | ||||
Clinical
Services net loss
|
(82,300 | ) | (59,100 | ) | 39 | % | ||||||
Total
Net Loss
|
$ | (1,500,200 | ) | $ | (1,600,500 | ) | (7 | )% |
The
decrease in net loss of $100,300 in the three months ended June 30, 2010
compared to the prior year period is due primarily to net decreases in research
and development costs from the completion of the clinical trial and decreases in
our interest and financing charges. These decreases were more than
offset by increased Sales and Marketing expenditure and General and
Administration expenditure, which includes litigation expenses incurred in
defending the lawsuit brought by Mr. Brandt and by Interest expenses, which
included a beneficial conversion charge on the June 3, 2010, Bridge
Note.
35
Results
of Operations for the nine months ended June 30, 2010 and 2009
The
following table presents consolidated statement of operations data for each of
the periods indicated as a percentage of revenues.
Nine
Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
100 | % | 100 | % | ||||
Cost
of revenues
|
21 | 19 | ||||||
Gross
profit
|
79 | 81 | ||||||
Research
and development
|
175 | 308 | ||||||
Sales
and marketing
|
126 | 134 | ||||||
General
and administrative expenses
|
757 | 447 | ||||||
Operating
loss
|
(979 | ) | (808 | ) | ||||
Other
income (expense), net
|
(9 | ) | (43 | ) | ||||
Net
income (loss)
|
(988 | )% | (851 | )% |
Revenues
Nine
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
|||||||||||
Neurometric
Information Service Revenues
|
$ | 96,700 | $ | 86,300 | 12 | % | ||||||
Clinical
Services Revenues
|
384,300 | 441,900 | (13 | )% | ||||||||
Total
Revenues
|
$ | 481,000 | $ | 528,200 | (9 | )% |
With
respect to our Neurometric Information Services business the number of paid rEEG
Reports delivered increased from 222 for the nine months ended June 30, 2009, to
248 for the nine months ended June 30, 2010, while the average revenue per
report remained constant at approximately $390. The total number of
free rEEG reports, which were not associated with our clinical trial, increased
from 123 for the nine months ended June 30, 2009, to 160 for the same period
ended June 30, 2010. These free rEEG reports are for training,
database-enhancement and compassionate-use purposes. Now that our
multi-site clinical study, which validates the efficacy of our service, has been
published, we do anticipate a modest increase in revenue given that there has
only been limited marketing support for these revenues to date. We
are also starting to focus on our contracts with insurance payers and the
military, which should increase the number of rEEG reports
processed. Furthermore, we will also start offering our services to
pharmaceutical companies to assist them with their product development
activities.
On
July 27, 2010 we received a letter from the FDA division that was reviewing our
510(k) submission suggesting that the rEEG service, unless otherwise
reclassified, is a class III device which, as standard procedure, would requires
an approved premarket approval application (PMA) before it can be marketed
legally. We are currently evaluating our alternatives in response to
the FDA letter. We will continue to discuss alternative approaches
with the FDA. During the pendency of these proceedings, we will be
able to continue to market our service as a non-device internet-based
neurometric information service. There is some risk that FDA will
seek to take enforcement action against rEEG based upon the Agency’s position
that rEEG is a medical device if we continue to market our
service.
Our
Clinical Services revenue declined by $57,600 for the nine months ended June 30,
2010, as compared to the corresponding prior year period; this was because of a
reduction in the hours available by the prescribing staff to attend to new
patients. To rectify this we have recruited a new psychiatrist, who
started working with our Clinical Services at the beginning of August,
2010. We anticipate that new patient volume, and therefore revenues,
will start increasing in the fourth quarter of calendar 2010. We do
not plan to materially expand our Clinical Services business beyond its current
potential, and therefore we do not anticipate a significant increase in revenues
generated by this business segment beyond being a self-sustaining, stand-alone
clinic.
36
Cost
of Revenues
Nine
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
Percent
Change
|
||||||||||
Cost
of Neurometric Information Services revenues
|
$ | 101,900 | $ | 99,800 | 2 | % |
Cost
of Neurometric Information Services revenues consists of payroll costs,
consulting costs, and other miscellaneous charges. Consulting costs
primarily represent external costs associated with the processing and analysis
of rEEG Reports and range between $75 and $100 per rEEG Report. For
the nine months ended June 30, 2010, cost of revenues were $101,900 consisting
primarily of direct labor and benefit costs (including stock-based compensation
costs) of $77,900 and consulting fees of $24,400. For the nine months
ended June 30, 2009, cost of revenues were $99,800, which includes direct labor
and benefit costs (including stock based compensation costs) of $75,500, and
consulting fees of $22,300. There has been no material change in Cost
of Neurometric Information Services revenues for the two nine-month periods
ending June 30, 2010 and 2009.
We
ultimately expect cost of revenues to decrease as a percentage of revenues as
operating efficiencies improve with the volume of reports
processed.
Research
and Development
Nine
Months Ended June 30,
|
||||||||||||
2010
|
2009
|
Percent
Change
|
||||||||||
Neurometric
Information Services research and development
|
$ | 843,600 | $ | 1,628,500 | (48 | )% |
Research
and development expenses consist of payroll costs (including stock-based
compensation costs), consulting fees, clinical study costs, patient marketing
and recruitment costs and other miscellaneous costs. Research and
development costs for the nine months ended June 30, 2010, included the
following: payroll and benefit costs (including stock based
compensation) of $631,100, consultant costs of $157,400 and other miscellaneous
costs of $55,100 which include travel, database and support
costs. There were negligible clinical study patient costs or patient
marketing and recruitment costs incurred for the nine months ended June 30
2010. For the comparable period for 2009, research and development
costs included: payroll and benefit costs (including stock based
compensation) of $594,600, consultant costs of $49,200 and other miscellaneous
costs of $54,800 which included travel, database and support
costs. Additionally, as the clinical study was in progress during the
2009 period, research and development costs included clinical study patient
costs of $777,600 and patient marketing and recruitment costs of
$152,400.
Comparing
the nine months ended June 30, 2010 with the corresponding period in 2009,
clinical study patient costs and patient marketing and recruitment costs were
eliminated in the 2010 period as the study was completed in September
2009. Consequently, the focus of the research and development
department moved from conducting the clinical study to analyzing the data and
drafting scientific papers for publications; the department also generated
several applications for research grants for future
funding. Additionally, the focus moved to enhancing the rEEG
production system and the preparation of the 510(k) application with the
FDA. With this shift in focus, consulting fees increased by $108,100;
in total $40,000 was spent on research and $157,400 was spent on product
enhancements. Of the $157,400, $56,900 was spent on consulting
resources assisting with the filing of our 510(k) application with the FDA, the
balance, $100,500, was spent on programming resources to improve our database
and the rEEG process. Payroll and benefits increased by $36,500 in
the 2010 period primarily due to the reassignment of a staff member between
departments and due to an increase in stock based compensation.
37
Sales
and marketing
Nine
Months Ended June 30,
|
|||||||||||||
Sales
and Marketing
|
2010
|
2009
|
Percent
Change
|
||||||||||
Neurometric
Information Services
|
$ | 587,800 | $ | 702,500 | (16 | )% | |||||||
Clinical
Services
|
16,000 | 5,600 | 186 | % | |||||||||
Total
Sales and Marketing
|
$ | 603,800 | $ | 708,100 | (15 | )% |
Sales
and marketing expenses associated with our Neurometric Information Services
business consist primarily of payroll and benefit costs, including stock-based
compensation; advertising and marketing; consulting fees and conference and
travel expenses. Sales and marketing expenses for the nine-month
period ended June 30, 2010 included the following expenses: payroll
and benefits $363,500, advertising and marketing $58,700, consulting $89,100 and
conferences and travel $45,600. For the comparable period in 2009
expenses were as follows: payroll and benefits $457,900, advertising
and marketing $105,100, consulting $74,200 and conferences and travel
$20,500.
Comparing
the nine months ended June 30, 2010, with the same period in 2009; payroll and
benefits decreased by $94,400 in the 2010 period as a result a reduction in
staff and the reassignment of staff to another
department. Advertising and marketing expenses decreased by $46,400
as advertising was curtailed while the Company awaited its 510(k) clearance and
marketing efforts were largely limited to planning and network development,
whereas for the 2009 period the Company was actively executing its advertising
and marketing plans. Conference and travel expenses increased by
$25,100 in the 2010 period as the Company conducted its first user-group
conference in January 2010.
The
Clinical Services sales and marketing expenses consists of advertising to
attract patients to the clinic. In the nine months ending June 30,
2010, Clinical Services also invested in re-launching its updated website and
the development of a new marketing strategy, which accounted for the increase in
expenditure. We anticipate a moderate increase in marketing
expenditure to attract new patients to the clinic as the capacity to treat
patients has increased with the addition of a second psychiatrist.
General
and administrative
Nine
Months Ended June 30,
|
|||||||||||||
General
and administrative
|
2010
|
2009
|
Percent
Change
|
||||||||||
Neurometric
Information Services
|
$ | 3,117,600 | $ | 1,858,300 | 68 | % | |||||||
Clinical
Services
|
522,300 | 501,800 | 4 | % | |||||||||
Total
General and administrative
|
$ | 3,639,900 | $ | 2,360,100 | 54 | % |
General
and administrative expenses for our Neurometric Information Services business
are largely comprised of payroll and benefit costs, including stock based
compensation, legal, patent costs, other professional and consulting fees,
general administrative and occupancy costs, conference and travel and
miscellaneous costs. For the nine-months ended June 30, 2010, General
and Administrative costs included the following: salaries and benefit
costs of $774,300; legal fees of $1,484,900: other professional and
consulting fees of $381,100; general administrative and occupancy costs of
$333,200; patent costs $61,400 and conference and travel costs of
$82,400. For the same period in 2009, General and Administrative
costs included the following: salaries and benefit costs of $627,000;
legal fees of $390,300; other professional and consulting fees of $336,800;
general administrative and occupancy costs of $345,700; patent costs of $112,700
and conference and travel expenses of $45,700. Additionally other
one-time miscellaneous charges of $99,700 were booked for the 2009
period.
With
respect to our Neurometric Information Services business, in the nine months
ended June 30, 2010 in comparison to the same period in 2009, payroll and
benefit expenses increased by a net $147,300 of which $140,200 was due to an
increase in stock based compensation primarily due to the accounting for vested
option grants given to employees, directors, advisors and consultants in March
2010. The balance of the change was due to the staff mix as the
former CEO, Mr. Brandt left the Company in April 2009 and the former President,
Mr. Carpenter became the CEO. Additionally the Chief Financial
Officer (CFO), who was previously engaged as a consultant, joined the staff in
mid February, 2010. Professional and consulting fees increased by a
net $44,300 which is partly due to the mix of consulting services used and
increased frequency and complexity of our SEC filings requiring additional
professional services. Additionally, consultants were hired in
connection with the Brandt litigation and private placement
financings. Legal fees increased by a net $1,094,500 which was due to
$1,128,800 being incurred in defending against actions brought by Mr. Brandt
(see Matters Involving our
Former Chief Executive Officer and Former Director, Leonard
Brandt). This was partially offset by a decrease of $34,200 on
non-litigation related legal fees. General administrative and
occupancy costs decreased by a $12,500. Patent costs declined by
$51,200 as costs were largely associated with patent
maintenance. Conference and travel costs increased by $36,600 as a
result of increased travel associated with raising capital and litigation
activities. Miscellaneous expenses incurred in the 2009 nine-month
period of $99,700 were the result of a revised IRS assessment on 2006 payroll
taxes and Delaware Franchise Tax assessments for calendar years 2007 and
2008.
38
General
and administrative expenses for our Clinical Services business includes all
costs associated with operating NTC. This includes payroll costs,
medical supplies, occupancy costs and other general and administrative
costs. These costs increased by $20,500 to $522,300 in the nine
months ending June 30, 2010 from $501,300 for the comparable period in
2009. This increase is largely due to clinical services staff that
had worked on the clinical trial who were no longer being reimbursed by the
Neurometric Information Services for their time spent on the
study.
Interest
income (expense)
Nine
Months Ended June 30,
|
||||||||||
2010
|
2009
|
Percent
Change
|
||||||||
Neurometric
Information Services (Expense), net
|
$
|
(42,600
|
)
|
$
|
(219,800
|
)
|
(81
|
)%
|
||
Clinical
Services (Expense)
|
(100
|
)
|
(100
|
)
|
0
|
%
|
||||
Total
interest income (expense)
|
$
|
(42,700
|
)
|
$
|
(219,900
|
)
|
(81
|
)%
|
With
respect to our Neurometric Information Services business, we earned interest
income of $3,100 for the nine months ended June 30, 2010 from an interest
bearing account. This was offset by $8,100 of interest expense on
promissory notes for the period. Additionally, the beneficial
conversion discount amortization of the June 3, 2010 Bridge Note was $37,500 for
the period and charged to interest. For the comparable period in
2009, net interest income was $8,600, while interest expenses on outstanding
promissory notes were $30,900. Additionally, we incurred warrant
discount charges of $107,500 associated with the bridge financings during this
quarter ended June 30, 2009. Furthermore, a charge of $90,000 was
incurred as a financing premium in connection with the promissory note issued to
Mr. Pappajohn during the quarter ended June 30, 2009.
Net
Loss
Nine
Months Ended June 30,
|
||||||||||
2010
|
2009
|
Percent
Change
|
||||||||
Neurometric
Information Services net loss
|
$
|
(4,617,000
|
)
|
$
|
(4,435,300
|
)
|
4
|
%
|
||
Clinical
Services net loss
|
(136,200
|
)
|
(60,100
|
)
|
127
|
%
|
||||
Total
Net Loss
|
$
|
(4,753,200
|
)
|
$
|
(4,495,400
|
)
|
6
|
%
|
The
increase in net loss of $257,800 in the nine months ended June 30, 2010 compared
to the prior year period was primarily due to the $1.1 million that was incurred
in defending against the lawsuit brought by Mr. Brandt, the Company’s former
CEO. For Neurometric Services over this period ended June 30, 2010,
all departments experienced a reduction in expenditures except for those
expenses associated with the litigation. Our Clinical Services
operation experienced an increased deficit due to $57,600 reduction in revenues
and an $18,500 increase in expenditure over the period ended June 30, 2010 with
a resultant $76,100 increase in net loss.
Liquidity
and Capital Resources
Since our
inception, we have incurred significant losses. As of September 30,
2009, we had an accumulated deficit of approximately $25.2 million and as of
June 30, 2010, we had an accumulated deficit of approximately $29.9
million. We have not yet achieved profitability and anticipate that
we will continue to incur net losses for the foreseeable future. We
expect that our research and development, selling and marketing and general and
administrative expenses will continue to grow and, as a result, we will need to
generate significant product revenues to achieve profitability. We
may never achieve profitability.
39
As of
September 30, 2009 we had approximately $0.99 million in cash and cash
equivalents and a working capital deficit of approximately $1.1
million compared to approximately $2.0 million in cash and cash
equivalents and a working capital balance of approximately $0.83
million at September 30, 2008.
As of
June 30, 2010 we had approximately $35,100 in cash and cash equivalents and a
working capital deficit of approximately $1.8 million compared to approximately
$0.99 million in cash and cash equivalents and a working capital deficit of
approximately $1.1 million at September 30, 2009.
Operating
Capital and Capital Expenditure Requirements
Our
continued operating losses and limited capital raise substantial doubt about our
ability to continue as a going concern, and we need to raise substantial
additional funds in the next 12 months in order to continue to conduct our
business. Until we can generate a sufficient amount of revenues to
finance our cash requirements, which we may never do, we expect to finance
future cash needs primarily through public or private equity offerings, debt
financings, borrowings or strategic collaborations.
We need
additional funds immediately to continue our operations and will need
substantial additional funds before we can increase demand for our rEEG
services. We are currently exploring additional sources of capital;
however, we do not know whether additional funding will be available on
acceptable terms, or at all, especially given the economic conditions that
currently prevail. In addition, any additional equity funding may
result in significant dilution to existing stockholders, and, if we incur
additional debt financing, a substantial portion of our operating cash flow may
be dedicated to the payment of principal and interest on such indebtedness, thus
limiting funds available for our business activities. We expect to
continue to incur operating losses in the future and to make capital
expenditures to expand our research and development programs (including
upgrading our CNS Database) and to scale up our commercial operations and
marketing efforts. If adequate funds are not available, it would have
a material adverse effect on our business, financial condition and/or results of
operations, and could ultimately cause us to have to cease
operations.
Sources
of Liquidity
Since our
inception substantially all of our operations have been financed primarily from
equity and debt financings. Through June 30, 2010, we had received
proceeds of approximately $13.7 million from the sale of stock, $5.0 million
from the issuance of convertible promissory notes and $220,000 from the issuance
of common stock to employees in connection with expenses paid by such employees
on behalf of the Company.
On
October 1, 2010, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with John Pappajohn and SAIL as investors, pursuant to
which we issued to the investors secured convertible promissory notes (the
“October Notes”) in the aggregate principal amount of $1,011,688 and warrants to
purchase up to 1,686,144 shares of common stock, as
follows: (a) We received $500,000 in gross proceeds from the
issuance to the investors of October Notes in the aggregate principal amount of
$500,000 and related warrants to purchase up to 833,332 shares. (b)
We also issued October Notes in the aggregate principal amount of $511,688, and
related warrants to purchase up to 852,812 shares, to Mr. Pappajohn in exchange
for the cancellation of the two Bridge Notes originally issued to him on June 3,
2010 and July 25, 2010 in the aggregate principal amount of $500,000 (and
accrued and unpaid interest on those notes) and a warrant to purchase up to
250,000 shares originally issued to him on July 25, 2010. The
transaction closed on October 1, 2010.
On
October 7 and October 12, 2010, a third and fourth investor, respectively,
executed the Purchase Agreement. In connection therewith, we issued
October Notes in the aggregate principal amount of $600,000 and warrants to
purchase up to 999,999 shares of common stock of the Company, to such investors
on those dates. We received $588,000 in net proceeds from these
investors. Monarch Capital Group LLC (“Monarch”) acted as
non-exclusive placement agent with respect to the placement of October Notes in
the aggregate principal amount of $100,000 and related warrants, pursuant to an
engagement agreement, dated September 30, 2010, between us and
Monarch. Under the engagement agreement, in return for its services
as non-exclusive placement agent, Monarch is entitled to receive (a) a cash fee
equal to 10% of the gross proceeds raised from the sale of Notes to investors
introduced to the Company by Monarch; (b) a cash expense allowance equal to 2%
of the gross proceeds raised from the sale of Notes to such investors; and (c)
five-year warrants (the “Placement Agent Warrants”) to purchase common stock of
the Company equal to 10% of the shares issuable upon conversion of Notes issued
to such investors. In connection with the October 12, 2010 closing,
Monarch received a cash fee of $10,000 and a cash expense allowance of $2,000
and, on October 25, 2010, received Placement Agent Warrants to purchase 33,333
shares of the Company’s common stock at an exercise price of $0.33 per
share.
40
On
October 21, 2010 and October 28, a fifth and sixth investor, respectively,
executed the Purchase Agreement. In connection therewith, we issued
October Notes in the aggregate principal amount of $250,000 and warrants to
purchase up to 416,666 shares of common stock to such investors on such
dates. We received approximately $250,000 in net proceeds from the
issuance to these investors.
On
November 3, 2010, three affiliated entities executed the Purchase
Agreement. In connection therewith, we issued October Notes in the
aggregate principal amount of $762,250 and warrants to purchase up to 1,270,414
shares of common stock, as follows: (a) We received
$250,000 in gross proceeds from the issuance to BGN Acquisition Ltd., LP, an
entity controlled by our director George Kallins, of October Notes in the
aggregate principal amount of $250,000 and related warrants to purchase up to
416,666 shares. (b) We also issued October Notes in the
aggregate principal amount of $512,250, and related warrants to purchase up to
512,250 shares, to Deerwood Holdings LLC and Deerwood Partners LLC, two entities
controlled by Mr. Kallins, in exchange for the cancellation of the Deerwood
Notes originally issued on July 5, 2010 and August 20, 2010 in the aggregate
principal amount of $500,000 (and accrued and unpaid interest on those notes)
and warrants to purchase an aggregate of up to 150,000 shares originally issued
on August 20, 2010. The related guaranties and oral
indemnification and security agreement that had been entered into in connection
with the Deerwood Notes were likewise terminated. SAIL, of
which our director David Jones is a managing partner, issued unconditional
guaranties to each of the Deerwood investors, guaranteeing the prompt and
complete payment when due of all principal, interest and other amounts under the
October Notes issued to such investors. The obligations under each
guaranty are independent of our obligations under the October Notes and separate
actions may be brought against the guarantor. In connection with its
serving as guarantor, we granted SAIL warrants to purchase up to an aggregate of
341,498 shares of common stock. The warrants to purchase 100,000
shares of common stock previously granted to SAIL on August 20, 2010 were
canceled.
The
Purchase Agreement provides for the issuance and sale of October Notes, for cash
or in exchange for outstanding convertible notes, in the aggregate principal
amount of up to $3,000,000 plus an amount corresponding to accrued and unpaid
interest on any exchanged notes, and warrants to purchase a number of shares
corresponding to 50% of the number of shares issuable on conversion of the
October Notes. The agreement provides for multiple closings, but
mandates that no closings may occur after January 31, 2011. The
Purchase Agreement also provides that the Company and the holders of the October
Notes will work in
good faith to enter into a registration rights agreement covering the
registration of the resale of the shares underlying the October Notes and the
related warrants.
The
October Notes mature one year from the date of issuance (subject to earlier
conversion or prepayment), earn interest equal to 9% per year with interest
payable at maturity, and are convertible into shares of common stock of the
Company at a conversion price of $0.30. The conversion price is
subject to adjustment upon (1) the subdivision or combination of, or stock
dividends paid on, the common stock; (2) the issuance of cash dividends and
distributions on the common stock; (3) the distribution of other capital stock,
indebtedness or other non-cash assets; and (4) the completion of a financing at
a price below the conversion price then in effect. The October Notes
can be declared due and payable upon an event of default, defined in the October
Notes to occur, among other things, if the Company fails to pay principal and
interest when due, in the case of voluntary or involuntary bankruptcy or if the
Company fails to perform any covenant or agreement as required by the October
Note.
Our
obligations under the terms of the October Notes are secured by a security
interest in the tangible and intangible assets of the Company, pursuant to a
Security Agreement, dated as of October 1, 2010, by and between us and John
Pappajohn, as administrative agent for the holders of the October
Notes. The agreement and corresponding security interest terminate if
and when holders of a majority of the aggregate principal amount of October
Notes issued have converted their October Notes into shares of common
stock.
41
The
warrants related to the October Notes expire seven years from the date of
issuance and are exercisable for shares of common stock of the Company at an
exercise price of $0.30. Exercise price and number of shares issuable
upon exercise are subject to adjustment (1) upon the subdivision or combination
of, or stock dividends paid on, the common stock; (2) in case of any
reclassification, capital reorganization or change in capital stock and (3) upon
the completion of a financing at a price below the exercise price then in
effect.
The
Placement Agent Warrants have an exercise price equal to 110% of the conversion
price of the Notes. The terms of the Placement Agent Warrants, except
for the exercise price and period, are identical to the terms of the warrants
related to the October Notes.
On
July 5, 2010 and August 20, 2010, we issued unsecured promissory notes (each, a
“Deerwood Note”) in the aggregate principal amount of $500,000 to Deerwood
Partners LLC and Deerwood Holdings LLC, with each investor purchasing two notes
in the aggregate principal amount of $250,000. We received $250,000 in gross
proceeds from the issuance of the first two notes on July 5, 2010 and another
$250,000 in gross proceeds from the issuance of the second two notes on August
20, 2010. In connection with the August 20, 2010 transaction, each of
the two investors also received a warrant to purchase up to 75,000 shares of our
common stock at an exercise price (subject to customary anti-dilution
adjustments) of $0.56 per share.
SAIL
Venture Partners L.P. (“SAIL”), of which our director David Jones is a managing
partner, issued unconditional guaranties to each of the Deerwood investors,
guaranteeing the prompt and complete payment when due of all principal, interest
and other amounts under each Deerwood Note. We entered into an oral
agreement to indemnify SAIL and grant to SAIL a security interest in our assets
in connection with the guaranties. In addition, on August 20, 2010,
we granted SAIL warrants to purchase up to an aggregate of 100,000 shares of
common stock at an exercise price (subject to customary anti-dilution
adjustments) of $0.56 per share.
Each
Deerwood Note was convertible into shares of our common stock at a conversion
price of $0.50. The conversion price was subject to customary
anti-dilution adjustments, but would never be less than $0.30.
On
June 3, 2010, we entered into a Bridge Note and Warrant Purchase Agreement with
John Pappajohn to purchase two secured promissory notes (each, a “Bridge Note”)
in the aggregate principal amount of $500,000, with each Bridge Note in the
principal amount of $250,000 maturing on December 2, 2010. On June 3,
2010, Mr. Pappajohn loaned the Company $250,000 in exchange for the first Bridge
Note (there were no warrants issued in connection with this first note) and on
July 25, 2010, Mr. Pappajohn loaned us $250,000 in exchange for the second
Bridge Note. In connection with his purchase of the second Bridge
Note, Mr. Pappajohn received a warrant to purchase up to 250,000 shares of our
common stock. The exercise price of the warrant (subject to customary
anti-dilution adjustments) was $0.50 per share.
Pursuant
to a separate agreement that we entered into with Mr. Pappajohn on July 25,
2010, we granted him a right to convert his Bridge Notes into shares of our
common stock at a conversion price of $0.50. The conversion price was
subject to customary anti-dilution adjustments, but would never be less than
$0.30.
Each
Bridge Note accrued interest at a rate of 9% per annum which would have been
paid together with the repayment of the principal amount, unless earlier
converted, at the earliest of (i) the maturity date; (ii) prepayment of the
Bridge Note at the option of the Company (iii) closing of a financing in which
the aggregate proceeds to the Company are not less than $3,000,000 or (iv) the
occurrence of an Event of Default (as defined in the Bridge
Note). The Purchase Agreement and each Bridge Note granted the
investor a senior security interest in and to all of the Company’s existing and
future right, title and interest in its tangible and intangible
property.
42
Cash
Flows
Net cash
used in operating activities was $4.6 million for the fiscal year ended
September 30, 2009 compared to $3.7 million for fiscal year ended September 30,
2008. The increase in cash used of $0.9 million was primarily
attributable to increased legal fees associated with the Brandt litigation, our
private placement and bridge financings, investigation of FDA licensure issues
and the filing of patent applications.
Net cash
used in operating activities was $4.1 million for the nine months ended June 30,
2010 compared to $3.1 million for nine months ended June 30,
2009. The increase in cash used of $1.0 million was primarily
attributable to increased legal fees associated with the Brandt litigation of
$1.13 million.
For the
fiscal year ended September 30, 2009, net cash used in investing activities was
$2,000 for the purchase of office equipment as compared to $74,600 for the
fiscal year ended September 30, 2008. Our 2008 investing activities
related to the acquisition of the Neuro-Therapy Clinic and the purchase of
furniture and equipment for our offices.
Investing
activities consisted of an $8,900 purchase of office equipment during the nine
months ended June 30, 2010. In the comparable period in 2009, $2,000
was used to purchase office equipment.
Net cash
proceeds from financing activities for the fiscal year ended September 30, 2009
were $1.8 million, net of offering costs, raised on August 26, 2009 in
connection with the first closing of our private placement transaction; $1.7
million raised in bridge financing transactions (which ultimately converted into
equity as further described under Note 2 to our year-end Financial Statements
included elsewhere in this prospectus), and $295,500 due to the exercise of
options and warrants. These proceeds were partly offset by the
repayment of a convertible promissory note, with accrued interest, totaling
$92,600 and the repayment of $86,700 on a promissory note issued to Daniel
Hoffman in connection with our acquisition of NTC. Net cash used by
financing activities in 2008 primarily related to the payment of $60,600 on a
promissory note in connection with our NTC acquisition.
Net cash
proceeds from financing activities for the nine months ended June 30, 2010 were
$3.2 million. Of this $2.99 million were raised, net of placement
agent fees, legal fees and other offering costs, on December 24 and 31, 2009 and
January 4, 2010, in connection with the second, third and fourth closings of our
private placement transaction. Additionally, $250,000 was raised from
the exchange of a secured, convertible promissory note. These
proceeds were partly offset by the repayment of $71,300 on a promissory note
issued to Daniel Hoffman M.D. in connection with our acquisition of NTC and on a
capital lease. Net cash proceeds from financing activities in the
period ended June 30, 2009 were $1.7 million raised in exchange of secured,
convertible promissory notes. Additionally, $294,900 was raised as a
result of the exercise of warrants and options by shareholders. These
net cash proceeds were partially offset with the use of $50,000 to pay off a
convertible promissory note and 65,800 used to pay down the promissory note
issued in connection with our acquisition of NTC and on a capital
lease.
Contractual
Obligations and Commercial Commitments
Net cash
proceeds from financing activities for the nine months ended June 30, 2010 were
$3.2 million. Of this $2.99 million were raised, net of placement
agent fees, legal fees and other offering costs, on December 24 and 31, 2009 and
January 4, 2010, in connection with the second, third and fourth closings of our
private placement transaction. Additionally, $250,000 was raised from
the exchange of a secured, convertible promissory note. These
proceeds were partly offset by the repayment of $71,300 on a promissory note
issued to Daniel Hoffman M.D. in connection with our acquisition of NTC and on a
capital lease. Net cash proceeds from financing activities in the
period ended June 30, 2009 were $1.7 million raised in exchange of secured,
convertible promissory notes. Additionally, $294,900 was raised as a
result of the exercise of warrants and options by shareholders. These
net cash proceeds were partially offset with the use of $50,000 to pay off a
convertible promissory note and 65,800 used to pay down the promissory note
issued in connection with our acquisition of NTC and on a capital
lease. Please see Notes 5 and 8 to our unaudited condensed
consolidated financial statements in this prospectus for further
details.
43
Income Taxes
Since
inception, we have incurred operating losses and, accordingly, have not recorded
a provision for federal income taxes for any periods presented. As of
September 30, 2009, we had net operating loss carryforwards for federal income
tax purposes of $20.8 million. Utilization of net operating loss and
credit carryforwards may be subject to a substantial annual limitation due to
restrictions contained in the Internal Revenue Code that are applicable if we
experience an “ownership change”. The annual limitation may result in
the expiration of our net operating loss and tax credit carryforwards before
they can be used.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements or financing activities with special purpose
entities.
44
BUSINESS
With
respect to this discussion, the terms “we” “us” “our” “CNS” and the “Company”
refer to CNS Response, Inc., a Delaware corporation and its wholly-owned
subsidiaries CNS Response, Inc., a California corporation (“CNS California”),
Colorado CNS Response, Inc., a Colorado corporation (“CNS Colorado”) and
Neuro-Therapy Clinic, Inc., a Colorado professional medical corporation and a
wholly-owned subsidiary of CNS Colorado (“NTC”).
Background
CNS
Response, Inc. was incorporated in Delaware on March 16, 1987, under the name
Age Research, Inc. Prior to January 16, 2007, CNS Response, Inc.
(then called Strativation, Inc.) existed as a “shell company” with nominal
assets whose sole business was to identify, evaluate and investigate various
companies to acquire or with which to merge. On January 16, 2007, we
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CNS
Response, Inc., a California corporation formed on January 11, 2000 (“CNS
California”), and CNS Merger Corporation, a California corporation and our
wholly-owned subsidiary (“MergerCo”) pursuant to which we agreed to acquire CNS
California in a merger transaction wherein MergerCo would merge with and into
CNS California, with CNS California being the surviving corporation (the
“Merger”). On March 7, 2007, the Merger closed, CNS California became
our wholly-owned subsidiary, and on the same date we changed our corporate name
from Strativation, Inc. to CNS Response, Inc. Simultaneous with the
closing of the Merger, we received gross proceeds of approximately $7.0 million
from the first closing of a private placement transaction with institutional
investors and other high net worth individuals. On May 16, 2007, we
completed a second closing of the private placement which resulted in $797,300
of additional gross proceeds to us. After commissions and expenses,
we received net proceeds of approximately $6.7 million in the private
placement.
Overview
We are
an online neuroinformatic company that develops reference data and analytic
tools for clinicians and researchers, with two distinct business
segments. Our Neurometric Information Services, previously called
Laboratory Information Services, business operated by CNS California, which we
consider our primary business, is focused on the commercialization of a patented
system that provides clinicians with objective neurophysiological data based on
EEG. This reference data is reported to reduce Trial and Error
pharmacotherapy in patients with behavioral (psychiatric and/or addictive)
disorders. Our Clinical Services business operated by our
wholly-owned subsidiary, Neuro-Therapy Clinic, Inc. (“NTC”), is a full service
psychiatric clinic.
Neurometric
Information Services
Traditionally,
prescription of medication for the treatment of behavioral disorders (such as
depression, bipolar disorders, eating disorders, addiction, anxiety disorders,
ADHD and schizophrenia) has been primarily based on symptomatic factors, while
the underlying physiology and pathology of the disorder can rarely be analyzed,
often resulting in multiple ineffective, costly, and often lengthy, courses of
treatment before effective medications are identified. Some patients
never find effective medications.
We
believe that our neurometric information offers an improvement upon traditional
methods because our technology is designed to correlate the success of courses
of medication with the neurophysiological characteristics of a particular
EEG. Our technology provides medical professionals with medication
sensitivity data for a subject patient based upon the identification and
correlation of treatment outcome information from other patients with similar
neurophysiologic characteristics. This treatment outcome information
is contained in a proprietary outcomes database that consists of over 17,000
medication trials for patients with psychiatric or addictive problems (the
“CNS
Database”). For each patient in the CNS Database, we have
compiled electroencephalographic (“EEG”) scans, symptoms and
outcomes often across multiple treatments from multiple
physicians. This patented technology, called “Referenced-EEG®” or
“rEEG®”, compares a patient’s EEG to the outcomes in the database and
displays statistical results based on the treatment response of
patients with similar neurophysiology.
With
rEEG®, physicians order a digital EEG for a patient, which is then evaluated
with reference to the CNS Database. By providing this reference
correlation, an attending physician has the knowledge of how other patients
having similar brain function have previously responded to a myriad of treatment
alternatives. Analysis of this complete data set yielded a platform
of 74 quantitative EEG statistics that have shown utility in characterizing
patient pathophysiology. This platform then allows a new patient to
be characterized, based on these 74 statistics, and the database to be queried
to understand the statistical probability of how patients with similar brain
patterns have previously responded to the medications currently in the
database. This technology allows us to create and provide simple
reports (“rEEG
Reports”) to the prescriber that summarizes historical treatment success
of specific medications for patients with similar brain function. It
provides neither a diagnosis nor specific treatment, but simply offers
objective, evidenced-based information for clinician education and decision
support.
45
Our
Neurometric Information Services business is focused on increasing the demand
for our rEEG Reports. We believe the key factors that will drive
broader adoption of our rEEG Reports will be acceptance by healthcare providers
and patients of their benefit, demonstration of the cost-effectiveness of using
our technology, reimbursement by third-party payers, expansion of our sales
force and increased marketing efforts.
In
addition to its utility in providing clinicians with medication sensitivity
information, rEEG provides us with significant opportunities in the area of
pharmaceutical development. rEEG, in combination with the information
contained in the CNS Database, may be able to identify novel uses for
neuropsychiatric medications currently on the market and in late stages of
clinical development, as well as aid in the identification of neurophysiologic
characteristics of clinical subjects that may be successfully treated with
neuropsychiatric medications in the clinical testing stage. We intend
to enter into relationships with established drug and biotechnology companies to
further explore these opportunities, although no relationships are currently
contemplated. The development of biomarkers as the new method for
identifying the correct patient population to research is being encouraged by
both The National Institute of Mental Health (NIMH) and The Food and Drug
Administration (FDA).
Clinical
Services
In
January 2008, we acquired our then largest customer, the Neuro-Therapy Clinic,
Inc. Upon the completion of the transaction, NTC became a
wholly-owned subsidiary of ours. NTC operates one of the largest
psychiatric medication management practices in the state of Colorado, with six
full time and seven part time employees including psychiatrists and clinical
nurse specialists with prescribing privileges. Daniel A. Hoffman,
M.D. is the medical director at NTC, and, after the acquisition, became our
Chief Medical Officer and more recently, our President.
NTC,
having performed a significant number of rEEG’s, serves as an important resource
in our product development, the expansion of our CNS Database, production system
development and implementation, along with the integration of our rEEG services
into a medical practice. Through NTC, we also expect to develop
marketing and patient acquisition strategies for our Neurometric
Information Services business. Specifically, NTC is learning how to
best communicate the advantages of rEEG to patients and referring physicians in
the local market. We will share this knowledge and developed
communication programs learned through NTC with other physicians using our
services, which we believe will help drive market acceptance of our
services. In addition, we plan to use NTC to train practitioners
across the country in the uses of rEEG technology.
We
view our Clinical Services business as secondary to our Neurometric
Information Services business, and we have no current plans to expand this
business.
Neurometric
Information Services
The
Challenge and the Opportunity
The
1990’s were known as “the Decade of the Brain,” a period in which basic
neuroscience yielded major advances in drug discovery and
neurotherapy. Several trends have emerged which may propel
significant adoption of these advances over the next decade:
|
·
|
Comparative
Effectiveness Research is incorporated into the Obama health
plan. The cost to treat Americans under care for depression and
other mental illnesses rose by nearly two-thirds from $35 billion to $58
billion in the last 10 years, according to a recent report from the Agency
for Healthcare Research and Quality. Finding more
cost-effective treatment modalities in mental disorders will be critical
to successful health care reform;
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Mental
Health Parity Act (Parity Act) requires payers, beginning in 2010, to pay
for behavioral medications and treatments using the same standards for
evidence and coverage as they currently use for medical/surgical
treatments;
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According
to a recent RAND report, 275,000 returning military personnel from the
Iraq and Afghanistan theatres suffer from Major Depression, Post Traumatic
Stress Disorder (PTSD), traumatic brain injury;
and
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Consumers
have emerged as active decision makers in behavioral treatment, driven by
over $4.8 billion in annual Pharma direct-to-consumer advertising and the
internet. At the same time, media costs for reaching those
consumers are at historic lows.
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Today,
there are over 100 prescription drugs available to patients suffering from a
behavioral disorder, representing one of the largest and fastest-growing drug
classes. Unfortunately, psychotropic drugs often do not work, or lose
their effect over time, and over 17 million Americans who have failed two or
more medication treatments are now considered “treatment
resistant”. For these patients, the conventional “trial and error”
method of prescribing psychotropic drugs has resulted in low efficacy, high
relapse and treatment discontinuation rates, significant patient suffering and
billions in additional cost to payers.
We
believe we are the first company to create a reference database that correlates
a patient’s response to major drug classes and specific medications with their
individual brain physiology. We developed this tool to help
clinicians who seek to improve pharmacotherapy outcomes, particularly in
treatment resistant patients, a particularly expensive patient population with
profound unmet clinical needs. rEEG® data has informed physicians in
behavioral disorders such as depression, anxiety, anorexia, OCD, bipolar, ADHD,
addiction and others.
rEEG®
was developed by a pathologist/psychiatrist who recognized that correlation of a
patient’s unique brain patterns to known long-term medication outcomes in
similar patients might significantly improvetheir knowledge
base. This approach — commonly referred to as medical informatics —
is in the process of transforming both clinical practice and pharmaceutical
development. CNS Response brings objective neurophysiological data to
behavioral medicine, where the unmet clinical need is well-documented,
expensive, and growing.
The
rEEG® Method
rEEG®
Reports are offered as a service, in which standard, FDA-cleared
electroencephalogram (EEG) readings are referenced to a neurometric database
which reports patient-specific response statistics for different
medications. EEG recording devices are widely available, inexpensive
to lease, and are available in most cities by independent mobile EEG
providers.
The
service works as follows:
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Patients
go to a national rEEG® provider, who performs a standard digital
EEG.
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EEG
data is uploaded over the web to our central analytical
database.
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We
analyze the data against the CNS Database for patients with similar
neurophysiology.
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We
provide a report describing the statistical response of patients with
similar neurophysiology using different
medications.
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The
rEEG® Report is sent back to the doctor, typically the next
day.
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Treatment
Decisions Made by Licensed Professionals
With the
exception of our subsidiary, the Neuro-Therapy Clinic based in Denver, CO, we do
not currently operate our own healthcare facilities, employ our own treating
physicians or provide medical advice or treatment to
patients. Physicians who contract for our rEEG Reports own their own
facilities or professional licenses, and control and are responsible for the
clinical activities provided on their premises. Patients receive
medical care in accordance with orders from their attending physicians or
providers. Physicians who contract for rEEG Reports are responsible
for exercising their independent medical judgment in determining the specific
application of the information contained in the rEEG Reports, and the
appropriate course of care for each patient. Following the
prescription of any medication, Physicians are presumed to administer and
provide continuing care treatment.
Estimated
Market for rEEG Reports
Currently,
the wholesale (direct to physician) price for standard rEEG testing is $400 per
test, and the retail (payer and consumer) price is approximately
$800. Thus far, payments have typically been from psychiatrists whose
patients pay privately for the rEEG® Report. The National Institute
of Mental Health (NIMH) estimates that only 12.7% of patients get minimally
effective treatment, with over 17 million Americans now classified as “treatment
resistant”, meaning they’ve failed to find relief after trying two or more
medications.
We
therefore estimate the potential market for our rEEG Reports at $1.7 billion
annually, based on an addressable market of 17 million Treatment Resistant
patients, with only 12.5% of patients seeking care and complying with
treatment.
Path
to Adoption
Several
biotechnology firms have successfully commercialized products that predict
medication response, including Genomic Health’s OncotypeDx which predicts
response to chemotherapy, and Roche/Affymetrix Cytochrome P450 test which shows
how each patient is likely to metabolize a given antidepressant. We
are following the paths to adoption used by these successful biomarker firms by
focusing on growth in three stages:
(1) Private
pay market.
Consumers
and private-pay psychiatrists drive over 33% of the market for psychiatric
visits, and a significant proportion of all licensed psychiatrists now describe
themselves as private pay only. We believe consumers who have
experienced treatment failure will seek out our network of physicians once they
become aware of the successful outcomes demonstrated in our clinical
trials.
During
2008, the recruiting for our Depression Efficacy Trial (the Depression Efficacy
Trial is further described under the heading Neurometric Services
Accomplishments on page 54) generated many important lessons about integrated
marketing for our rEEG® service. By using a media mix of web, radio
and TV, interested patients were delivered into the trial at an average cost of
$40-$68 per contact. We will continue to pursue integrated consumer
marketing as a means to introduce interested patients to our rEEG® provider
network.
To drive
growth in private pay, consumer-driven rEEG testing, we plan to do the
following:
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Grow
our focused physician network: We currently have 51 active
practicing physicians utilizing rEEG in their practices, defined as having
paid for testing within the last 12 months. An additional 52
physicians are currently involved in training or clinical trials utilizing
rEEG. Physicians who become “power users” (which we define as
physicians who conduct several tests per month) report significantly
better results than casual users of rEEG technology, and have certain
economies of scale in using the test in their
practices. Similar to the adoption of LASIK technology in
consumer-driven opthalmology, successful practices using rEEG have
reported that as their word-of-mouth referrals increase, their procedure
billings increase, and their average patient visits decrease (as patients
improve). Accordingly, their patient turnover may increase over
time, requiring additional marketing efforts to grow their practice
volume.
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48
We plan
to focus on supporting these power users through direct marketing, clinical
practice support (patient intake, scheduling, washout support and reporting),
and technical support. This focused network approach has been
successful in other specialties (for example, in organ transplant networks and
in disease management) because it is easier to sell to payers, facilitates data
collection, and is more cost-effective in delivering care even at higher
provider margins.
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Increase
unit pricing: Currently, the wholesale (direct-to-physician)
price for standard rEEG testing is $400 per test, and the retail (payer
and consumer) is approximately $800. We anticipate that our
pricing will be increased over time with greater acceptance of the test as
a standard of care, rewarding power users for committed volume and
affording improvement in test margins
overall.
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Utilize
our neurometric information service: In 2008, we purchased the
psychiatric clinic in Denver, co-founded by our Chief Medical Officer,
Daniel Hoffman, MD. The clinic currently serves as a platform
for perfecting rEEG workflow, information systems, product development and
research. We also test local marketing strategies in Denver
which can then be generalized to other rEEG® network
clinics. The Denver clinic may ultimately become a national
Center of Excellence for neuropsychiatry, where insurers may direct
certain treatment-resistant
patients.
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Scalable
platform for delivery: During 2008 and 2009, significant
development effort was focused on production systems and lab
infrastructure to accommodate potential growth in the production volume of
our rEEG Reports. Our current production application is able to
accommodate up to 100 tests per week without additional
manpower. In addition to providing scalable capacity, the
production system provides for online delivery of tests and delivery of
test data to physicians’ desktops. Currently, we are investing
in projects to reduce or eliminate the remaining manual processes in test
production: “artifacting” of EEG data and Neurologist review of
each case. It is estimated that these processes will, over
time, be replaced with validated algorithms and/or post-facto sampling for
quality assurance.
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(2) Payer
economic trials.
Health
plans currently spend over $30 billion on psychotropic medications each year
according to the Substance Abuse and Mental Health Services Administration
(SAMHSA), and most are aware that these agents only work on about 30% of
patients who take them. The lack of medication adherence and poor
treatment outcomes in behavioral health have been longstanding issues for
payers, but they’ve lacked a targeted, cost-efficient approach to solve the
problem.
Presently,
rEEG is not a reimbursable procedure for most health care
payers. Initially, payer response to most new technologies is a
reflexive denial of coverage, regardless of the superiority of evidence or
economics. Over time, however, certain payers may adopt technologies
which confer a clear marketing or underwriting advantage, or which protect them
from legal claims for reimbursement under new legislation (e.g.
Parity). Because of this, it is possible that with sufficient
marketing efforts, we may shift payer “fear of adoption” to “fear of not
adopting” and increase the number of payers that approve our rEEG Reports as a
reimbursable expense.
We intend
to prove that our rEEG Reports are a compelling value for payers through
independent research, budget impact models, and payer pilots (economic
trials):
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Evidence for
payers: We will share well-designed research on rEEG®
efficacy, showing the weight of superior evidence in controlled and
real-world clinical trials and case
series.
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Parity: In
2010, Mental Health Parity Act (Parity Act) will change all payers’
coverage criteria, requiring equal coverage for behavioral and medical
therapies, using the same coverage criteria and
evidence. Milliman Global Actuarial Services estimates a 1-3%
increase in overall health costs resulting from a significant increase in
behavioral health expenditures driven by the Parity Act. Of
particular interest to us, however, is the specific language in the Parity
Act which requires that coverage of a scope-of-service for one type of
diagnosis (for example: a Neurologist performing a diagnostic
EEG for Epilepsy) be applied equally as the use of an EEG by a
Psychiatrist for medication
management.
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Budget Impact
Model: A Budget Impact Model for rEEG® has been
developed by Analysis Group Economics based on the published research of
Kessler, Russell, and others covering the cost of treatment failure in
mental disorders. Modeling the economic impact of rEEG® in a
health plan with five million members, we estimate that full utilization
of rEEG® in treatment-resistant depression, anxiety, bipolar and ADHD
could save $8,500 per treatment resistant member for a savings of $45
million per year.
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Economic
Trials: Economic Trials are intended to demonstrate the
comparative effectiveness of rEEG versus prevailing Trial & Error
medication management through pilot programs within a payer’s own
population. Although no payer is currently reimbursing
physicians for the use of rEEG technology, we are currently negotiating
pilot programs for reimbursement coverage with several of the nation’s
largest payers, representing over 80 million covered
lives.
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(3) Full
payer coverage.
Full
reimbursement of referenced-EEG is likely to follow successful
direct-to-consumer adoption of the rEEG test, along with continued release of
confirmatory rEEG research in peer-reviewed publications. Following
the example of the biomarker firms discussed above, it appears possible to
accelerate the effect of these initiatives in the following ways:
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Patient
Advocacy: we believe that some components of the rEEG
test may be billable to payers under Mental Health Parity
Act. Historically, patients of our physician network providers,
and those in our own clinic in Colorado, have paid out of pocket for rEEG
testing and then sought reimbursement from their insurance
carrier. Although these providers frequently furnish
information to support these claims, the success of their prosecution by
patients is unclear.
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Accordingly,
we intend to follow the example of biomarker firms such as Genomic Health, which
developed Patient Advocacy services where patient claims were documented and
tracked, and the company helped organize the advocacy of each claim with third
party payers. Using this approach, Genomic Health was able to win a
retrospective reversal of claim denials for its test from Medicare (the Centers
for Medicare and Medicaid Services) in 2006.
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Guideline
development: we intend to continue internal and
externally-sponsored clinical research to prove the efficacy of our
technology to professional associations, such as the American Psychiatric
Association. We believe that with strong clinical results,
professional associations may endorse rEEG in their treatment guidelines,
which may drive full payer
coverage.
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We also
believe that the inclusion of historical and new rEEG research in Comparative
Effectiveness studies conducted under the Agency for Healthcare Research and
Quality (AHRQ) would be a significant milestone. As a consequence of
this recent focus on cost-effective treatment, an unprecedented level of funding
has been made available under the Economic Recovery Act, the budgets for NIH and
AHRQ, and earmarked budgets for Defense and the Veterans Association
(VA). We intend to pursue research opportunities with several
external sponsors of research, including:
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the National Institutes of
Mental Health, focusing on the cost-effectiveness of rEEG as a more
deployable version of brain imaging to guide
prescribing;
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the Department of Defense and
the Veterans Administration, to address the potential for rEEG in
treating returning soldiers with PTSD and Major Depression;
and
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the Centers for Medicare and
Medicaid Services (CMS), as a mechanism for improving quality and
cost performance in programs that spend billions on psychotropic
medications.
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Neurometric
Services Accomplishments
Over the
last few years, we have been primarily focused on proving the efficacy of
rEEG-guided treatments through multiple clinical trials. The largest
of these — the Depression Efficacy Trial — was a multi-center, randomized,
parallel controlled trial completed in 2009 at 12 medical centers, including
Harvard, Stanford, Cornell, UCI and Rush. The study began in late
2007 and was completed in September 2009, screening 465 potential subjects with
Treatment Resistant Depression and ultimately randomizing 114 participants to a
12-week course of treatment utilizing rEEG in the experimental group, and a
modified STAR*D algorithm in the control group (STAR*D, or Sequenced
Alternatives to Relieve Depression, was a large, seven-year study sponsored by
the National Institute of Mental Health and completed in
2006). Top-line results were consistent with previous clinical trials
of rEEG:
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The
study found that rEEG significantly outperformed the modified STAR*D
treatment algorithm from the beginning. The difference, or
separation, between rEEG and the STAR*D control group was 50 and 100
percent for the study’s two primary endpoints. By contrast,
separation between a new treatment and a control group often averages less
than 10 percent in antidepressant studies. Interestingly,
separation was achieved early (week 2) and durable, continuing to grow
through week 12.
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The
control group in this case, STAR*D, was a particularly tough comparator,
representing a level of evidence-based depression care that is available
to only 10% of the US population, according to one of the study’s
authors.
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Statistical
significance (p < .05) was achieved on all primary and most secondary
endpoints.
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In the
course of undertaking the study, we also gained insights into marketing of the
rEEG technology, highlighting aspects of marketing which proved to be more
successful than others. Furthermore, we also developed a foundation
for commercialization of the rEEG technology with insurance companies, and
signed a payer group, Cal Optima (a Southern California health plan for
Medicare/Medicaid enrollees), to run a pilot study with us. A second
large insurer is in the process of negotiating a pilot
study. Additionally, over the course of the last few years, much time
has been spent securing sufficient financing to continue our operations and
ensure that the clinical trial was completed.
Going
forward, we plan to continue expanding the CNS Database with the addition of
more pharmaceuticals and their respective outcomes. Additionally, we
plan on improving the functionality and clinical utility of our rEEG Reports, in
order to improve adoption and compress the training period necessary for
physicians to become proficient with the report. Finally, we plan to
increase and refine our marketing efforts to consumers and psychiatrists, and
expand our effort to obtain regular insurance reimbursement for rEEG-guided
therapies.
Use
of rEEG Technology in Pharmaceutical Development
In
addition to its utility in providing psychiatrists and other physicians with
medication sensitivity guidance, rEEG provides us with significant opportunities
in the area of pharmaceutical development. In the future, we aim to
use our propriety data and processes to advance central nervous system (CNS)
pharmaceutical development and economics, in one or more of the following
ways:
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Enrichment: selecting
patients for clinical trial who not only have the symptoms of interest,
but are shown by rEEG® screening to likely respond to the developer’s
drug. An oft-cited example is the antidepressant Prozac, which
failed several clinical trials before it achieved success in two separate
trials. The ability to design trials in which exclusion
criteria identify and exclude patients who are clearly resistant, as
determined by rEEG, has the potential to sharpen patient focus and
productivity in clinical trials of psychotropic
medications.
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Repositioning: rEEG®
may suggest new applications/indications of existing
medications. For example, Selective Serotonin Reuptake
Inhibitors Antidepressants (SSRI’s) are now commonly given by primary care
physicians for depression and other complaints, but often produce unwanted
side effects or inadequate results. The ability to biomarker
patients who respond better to tricyclics (TCA’s), or combinations of
TCA’s and stimulants, offers the potential for new indications for
existing compounds.
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Salvage: resuscitation
of medications that failed phase II or III studies. One example
of this opportunity is Sanofi-Aventis’ unsuccessful PMA filing for
Rimonabant, a promising anti-obesity/cardiometabolic compound which was
denied approval in the U.S. due to CNS side-effects in their clinical
trial populations. Being able to screen out trial participants
with resistance to a certain medication is an application for rEEG, and
could create “theranostic” products (where an indication for use is
combined with rEEG) for compounds which have failed to receive broader
approval.
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New
Combinations: unwanted adverse effects occur with
medications in fields from cancer to hepatitis. The ability to
improve these medications, in combination with psychotropics, may improve
safety, compliance, and, sometimes, patient
outcomes.
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Decision
Support: improved understanding supports improved
decision making at all levels of pharmaceutical
development.
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Competition
Comparable
Companies
Although
there are no companies offering a service directly comparable to rEEG, the
following companies might be noted as pursuing similar strategies:
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GENOMIC
HEALTH (Nasdaq: GHDX) Genomic Health, Inc. is a life
science company focused on the development and commercialization of
genomic-based clinical laboratory services for cancer that allow
physicians and patients to make individualized treatment
decisions. The company was founded in 2000 and is based in
Redwood City, California. In 2004, the company launched the
Oncotype DX breast cancer test, which has been shown to predict the
likelihood of chemotherapy benefit, as well as recurrence in early-stage
breast cancer. By the end of 2008, the company reported that
over 90% of health plans were reimbursing use of this test. In
addition to its adopted Oncotype DX breast cancer test, Genomic Health
launched its Oncotype DX colon cancer test in early
2010.
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ASPECT
MEDICAL SYSTEMS, INC. (Nasdaq: ASPM), an EEG anesthesia
monitoring company, is developing a specific EEG measurement system that
indicates a patient’s likely response to some antidepressant
medications. Its biomarker, based on research from the UCLA
Neuropsychiatric Institute, is called
Cordance.
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A
375-subject multi-site clinical trial on the efficacy of this biomarker in
guiding treatment of treatment resistant depression — the BRITE trial —
demonstrated positive predictive outcomes for a single antidepressant,
escitalopram (Lexapro). Patients in the trial were measured prior to
and after taking medication. Publicly available data suggests that
the technology may validate a patient’s treatment but does not guide specific
treatment. Initial trials have shown efficacy in correlating a
patient’s ultimate response to antidepressants. The revenue model may
involve sale of equipment and a per-patient charge, but the company does not
currently appear to be close to a commercial release of its
product.
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BRAIN
RESOURCE COMPANY (Aust: BRRZF) (www.brainresource.com), is an
Australian Clinical Research Organization (CRO) and biomarker company
focused on personalized medicine solutions for patients, clinicians,
pharmaceutical trials and discovery research. As a CRO, its
main focus has been iSPOT, an $18 million international biomarker study
with a private biotechnology company. Their revenue model
includes physician services and sale of systems and services to
pharmaceutical development companies in the CNS discovery
field. As a biomarker provider, it signed a $6 million
agreement in 2008 with Optum (United Healthcare) to provide screening for
plan members.
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We
believe that we have a competitive advantage with respect to the behavioral
technology firms such as Aspect Medical or Brain Resource Company as we offer
more comprehensive testing (e.g. to cover the full range of CNS medications, not
just certain antidepressants in the case of Aspect Medical) and have conducted
studies to validate the efficacy of our service. We also believe that
we offer greater clinical utility (ease of use, rapid results) in day-to-day
clinical practice than our competitors.
Emerging
Medical Device Technologies
The field
of neuropsychiatry is undergoing dramatic change as a result of the introduction
of new technologies. Many of these technologies are focused on the
same treatment-resistant patient populations which are the focus of rEEG, and
are priced from $10,000 to over $50,000 for a full course of
treatment. Two of the three examples presented here are invasive,
implantable devices.
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CYBERONICS, INC.
(Nasdaq: CYBX) is a neuromodulation company, engaged in the
design, development, manufacture, and marketing of implantable medical
devices that provide vagus nerve stimulation (VNS) therapy for the
treatment of epilepsy and treatment-resistant depression. The
VNS therapy system consists of an implantable generator that delivers an
electrical signal to an implantable lead attached to the left vagus nerve,
as well as a bipolar lead, a programming wand and software, and a
tunneling tool.
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Cyberonics
has developed an implantable Vagus Nerve Stimulation device approved for
treatment-resistant depression. This device has received pre-market
approval from the Food and Drug Agency for patients and is believed
to be under reimbursement review by insurance payers.
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MEDTRONIC,
INC. (NYSE: MDT). Medtronic has an implantable deep
brain stimulation device (DBS) in development which is similar to their
device approved for Parkinson’s treatment. Deep brain
stimulation uses an implanted electrode – essentially a pacemaker for the
brain — to deliver electrical stimulation to specific structures within
the brain. The Food and Drug Administration (FDA) approved DBS
as a treatment for essential tremor in 1997, for Parkinson’s disease in
2002, and dystonia in 2003. DBS is also routinely used to treat
chronic pain and has been used to treat various affective disorders,
including major depression. While DBS has proven helpful for
some patients, there is potential for serious complications and side
effects.
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NEURONETICS
(Privately held) (www.neuronetics.com). Neuronetics has
pioneered and refined the NeuroStar TMS Therapy system for non-invasive,
non-systemic treatment for depression using a focused, pulsed magnetic
field to stimulate function in targeted brain
regions. NeuroStar TMS Therapy stimulates nerve cells in an
area of the brain that is linked to depression by delivering highly
focused MRI-strength magnetic field
pulses.
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TMS is
performed in a physician’s office with each treatment lasting about 40 minutes
daily for four to six weeks. In an open-label clinical trial, which
is most like real world clinical practice, approximately one in two patients
experienced significant improvement in symptoms, and one in three experienced
complete symptom resolution. NeuroStar TMS Therapy was cleared by the
FDA in October 2008 for patients who have not adequately benefited from prior
antidepressant medication.
From a
competitive standpoint, we view these emerging treatment options as expensive
augmentations to existing therapies for treatment-resistant patients, and as
competitive therapeutic options to medications. To the best of our
knowledge, rEEG-informed therapy provides a higher probability of treatment
success at a significantly lower cost than device-based solutions, which gives
us a competitive advantage in the marketplace.
Intellectual
Property
rEEG
Patents
We have
four issued U.S. patents which we believe provide us with the right to exclude
others from using our rEEG technology. In addition, we believe these
patents cover the analytical methodology we use with any form of neurophysiology
measurement including SPECT (Single Photon Emission Computed Tomography), fMRI
(Functional Magnetic Resonance Imaging), PET (Positron Emission Tomography), CAT
(Computerized Axial Tomography), and MEG
(Magnetoencephalography)). We do not currently have data on the
utility of such alternate measurements, but we believe they may, in the future,
prove to be useful to guide therapy in a manner similar to rEEG. We
have also filed patent applications for our technology in various foreign
jurisdictions, and have issued patents in Australia and Israel.
53
rEEG
Trademarks
“Referenced-EEG”
and “rEEG” are registered trademarks of CNS California in the United
States. We will continue to expand our brand names and our
proprietary trademarks worldwide as our operations expand.
CNS
Database
The CNS
Database consists of over 17,000 medication trials across over 2,000 patients
who had psychiatric or addictive problems. The CNS Database is
maintained in two parts:
1. The
QEEG Database
The QEEG
Database includes EEG recordings and neurometric data derived from analysis of
these recordings. This data is collectively known as the QEEG
Data. QEEG or “Quantitative EEG” is a standard measure that adds
modern computer and statistical analyses to traditional EEG
studies. The Company utilizes two separate, FDA-approved external
QEEG databases which provide statistical and normative information in the rEEG
process.
2. The
Clinical Outcomes Database
The
Clinical Outcomes Database consists of physician provided assessments of the
clinical long-term outcomes (average of 405 days) of patients and their
associated medications. The clinical outcomes of patients are
recorded using an industry-standard outcome rating scale, the Clinical Global
Impression Global Improvement scale (“CGI-I”). The CGI-I requires a
clinician to rate how much the patient’s illness has improved or worsened
relative to a baseline state. A patient’s illness is compared to
change over time and rated as: very much improved, much improved,
minimally improved, no change, minimally worse, much worse, or very much
worse.
The
format of the data is standardized and that standard is enforced at the time of
capture by a software application. Outcome data is input into the
database by the treating physician or in some cases, their office
staff. Each Physician has access to his/her own patient data through
the software tool that captures clinical outcome data.
We
consider the information contained in the CNS Database to be a valuable trade
secret and are diligent about protecting such information. The CNS
Database is stored on a secure server and only a limited number of employees
have access to it.
Research
and Development
In the
remainder of 2010, we plan to continue to enhance, refine and improve the
accuracy of our CNS Database and rEEG through expansion of the number of
medications covered by our rEEG Reports, expansion of our biomarkers, refinement
of our biomarker system, and by reducing the time to turnaround a report to the
physician.
Government
Regulation
Since
April of 2008, we have been responding to inquiries from the FDA with respect to
our rEEG service. The FDA contends that our rEEG service constitutes a medical
device which is subject to regulation by the FDA. On April 10, 2008
we received correspondence from the FDA in which the FDA indicated it believed,
based in part on the combination of certain marketing statements it read on our
website, together with the delivery of our rEEG Reports, that we were selling a
software product to aid in diagnosis, which constituted a “medical device”
requiring pre-market approval or 510(k) clearance by the FDA pursuant to the
Federal Food, Drug and Cosmetic Act (the “Act”). We responded to the
FDA on April 24, 2008 indicating that we believed it had incorrectly understood
our product offering, and clarified that our rEEG services are not diagnostic
and thus for this as well as other reasons, do not constitute a medical
device. On December 14, 2008, the FDA again contacted us and
indicated that, based upon its review of our description of our intended use of
the rEEG Reports on our website, it continued to maintain that our rEEG service
met its definition of medical devices. In response to the FDA
communications, we made a number of changes to our website and other marketing
documents to reflect that rEEG is a service to aid in medication selection and
is not an aid to diagnosis. On September 4, 2009, through our
regulatory counsel, we responded to the December 14, 2008 FDA letter explaining
our position in more detail.
54
In
December, 2009, the FDA responded by proposing a 510(k) regulatory pathway which
the Company determined was a reasonable route to clearance, and we chose to
submit an application to obtain 510(k) clearance for our rEEG service in April,
2010, without waiving our right to continue to take the position that our
services represent an information service and do not constitute a medical
device. We sought review of our rEEG service based upon its
equivalence to predicate devices that already have FDA clearance which appeared
to represent a sound mechanism to reduce regulatory risks.
On
July 27, 2010 we received a letter (the “NSE Letter”) from the FDA stating that
they determined that our rEEG service was not substantially equivalent to the
predicate devices that had previously been granted 510(k) clearance and that
among other options we could be required to file an approved premarket approval
application (PMA) before the rEEG services could be marketed, unless it is
otherwise reclassified. The Company has filed a request for
reconsideration of the NSE letter.
We
have revised the claims made on our website with respect to the rEEG service and
to persons to whom we market the service and we plan to continue
marketing our service as a non-device internet-based neurometric information
service, while continuing to discuss alternative approaches with the
FDA. Alternative approaches may include submitting a new 510(k) with
revised claims for rEEG and/or additional information about the predicate
devices. If we continue to market our rEEG service and the FDA
determines that we should be subject to FDA regulation, it could seek
enforcement action against the Company based upon its position that our rEEG
services are a medical device.
If we
continue to market our rEEG service, the FDA could seek enforcement action
against us. In addition, complying with regulatory requirements
imposed by the FDA will delay our ability to market our rEEG service, will
involve substantial expenditures as well as time and will further reduce our
limited operating capital.
In
addition to the foregoing, federal and state laws and regulations relating to
the sale of our Neurometric Information Services are subject to future changes,
as are administrative interpretations of regulatory agencies. In the
event that federal and state laws and regulations change, we may need to incur
additional costs to seek government approvals for the sale of our Neurometric
Information Services.
In the
future, we may seek approval for medications or combinations of medications for
new indications, either with corporate partners, or potentially, on our
own. The development and commercialization of medications for new
indications is subject to extensive regulation by the U.S. Federal government,
principally through the FDA and other federal, state and governmental
authorities elsewhere. Prior to marketing any central nervous system
medication, and in many cases prior to being able to successfully partner a
central nervous system medication, we will have to conduct extensive clinical
trials at our own expense to determine safety and efficacy of the indication
that we are pursuing.
Description
of Property
On
January 22, 2010, we moved to our new leased facility for our headquarters and
Neurometric Information Services business, located at 85 Enterprise, Suite 410,
Aliso Viejo, California 92656. We entered into a 36 month lease for
the 2,023 square foot facility, which expires on January 31,
2013. The average cost of the lease for the period is $3,642 per
month.
With
respect to our Clinical Services operations, on April 1, 2010, we negotiated a
37 month extension to the original lease for our clinical services space, which
expired in February 2010. The new lease for our 3,542 square foot
facility will expire on April 30, 2013, and has an average cost for the lease
term of $5,100 per month.
55
We
believe that our current space is adequate for our needs and that suitable
additional or substitute space will be available to accommodate the foreseeable
expansion of our operations.
Employees
As of
September 30, 2010, we had approximately 15 full-time and 7 part-time employees,
and 3 independent contractors. We offer all full-time employees
medical insurance, dental insurance and paid vacation. We believe
that our relations with our employees are good. None of our employees
belong to a union.
Legal
Proceedings
From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the ordinary course of business. Other than as set
forth below, we are not currently party to any legal proceedings, the adverse
outcome of which, in our management’s opinion, individually or in the aggregate,
would have a material adverse effect on our results of operations or financial
position.
Between
June 2009 and July 2010, we were involved in litigation against Leonard J.
Brandt, a stockholder, former director and our former Chief Executive Officer
(“Brandt”) in the Delaware Chancery Court and the United States District Court
for the Central District of California. At the conclusion of a
two-day trial that commenced December 1, the Chancery Court entered judgment for
the Company and dismissed with prejudice Brandt’s action brought pursuant to
Section 225 of the Delaware General Corporation Law, which sought to oust the
incumbent directors other than Brandt. The Chancery Court thereby
found that the purported special meeting of stockholders convened by Brandt on
September 4, 2009 was not valid and that the directors purportedly elected at
that meeting are not entitled to be seated. On January 4, 2010,
Brandt filed an appeal with the Supreme Court of the State of Delaware in
relation to the case. On April 20, 2010, the Delaware Supreme Court
summarily affirmed the ruling of the Chancery Court dismissing the 225
action.
The
Chancery Court also denied an injunction sought by Mr. Brandt to prevent the
voting of shares issued by the Company in connection with our bridge financing
in June 2009 and securities offering in August 2009, and dismissed Brandt’s
claims regarding those financings and stock issuances. On January 4,
2010, Brandt also filed an appeal in relation to this ruling with the Delaware
Supreme Court. On February 25, 2010, Mr. Brandt voluntarily dismissed
this appeal, and the ruling of the Chancery Court thereby became final and
non-appealable.
On July
7, 2010, Mr. Brandt moved to dismiss his counterclaims against the Company that
were pending before the United States District Court for the Central District of
California and the Company consented to dismiss its complaint against Mr.
Brandt, and on July 13, 2010, all of the Company’s claims and Mr. Brandt’s
counterclaims in such action were dismissed. This resolved all
pending actions between the Company and Mr. Brandt.
We have
expended substantial resources to pursue the defense of legal proceedings
initiated by Mr. Brandt. We do not know whether Mr. Brandt will
institute new claims against us and the defense of any such claims could involve
the expenditure of additional resources by the Company.
Website
We
maintain a website at www.CNSResponse.com. The reference to our web
address does not constitute incorporation by reference of the information
contained at this site.
56
MANAGEMENT
The
following table sets forth the name, age and position of each of our executive
officers and directors as of October 28, 2010.
Name
|
Age
|
Position
|
||
George
Carpenter
|
52
|
Chairman
of the Board, Chief Executive Officer and Secretary
|
||
Paul
Buck
|
54
|
Chief
Financial Officer
|
||
Daniel
Hoffman
|
62
|
President,
Chief Medical Officer
|
||
Michael
Darkoch
|
66
|
Executive
Vice President and Chief Marketing Officer
|
||
John
Pappajohn
|
82
|
Director
|
||
David
B. Jones
|
66
|
Director
|
||
Jerome
Vaccaro, M.D.
|
54
|
Director
|
||
Dr.
Henry T. Harbin
|
63
|
Director
|
||
Dr.
George J. Kallins
|
50
|
Director
|
George
Carpenter, Chairman of the Board, Chief Executive Officer,
Secretary
George
Carpenter joined our board of directors as Chairman on April 10,
2009. Mr. Carpenter has been serving as our Chief Executive Officer
since April 10, 2009 and prior to that date served as our President since
October 1, 2007. As President, Mr. Carpenter’s primary responsibility
involved developing strategy and commercializing our rEEG
technology. From 2002 until he joined CNS, Mr. Carpenter was the
President & CEO of WorkWell Systems, Inc., a national physical medicine firm
that manages occupational health programs for Fortune 500
employers. Prior to his position at WorkWell Systems, Mr. Carpenter
founded and served as Chairman and CEO of Core, Inc., a company focused on
integrated disability management and work-force analytics. He served
in those positions from 1990 until Core was acquired by Assurant, Inc. in
2001. From 1984 to 1990, Mr. Carpenter was a Vice President of
Operations with Baxter Healthcare, served as a Director of Business Development
and as a strategic partner for Baxter’s alternate site
businesses. Mr. Carpenter began his career at Inland Steel where he
served as a Senior Systems Consultant in manufacturing process
control. Mr. Carpenter holds an MBA in Finance from the University of
Chicago and a BA with Distinction in International Policy & Law from
Dartmouth College. The Board selected Mr. Carpenter to serve as a
director because of his extensive experience as chief executive officer for
several companies and his service in a variety of leadership positions in the
areas of fund raising, business development and building a management
team. Mr. Carpenter provides critical insight into the areas of
organizational and operational management.
Paul
Buck, Chief Financial Officer
Effective
February 18, 2010, we appointed Paul Buck, 54, to the position of Chief
Financial Officer. Mr. Buck has been working with the Company as an
independent consultant since December 2008, assisting management with finance
and accounting matters as well as the Company’s filings with the Securities and
Exchange Commission. Mr. Buck has worked as an independent consultant
since 2004 and has broad experience with a wide variety of public
companies. His projects have included forensic accounting,
restatements, acquisitions, interim management and system
implementations. Mr. Buck, a Swiss National, was raised in Southern
Africa and holds a Bachelor of Science degree in Chemistry and a Bachelor of
Commerce degree both from the University of Cape Town, South
Africa. He started his career with Touche Ross & Co. in Cape Town
and qualified as a Chartered Accountant. In 1985, Mr. Buck joined the
Los Angeles office of Touche Ross & Co. where he was an audit
manager. In 1991 he joined the American Red Cross Biomedical Services
as the CFO of the Southern Californian Region. After five years with
the organization, he returned to Deloitte & Touche as a manager in the
Solutions Consulting Group. In 1998, Mr. Buck was recruited back to
the American Red Cross Biomedical Services as CFO and became the Director of
Operations for the Southern California Region until 2003.
Daniel
Hoffman, Chief Medical Officer and President
Dr.
Hoffman, 62, became our President on April 10, 2009 and our Chief Medical
Officer on January 15, 2008 upon our acquisition of Neuro-Therapy Clinic, Inc.,
which at the time of the acquisition was our largest customer and which was
owned by Dr. Hoffman. He had served as the Medical Director of
Neuro-Therapy Clinic, Inc. since 1993. Dr. Hoffman is a
Neuropsychiatrist with over 25 years experience treating general psychiatric
conditions such as depression, bipolar disorder and anxiety. He
provides the newest advances in diagnosing and treating attentional and learning
problems in children and adults. Dr. Hoffman has authored over 40
professional articles, textbook chapters, poster presentations and letters to
the editors on various aspects of neuropsychiatry, Quantitative EEG, LORETA,
Referenced EEG, advances in medication management, national position papers and
standards, Mild Traumatic Brain Injury, neurocognitive effects of Silicone
Toxicity, sexual dysfunction and other various topics. Dr. Hoffman
has given over 58 major presentations and seminars, including Grand Rounds at
Universities and Hospitals, workshops and presentations at national society
meetings (such as American Psychiatric Association and American Neuropsychiatric
Association), national CME conferences, insurance companies, national
professional associations, panel member discussant, and presenter of poster
sessions. He has also lectured internationally as part of a
consortium advancing Quantitative EEG in Psychiatry and done research with the
major national academic institutions on the use of Referenced EEG to help guide
treatment choices and as a Biomarker. Dr. Hoffman has a Bachelor of
Science in Psychology from the University of Michigan, an MD from Wayne State
University School of Medicine and conducted his Residency in Psychiatry at the
University of Colorado Health Sciences Center. During the past five
years, Dr. Hoffman has served as the President of Neuro-Therapy Clinic, Inc., a
wholly-owned subsidiary of the company that is focused on discovering ways to
integrate technology into the creation of better business
practices.
57
Michael
Darkoch, Executive Vice President and Chief Marketing Officer
Michael
Darkoch, 66, became our Executive Vice President and Chief Marketing Officer on
July 6, 2010. Mr. Darkoch is responsible for managing and
implementing various business activities associated with the launch and the
commercialization of rEEG. This includes responsibility for business
development, revenue generation, marketing, network management and performance
and patient management. He is also responsible for managing sales and
product placement across the various market channels we address including
commercial payers, government agencies, employers and direct to
consumer. Mr. Darkoch’s experience in healthcare spans over 30
years. He has significant business development and executive
management in the pharmaceutical distribution field. Mr. Darkoch
holds a Bachelor of Science of Industrial Engineering degree from Lehigh
University and Master of Science in Business from Southern Methodist
University. He started his engineering and management career with
Texas Instruments and Mobil Chemical Company. He moved into
healthcare in 1974 and joined Baxter International. He progressed
through product development, logistics and distribution, business development
and general manager over several business units. He pioneered
business initiatives into home infusion, hospital systems, and alternate site
delivery systems. He was responsible for client acquisition and
renewal on the original Baxter team that developed Mail Order prescription
fulfillment. This business unit was eventually spun-off and became
Caremark Rx. Mr. Darkoch managed Caremark Rx sales and client growth
from $100 million to $ 2.1 billion in a five year time frame. He left
Caremark Rx in the late 1990’s and managed business development and client
management for two disability management companies— CORE, Inc. and WorkWell
Health Systems. In 2004, he reentered the PBM industry by joining
MedImpact Health Systems in San Diego. He managed new business
development for self insured clients achieving 25% growth per year; product
development releasing 2 major products in one year; and Specialty Pharmacy, a
value added product generating $20 million in year one.
John
Pappajohn, Director
John
Pappajohn joined our board of directors on August 26, 2009. Since
1969, Mr. Pappajohn has been the President and sole owner of Pappajohn Capital
Resources, a venture capital firm, and President and sole owner of Equity
Dynamics, Inc., a financial consulting firm, both located in Des Moines,
Iowa. He serves as a director on the boards of the following public
companies: American CareSource Holdings, Inc., Dallas, TX since 1994;
PharmAthene, Inc., Annapolis, MD, since 2007; Spectrascience, Inc., San Diego,
CA, since 2007, and ConMed Healthcare Management, Inc., Hanover, MD, since
2005. Mr. Pappajohn also serves as director of CareGuide, Inc.,
Florida (formerly Patient Infosystems, Inc.) since 1996, which was a public
company through January 2009. Mr. Pappajohn was chosen to serve as a
director of the Company because of his unparalleled experience serving as a
director of more than 40 companies and the substantial insight he has gained
into the life sciences and healthcare industries by actively investing in the
industries for more than 40 years, and by founding and supporting several public
healthcare companies.
58
David
B. Jones, Director
David B.
Jones has been a director of CNS California since August 2006, and became a
director of the company upon the completion of our merger with CNS California on
March 7, 2007. Mr. Jones currently serves as a partner of SAIL
Venture Partners, L.P., a position which he has held since 2003. Mr.
Jones served as Chairman and Chief Executive Officer of Dartron, Inc., a
computer accessories manufacturer. From 1985 to 1997, Mr. Jones was a
general partner of InterVen Partners, a venture capital firm with offices in
Southern California and Portland, Oregon. From 1979 to 1985, Mr.
Jones was President and Chief Executive Officer of First Interstate Capital,
Inc., the venture capital affiliate of First Interstate Bancorp. Mr.
Jones is a graduate of Dartmouth College and holds Masters of Business
Administration and law degrees from the University of Southern
California. Mr. Jones is the longest-serving member on our board and
adds substantial expertise from his venture capital finance background and his
executive experience. His experience provides the Company with
valuable insight with respect to financing and operational strategies and
corporate governance issues.
Jerome
Vaccaro, M.D., Director
Jerome
Vaccaro, M.D., joined the board of directors of CNS California in 2006 and
became a director of the Company upon the completion of our merger with CNS
California on March 7, 2007. Dr. Vaccaro is President and Chief
Operating Officer of APS Healthcare, Inc. (APS), a privately held specialty
healthcare company, which he joined in June 2007. From February 2001
until its acquisition by United Health Group in 2005, Dr. Vaccaro served as
President and Chief Executive Officer of PacifiCare Behavioral Health (“PBH”),
and then served as Senior Vice President with United Health Group’s Specialized
Care Services until he joined APS. Dr. Vaccaro has also served as
Medical Director of PBH (1996-2001), Chief Executive Officer of PacifiCare
Dental and Vision (2002-2004), and Senior Vice President for the PacifiCare
Specialty Health Division (2002-2004). Dr. Vaccaro has an extensive
background in community mental health and public sector work, including editing
the textbook, “Practicing Psychiatry in the Community,” which is hailed as the
definitive community psychiatry text. Dr. Vaccaro completed medical
school and a Psychiatry Residency at the Albert Einstein College of Medicine in
New York City. After his training, Dr. Vaccaro served on the
full-time faculty of the University of Hawaii (1985-1989) and UCLA (1989-1996)
Departments of Psychiatry. Dr. Vaccaro was chosen to serve on the
Company’s board because of his experience in senior executive positions in a
diverse set of mental healthcare companies, his extensive background in
community mental health and public sector work and his valuable experience in
medical academia.
Henry
T. Harbin, M.D., Director
Henry
Harbin, M.D. joined our board of directors on October 17, 2007. Since
2004, Dr. Harbin has worked as an independent consultant providing health care
consulting services to a number of private and public
organizations. Dr. Harbin is a psychiatrist with over 30 years of
experience in the behavioral health field. He has held a number of
senior positions in both public and private health care
organizations. He worked for 10 years in the public mental health
system in Maryland serving as director of the state mental health authority for
three of those years. He has been CEO of two national behavioral
healthcare companies — Greenspring Health Services and Magellan Health
Services. At the time he was CEO of Magellan, it was the largest
managed behavioral healthcare company managing the mental health and substance
abuse benefits of approximately 70 million Americans including persons who were
insured by private employers, Medicaid and Medicare. In 2002 and
2003, he served on the President’s New Freedom Commission on Mental
Health. As a part of the Commission he was chair of the subcommittee
for the Interface between Mental Health and General Medicine. In
2005, he served as co-chair of the National Business Group on Health’s work
group that produced the Employer’s Guide to Behavioral Health Services in
December 2005. The Board selected Dr. Harbin to serve as a director
because of his over 30 years of experience in the behavioral health field, which
includes an impressive service record in the area of public sector
health. His experience provides significant vision to a company in
the mental healthcare industry.
George
J. Kallins, M.D., Director
George
Kallins, M.D. joined our board of directors on July 5, 2010. Dr.
Kallins has served as President and CEO of ACP Management, his family’s property
management, development and real estate investment firm since 2004; however, he
also continues to practice medicine in his specialty field of Obstetrics and
Gynecology. He founded and was the CEO and President of Mission
Obstetrics and Gynecology which was a 14 physician strong medical group and was
also the founder and CEO of Medical Management Resources, a medical management
and billing company. Dr Kallins served as the Medical Director of the
USC Center for Women’s Mood Disorders while on the faculty at the University of
Southern California School of Medicine in 1999 through 2000. During
this time he also authored a book titled, Five Steps to a PMS Free
Life, which includes issues dealing with mood disorders impacting some
women. He published this book through The Village Healer Press which
he founded. Dr. Kallins received his B.Sc majoring in Psychobiology
from the University of Southern California and his medical degree from the Rush
School of Medicine in Chicago, IL. He returned to the University of
Southern California to do his residency in Obstetrics and
Gynecology. Dr. Kallins also has an MBA from Pepperdine
University. The Board selected Dr. Kallins to serve as a director
because of his 20-plus years of experience in primary medicine, specifically in
the field of mood disorders, and his business accomplishments. His
experience provides the Company insight into the field of primary medical care
and its relationship to the prescribing of psychotropic drugs. We
believe the prescription of psychotropic drugs is an area of medicine which
could benefit from our rEEG technology.
59
Board
Composition and Committees and Director Independence
Our board
of directors currently consists of six members: George Carpenter,
Henry Harbin, David Jones, Jerome Vaccaro, John Pappajohn and George
Kallins. With the exception of George Kallins, who was appointed to
our board on July 5, 2010, each director was elected at our annual meeting of
shareholders held on April 27, 2010. Each of our directors will serve
until our next annual meeting and until his successor is duly elected and
qualified.
We are
not a “listed company” under SEC rules and are therefore not required to have
separate committees comprised of independent directors. Our board of
directors has, however, determined that David Jones, Jerome Vaccaro, Henry
Harbin, John Pappajohn and George Kallins are “independent” as that term is
defined in Section 5600 of the Nasdaq Listing Rules as required by the NASDAQ
Stock Market (the “Nasdaq Listing Rules”). Our board of directors
established an audit committee and a compensation committee at a board meeting
held on March 3, 2010, and each committee has its own charter. The
primary functions of these two committees are described below.
Audit
Committee. The primary functions of the Audit Committee are
to: assist the board of directors in its oversight responsibilities
regarding (1) the integrity of the Company’s financial statements, (2) the
Company’s compliance with legal and regulatory requirements, (3) the independent
accountant’s qualifications and independence and (4) the Company’s internal and
disclosure controls; prepare the report of the Audit Committee required by the
SEC for inclusion in the Company’s annual proxy statement; retain and terminate
the Company’s independent accountant; approve audit and non-audit services to be
performed by the independent accountant; and perform such other functions as the
board of directors may from time to time assign to the committee.
The Audit
Committee is composed of three members, all of whom are “independent” as such
term is defined in the rules and regulations of the SEC and the Nasdaq Listing
Rules. Our board has also determined that David Jones qualifies as an
“audit committee financial expert” within the meaning of the rules and
regulations of the SEC and that each of our other committee members is able to
read and understand fundamental financial statements and has substantial
business experience that results in that member’s financial
sophistication.
Compensation
Committee. The Company’s executive compensation program is
administered by the Compensation Committee. The Compensation
Committee is composed of three directors, each of whom qualifies as an outside
director within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended. The committee reports to the full board of
directors on all matters within the committee’s responsibilities.
The
Compensation Committee’s primary functions are to: discharge the
oversight responsibilities of the board of directors with respect to
compensation of the Company’s executives; if required, prepare the report of the
Compensation Committee pursuant to SEC rules for inclusion in the Company’s
annual proxy statement; and administer designated executive compensation plans
of the Company. The Chief Executive Officer is not present during
voting or deliberations on his or her compensation.
60
The
following table below sets forth the membership of each Committee:
Name
of Director
|
Audit
Committee
|
Compensation
Committee
|
||
John
Pappajohn
|
Member
|
Chair
|
||
David
B. Jones
|
Chair
|
Member
|
||
Jerome
Vaccaro
|
Member
|
|||
Henry
T. Harbin
|
Member
|
Dr.
Kallins has not been assigned to any board committee at this time.
We do not
have a nominating and corporate governance committee and the function
customarily delegated to such committee is performed by our full board of
directors. In addition, we do not have any charter that relates to
the functions traditionally performed by such committee.
61
EXECUTIVE
COMPENSATION
Compensation
Structure
Compensation
Philosophy
Generally,
we compensate our executive officers with a compensation package that is
designed to drive company performance to maximize shareholder value while
meeting our needs and the needs of our executives. The following are
objectives we consider:
|
·
|
Alignment
- to align the interests of executives and shareholders through
equity-based compensation awards;
|
|
·
|
Retention
- to attract, retain and motivate highly qualified, high performing
executives to lead our growth and success;
and
|
|
·
|
Performance
- to provide, when appropriate, compensation that is dependent upon the
executive’s achievements and the company’s
performance.
|
In order
to achieve the above objectives, our executive compensation philosophy is guided
by the following principles:
|
·
|
Rewards
under incentive plans are based upon our short-term and longer-term
financial results and increasing shareholder
value;
|
|
·
|
Executive
pay is set at sufficiently competitive levels to attract, retain and
motivate highly talented individuals who are necessary for us to strive to
achieve our goals, objectives and overall financial
success;
|
|
·
|
Compensation
of an executive is based on such individual’s role, responsibilities,
performance and experience; and
|
|
·
|
Annual
performance of our company and the executive are taken into account in
determining annual bonuses with the goal of fostering a
pay-for-performance culture.
|
Compensation
Elements
We
compensate our executives through a variety of components, which may include a
base salary, annual performance based incentive bonuses, equity incentives, and
benefits and perquisites, in order to provide our executives with a competitive
overall compensation package. The mix and value of these components
are impacted by a variety of factors, such as responsibility level, individual
negotiations and performance and market practice. The purpose and key
characteristics for each component are described below.
Base
Salary
Base
salary provides executives with a steady income stream and is based upon the
executive’s level of responsibility, experience, individual performance and
contributions to our overall success, as well as negotiations between the
company and such executive officer. Competitive base salaries, in
conjunction with other pay components, enable us to attract and retain talented
executives. The Board typically sets base salaries for our executives
at levels that it deems to be competitive, with input from our Chief Executive
Officer.
Annual
Incentive Bonuses
Annual
incentive bonuses are a variable performance-based component of
compensation. The primary objective of an annual incentive bonus is
to reward executives for achieving corporate and individual goals and to align a
portion of total pay opportunities for executives to the attainment of our
company’s performance goals. Annual incentive awards, when provided,
act as a means to recognize the contribution of our executive officers to our
overall financial, operational and strategic success.
62
Equity
Incentives
Equity
incentives are intended to align executive and shareholder interests by linking
a portion of executive pay to long-term shareholder value creation and financial
success over a multi-year period. Equity incentives may also be
provided to our executives to attract and enhance the retention of executives
and to facilitate stock ownership by our executives. The Board
considers individual and company performance when determining long-term
incentive opportunities.
Health
& Welfare Benefits
The
executive officers participate in health and welfare, and paid time-off benefits
which we believe are competitive in the marketplace. Health and
welfare and paid time-off benefits help ensure that we have a productive and
focused workforce.
Severance
and Change of Control Arrangements
We do
not have a formal plan for severance or separation pay for our employees, but we
typically include a severance provision in the employment agreements of our
executive officers that have written employment agreements with
us. Generally, such provisions are triggered in the event of
involuntary termination of the executive without cause or in the event of a
change in control. Please see the description of our employment
agreements with each of George Carpenter, Daniel Hoffman, Michael
Darkoch and Paul Buck below for further information.
Other
Benefits
In order
to attract and retain highly qualified executives, we may provide our executive
officers with automobile allowances, consistent with current market
practices.
Accounting
and Tax Considerations
We
consider the accounting implications of all aspects of our executive
compensation strategy and, so long as doing so does not conflict with our
general performance objectives described above, we strive to achieve the most
favorable accounting (and tax) treatment possible to the company and our
executive officers.
Process
for Setting Executive Compensation; Factors Considered
When
making pay determinations for named executive officers, the Board considers a
variety of factors including, among others: (1) actual company
performance as compared to pre-established goals, (2) individual executive
performance and expected contribution to our future success, (3) changes in
economic conditions and the external marketplace, (4) prior years’ bonuses and
long-term incentive awards, and (5) in the case of executive officers, other
than Chief Executive Officer, the recommendation of our Chief Executive Officer,
and in the case of our Chief Executive Officer, his negotiations with our
Board. No specific weighing is assigned to these factors nor are
particular targets set for any particular factor. Ultimately, the
Board uses its judgment and discretion when determining how much to pay our
executive officers and sets the pay for such executives by element (including
cash versus non-cash compensation) and in the aggregate, at levels that it
believes are competitive and necessary to attract and retain talented executives
capable of achieving the Company’s long-term objectives.
Summary
Compensation Table
The
following table provides disclosure concerning all compensation paid for
services to us in all capacities for our fiscal years ending September 30, 2010
and 2009 (i) as to each person serving as our principal executive officer
(“PEO”) or acting in a similar capacity during our fiscal year ended September
30, 2010, and (ii) as to our two most highly compensated executive officer other
than our PEO who were serving executive officers on September 30, 2010, whose
total compensation exceeded $100,000; and (iii) up to two additional individuals
for whom disclosure would have been provided under (ii) but for the fact that
they were not serving as executive officers on September 30, 2010. The people
listed in the table below are referred to as our “named executive
officers”.
63
Name
and
Principal
Position
|
Fiscal
Year
Ended
September
30,
2010
|
Salary
($)
|
Bonus
($)
|
Option
Awards
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||
George
Carpenter (Chief Executive Officer,
|
2010
|
213,700 | (9) | 2,167,300 | (1)(5) | 20,800 | (3) | 2,401,800 | |||||||||||||
Principal
Executive Officer, Director)
|
2009
|
180,000 | - | - | 20,500 | (3) | 200,500 | ||||||||||||||
Daniel
Hoffman (President, Chief Medical Officer)
|
2010
|
150,000 | - | 270,900 | (1)(6) | 26,100 | (4) | 447,000 | |||||||||||||
2009
|
150,000 | - | - | 33,400 | (4) | 183,400 | |||||||||||||||
Paul
Buck (Chief Financial Officer)
|
2010
|
127,000 | (10) | - | 243,800 | (1)(7) | 8,500 | (3) | 379,300 | ||||||||||||
2009
|
- | - | - | - | |||||||||||||||||
Michael
Darkoch (Executive Vice President and Chief Marketing
Officer)
|
2010
|
52,000 | - | 180,000 | (2)(8) | 6,100 | (3) | 238,100 | |||||||||||||
2009
|
- | - | - | - | - |
(1) These
options were granted on March 3, 2010. The amount reflected in the table
represents the aggregate grant-date fair value of options computed in accordance
with FASB ASC Topic 718 (formerly FAS 123R). The Company estimates
the fair value of each option on the grant date using the Black-Scholes model
with the following assumptions: dividend yield 0%; risk-free interest rate
3.62%; expected volatility 215% and expected life of the option 5
years.
(2) These
options were granted on July 6, 2010. The amount reflected in the table
represents the aggregate grant-date fair value of options computed in accordance
with FASB ASC Topic 718 (formerly FAS 123R). The Company estimates
the fair value of each option on the grant date using the Black-Scholes model
with the following assumptions: dividend yield 0%; risk-free interest rate
1.81%; expected volatility 516% and expected life of the option 5
years.
(3)
Relates to healthcare insurance premiums paid on behalf of executive officers by
the Company.
(4) Relates
to healthcare insurance premiums for the year ended September 30, 2010 of
$22,700 and automobile expenses of $3,400 paid on behalf of Dr. Hoffman by the
Company. For the year ended September 30, 2009, healthcare insurance premiums
were $28,300 and automobile expenses were $4,400.
(5) The
aggregate number of option awards outstanding for Mr. Carpenter at September 30,
2010 was 4,000,000 from the March 3, 2010 grant and 968,875 from the October 1,
2007 grant.
(6) The
aggregate number of option awards outstanding for Dr. Hoffman at September 30,
2010 was 500,000 shares from the March 3, 2010 grant and 814,062 and 119,013
shares from grants on August 8, 2007 and August 11, 2006
respectively.
(7) The
aggregate number of option awards outstanding for Mr. Buck at September 30, 2010
was 450,000 from the March 3, 2010 grant.
(8) The
aggregate number of option awards outstanding for Mr. Darkoch at September 30,
2010 was 450,000 from the July 6, 2010 grant.
64
(9) $33,700
of Mr. Carpenter’s salary is accrued and payment has been
deferred.
(10) $26,000
of Mr. Buck’s salary is accrued and payment has been
deferred.
Grant
of Plan Based Awards in the Fiscal Year Ending September 30,
2010
Option
grants to executive officers occurred during fiscal year ending September 30,
2010 under our 2006 Stock Incentive Plan as amended and restated, which is the
only plan pursuant to which awards can be granted. The options to
acquire shares of common stock granted to management were as
follows:
|
(1)
|
On
March 3, 2010, options were granted to Mr. Carpenter in the amount of
4,000,000 shares, Dr. Hoffman in the amount of 500,000 shares,
and Mr. Buck in the amount of 450,000
shares.
|
|
(2)
|
On
July 6, 2010, options were granted to Mr. Darkoch in the amount of 450,000
shares.
|
Narrative
Disclosure to Summary Compensation Table and Grants of Plan-Based Awards
Table
Since
we had limited cash and cash equivalent resources as of September 30, 2010, we
elected to preserve our cash and did not pay any bonuses to our executive
officers during our fiscal year ended September 30, 2010.
The
following is a summary of each employment agreement that we have entered into
with respect to our named executive officers, which summary includes, where
applicable, a description of all payments the company is required to make to
such named executive officers at, following or in connection with the
resignation, retirement or other termination of such named executive officers,
or a change in control of our company or a change in the responsibilities of
such named executive officers following a change in control.
Employment
Agreements
George
Carpenter
On
October 1, 2007, after our 2007 fiscal year end, we entered into an employment
agreement with George Carpenter pursuant to which Mr. Carpenter served as our
President. During the period of his employment, Mr. Carpenter will
receive a base salary of no less than $180,000 per annum, which is subject to
upward adjustment at the discretion of the Chief Executive Officer or our Board
of Directors. On March 3, 2010, the Board of Directors resolved to
increase the annual base salary of Mr. Carpenter to $270,000, with the increase
in salary having retroactive effect to January 1, 2010. In addition,
pursuant to the terms of the employment agreement, on October 1, 2007, Mr.
Carpenter was granted an option to purchase 968,875 shares of our common stock
at an exercise price of $0.89 per share pursuant to our 2006 Stock Incentive
Plan. These options vest as follows: 121,109 shares vested
immediately with the remaining 847,766 shares vesting equally over 42 months
commencing April 30, 2008. In the event of a change of control
transaction, a portion of Mr. Carpenter’s unvested options equal to the number
of unvested options at the date of the corporate transaction multiplied by the
ratio of the time elapsed between October 1, 2008 and the date of corporate
transaction over the vesting period (48 months) will automatically accelerate,
and become fully vested. Mr. Carpenter will be entitled to four weeks
vacation per annum, health and dental insurance coverage for himself and his
dependents, and other fringe benefits that we may offer our employees from time
to time.
Mr.
Carpenter’s employment is on an “at-will” basis, and Mr. Carpenter may terminate
his employment with us for any reason or for no reason. Similarly, we
may terminate Mr. Carpenter’s employment with or without cause. If we
terminate Mr. Carpenter’s employment without cause or Mr. Carpenter
involuntarily terminates his employment with us (an involuntary termination
includes changes, without Mr. Carpenter’s consent or pursuant to a corporate
transaction, in Mr. Carpenter’s title or responsibilities so that he is no
longer the President of the company), Mr. Carpenter shall be eligible to receive
as severance his salary and benefits for a period equal to six months payable in
one lump sum upon termination. If Mr. Carpenter is terminated by us
for cause, or if Mr. Carpenter voluntarily terminates his employment, he will
not be entitled to any severance.
65
As of
April 10, 2009, Mr. Carpenter was named Chief Executive Officer and a Director
of the company and Daniel Hoffman became our President. Other than
Mr. Carpenter’s 2010 salary increase described above, his option grant on March
3, 2010 described below and his change in title, there have been no changes in
the terms of Mr. Carpenter’s employment with us.
Daniel
Hoffman
On
January 11, 2008, we entered into an employment agreement with Daniel Hoffman
pursuant to which Dr. Hoffman began serving as our Chief Medical Officer
effective January 15, 2008. During the period of his employment, Dr.
Hoffman will receive a base salary of $150,000 per annum, which is subject to
upward adjustment. Dr. Hoffman will also have the opportunity to
receive bonus compensation, if and when approved by our Board of
Directors. Dr. Hoffman’s employment is on an “at-will” basis, and Dr.
Hoffman may terminate his employment with us for any reason or for no
reason. Similarly, we may terminate Dr. Hoffman’s employment with or
without cause. If we terminate Dr. Hoffman’s employment without cause
or Dr. Hoffman involuntarily terminates his employment with us (an involuntary
termination includes changes, without Dr. Hoffman’s consent or pursuant to a
corporate transaction, in Dr. Hoffman’s title or responsibilities so that he is
no longer the Chief Medical Officer of the company), Dr. Hoffman will be
eligible to receive as severance his salary and benefits for a period equal to
six months payable in one lump sum upon termination. If Dr. Hoffman
is terminated by us for cause, or if Dr. Hoffman voluntarily terminates his
employment, he will not be entitled to any severance. Dr. Hoffman
will be entitled to four weeks vacation per annum, health and dental insurance
coverage for himself and his dependents, and other fringe benefits that we may
offer our employees from time to time.
Prior to
his employment, from October 1, 2007 to January 15, 2008 Dr. Hoffman earned
$15,000 for consulting services rendered to the company. In addition,
as compensation for his services to us as a consultant, Dr. Hoffman was granted
options to purchase an aggregate of 814,062 shares of our common stock at an
exercise price of $1.09 on August 7, 2007. In accordance with the
terms of his employment agreement, the terms of Dr. Hoffman’s option grant were
amended to provide that in the event of a change of control transaction, a
portion of Dr. Hoffman’s unvested options equal to the number of unvested
options at the date of the corporate transaction multiplied by the ratio of the
time elapsed between August 7, 2007 and the date of corporate transaction over
the vesting period (42 months), will automatically accelerate, and become fully
vested.
In
addition to being the Chief Medical Officer, Dr. Hoffman was named President of
the Company on April 10, 2009.
Paul
Buck
On
February 18, 2010, we entered into an employment agreement with Paul Buck
pursuant to which Mr. Buck began serving as our Chief Financial Officer on an
“at will” basis and will be paid a salary of no less than $208,000 per annum,
which is subject to upward adjustment at the discretion of the Chief Executive
Officer or the Board of Directors of the Company. Pursuant to his
employment agreement, Mr. Buck also received an option to purchase 450,000
shares of the company’s common stock on March 3, 2010, which options vest in 48
equal installments commencing on March 3, 2010. Mr. Buck will be
entitled to four weeks vacation per annum, health and dental insurance coverage
for himself and his dependents, and other fringe benefits that the Company may
offer its employees from time to time. As Mr. Buck’s employment is on
an “at-will” basis, he may terminate his employment with the Company for any
reason or for no reason. Similarly, the Company may terminate Mr.
Buck’s employment with or without cause. If the Company terminates
Mr. Buck’s employment without cause or Mr. Buck involuntarily terminates his
employment with the Company, Mr. Buck shall be eligible to receive as severance
his salary and benefits for a period equal to six months payable in one lump sum
upon termination. If Mr. Buck is terminated by the Company for cause,
or if Mr. Buck voluntarily terminates his employment, he will not be entitled to
any severance.
66
Michael
Darkoch
On
July 6, 2010, we entered into an employment agreement with Michael Darkoch
pursuant to which Mr. Darkoch began serving as our Executive Vice President and
Chief Marketing Officer on an “at will” basis and will be paid a salary of no
less than $208,000 per annum, which is subject to upward adjustment at the
discretion of the Chief Executive Officer or the Board of Directors of the
Company. Pursuant to his employment agreement, Mr. Darkoch also received
an option to purchase 450,000 shares of the company’s common stock on July 6,
2010, which options vest in 48 equal installments commencing on July 6,
2010. Mr. Darkoch will be entitled to four weeks vacation per annum,
health and dental insurance coverage for himself and his dependents, and other
fringe benefits that the Company may offer its employees from time to time. As
Mr. Darkoch’s employment is on an “at-will” basis, he may terminate his
employment with the Company for any reason or for no reason. Similarly, the
Company may terminate Mr. Darkoch’s employment with or without cause. If the
Company terminates Mr. Darkoch’s employment after January 2, 2011, without cause
or Mr. Darkoch involuntarily terminates his employment after January 2, 2011,
with the Company, Mr. Darkoch shall be eligible to receive as severance his
salary and benefits for a period equal to six months payable in one lump sum
upon termination. If Mr. Darkoch is terminated by the Company for cause, or if
Mr. Darkoch voluntarily terminates his employment, he will not be entitled to
any severance.
The
Company has no other employment agreements with its executive
officers.
2006
Stock Incentive Plan
On
August 3, 2006, CNS California adopted the CNS California 2006 Stock Incentive
Plan (the “2006 Plan”). On March 7, 2007, in connection with the
closing of the merger transaction with CNS California, we assumed the CNS
California stock option plan and all of the options granted under the plan at
the same price and terms. Subsequently, we amended the 2006 Plan on
March 3, 2010 to increase the number of shares of common stock reserved for
issuance under the 2006 Plan from 10 million to 20 million shares and increased
the limit on shares underlying awards granted within a calendar year to any
eligible employee or director from 3 million to 4 million shares of common
stock. The amendment was approved by our shareholders at the annual
meeting held on April 27, 2010. The following is a summary of the
2006 Plan, as amended, which we use to provide equity compensation to employees,
directors and consultants to the company.
The
2006 Plan provides for the issuance of awards in the form of restricted shares,
stock options (which may constitute incentive stock options (ISO) or
nonstatutory stock options (NSO)), stock appreciation rights and stock unit
grants and is administered by the board of directors. As of
October 28, 2010, 2,124,740 options were exercised and there were 15,670,973
options and 183,937 restricted shares outstanding under the amended 2006 Plan,
leaving 2,020,350 shares available for issuance pursuant to future
awards.The option price for each share of stock subject to an option
shall be (i) no less than the fair market value of a share of stock on the date
the option is granted, if the option is an ISO, or (ii) no less than 85% of the
fair market value of the stock on the date the option is granted, if the option
is a NSO; provided, however, if the option is an ISO granted to an eligible
employee who is a 10% shareholder, the option price for each share of stock
subject to such ISO shall be no less than 110% of the fair market value of a
share of stock on the date such ISO is granted. Stock options have a maximum
term of ten years from the date of grant, except for ISOs granted to an eligible
employee who is a 10% shareholder, in which case the maximum term is five years
from the date of grant. ISOs may be granted only to eligible
employees.
Outstanding
Equity Awards at Fiscal Year-End 2010
The
following table presents information regarding outstanding options held by our
named executive officers as of the end of our fiscal year ended September 30,
2010.
Name
|
Number of Securities Underlying
Unexercised Options (#)
|
Option Exercise
Price ($)
|
Option Expiration
Date
|
||||||||||
Exercisable
|
Unexercisable
|
||||||||||||
George Carpenter
(1)
|
583,338 | 3,416,662 | 0.55 |
March
2, 2020
|
|||||||||
726,629 | 242,246 | 0.89 |
October
1, 2017
|
||||||||||
Daniel
Hoffman
(2)
|
72,919 | 427,081 | 0.55 |
March
2, 2010
|
|||||||||
712,316 | 101,746 | 1.09 |
August
8, 2017
|
||||||||||
119,013 | 0 | 0.12 |
August
11, 2016
|
||||||||||
Paul
Buck(3)
|
65,625 | 384,375 | 0.55 |
March
2, 2020
|
|||||||||
Michael
Darkoch(4)
|
28,125 | 421,875 | 0.44 |
July
6, 2020
|
|||||||||
67
(1) On
March 3, 2010, Mr. Carpenter was granted options to purchase 4,000,000 shares of
common stock. The options are exercisable at $0.55 per share and vest
equally over 48 months starting on March 3, 2010.
On
October 1, 2007 Mr. Carpenter was granted options to purchase 968,875 shares of
common stock. The options are exercisable at an exercise price of
$0.89 and vest as follows: 121,109 shares vested immediately with the remaining
847,766 shares vesting equally over 42 months commencing April 30,
2008.
(2) On
March 3, 2010, Dr Hoffman was granted options to purchase 500,000 shares of
common stock. The options are exercisable at $0.55 per share and vest
equally over 48 months starting on March 3, 2010.
On August
8, 2007, Dr. Hoffman was granted options to purchase 814,062 shares of our
common stock. The options are exercisable at $1.09 per share and vest
as follows: options to purchase 203,516 shares vested on March 8, 2008;
options to purchase 593,600 shares vest in equal monthly installments of 16,960
shares over 35 months commencing on April 30, 2008; the remaining options to
purchase 16,946 shares vest on March 31, 2011.
On August
11, 2006, Dr. Hoffman was granted an option to purchase 119,013 shares of common
stock at an exercise price of $0.12 per share, which is now fully
exercisable.
(3) On
March 3, 2010, Mr. Buck was granted options to purchase 450,000 shares of common
stock. The options are exercisable at $0.55 per share and vest
equally over 48 months starting on March 3, 2010.
(4) On
July 6, 2010, Mr. Darkoch was granted options to purchase 450,000 shares of
common stock. The options are exercisable at $0.40 per share and vest
equally over 48 months starting on July 6, 2010.
Director
Compensation
During
our fiscal year ended September 30, 2010, each of our non-employee directors
received as compensation for their services on our board options to purchase
250,000 shares of common stock. The options were granted on March 3,
2010 for all non-employee directors except for Dr. Kallins, whose options were
granted on July 5, 2010. The options granted on March 3, 2010 were
subject to approval by our stockholders at our 2010 annual meeting of amendments
to our 2006 Stock Incentive Plan, which approval was obtained on April 27,
2010. The options granted on March 3, 2010 and July 5, 2010 vest in
equal monthly installments over a 36-month period beginning on the date of
grant. The options granted on March 3, 2010 have an exercise price of
$0.55 per share and the options granted on July 5, 2010 have an exercise price
of $0.40 per share. Apart from these options, non-employee directors
did not receive any cash or other compensation for their service on our board of
directors or committees thereof during the fiscal year ended September 30,
2010. We do not pay management directors for board service in
addition to their regular employee compensation. The full board of
directors has the primary responsibility for reviewing and considering any
revisions to director compensation. As described below, Dr. Harbin
received compensation for consulting services he provided to the company during
our fiscal year ending September 30, 2010 and Mr. Thompson received compensation
for his advisory services.
68
Non-Employee
Director Compensation
Name
|
Option
Awards ($)
|
All
Other Compensation ($)
|
Total
($)
|
|||||||||
Jerome
Vaccaro M.D. (3)
|
135,500 | (1) | 0 | 135,500 | ||||||||
Henry
Harbin M.D. (4)
|
352,200 | (1) | 45,000 | 387,200 | ||||||||
John
Pappajohn (5)
|
135,500 | (1) | 0 | 135,500 | ||||||||
David
Jones (6)
|
135,500 | (1) | 0 | 135,500 | ||||||||
Tommy
Thompson (7)
|
81,300 | (1) | 0 | 81,300 | ||||||||
George
Kallins M.D.(8)
|
100,000 | (2) | 0 | 100,000 |
(1)
|
These
options were granted on March 3, 2010. The amount reflected in
the table represents the aggregate grant-date fair value of options
computed in accordance with FASB ASC Topic 718 (formerly FAS
123R). The Company estimates the fair value of each option on
the grant date using the Black-Scholes model with the following
assumptions: dividend yield 0%; risk-free interest rate 3.62%;
expected volatility 215% and expected life of the option 5
years.
|
(2)
|
These
options were granted on July 5, 2010. The amount reflected in
the table represents the aggregate grant-date fair value of options
computed in accordance with FASB ASC Topic 718 (formerly FAS
123R). The Company estimates the fair value of each option on
the grant date using the Black-Scholes model with the following
assumptions: dividend yield 0%; risk-free interest rate 1.81%;
expected volatility 536% and expected life of the option 5
years.
|
(3)
|
On
March 3, 2010, Dr.Vaccaro was granted 250,000 options having an exercise
price of $0.55 for his services as a director. The options vest
equally over 36 months starting on the date of
grant.
|
The
aggregate number of option awards outstanding for Dr. Vaccaro at September 30,
2010 was 270,000. On August 28, 2006, Dr. Vaccaro was granted 20,000
options having an exercise price of $0.12 for his service as a
director. The options vested semiannually in four equal amounts over
a period of two years commencing February 28, 2007 through August 31,
2008. These options expire on August 28, 2016 and are fully
vested.
(4)
|
On
March 3, 2010 Dr Harbin was granted 250,000 options for his services as a
director and 400,000 options for consulting services pursuant to his March
26, 2010 Consulting Agreement described below. These options
have an exercise price of $0.55 and vest equally over 36 months starting
on the date of grant. All other compensation is comprised of
the cash payment of $24,000 paid in January 2010 for Dr. Harbin’s March
17, 2009 Consulting Agreement described below, plus $21,000 which have
been accrued through September 30, 2010 on Dr. Harbin’s March 26, 2010
Consulting Agreement. To date, no cash payment has been made on
the March 26, 2010 agreement.
|
On August
8, 2007, we entered into an agreement with Dr. Harbin for consulting
services. Pursuant to the agreement, we granted, on August 8, 2007,
options to purchase 24,000 shares of our common stock at an exercise price of
$1.09 per share pursuant to our 2006 Stock Incentive Plan. The
options expire on August 8, 2017 and are now fully vested.
As
compensation for his service as a director of the Company, on December 19, 2007,
we granted Dr. Harbin options to purchase 20,000 shares of our common stock at
an exercise price of $0.80 per share under our 2006 Stock Incentive
Plan. The options expire on December 19, 2017 and are now fully
vested.
69
On
April 15, 2008, we entered into a consulting agreement with Dr. Harbin which
expired on December 31, 2008. Pursuant to the agreement, we paid Dr.
Harbin a consulting fee of $24,000 in cash of which $16,000 was paid during the
fiscal year ended September 30, 2008 and $8,000
was paid during the fiscal year ended September 30,
2009. Additionally Dr. Harbin was granted options to purchase 56,000
shares of our common stock at an exercise price of $0.96 per share under our
2006 Stock Incentive Plan. The options expire on April 15, 2018 and
are now fully vested.
On March
17, 2009, we entered into a consulting agreement with Dr. Harbin (the “March 17,
2009 Consulting Agreement”), which expired on December 31, 2009 pursuant to
which Dr. Harbin was to be paid an aggregate of $24,000 as compensation for his
consulting services. Dr. Harbin was paid the $24,000 due to him in
January 2010. In addition, as further compensation, we granted Dr.
Harbin options to purchase 56,000 shares of our common stock at an exercise
price of $0.40 per share, with the options vesting in equal monthly installments
over a twelve month period commencing on January 1, 2009. The options
expire on March 17, 2019.
On
March 26, 2010, we entered into a consulting agreement with Dr. Harbin (the
“March 26, 2010 Consulting Agreement”), pursuant to which Dr. Harbin is to be
paid an aggregate of $36,000 as compensation for his consulting
services. As of September 30, 2010 we have an accrued liability of
$21,000 for the nine months of the contract term to that date. Dr.
Harbin has not been paid anything yet on this contact. The agreement
expires on December 31, 2010, but is renewable for two one year terms on January
1, 2011 and 2012. In addition, as further compensation, we granted
Dr. Harbin options to purchase 400,000 shares of our common stock at an exercise
price of $0.55 per share, with the options vesting in 36 equal monthly
installments commencing on March 3, 2010. The options expire on March
2, 2020.
(5)
|
On
March 3, 2010, Mr. Pappajohn was granted 250,000 options having an
exercise price of $0.55 for his services as a director. The
options vest equally over 36 months starting on the date of
grant.
|
(6)
|
On
March 3, 2010, Mr. Jones was granted 250,000 options having an exercise
price of $0.55 for his services as a director. The options vest
equally over 36 months starting on the date of
grant.
|
(7)
|
On
March 3, 2010, Mr. Thompson was granted 250,000 options having an exercise
price of $0.55 for his services as a director. Mr. Thompson
resigned from the Board effective March 12, 2010 thereby forfeiting his
options with no options vested. On March 3, 2010 Mr. Thompson
was also granted 150,000 options for his services as an advisor to the
Company. These options have an exercise price of $0.55 and vest
equally over 36 months starting on the date of
grant.
|
(8)
|
On
July 5, 2010, Dr. Kallins was granted 250,000 options having an exercise
price of $0.40 for his services as a director. The options vest
equally over 36 months starting on the date of
grant.
|
Changes
in Control
We do not
have any arrangements which may at a subsequent date result in a change in
control.
70
PRINCIPAL
AND SELLING STOCKHOLDERS
The
selling security holders may offer and sell, from time to time, any or all of
the shares of common stock held by them. Because the selling security
holders may offer all or only some portion of the 65,879,838 shares of common
stock to be registered, we cannot estimate how many shares of common stock the
selling security holders may hold upon termination of the offering, nor can we
express, as a percentage, how this number of shares will relate to the total
number of shares that we will have outstanding at that time.
The
following table presents information regarding the beneficial ownership of our
common stock as of October 28, 2010 (unless information therein specifically
references an alternative date), and the number of shares of common stock
covered by this prospectus. The number of shares in the table
represents an estimate of the number of shares of common stock to be offered
by:
|
·
|
each
of the executive officers;
|
|
·
|
each
of our directors;
|
|
·
|
all
of our directors and executive officers as a
group;
|
|
·
|
each
stockholder known by us to be the beneficial owner of more than 5% of our
common stock; and
|
|
·
|
each
of the selling stockholders.
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to
securities. Unless otherwise indicated below, to our knowledge, the
persons and entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable. Shares of our common stock subject to
options and warrants from the company that are currently exercisable or
exercisable within sixty days of October 28, 2010 are deemed to be outstanding
and to be beneficially owned by the person holding the options for the purpose
of computing the percentage ownership of that person but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.
The
information presented in this table is based on 56,023,921 shares of our common
stock outstanding on October 28, 2010. Unless otherwise indicated,
the address of each of the executive officers and directors and 5% or more
stockholders named below is c/o CNS Response, Inc., 85 Enterprise, Suite 410,
Aliso Viejo, CA 92656.
Number
of Shares Beneficially Owned Prior to Offering
|
Number
of Shares Beneficially Owned After Offering
|
|||||||||||||||||||
Name
of Beneficial Owner
|
Number
|
Percentage
of Shares Outstanding
|
Number
of Shares Being Offered
|
Number
|
Percentage
of Shares Outstanding
|
|||||||||||||||
Executive
Officers and Directors:
|
||||||||||||||||||||
George
Carpenter (1)
Chief
Executive Officer, Secretary
|
2,243,860 | 3.9 | % | 540,000 | 1,703,860 | 2.9 | % | |||||||||||||
Paul
Buck (2)
Chief
Financial Officer
|
373,125 | * | 270,000 | 103,125 | * | |||||||||||||||
Dr.
Daniel Hoffman (3)
President
and Chief Medical Officer
|
1,107,822 | 1.9 | % | 110,545 | 997,277 | 1.7 | % | |||||||||||||
Michael
Darkoch (4)
|
56,250 | * | 56,250 | * | ||||||||||||||||
David
B. Jones(5)
Director
|
10,383,536 | 17.3 | % | 8,696,055 | 1,687,481 | 2.8 | % | |||||||||||||
Dr.
Jerome Vaccaro (6)
Director
|
96,400 | * | 96,400 | * | ||||||||||||||||
Dr.
Henry Harbin (7)
Director
|
365,459 | * | 10,834 | 354,625 | * |
71
Number
of Shares Beneficially Owned Prior to Offering
|
Number
of Shares Beneficially Owned After Offering
|
|||||||||||||||||||
Name
of Beneficial Owner
|
Number
|
Percentage
of Shares Outstanding
|
Number
of Shares Being Offered
|
Number
|
Percentage
of Shares Outstanding
|
|||||||||||||||
John
Pappajohn (8)
Director
|
15,665,414 | 24.7 | % | 11,720,912 | 3,944,502 | 6.2 | % | |||||||||||||
Dr.
George Kallins (9)
Director
|
3,588,175 | 6.0 | % | - | 3,588,175 | 6.0 | % | |||||||||||||
Directors
and officers as a group (9 persons) (10)
|
33,880,041 | 45.6 | % | 21,348,346 | 12,531,695 | 16.9 | % | |||||||||||||
Non-Director
5%+ Stockholders:
|
||||||||||||||||||||
Leonard
Brandt (11)
|
11,081,982 | 19.0 | % | 9,970,523 | 1,111,459 | 1.9 | % | |||||||||||||
SAIL
Venture Partners LP (5)
|
10,383,536 | 17.3 | % | 8,696,055 | 1,687,481 | 2.8 | % | |||||||||||||
Other
Selling Stockholders:
|
- | - | ||||||||||||||||||
Argyris
Vassiliou (12)
|
500,001 | * | 500,001 | - | - | |||||||||||||||
James
Howard Desnick, M.D. (13)
|
1,620,000 | 2.9 | % | 1,620,000 | - | - | ||||||||||||||
Peter
Unanue (14)
|
974,990 | 1.7 | % | 974,990 | - | - | ||||||||||||||
Ann
Vassiliou Children’s Trust P2587 (15)
|
500,001 | * | 500,001 | - | - | |||||||||||||||
AC
Care, LLC (16)
|
100,000 | * | 100,000 | - | - | |||||||||||||||
AJWC
Ltd. (17)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Andy’s
Liquor, Inc. (18)
|
750,000 | 1.3 | % | 750,000 | - | - | ||||||||||||||
Theodore
Chafoulias (19)
|
150,000 | * | 150,000 | - | - | |||||||||||||||
Dennis
James Colbert and Patti J. Colbert,
as
joint tenants with right of survivorship (20)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Ronald
I. Dozoretz, M.D. (21)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Richard
L. Hexum, Jr. (22)
|
770,000 | 1.4 | % | 770,000 | - | - | ||||||||||||||
Larry
Hopfenspirger (23)
|
600,000 | 1.1 | % | 600,000 | - | - | ||||||||||||||
William
and Joanne Jellison (24)
|
500,000 | * | 500,000 | - | - | |||||||||||||||
Jeffrey
P. Knightly (25)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Meyer
Leon Proler (26)
|
1,853,274 | 3.3 | % | 1,847,274 | 6,000 | * | ||||||||||||||
Dale
Ragan (27)
|
645,000 | 1.1 | % | 645,000 | - | - | ||||||||||||||
Richard
Lee Roehl (28)
|
1,080,000 | 1.9 | % | 1,080,000 | - | - | ||||||||||||||
Lindsay
A. Rosenwald, M.D. (29)
|
1,080,000 | 1.9 | % | 1,080,000 | - | - | ||||||||||||||
Gene
Salkind, M.D. (30)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Starr
F. Schlobohm Rev. Trust U/D/A 12/09/04 (31)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Myron
F. Steves, Jr. (32)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
David
S. Strutt (33)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Brian
J. Thompson (34)
|
720,000 | 1.3 | % | 270,000 | 450,000 | * | ||||||||||||||
Mark
C. Thompson & Bonita S. Thompson
Revocable
Living Trust Dated 1/14/04 (35)
|
1,620,000 | 2.9 | % | 1,620,000 | - | - | ||||||||||||||
John
Francis Wheeler (36)
|
270,000 | * | 270,000 | - | - | |||||||||||||||
White
Sand Investor Group, L.P. (37)
|
1,350,000 | 2.4 | % | 1,350,000 | - | - | ||||||||||||||
B
+ D Associates (38)
|
500,000 | * | 500,000 | - | - | |||||||||||||||
Adolfo
and Donna Carmona, as joint tenants
with
right of survivorship (39)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
The
Carnahan Trust (40)
|
540,000 | 1.0 | % | 540,000 | - | - | ||||||||||||||
Jordan
Family LLC (41)
|
330,000 | * | 330,000 | - | - | |||||||||||||||
John
V. BiVona (42)
|
250,000 | * | 250,000 | - | - | |||||||||||||||
Maxim
Group LLC (43)
|
965,134 | 1.7 | % | 965,134 | - | - |
72
Number
of Shares Beneficially Owned Prior to Offering
|
Number
of Shares Beneficially Owned After Offering
|
|||||||||||||||||||
Name
of Beneficial Owner
|
Number
|
Percentage
of Shares Outstanding
|
Number
of Shares Being Offered
|
Number
|
Percentage
of Shares Outstanding
|
|||||||||||||||
Monarch
Capital Group (44)
|
75,340 | * | 65,340 | 10,000 | * | |||||||||||||||
Robert
Nathan (45)
|
175,793 | * | 152,460 | 23,333 | * | |||||||||||||||
Felix
Investments, LLC (46)
|
292,200 | * | 292,200 | - | - | |||||||||||||||
George
C. Foulkes (47)
|
30,102 | * | 30,102 | - | - | |||||||||||||||
Max
A. Schneider, Inc. (48)
|
128,617 | * | 128,617 | - | - | |||||||||||||||
Kenneth
Leonard (49)
|
150,513 | * | 150,513 | - | - | |||||||||||||||
Anthony
Morgenthau (50)
|
7,415 | * | 7,415 | - | - | |||||||||||||||
Mao
Holdings (Cayman) Limited (51)
|
400,000 | * | 400,000 | - | - | |||||||||||||||
Glenn
Baron (52)
|
90,308 | * | 90,308 | - | - | |||||||||||||||
Moty
Yekutiel (53)
|
208,553 | * | 34,607 | 173,946 | * | |||||||||||||||
Pike
Family Trust (54)
|
107,834 | * | 107,834 | - | - | |||||||||||||||
Carl
Cadwell (55)
|
642,336 | 1.1 | % | 144,136 | 498,200 | * | ||||||||||||||
Brian
MacDonald (56)
|
2,414,834 | 4.2 | % | 1,015,459 | 1,399,375 | 2.4 | % | |||||||||||||
W.
Hamlin Emory (57)
|
1,358,769 | 2.4 | % | 117,170 | 1,241,599 | 2.2 | % | |||||||||||||
Heartland
Value Fund (58)
|
2,340,000 | 4.1 | % | 2,340,000 | - | - | ||||||||||||||
EAC
Investment Limited Partnership (59)
|
1,766,279 | 3.1 | % | 1,766,279 | - | - | ||||||||||||||
Partner
Healthcare Offshore Fund, Ltd. Partner Healthcare Fund, L.P.
(60)
|
1,333,657 | 2.4 | % | 1,333,657 | - | - | ||||||||||||||
David
J. Zwiebel (61)
|
24,486 | * | 12,501 | 11,985 | * | |||||||||||||||
Craig
B. Swanson (62)
|
29,250 | * | 29,250 | - | - | |||||||||||||||
David
J. Galey (63)
|
56,122 | * | 15,231 | 40,891 | * | |||||||||||||||
Bill
and Kim Woodworth (64)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Bradley
N. Rotter Self Employed
Pension
Plan & trust (65)
|
142,751 | * | 33,751 | 109,000 | * | |||||||||||||||
Bradley
Rotter (66)
|
532,333 | * | 100,000 | 432,333 | * | |||||||||||||||
Paul
E. von Kuster (67)
|
109,688 | * | 109,688 | - | - | |||||||||||||||
Paul
E. von Kuster, Trustee, Credit
trust
under will of Thomas W. von Kuster (68)
|
55,575 | * | 55,575 | - | - | |||||||||||||||
David
R. Holbrooke (69)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Max
A Schneider, M.D. Trust (70)
|
18,625 | * | 14,625 | 4,000 | * | |||||||||||||||
Frederick
E. Kahn, MD (71)
|
29,250 | * | 29,250 | - | - | |||||||||||||||
Dr.
Jim Greenblatt (72)
|
200,484 | 187,528 | 12,956 | * | ||||||||||||||||
Lawrence
M. Baill (73)
|
44,727 | * | 44,727 | - | - | |||||||||||||||
Jospeh
A. Bailey (74)
|
29,250 | * | 29,250 | - | - | |||||||||||||||
Daniel
E. Greenblatt (75)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Fred
Ehrman (76)
|
325,000 | * | 75,000 | 250,000 | * | |||||||||||||||
Michael
T. Cullen, M.D. (77)
|
54,182 | * | 26,000 | 28,182 | * | |||||||||||||||
Crown
Jewel Ventures, LLC (78)
|
181,226 | * | 49,419 | 131,807 | * | |||||||||||||||
Itasca
Capital Partners, LLC (79)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Kerry
Judd and Susan Stillman (80)
|
10,970 | * | 10,970 | - | - | |||||||||||||||
H.
R. Swanson Revocable Trust (81)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Robert
James Blinken Jr. (82)
|
29,250 | * | 29,250 | - | - | |||||||||||||||
Brean
Murray Carret & Co. (83)
|
1,278,657 | 2.3 | % | 1,257,650 | 21,007 | * | ||||||||||||||
Hal
F. Lewis (84)
|
32,500 | * | 32,500 | - | - | |||||||||||||||
G&A
Consulting Retirement Trust (85)
|
58,500 | * | 58,500 | - | - | |||||||||||||||
Scott
Alderton (86)
|
50,894 | * | 50,894 | - | - | |||||||||||||||
Murray
Markiles (87)
|
50,894 | * | 50,894 | - | - | |||||||||||||||
V.
Joseph Stubbs (88)
|
50,894 | * | 50,894 | - | - | |||||||||||||||
Jonathan
Hodes (89)
|
25,535 | * | 25,535 | - | - | |||||||||||||||
John
McIlvery (90)
|
25,804 | * | 25,804 | - | - |
73
Number
of Shares Beneficially Owned Prior to Offering
|
Number
of Shares Beneficially Owned After Offering
|
|||||||||||||||||||
Name
of Beneficial Owner
|
Number
|
Percentage
of Shares Outstanding
|
Number
of Shares Being Offered
|
Number
|
Percentage
of Shares Outstanding
|
|||||||||||||||
Greg
Akselrud (91)
|
21,272 | * | 21,272 | - | - | |||||||||||||||
Scott
Galer (92)
|
17,877 | * | 17,877 | - | - | |||||||||||||||
Kevin
DeBre (93)
|
22,558 | * | 22,558 | - | - | |||||||||||||||
Ryan
Azlein (94)
|
9,430 | * | 9,430 | - | - | |||||||||||||||
AJ
Investors # 1 (95)
|
359,506 | * | 50,001 | 309,505 | * | |||||||||||||||
John
Pagnucco (96)
|
650,699 | 1.2 | % | 560,807 | 89,892 | * | ||||||||||||||
Tanya
Ragan (97)
|
125,000 | * | 125,000 | - | - | |||||||||||||||
Ann
& RJ Vassiliou (98)
|
367,608 | * | 367,608 | - | - | |||||||||||||||
NICALE
Partners (99)
|
367,608 | * | 367,608 | - | - | |||||||||||||||
Thomas
W. Von Kuster Jr. (100)
|
17,625 | * | 14,625 | 3,000 | * | |||||||||||||||
Thomas
E. Brust & Susan Brust JT TEN (101)
|
58,500 | * | 58,500 | - | - |
* Less
than 1%
(1)
|
Data
as of November 4, 2010. Consists of (a) 360,000 shares of common stock (b)
180,000 shares of common stock issuable upon the exercise of vested and
exercisable warrants to purchase common stock having an exercise price of
$0.30 per share and (c) options to acquire 1,703,860 shares of common
stock issuable upon the exercise of vested and exercisable
options. 360,000 shares of common stock and 180,000 shares of
common stock issuable upon exercise of warrants are being registered for
resale on this prospectus. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered were acquired by the investor by participating in the
2009 private placement.
|
(2)
|
Data
as of November 4, 2010. Consists of (a) 180,000 shares of common stock (b)
90,000 shares reserved for issuance upon exercise of warrants to purchase
common stock having an exercise price of $0.30 per share and (c) options
to acquire 103,125 shares of common stock issuable upon the exercise of
vested and exercisable options. 180,000 shares of common stock
and 90,000 shares of common stock issuable upon exercise of warrants are
being registered for resale on this prospectus. These warrants
to purchase common stock do not have a cashless exercise
feature. The securities being registered were acquired by the
investor by participating in the 2009 private placement. Prior
to becoming an employee of the company, Mr. Buck was a financial
consultant to CNS Response.
|
( 3)
|
Data
as of November 4, 2010. Consists of (a) 98,544 shares of common stock,
which includes 500 shares held by Dr. Hoffman’s daughter (b) 12,501 shares
of common stock issuable upon the exercise of vested and exercisable
warrants to purchase common stock and (c) options to acquire 996,777
shares of common stock issuable upon the exercise of vested and
exercisable options. 98,044 shares of common stock and 12,501
shares of common stock issuable upon exercise of warrants are being
registered for resale on this prospectus. The securities being
registered were acquired by the investor by participating in the 2007
private placement and in connection with the completion of the reverse
merger pursuant to which the investor’s securities in CNS California were
exchanged for securities in the company. The shares of common
stock issuable upon exercise of warrants that are being registered for
resale on this prospectus have an exercise price of $1.80 per
share. These warrants to purchase common stock have a cashless
exercise feature.
|
(4)
|
Data
as of November 4, 2010. Consists of options to acquire 56,250 shares of
common stock issuable upon the exercise of vested and exercisable
options.
|
(5)
|
Data
as of November 4, 2010. Consists of (a) 6,471,067 shares of common stock
held by SAIL Venture Partners, L.P., (b) 852,917 shares of common
stock issuable upon the conversion of convertible notes held by SAIL
Venture Partners, L.P., (c) 2,983,152 shares of Common Stock issuable upon
the exercise of vested and exercisable warrants held by SAIL Venture
Partners, L.P., and (d) options to acquire 76,400 shares of common stock
issuable upon the exercise of vested and exercisable options held by David
Jones. SAIL Venture Partners, LLC is the general partner of
SAIL Venture Partners, L.P. 6,471,067 shares of common stock
and 2,224,988 shares of common stock issuable upon exercise of warrants
are being registered for resale on this prospectus by SAIL Venture
Partners, L.P. SAIL Venture Partners, L.P. acquired its
securities being registered for resale pursuant to the transactions
described under the heading “Related Party Transactions- Transactions with
SAIL Venture Partners L.P.” below. SAIL Venture Partners also
acquired securities in the company being registered for resale upon the
completion of the reverse merger pursuant to which CNS California became a
subsidiary of the Company. The shares of common stock issuable
upon exercise of warrants that are being registered for resale on this
prospectus have an exercise price of $0.25 per share with respect to
100,000 shares, $0.30 with respect to 1,419,178 shares, $1.51 with respect
to 594,060 shares and $1.80 with respect to 111,750 shares. All
warrants to purchase common stock have a cashless exercise features except
for the $0.30 per share warrants which do not have a cashless exercise
feature. The unanimous vote of the managing members of SAIL
Venture Partners, LLC (who are David B. Jones, Walter Schindler, Alan
Sellers, Henry Habicht and Michael Hammons), is required to voting and
make investment decisions over the shares held by SAIL Venture Partners,
L.P. The address of SAIL Venture Partners, L.P. is 600 Anton
Blvd., Suite 1010, Costa Mesa, CA
92626.
|
74
(6)
|
Data
as of November 4, 2010. Consists of options to acquire 96,400 shares of
common stock issuable upon the exercise of vested and exercisable
options.
|
(7)
|
Data
as of November 4, 2010. Consists of (a) 8,333 shares of common stock, (b)
2,501 shares of common stock issuable upon the exercise of warrants to
purchase common stock and (c) options to acquire 354,625 shares of common
stock issuable upon the exercise of vested and exercisable
options. 8,333 shares of common stock and 2,501 shares of
common stock issuable upon exercise of warrants having an exercise price
of $1.80 per share are being registered for resale on this prospectus by
the selling stockholder. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered were acquired by the investor by participating in the 2007
private placement.
|
(8)
|
Data
as of November 4, 2010. Consists of (a) 8,387,578 shares of common stock,
(b) 2,598,624 shares of common stock issuable upon the conversion of
convertible notes, (c) 4,602,812 shares of common stock issuable upon the
exercise of warrants to purchase common stock having an exercise price of
$0.30 per share, and (d) 76,400 shares of common stock issuable upon the
exercise of vested and exercisable options. Of the warrants to
purchase common stock, 3,333,334 do not have a cashless exercise feature
and 1,269,478 warrants have a cashless exercise
feature. 8,387,578 shares of common stock and 3,333,334 shares
of common stock issuable upon exercise of warrants are being registered
for resale on this prospectus by the selling stockholder. The
securities being registered for resale were acquired by the investor
pursuant to the transactions described below under the heading “Related
Party Transactions-Transactions with John Pappajohn.” The
address of John Pappajohn is 2116 Financial Center, Des Moines, IA
50309.
|
(9)
|
Data
as of November 4, 2010. Consists of (a) 38,000 shares of common
stock, (b) 2,579,581 shares of common stock issuable upon the conversion
of the Deerwood Notes, (c) 928,914 shares of common stock issuable upon
the exercise of warrants and (d) options to acquire 41,680 shares of
common stock issuable upon the exercise of vested and exercisable
options. The Deerwood Notes and warrants are held by Deerwood
Partners LLC and Deerwood Holdings LLC, of which the stockholder is the
co-managing member along with his spouse, and by BGN Acquisition Ltd., LP,
of which the stockholder is general partner. The address of
Deerwood Partners LLC and Deerwood Holdings LLC is 16 Deerwood Lane,
Newport Beach, CA 92660. The address of BGN Acquisition Ltd., LP is 15747
Woodruff Ave., Bellflower, CA
90706.
|
(10)
|
Data
as of November 4, 2010. Consists of (a) 15,543,522 shares of common stock
(b) 6,031,122 shares of common stock issuable upon the conversion of
convertible notes, (c) 8,799,880 shares of common stock issuable upon the
exercise of vested and exercisable warrants and (d) 3,505,517 shares of
common stock issuable upon the exercise of vested and exercisable
options.
|
(11)
|
Data
as of November 4, 2010. Consists of (a) 8,890,795 shares of common
stock (including 540,000 shares owned by Mr. Brandt’s children and 956,164
shares held by Brandt Ventures), (b) 1,079,728 shares reserved for
issuance upon exercise of warrants to purchase common stock (including
warrants to purchase 478,082 shares of common stock held by Brandt
Ventures) and (c) 1,111,459 shares reserved for issuance upon exercise of
options to purchase common stock held by Mr. Brandt. Of these
holdings, 8,890,795 shares of common stock and 1,079,728 shares of common
stock reserved for issuance upon exercise of certain warrants to purchase
common stock having an exercise price of $0.30 per share with respect to
478,082 shares and $0.59 per share with respect to 601,646 shares are
being registered for resale. The $0.59 per share warrants to
purchase common stock have a cashless exercise feature; the $0.30 per
share warrants to purchase common stock do not have a cashless exercise
feature. The securities being registered for resale were
acquired by the investor pursuant to the transactions described below
under the heading “Related Party Transactions- Transaction with Leonard
Brandt.” The address of Leonard Brandt is 28911 Via Hacienda
San Juan Capistrano CA 92675. Leonard Brandt became our
Chairman of the Board, Chief Executive Officer and Secretary upon
completion of our merger with CNS California and served in these positions
until April 10, 2009. Mr. Brandt is a founder of CNS
California, and previously served as its President and Chief Executive
Officer, and as a member of its Board of
Directors.
|
75
(12)
|
Consists
of 333,334 shares of common stock and 166,667 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(13)
|
Consists
of 1,080,000 shares of common stock and 540,000 shares reserved for
issuance upon exercise of warrants to purchase common stock having an
exercise price of $0.30 per share. These warrants to purchase
common stock do not have a cashless exercise feature. The
securities being registered for resale were acquired by the investor by
participating in the 2009 private
placement.
|
(14)
|
Consists
of 650,000 shares of common stock and 324,990 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(15)
|
Consists
of 333,334 shares of common stock and 166,667 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. Argyris Vassiliou, as trustee of
the Ann Vassiliou Children’s Trust P2587, exercises voting and investment
authority over the shares held by this selling
stockholder.
|
(16)
|
Consists
of 66,667 shares of common stock and 33,333 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. Andrew Chafoulias, as Chief
Manager, exercises voting and investment authority over the shares held by
this selling stockholder.
|
(17)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. William Wu, as President,
exercises voting and investment authority over the shares held by this
selling stockholder.
|
(18)
|
Consists
of 500,000 shares of common stock and 250,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. Gus Chafoulias, as President,
exercises voting and investment authority over the shares held by this
selling stockholder.
|
(19)
|
Consists
of 100,000 shares of common stock and 50,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(20)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
76
(21)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(22)
|
Consists
of 513,333 shares of common stock and 256,667 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(23)
|
Consists
of 400,000 shares of common stock and 200,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(24)
|
Consists
of 333,333 shares of common stock and 166,667 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(25)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(26)
|
Consists
of 1,460,351 shares of common stock, 386,923 shares reserved for issuance
upon exercise of warrants to purchase common stock and options to acquire
6,000 shares of common stock issuable upon the exercise of vested and
exercisable options. 1,460,351 shares of common stock and
386,923 shares of common stock issuable upon exercise of warrants having
an exercise price of $0.59 per share with respect to 26,923 shares and
$0.30 per share with respect to 360,000 shares are being registered for
resale on this prospectus by the selling stockholder. The $0.59
per share warrants to purchase common stock have a cashless exercise
feature; the $0.30 per share warrants to purchase common stock do not have
a cashless exercise feature. Dr. Proler acquired securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007. In addition, Dr. Proler acquired shares being
registered for resale through his participation in the 2009 private
placement. Dr. Proler provides medical consulting services to
the company.
|
(27)
|
Consists
of 430,000 shares of common stock and 215,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(28)
|
Consists
of 720,000 shares of common stock and 360,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(29)
|
Consists
of 720,000 shares of common stock and 360,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. The selling stockholder is an
affiliate of a broker dealer but has certified to the company that she
bought the securities being registered for resale in the ordinary course
of business, and at the time of the purchase of such securities, had no
agreements or understandings, directly or indirectly, with any person to
distribute such securities.
|
77
(30)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(31)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. Starr F. Schlobohm, as trustee
of the selling stockholder, exercises voting and investment authority over
the shares held by this selling
stockholder.
|
(32)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(33)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(34)
|
Consists
of 180,000 shares of common stock and 540,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. Of these warrants to purchase common
stock 90,000 do not have a cashless exercise feature the remaining 450,000
do have the cashless exercise feature. Mr. Thompson is an
employee of Equity Dynamics, Inc., which has provided advisory services to
the company. 180,000 shares of common stock and 90,000 shares
reserved for issuance upon exercise of warrants to purchase common stock
are being registered for re-sale by the selling shareholder on this
prospectus. The securities being registered for resale were
acquired by the investor by participating in the 2009 private
placement.
|
(35)
|
Consists
of 1,080,000 shares of common stock and 540,000 shares reserved for
issuance upon exercise of warrants to purchase common stock having an
exercise price of $0.30 per share. These warrants to purchase
common stock do not have a cashless exercise feature. The
securities being registered for resale were acquired by the investor by
participating in the 2009 private placement. Mark C. Thompson
& Bonita S. Thompson, as trustees, exercise voting and investment
authority over the shares held by this selling
stockholder.
|
(36)
|
Consists
of 180,000 shares of common stock and 90,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(37)
|
Consists
of 900,000 shares of common stock and 450,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. Elliott Donnelley, as President,
Corporate G.P., exercises voting and investment authority over the shares
held by this selling stockholder.
|
(38)
|
Consists
of 333,333 shares of common stock and 166,667 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. Bruce Seyburn, as Partner,
exercises voting and investment authority over the shares held by this
selling stockholder.
|
78
(39)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(40)
|
Consists
of 360,000 shares of common stock and 180,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. Kevin and Laurie Carnahan, as
trustees, exercise voting and investment authority over the shares held by
this selling stockholder.
|
(41)
|
Consists
of 220,000 shares of common stock and 110,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement. Patricia J. Jordan, as Chief
Manager, exercises voting and investment authority over the shares held by
this selling stockholder.
|
(42)
|
Consists
of 166,667 shares of common stock and 83,333 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2009 private placement.
|
(43)
|
Consists
of 965,134 shares reserved for issuance upon exercise of warrants to
purchase common stock having an exercise price of $0.33 per
share. These warrants to purchase common stock do not have a
cashless exercise feature. The selling stockholder is a
broker-dealer, and has represented to the company that it received its
warrants to purchase common stock as compensation for investment banking
services provided to the company in connection with the 2009 private
placement. Michael Rabinowitz exercises voting and investment
authority over the shares held by this selling
stockholder.
|
(44)
|
Consists
of 75,340 shares reserved for issuance upon exercise of warrants to
purchase common stock having an exercise price of $0.33 per
share. Of these warrants to purchase common stock 65,340 do not
have a cashless exercise feature and 10,000 have the cashless
feature. 65,340 shares reserved for issuance upon exercise of
warrants to purchase common stock are being registered for re-sale by the
selling shareholder on this prospectus. The selling stockholder
is a broker-dealer, and has represented to the company that it received
its warrants to purchase common stock as compensation for investment
banking services provided to the company in connection with its 2009 and
2010 private placements. Michael Potter, as Chairman, exercises
voting and investment authority over the shares held by this selling
stockholder.
|
(45)
|
Consists
of 175,793 shares reserved for issuance upon exercise of warrants to
purchase common stock having an exercise price of $0.33 per
share. Of these warrants to purchase common stock 152,460 do
not have a cashless exercise feature and 23,333 do have the cashless
feature. 152,460 shares reserved for issuance upon exercise of
warrants to purchase common stock are being registered for re-sale by the
selling shareholder on this prospectus. The selling stockholder
is a broker-dealer, and has represented to the company that it received
its warrants to purchase common stock as compensation for investment
banking services provided to the company in connection with the 2009 and
2010 private placements. The selling shareholder is also an
affiliate of a broker-dealer. The selling stockholder has
represented that it purchased or otherwise acquired the warrants in the
ordinary course of business and, at the time of such purchase/acquisition,
had no agreements or understandings, directly or indirectly, with any
person, to distribute the securities to be
resold.
|
(46)
|
Consists
of 292,200 shares reserved for issuance upon exercise of warrants to
purchase common stock having an exercise price of $0.33 per
share. These warrants to purchase common stock do not have a
cashless exercise feature. The selling stockholder is a
broker-dealer and has represented to the company that it received its
warrants to purchase common stock as compensation for investment banking
services provided to the company in connection with the 2009 private
placement. Frank Mazzola exercises voting and investment
authority over the shares held by this selling
stockholder.
|
79
(47)
|
Consists
of 21,636 shares of common stock and 8,466 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.59 per share. These warrants to purchase common
stock have a cashless exercise feature. The investor acquired
his securities in the company being registered for resale upon the
completion of the reverse merger pursuant to which CNS California became a
subsidiary of the company on March 7,
2007.
|
(48)
|
Consists
of 125,242 shares of common stock and 3,375 shares of common stock
issuable upon the exercise of vested and exercisable warrants having an
exercise price of $1.80 per share. These warrants to purchase
common stock have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2007 private placement. The investor also acquired its
securities in the company being registered for resale upon the completion
of the reverse merger pursuant to which CNS California became a subsidiary
of the company on March 7, 2007. Max A. Schneider exercises
voting and investment authority over the shares held by this selling
stockholder.
|
(49)
|
Consists
of 108,182 shares of common stock and 42,331 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock having an exercise price of $0.59 per share. These
warrants to purchase common stock have a cashless exercise
feature. The investor acquired his securities in the company
being registered for resale upon the completion of the reverse merger
pursuant to which CNS California became a subsidiary of the company on
March 7, 2007.
|
(50)
|
Consists
of 7,415 shares of common stock issuable upon the exercise of vested and
exercisable warrants to purchase common stock having an exercise price of
$0.01 per share. These warrants to purchase common stock have a
cashless exercise feature. The investor acquired his securities
in the company being registered for resale upon the completion of the
reverse merger pursuant to which CNS California became a subsidiary of the
company on March 7, 2007.
|
(51)
|
Consists
of 250,000 shares of common stock and 150,000 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock having an exercise price of $1.51 per share. These
warrants to purchase common stock have a cashless exercise
feature. The investor acquired its securities in the company
being registered for resale upon the completion of the reverse merger
pursuant to which CNS California became a subsidiary of the company on
March 7, 2007. Michel Clemence, Dominique Warluzel and Mansour
Ojjeh, as directors of the selling stockholder, each exercise voting and
dispositive power over the shares held by this selling
stockholder.
|
(52)
|
Consists
of 64,910 shares of common stock and 25,398 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock having an exercise price of $0.59 per share. These
warrants to purchase common stock have a cashless exercise
feature. The investor acquired his securities in the company
being registered for resale upon the completion of the reverse merger
pursuant to which CNS California became a subsidiary of the company on
March 7, 2007.
|
(53)
|
Consists
of 198,394 shares of common stock and 10,159 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock. 24,448 shares of common stock and 10,159 shares
reserved for issuance upon exercise of warrants to purchase common stock
having an exercise price of $0.59 per share are being registered for
re-sale by the selling shareholder on this prospectus. These
warrants to purchase common stock have a cashless exercise
feature. The investor acquired his securities in the company
being registered for resale upon the completion of the reverse merger
pursuant to which CNS California became a subsidiary of the company on
March 7, 2007.
|
(54)
|
Consists
of 107,834 shares of common stock. John Pike, as trustee of the
selling stockholder, exercises voting and investment authority over the
shares held by this selling stockholder. The investor acquired
his securities in the company being registered for resale upon the
completion of the reverse merger pursuant to which CNS California became a
subsidiary of the company on March 7,
2007.
|
80
(55)
|
Consists
of 600,006 shares of common stock and 42,330 shares of common stock
issuable upon the exercise of vested and exercisable warrants to purchase
common stock. 101,806 shares of common stock and 42,330 shares
reserved for issuance upon exercise of warrants to purchase common stock
having an exercise price of $0.59 per share are being registered for
re-sale by the selling shareholder on this prospectus. These
warrants to purchase common stock have a cashless exercise
feature. The investor acquired his securities in the company
being registered for resale upon the completion of the reverse merger
pursuant to which CNS California became a subsidiary of the company on
March 7, 2007.
|
(56)
|
Consists
of 1,242,375 shares of common stock and 1,172,459 shares of common stock
issuable upon the exercise of vested and exercisable options to purchase
common stock. Brian MacDonald is the Chief Engineer of the
Company. 1,015,459 shares of common stock are being registered
for re-sale by the selling shareholder on this prospectus. The
investor acquired his securities in the company being registered for
resale upon the completion of the reverse merger pursuant to which CNS
California became a subsidiary of the company on March 7,
2007.
|
(57)
|
Consists
of 1,015,334 shares of common stock, 4,233 shares of common stock issuable
upon the exercise of vested and exercisable warrants to purchase common
stock and 339,202 shares of common stock issuable upon the exercise of
vested and exercisable options to purchase common
stock. 117,170 shares of common stock are being registered for
re-sale by the selling shareholder on this prospectus. The
investor acquired his securities in the company being registered for
resale upon the completion of the reverse merger pursuant to which CNS
California became a subsidiary of the company on March 7,
2007.
|
(58)
|
Consists
of 1,800,000 shares of common stock and 540,000 shares reserved for
issuance upon exercise of warrants to purchase common stock having an
exercise price of $1.80 per share. These warrants to purchase
common stock have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2007 private placement. The selling stockholder is
affiliated with Alps Distributors, Inc. a registered broker/dealer and
member of FINRA. The selling stockholder purchased or otherwise
acquired these shares in the ordinary course of business and, at the time
of such purchase/acquisition, had no agreements or understandings,
directly or indirectly, with any person, to distribute the securities to
be resold. Mr.Paul T. Beste, Vice President & Secretary of
Heartland Group Inc., exercises voting and investment authority over the
shares held by this selling
stockholder.
|
(59)
|
Consists
of 1,292,177 shares of common stock and 474,102 shares of common stock
issuable upon the exercise of warrants to purchase common stock having an
exercise price of $0.59 per share. These warrants to purchase
common stock have a cashless exercise feature. The investor
acquired its securities in the company being registered for resale upon
the completion of the reverse merger pursuant to which CNS California
became a subsidiary of the company on March 7, 2007. Elizabeth
Morgentheau, as President of the selling stockholder, exercises voting and
investment authority over the shares held by this selling
stockholder.
|
(60)
|
Consists
of 651,090 shares of common stock and 195,327 shares reserved for issuance
upon exercise of certain warrants to purchase common stock having an
exercise price of $1.80 per share held by Partner Healthcare Fund, LP, and
374,800 shares of common stock and 112,440 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share held by Partner Healthcare Offshore Fund,
Ltd. These warrants to purchase common stock have a cashless
exercise feature. The securities being registered for resale
were acquired by the investor by participating in the 2007 private
placement. Brian Grossman, as the Portfolio Manager of Partner
Healthcare Offshore Fund, Ltd., exercises voting and investment authority
over the shares held by Partner Healthcare Offshore Fund,
Ltd. Brian Grossman, as the Portfolio Manager of Partner
Healthcare Fund, L.P., exercises voting and investment authority over the
shares held by Partner Healthcare Fund,
L.P.
|
(61)
|
Consists
of 11,985 shares of common stock and 12,501 shares reserved for issuance
upon exercise of warrants to purchase common stock. 12,501
warrants to purchase shares of common stock having an exercise price of
$1.80 per share are being registered for re-sale by the selling
shareholder on this prospectus. These warrants to purchase
common stock have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2007 private placement.
|
81
(62)
|
Consists
of 22,500 shares of common stock and 6,750 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement.
|
(63)
|
Consists
of 40,891 shares of common stock and 15,231 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 2,532 shares and $0.59 per share
with respect to 12,699 shares. These warrants to purchase
common stock have cashless exercise features. The securities
being registered were acquired by the investor by participating in the
2007 PIPE. The investor also acquired his securities in the
company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
|
(64)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement. Kimberly Craig-Woodworth and
William N. Woodworth are affiliated with Brean Murray, Carret & Co. a
registered broker/dealer and member of FINRA. Kimberly
Craig-Woodworth and William N. Woodworth purchased or otherwise acquired
these shares in the ordinary course of business and, at the time of such
purchase/acquisition, had no agreements or understandings, directly or
indirectly, with any person, to distribute the securities to be
resold.
|
(65)
|
Consists
of 109,000 shares of common stock and 33,751 shares reserved for issuance
upon exercise of warrants to purchase common stock. Bradley
Rotter, Trustee of the Bradley N. Rotter Self Employed Pension Plan &
Trust, exercises voting and investment authority over the shares held by
this selling stockholder. 33,751 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share are being registered for re-sale by the selling
shareholder on this prospectus. These warrants to purchase
common stock have a cashless exercise feature. The securities
being registered for resale were acquired by the investor by participating
in the 2007 private placement.
|
(66)
|
Consists
of 432,333 shares of common stock and 100,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. 100,000
shares reserved for issuance upon exercise of warrants to purchase common
stock having an exercise price of $1.80 per share are being registered for
re-sale by the selling shareholder on this prospectus. These
warrants to purchase common stock have a cashless exercise
feature. The securities being registered for resale were
acquired by the investor by participating in the 2007 private
placement.
|
(67)
|
Consists
of 84,375 shares of common stock and 25,313 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement.
|
(68)
|
Consists
of 42,750 shares of common stock and 12,825 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement. Paul E. von Kuster, Trustee, Credit
trust under will of Thomas W. von Kuster, exercises voting and investment
authority over the shares held by this selling
stockholder.
|
(69)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement.
|
(70)
|
Consists
of (a) 11,250 shares of common stock (b) 3,375 shares reserved for
issuance upon exercise of warrants to purchase common stock and (c) 4,000
shares reserved for issuance upon exercise of options to purchase common
stock. 11,250 shares of common stock and 3,375 shares reserved
for issuance upon exercise of warrants to purchase common stock having an
exercise price of $1.80 per share are being registered for re-sale by the
selling shareholder on this prospectus. These warrants to
purchase common stock have a cashless exercise feature. The
securities being registered for resale were acquired by the investor by
participating in the 2007 private placement. Max Schneider,
Trustee of the Max A Schneider, M.D. Trust, exercises voting and
investment authority over the shares held by this selling
stockholder.
|
82
(71)
|
Consists
of 22,500 shares of common stock and 6,750 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement.
|
(72)
|
Consists
of (a) 129,028 shares of common stock (b) 58,500 shares reserved for
issuance upon exercise of warrants to purchase common stock and (c) 12,956
shares reserved for issuance upon exercise of options to purchase common
stock. 129,028 shares of common stock and 58,500 shares
reserved for issuance upon exercise of warrants to purchase common stock
having an exercise price of $1.80 per share with respect to 13,500 shares
and $0.59 per share with respect to 45,000 shares are being registered for
re-sale by the selling shareholder on this prospectus. These
warrants to purchase common stock have cashless exercise
features. The securities being registered were acquired by the
investor by participating in the 2007 PIPE. The investor also
acquired his securities in the company being registered for resale upon
the completion of the reverse merger pursuant to which CNS California
became a subsidiary of the company on March 7, 2007. Dr.
Greenblatt is a contractor who acts as one of CNS Response, Inc.’s
Regional Medical Directors and in this capacity, among other things,
trains physicians in the use of
rEEG.
|
(73)
|
Consists
of 32,886 shares of common stock and 11,841 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 3,375 shares and $0.59 per share
with respect to 8,466 shares. These warrants to purchase common
stock have cashless exercise features. The securities being
registered were acquired by the investor by participating in the 2007
private placement. The investor also acquired his securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
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(74)
|
Consists
of 22,500 shares of common stock and 6,750 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement. Mr. Bailey is affiliated with Brean
Murray, Carret & Co., LLC, a registered broker/dealer and member of
FINRA, as he is an employee of Brean Murray, Carret & Co.,
LLC. Mr. Bailey purchased or otherwise acquired his shares in
the ordinary course of business and, at the time of such
purchase/acquisition, had no agreements or understandings, directly or
indirectly, with any person, to distribute the securities to be
resold.
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(75)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement.
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(76)
|
Consists
of 250,000 shares of common stock and 75,000 shares reserved for issuance
upon exercise of warrants to purchase common stock. 75,000
shares reserved for issuance upon exercise of warrants to purchase common
stock having an exercise price of $1.80 per share are being registered for
re-sale by the selling shareholder on this prospectus. These
warrants to purchase common stock have a cashless exercise
feature. The securities being registered for resale were
acquired by the investor by participating in the 2007 private
placement. Mr. Ehrman is affiliated with Brean Murray, Carret
& Co. a registered broker/dealer and member of FINRA. Mr.
Ehrman purchased or otherwise acquired his shares in the ordinary course
of business and, at the time of such purchase/acquisition, had no
agreements or understandings, directly or indirectly, with any person, to
distribute the securities to be
resold.
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83
(77)
|
Consists
of 48,182 shares of common stock and 6,000 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. 20,000 shares of common
stock and 6,000 shares reserved for issuance upon exercise of warrants to
purchase common stock are being registered for re-sale by the selling
shareholder on this prospectus. The securities being registered
for resale were acquired by the investor by participating in the 2007
private placement.
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(78)
|
Consists
of 131,807 shares of common stock and 49,419 shares reserved for issuance
upon exercise of warrants to purchase common stock. 49,419
shares reserved for issuance upon exercise of warrants to purchase common
stock having an exercise price of $1.80 per share with respect to 7,088
shares and $0.59 per share with respect to 42,331 shares are being
registered for re-sale by the selling shareholder on this
prospectus. These warrants to purchase common stock have
cashless exercise features. The securities being registered
were acquired by the investor by participating in the 2007 private
placement. The investor also acquired its securities in the
company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007. Sharon Keene exercises voting and investment
authority over the shares held by this selling
stockholder.
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(79)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement. Michael S. Wallace, the Managing
Member of Itasca Capital Partners, LLC, exercises voting and investment
authority over the shares held by this selling
stockholder.
|
(80)
|
Consists
of 8,438 shares of common stock and 2,532 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement.
|
(81)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement. H. R. Swanson, Trustee of the H. R.
Swanson Rev. Trust, exercises voting and investment authority over the
shares held by this selling
stockholder.
|
(82)
|
Consists
of 22,500 shares of common stock and 6,750 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement.
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(83)
|
Consists
of 641,472 shares of common stock and 637,185 shares reserved for issuance
upon exercise of warrants to purchase common stock. Brean
Murray, Carret & Co., LLC is a FINRA member firm. Brean
Murray, Carret & Co., LLC purchased or otherwise acquired its shares
in the ordinary course of business and, at the time of such
purchase/acquisition, had no agreements or understandings, directly or
indirectly, with any person, to distribute the securities to be
resold. William McCluskey, President and Chief Executive
Officer of Brean Murray, Carret & Co., LLC, exercises voting and
investment authority over the shares held by this selling
stockholder. 633,138 shares of common stock and 624,512 shares
reserved for issuance upon exercise of warrants to purchase common stock
having an exercise price of $1.44 per share with respect to 440,199
shares, $1.51 per share with respect to 4,752 shares and $1.80 per share
with respect to179,561 shares are being registered for re-sale by the
selling shareholder on this prospectus. Brean Murray acted as
placement agent in connection with the company’s 2007 private placement,
and received the securities being registered for resale as compensation
for its investment banking services. These warrants to purchase
common stock have cashless exercise features. The investor also
acquired its securities in the company being registered for resale upon
the completion of the reverse merger pursuant to which CNS California
became a subsidiary of the company on March 7, 2007. Michael
Rabinowitz exercises voting and investment authority over the shares held
by this selling stockholder.
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84
(84)
|
Consists
of 25,000 shares of common stock and 7,500 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement. Mr. Lewis is affiliated with a
registered broker/dealer and member of FINRA. Mr. Lewis
purchased or otherwise acquired his shares in the ordinary course of
business and, at the time of such purchase/acquisition, had no agreements
or understandings, directly or indirectly, with any person, to distribute
the securities to be resold.
|
(85)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement. Gary Gossard, as Trustee of the
G&A Consulting Retirement Trust, exercises voting and investment
authority over the shares held by this selling
stockholder.
|
(86)
|
Consists
of 36,096 shares of common stock and 14,798 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 6,860 shares and $1.51 per share
with respect to 7,938 shares. These warrants to purchase common
stock have cashless exercise features. The securities being
registered were acquired by the investor by participating in the 2007
private placement. The investor also acquired his securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
|
(87)
|
Consists
of 36,096 shares of common stock and 14,798 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 6,860 shares and $1.51 per share
with respect to 7,938 shares. These warrants to purchase common
stock have cashless exercise features. The securities being
registered were acquired by the investor by participating in the 2007
private placement. The investor also acquired his securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
|
(88)
|
Consists
of 36,096 shares of common stock and 14,798 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 6,860 shares and $1.51 per share
with respect to 7,938 shares. These warrants to purchase common
stock have cashless exercise features. The securities being
registered were acquired by the investor by participating in the 2007
private placement. The investor also acquired his securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
|
(89)
|
Consists
of 18,456 shares of common stock and 7,079 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 3,994 shares and $1.51 per share
with respect to 3,085 shares. These warrants to purchase common
stock have cashless exercise features. The securities being
registered were acquired by the investor by participating in the 2007
private placement. The investor also acquired his securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
|
(90)
|
Consists
of 18,624 shares of common stock and 7,180 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 3,994 shares and $1.51 per share
with respect to 3,186 shares. These warrants to purchase common
stock have cashless exercise features. The securities being
registered were acquired by the investor by participating in the 2007
private placement. The investor also acquired his securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
|
(91)
|
Consists
of 15,518 shares of common stock and 5,754 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 3,556 shares and $1.51 per share
with respect to 2,198 shares. These warrants to purchase common
stock have cashless exercise features. The securities being
registered were acquired by the investor by participating in the 2007
private placement. The investor also acquired his securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
|
85
(92)
|
Consists
of 12,869 shares of common stock and 5,008 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 2,714 shares and $1.51 per share
with respect to 2,294 shares. These warrants to purchase common
stock have cashless exercise features. The securities being
registered were acquired by the investor by participating in the 2007
private placement. The investor also acquired his securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
|
(93)
|
Consists
of 16,371 shares of common stock and 6,187 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share with respect to 3,636 shares and $1.51 per share
with respect to 2,551 shares. These warrants to purchase common
stock have cashless exercise features. The securities being
registered were acquired by the investor by participating in the 2007
private placement. The investor also acquired his securities in
the company being registered for resale upon the completion of the reverse
merger pursuant to which CNS California became a subsidiary of the company
on March 7, 2007.
|
(94)
|
Consists
of 7,254 shares of common stock and 2,176 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement.
|
(95)
|
Consists
of 309,505 shares of common stock and 50,001 shares reserved for issuance
upon exercise of warrants to purchase common stock. 50,001
shares reserved for issuance upon exercise of warrants to purchase common
stock having an exercise price of $1.80 per share are being registered for
re-sale by the selling shareholder on this prospectus. These
warrants to purchase common stock have a cashless exercise
feature. The securities being registered for resale were
acquired by the investor by participating in the 2007 private
placement. Adam Katz, as Partner of AJ Investors #1, exercises
voting and investment authority over the shares held by this selling
stockholder.
|
(96)
|
Consists
of 306,748 shares of common stock and 214,951 shares reserved for issuance
upon exercise of warrants to purchase common stock held by John Pagnucco;
75,000 shares of common stock and 45,000 shares reserved for issuance upon
exercise of warrants to purchase common stock held by John W. Pagnucco
1998 Rollover Roth IRA RBC Dain; and 9,000 shares of common stock held by
John Pagnucco as custodian for his grandchildren over which John Pagnucco
exercises voting and dispositive control. Of these holdings,
225,856 shares of common stock and 214,951 shares of common stock reserved
for issuance upon exercise of warrants to purchase common stock having an
exercise price of $0.01 per share with respect to 84,661 shares, $0.59 per
share with respect to 21,165 shares, $1.44 per share with respect to
49,327 shares, $1.51 per share with respect to 45,000 shares and $1.80 per
share with respect to14,798 shares held by John Pagnucco and 75,000 shares
of common stock and 45,000 shares of common stock reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.51 per share held by John W Pagnucco 1998 Rollover Roth IRA
RBC Dain are being registered for resale sale on this
prospectus. These warrants to purchase common stock have
cashless exercise features. The securities being registered for
resale by John Pagnucco were acquired by the investor by participating in
the 2007 private placement. Mr. Pagnucco also acquired his
securities in the company being registered for resale upon the completion
of the reverse merger pursuant to which CNS California became a subsidiary
of the company on March 7, 2007. The securities being
registered for resale by John W. Pagnucco 1998 Rollover Roth IRA RBC Dain
were acquired by the investor upon the completion of the reverse
merger.
|
(97)
|
Consists
of 83,333 shares of common stock and 41,667 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $0.30 per share. These warrants to purchase common
stock do not have a cashless exercise feature. The securities
being registered for resale were gifted to the holder by Mr. Dale Ragan
who acquired the securities in the 2009 private
placement.
|
86
(98)
|
Consists
of 367,608 shares of common stock. The securities being
registered for resale were gifted to the holder by Mr. Pappajohn who
acquired the securities in connection with a bridge financing in
2009.
|
(99)
|
Consists
of 367,608 shares of common stock. The securities being
registered were gifted to the holder by Mr. Pappajohn who acquired them in
connection with a bridge financing in 2009. Argyris Vassiliou,
as general partner of the NICALE Partners, exercises voting and investment
authority over the shares held by this selling
stockholder.
|
(100)
|
Consists
of 14,250 shares of common stock, (including 1,000 shares owned by his
minor child) and 3,375 shares reserved for issuance upon exercise of
warrants to purchase common stock. 11,250 shares of common
stock and 3,375 shares reserved for issuance upon exercise of warrants to
purchase common stock having an exercise price of $1.80 per share are
being registered for re-sale by the selling shareholder on this
prospectus. These warrants to purchase common stock have a
cashless exercise feature. The securities being registered for
resale were acquired by the investor by participating in the 2007 private
placement.
|
(101)
|
Consists
of 45,000 shares of common stock and 13,500 shares reserved for issuance
upon exercise of warrants to purchase common stock having an exercise
price of $1.80 per share. These warrants to purchase common
stock have a cashless exercise feature. The securities being
registered for resale were acquired by the investor by participating in
the 2007 private placement.
|
For a
description of the reverse merger pursuant to which CNS California became a
subsidiary of the Company on March 7, 2007, the 2007 private placement and the
2009 private placement, please see the disclosure under the heading “Related
Party Transactions” under the sub-headings “Merger Agreement” and “Transactions
with Selling Stockholders.”
87
RELATED
PARTY TRANSACTIONS
Certain
Relationships and Related Transactions
Except as
follows, since October 1, 2007, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which we are or
will be a party:
|
·
|
in
which the amount involved exceeds the lesser of $120,000 or 1% of the
average of our total assets at year-end for the last two completed fiscal
years; and
|
|
·
|
in
which any director, executive officer, other stockholders of more than 5%
of our common stock or any member of their immediate family had or will
have a direct or indirect material
interest.
|
Transactions
with George Carpenter
On
December 24, 2009, the Company completed a second closing of its private
placement in which it received gross proceeds of approximately $3 million, which
included $108,000 invested by Mr. Carpenter. In exchange for his
investment, the Company issued to Mr. Carpenter 360,000 shares of its common
stock and a five year non-callable warrant to purchase 180,000 shares of its
common stock at an exercise price of $0.30 per share. The
registration statement of which this prospectus forms a part, covers the resale
of the common stock and the common stock underlying the warrants sold in the
private placement to Mr. Carpenter. This investment was completed
with the identical terms as received by all other investors in the Company’s
private placement closings that took place on August 26, 2009, December 24,
2009, December 31, 2009 and January 4, 2010.
On
January 4, 2010 a family member of Mr. Carpenter’s was paid $36,000 for data
discovery consulting services in support of the Company’s litigation with Mr.
Brandt. This transaction was done with knowledge of certain board
members and was subsequently ratified by the Board.
On March
3, 2010, the Board granted options to purchase 4,000,000 shares to George
Carpenter, the Company’s Chief Executive Officer. The options have an
exercise price of $0.55 per share, vest in equal monthly installments over a
period of four years and have a term of 10 years from the date of
grant.
Transactions
with SAIL Venture Partners LP
On March
7, 2007, Odyssey Venture Partners II, L.P. (now called SAIL Venture Partners
LP), invested an aggregate of $447,000 in our Private Placement and in exchange
were issued 372,500 shares of our Common Stock and a warrant to purchase 111,750
shares of our common stock at an exercise price of $1.80 per
share. Mr. Jones, a director of the company, is a partner of SAIL
Venture Partners, L.P. The registration statement of which this
prospectus forms a part, covers the resale of the common stock and the common
stock underlying the warrants sold in the 2007 private placement to SAIL Venture
Partners LP.
On March
30, 2009, we executed two senior secured convertible promissory notes each in
the principal amount of $250,000 with SAIL Venture Partners, LP (“SAIL”) and
Brandt Ventures, GP (“Brandt”). David Jones, a member of our board of
directors, is one of four managing members of SAIL Venture Partners, LLC, which
is the general partner of SAIL. Leonard Brandt, also a member of our
board of directors until December 3, 2009 and our former Chief Executive
Officer, is the general partner of Brandt.
These
notes accrue interest at the rate of 8% per annum and are due and payable upon a
declaration by the note holder(s) requesting repayment, unless sooner converted
into shares of our common stock (as described below), upon the earlier to occur
of: (i) June 30, 2009 or (ii) an Event of Default (as defined in the
notes), which includes the default that occurred as a result of Mr. Brandt no
longer serving as our Chief Executive Officer effective as of April 10,
2009. The notes are secured by a lien on substantially all of our
assets (including all intellectual property). In the event of a
liquidation, dissolution or winding up of the company, unless Brandt and/or SAIL
informs us otherwise, we shall pay such investor an amount equal to the product
of 250% multiplied by the principal and all accrued but unpaid interest
outstanding on the note.
88
In
concert with an equity financing transaction of at least $1,500,000 (excluding
any and all other debt that is converted), the principal and all accrued, but
unpaid interest outstanding under the notes shall be automatically converted
into the securities issued in the equity financing by dividing such amount by
90% of the per share price paid by the investors in such financing.
On May
14, 2009, we entered into a Bridge Note and Warrant Purchase Agreement with
SAIL.
Pursuant
to the Purchase Agreement, on May 14, 2009, SAIL purchased a Secured Promissory
Note in the principal amount of $200,000 from us. In order to induce
SAIL to purchase the note, we issued to SAIL a warrant to purchase up to 100,000
shares of our common stock at a purchase price equal to $0.25 per
share. The warrant expires on the earlier to occur of May 31, 2016 or
a change of control of the company. The registration statement of
which this prospectus forms a part, covers the resale of the common stock
underlying the aforementioned warrant.
The
Purchase Agreement also provides that, at any time on or after June 30, 2009,
and provided that certain conditions are satisfied by us, SAIL will purchase
from us a second Secured Convertible Promissory Note in the principal sum of
$200,000 and will be issued a second warrant identical in terms to the warrant
described above. The aforementioned conditions include our entry into
a term sheet in which investors commit to participate in an equity financing by
us of not less than $2,000,000 (excluding any and all other debt that are to be
converted).
The notes
issued or issuable pursuant to the Purchase Agreement accrue interest at the
rate of 8% per annum and are due and payable, unless sooner converted into
shares of our common stock (as described below), upon the earlier to occur
of: (i) a declaration by SAIL on or after June 30, 2009 or (ii) an
Event of Default as defined in the notes. The note(s) are secured by
a lien on substantially all of our assets (including all intellectual
property). In the event of a liquidation, dissolution or winding up
of the company, unless SAIL informs us otherwise, we shall pay SAIL an amount
equal to the product of 250% multiplied by the principal and all accrued but
unpaid interest outstanding on the note(s).
In the
event we consummate an equity financing transaction of at least $1,500,000
(excluding any and all other debt that is converted), then the principal and all
accrued, but unpaid interest outstanding under the note(s) shall be
automatically converted into the securities issued in the equity financing by
dividing such amount by 85% of the per share price paid by the investors in such
financing.
In
addition, in the event we issue preferred stock that is not part of an equity
financing described above, SAIL may, at its option, convert the principal and
all accrued, but unpaid interest outstanding under the note(s) into preferred
stock by dividing such amount by 85% of the per share price paid by the
purchasers’ of our preferred stock.
On August
26, 2009, the Company completed an equity financing transaction of approximately
$2 million. As a result of the financing, each of the notes described
above that were held by SAIL and Brandt automatically converted into common
stock, with SAIL receiving 1,758,356 shares and Brandt receiving 956,164
shares. In addition, pursuant to the terms of the notes, SAIL was
issued a non-callable five year warrant to purchase 879,178 shares of common
stock at an exercise price of $0.30 per share and Brandt was issued a
non-callable five year warrant to purchase 478,082 shares of common stock at an
exercise price of $0.30 per share. The registration statement of
which this prospectus forms a part, covers the resale of the aforementioned
common stock and common stock underlying the warrants.
In
connection with the equity financing referred to above, on August 26, 2009, SAIL
purchased 6 Units for $324,000. Each Unit consists of 180,000 shares
of common stock and a five year non-callable warrant to purchase an additional
90,000 shares of common stock at an exercise price of $0.30 per
share. The shares of common stock and warrants comprising the Units
are immediately separable and were issued separately. This investment
was completed with the identical terms as received by all other investors in the
Company’s private placement closings that took place on August 26, 2009,
December 24, 2009, December 31, 2009 and January 4, 2010. The
registration statement of which this prospectus forms a part, covers the resale
of the common stock and the common stock underlying the warrants sold in the
2009 private placement to SAIL.
On
July 5, 2010 and August 20, 2010, we issued unsecured promissory notes (each, a
“Deerwood Note”) in the aggregate principal amount of $500,000 to Deerwood
Partners LLC and Deerwood Holdings LLC, with each investor purchasing two notes
in the aggregate principal amount of $250,000. SAIL issued
unconditional guaranties to each of these investors, guaranteeing the prompt and
complete payment when due of all principal, interest and other amounts under
each Deerwood Note. In addition, on August 20, 2010, we granted SAIL
warrants to purchase up to an aggregate of 100,000 shares of common stock at an
exercise price (subject to customary anti-dilution adjustments) of $0.56 per
share. We entered into an oral agreement to indemnify SAIL and grant
to SAIL a security interest in our assets in connection with the
guaranties.
89
On
October 1, 2010, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with John Pappajohn and SAIL as investors, pursuant to
which we issued to SAIL secured convertible promissory notes (the “October
Notes”) in the aggregate principal amount of $250,000 and warrants to purchase
up to 416,666 shares of common stock. The Company received $250,000
in gross proceeds from the issuance to SAIL. The October Notes mature
one year from the date of issuance (subject to earlier conversion or
prepayment), earn interest equal to 9% per year with interest payable at
maturity, and are convertible into shares of common stock of the Company at a
conversion price of $0.30. The conversion price is subject to
adjustment upon (1) the subdivision or combination of, or stock dividends paid
on, the common stock; (2) the issuance of cash dividends and distributions on
the common stock; (3) the distribution of other capital stock, indebtedness or
other non-cash assets; and (4) the completion of a financing at a price below
the conversion price then in effect. The October Notes can be
declared due and payable upon an event of default, defined in the October Notes
to occur, among other things, if the Company fails to pay principal and interest
when due, in the case of voluntary or involuntary bankruptcy or if the Company
fails to perform any covenant or agreement as required by the October
Note.
On
November 3, 2010, we issued October Notes in the aggregate principal amount of
$512,250, and related warrants to purchase up to 512,250 shares, to Deerwood
Holdings LLC and Deerwood Partners LLC, two entities controlled by Mr. Kallins,
in exchange for the cancellation of the Deerwood Notes originally issued on July
5, 2010 and August 20, 2010 in the aggregate principal amount of $500,000 (and
accrued and unpaid interest on those notes) and warrants to purchase an
aggregate of up to 150,000 shares originally issued on August 20,
2010. The related guaranties and oral indemnification and
security agreement that had been entered into in connection with the Deerwood
Notes were likewise terminated. SAIL issued unconditional guaranties
to each of the Deerwood investors, guaranteeing the prompt and complete payment
when due of all principal, interest and other amounts under the October Notes
issued to such investors. The obligations under each guaranty are
independent of our obligations under the October Notes and separate actions may
be brought against the guarantor. In connection with its serving as
guarantor, we granted SAIL warrants to purchase up to an aggregate of 341,498
shares of common stock. The warrants to purchase 100,000 shares of
common stock previously granted to SAIL on August 20, 2010 were canceled. In
connection with the November 3 transactions, SAIL and the Deerwood investors
entered into a Purchase Option Agreement pursuant to which SAIL has the option,
which is exercisable at any time through March 31, 2011, to purchase any or all
of the October Notes issued to the Deerwood investors in exchange for the
Deerwood Notes from time to time at a price equal to the aggregate principal
amount plus all accrued but unpaid interest.
Our
obligations under the terms of the October Notes are secured by a security
interest in the tangible and intangible assets of the Company, pursuant to a
Security Agreement, dated as of October 1, 2010, by and between us and John
Pappajohn, as administrative agent for the holders of the October
Notes. The agreement and corresponding security interest terminate if
and when holders of a majority of the aggregate principal amount of October
Notes issued have converted their October Notes into shares of common
stock.
The
warrants related to the October Notes expire on September 20, 2017 and are
exercisable for shares of common stock of the Company at an exercise price of
$0.30. Exercise price and number of shares issuable upon exercise are
subject to adjustment (1) upon the subdivision or combination of, or stock
dividends paid on, the common stock; (2) in case of any reclassification,
capital reorganization or change in capital stock and (3) upon the completion of
a financing at a price below the exercise price then in effect.
Transactions
with Leonard Brandt
Please
see the discussion above under the heading “Transaction with Sail Venture
Partners LP” for a summary of a bridge financing transaction which closed on
March 30, 2009, in which Mr. Brandt participated.
Transactions
with Henry Harbin, M.D.
Prior to
his appointment as a Director, Dr. Harbin was party to several transactions with
us. On March 7, 2007, Dr. Harbin participated in the first closing of
our private placement transaction pursuant to which we received gross proceeds
of approximately $7.0 million from institutional investors and other high net
worth individuals. In the first closing of the private placement, we
sold 5,840,374 “Investment Units” at $1.20 per Investment Unit. Each
Investment Unit consists of one share of our common stock, and a five year
non-callable warrant to purchase three-tenths of one share of our common stock,
at an exercise price of $1.80 per share. Mr. Harbin received 8,334
shares of our common stock and a warrant to purchase 2,501 shares of our common
stock as a result of his investment in the company. The registration
statement of which this prospectus forms a part, covers the resale of the common
stock and the common stock underlying the warrants sold in the 2007 private
placement to Dr. Harbin.
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In
addition, since June 2007, Dr. Harbin has acted as a strategic advisor to the
company, and has advised us on our marketing initiatives. As
compensation for his services as an advisor, on August 8, 2007, we granted Dr.
Harbin a non-qualified option to purchase 24,000 shares of our common stock at
an exercise price of $1.09 per share. Options to purchase 6,000
shares vested on the date of grant, and the remaining 18,000 shares vested in
equal installments of 2,000 shares on each monthly anniversary of the grant date
for a period of nine months.
Subsequently,
on April 15, 2008, we entered into a consulting agreement which expired on
December 31, 2008 pursuant to which Dr. Harbin was paid an aggregate of $24,000
and was granted options to purchase 56,000 shares of our common stock at an
exercise price of $0.96 per share, with options to purchase 14,000 shares
vesting on the date of grant, options to purchase 37,328 shares vesting in eight
equal monthly installments of 4,666 options commencing on April 30, 2008, and
the remaining options to purchase 4,672 shares vesting on December 31,
2008.
On March
17, 2009, we entered into a consulting agreement with Dr. Harbin which expired
on December 31, 2009 pursuant to which Dr. Harbin was paid an aggregate of
$24,000 as compensation for his consulting services. Dr. Harbin was
paid the $24,000 due to him in January 2010. In addition, as further
compensation, we granted Dr. Harbin options to purchase 56,000 shares of our
common stock at an exercise price of $0.40 per share, with the option vesting in
equal monthly installments over a twelve month period commencing on January 1,
2009.
On March
26, 2010, we entered into a new Consulting Agreement with Dr. Harbin, pursuant
to which Dr. Harbin is to be paid an aggregate of $36,000 as compensation for
his consulting services. The agreement expires on December 31, 2010,
but is renewable for two one-year terms on January 1, 2011 and
2012. In addition to his cash compensation, on March 3, 2010 we
granted Dr. Harbin options to purchase 400,000 shares of our common stock at an
exercise price of $0.55 per share as further compensation for such services,
with the options vesting in equal monthly installments over a 36 month period
commencing on March 3, 2010. The options expire on March 3,
2020.
Transactions
with Daniel Hoffman, M.D.
On
January 11, 2008, we, through our wholly owned subsidiary, Colorado CNS
Response, Inc. and pursuant to the terms of a Stock Purchase Agreement, acquired
all of the outstanding common stock of Neuro-Therapy Clinic, PC, a Colorado
professional medical corporation wholly owned by Dr. Hoffman (“NTC”) in exchange
for a non-interest bearing note of $300,000 payable in equal monthly
installments over 36 months. At the time of the transaction, NTC was
our largest customer. Upon the completion of the acquisition, Dr.
Hoffman was appointed our Chief Medical Officer. The Stock Purchase
Agreement provides that upon the occurrence of certain events, as defined in the
purchase agreement, Dr. Hoffman has a repurchase option for a period of three
years subsequent to the closing, as well as certain rights of first refusal, in
relation to the assets and liabilities we acquired.
On March
3, 2010, the Board granted options to purchase 500,000 shares to Daniel
Hoffman. Each of the options have an exercise price of $0.55 per
share, vest in equal monthly installments over a period of four years and have a
term of 10 years from the date of grant.
Prior to
his employment, from October 1, 2007 to January 15, 2008, Dr. Hoffman earned
$15,000 for consulting services rendered to the Company. In addition,
as compensation for his services to us as a consultant, Dr. Hoffman was granted
options to purchase an aggregate of 814,062 shares of our common stock at an
exercise price of $1.09 on August 7, 2007. In accordance with the
terms of his employment agreement, the terms of Dr. Hoffman’s option grant were
amended to provide that in the event of a change of control transaction, a
portion of Dr. Hoffman’s unvested options equal to the number of unvested
options at the date of the corporate transaction multiplied by the ratio of the
time elapsed between August 7, 2007 and the date of corporate transaction over
the vesting period (42 months), will automatically accelerate, and become fully
vested.
91
Prior to
his employment with us, Dr. Hoffman participated in our private placement
transaction which closed on May 16, 2007. In the private placement,
we received gross proceeds of approximately $7.8 million from institutional
investors and other high net worth individuals, including $50,000 from Dr.
Hoffman. In exchange for his investment, Dr. Hoffman was issued
41,667 shares of our common stock, and a fully-vested five year non-callable
warrant to purchase 12,501 shares of our common stock at an exercise price of
$1.80 per share. The registration statement of which this prospectus
forms a part, covers the resale of the common stock and the common stock
underlying the warrants sold in the 2007 private placement to Dr.
Hoffman.
Transactions
with John Pappajohn
In
conjunction with the closing of the Company’s private placement on August 26,
2009, Mr. Pappajohn joined the Company’s Board of Directors.
On June
12, 2009, we entered into a Bridge Note and Warrant Purchase Agreement with Mr.
John Pappajohn (“Pappajohn”).
Pursuant
to the Purchase Agreement, on June 12, 2009, Pappajohn purchased a Secured
Convertible Promissory Note in the principal amount of $1,000,000 from
us. In order to induce Pappajohn to purchase the note, we issued to
Pappajohn a warrant to purchase up to 2,333,333 shares of our common stock and
issued to relatives of Pappajohn warrants to purchase up to a total of 1,000,000
shares, all at a purchase price equal to $0.30 per share. These
warrants were exercised for shares of common stock in cashless exercises on
February 23, 2010 and February 24, 2010, and such shares are being registered
for resale on this registration statement of which this prospectus forms a
part.
The note
issued pursuant to the Purchase Agreement provided that the principal amount of
$1,000,000 together with a single Premium Payment of $90,000 which is due and
payable, unless sooner converted into shares of our common stock (as described
below), upon the earlier to occur of: (i) a declaration by Pappajohn
on or after June 30, 2010 or (ii) an Event of Default as defined in the
note. The note was secured by a lien on substantially all of our
assets (including all intellectual property). In the event of a
liquidation, dissolution or winding up of the company, unless Pappajohn informs
us otherwise, we were required to pay Pappajohn an amount equal to the product
of 250% multiplied by the then outstanding principal amount of the note and the
Premium Payment.
The note
also contained a provision that, in the event we consummated an equity financing
transaction of at least $1,500,000 (excluding any and all other debt that is
converted), the then outstanding principal amount of the note (but excluding the
Premium Payment, which will be repaid in cash at the time of such equity
financing) shall be automatically converted into the securities issued in the
equity financing by dividing such amount by the per share price paid by the
investors in such financing.
On August
26, 2009, the Company completed an equity financing transaction of approximately
$2 million. As a result of the financing, the note described above
held by Mr. Pappajohn automatically converted into common stock, with Mr.
Pappajohn receiving 3,333,334 shares. In addition, pursuant to the
terms of the note, Mr. Pappajohn received a five year non-callable warrant to
purchase 1,666,667 shares of common stock at an exercise price of $0.30 per
share. The registration statement of which this prospectus forms a
part, covers the resale of the aforementioned common stock and the common stock
underlying the warrants issued to Mr. Pappajohn.
In
connection with the equity financing referred to above, on August 26, 2009, Mr.
Pappajohn invested an additional $1,000,000 in the Company. In
exchange for his investment, the Company issued an additional 3,333,333 shares
of common stock to Mr. Pappajohn and a five year non-callable warrant to
purchase 1,666,667 shares of common stock at an exercise price of $0.30 per
share. The terms of this investment were identical to the terms
received by all other investors in the Company’s private placement closings that
took place on August 26, 2009, December 24, 2009, December 31, 2009 and January
4, 2010. The registration statement of which this prospectus forms a
part, covers the resale of the common stock and the common stock underlying the
warrants sold in the 2009 private placement to Mr. Pappajohn.
The
Company intends to reimburse Equity Dynamics, Inc., a company solely owned by
Mr. Pappajohn, for expenses which Equity Dynamics incurred between May and
December, 2009 on behalf of CNS Response, Inc. These expenses include
$34,700 incurred in connection with the Company’s private placement financing
and other activities.
92
On
February 23, 2010 Mr. Pappajohn exercised 2,333,333 warrants and was issued
1,720,910 shares of common stock in a net exercise of warrants in lieu of cash
transaction.
On
June 3, 2010, we entered into a Bridge Note and Warrant Purchase Agreement with
John Pappajohn, pursuant to which Mr. Pappajohn agreed to purchase two secured
promissory notes (each, a “Bridge Note”) in the aggregate principal amount of
$500,000, with each Bridge Note in the principal amount of $250,000 maturing on
December 2, 2010. On June 3, 2010, Mr. Pappajohn loaned the Company
$250,000 in exchange for the first Bridge Note (there were no warrants issued in
connection with this first note) and on July 25, 2010, Mr. Pappajohn loaned us
$250,000 in exchange for the second Bridge Note. In connection with
his purchase of the second Bridge Note, Mr. Pappajohn received a warrant to
purchase up to 250,000 shares of our common stock in accordance with the Bridge
Note and Warrant Purchase Agreement. The exercise price of the
warrant (subject to customary anti-dilution adjustments) was $0.50 per
share.
Pursuant
to a separate agreement that we entered into with Mr. Pappajohn, we granted him
a right to convert the Bridge Notes into shares of our common stock at a
conversion price of $0.50, subject to customary anti-dilution
adjustments.
Each
Bridge Note accrued interest at a rate of 9% per annum which would have been
paid together with the repayment of the principal amount at the earliest of (i)
the maturity date; (ii) prepayment of the Bridge Note at the option of the
Company (iii) closing of a financing in which the aggregate proceeds to the
Company are not less than $3,000,000 or (iv) the occurrence of an Event of
Default (as defined in the Bridge Note). The Purchase Agreement and
each Bridge Note grants the investor a senior security interest in and to all of
the Company’s existing and future right, title and interest in its tangible and
intangible property.
On
October 1, 2010, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with John Pappajohn and SAIL as investors, pursuant to
which we issued to Mr. Pappajohn secured convertible promissory notes (the
“October Notes”) in the aggregate principal amount of $761,688 and warrants to
purchase up to 1,269,478 shares of common stock. The Company received
$250,000 in gross proceeds from the issuance to Mr. Pappajohn. We
also issued October Notes in the aggregate principal amount of $511,688, and
related warrants to purchase up to 852,812 shares, to Mr. Pappajohn in exchange
for the cancellation of the two Bridge Notes originally issued to him on June 3,
2010 and July 25, 2010 in the aggregate principal amount of $500,000 (and
accrued and unpaid interest on those notes) and a warrant to purchase up to
250,000 shares originally issued to him on July 25, 2010.
The
October Notes mature one year from the date of issuance (subject to earlier
conversion or prepayment), earn interest equal to 9% per year with interest
payable at maturity, and are convertible into shares of common stock of the
Company at a conversion price of $0.30. The conversion price is
subject to adjustment upon (1) the subdivision or combination of, or stock
dividends paid on, the common stock; (2) the issuance of cash dividends and
distributions on the common stock; (3) the distribution of other capital stock,
indebtedness or other non-cash assets; and (4) the completion of a financing at
a price below the conversion price then in effect. The October Notes
can be declared due and payable upon an event of default, defined in the October
Notes to occur, among other things, if the Company fails to pay principal and
interest when due, in the case of voluntary or involuntary bankruptcy or if the
Company fails to perform any covenant or agreement as required by the October
Note.
Our
obligations under the terms of the October Notes are secured by a security
interest in the tangible and intangible assets of the Company, pursuant to a
Security Agreement, dated as of October 1, 2010, by and between us and John
Pappajohn, as administrative agent for the holders of the October
Notes. The agreement and corresponding security interest terminate if
and when holders of a majority of the aggregate principal amount of October
Notes issued have converted their October Notes into shares of common
stock.
The
warrants related to the October Notes expire on September 20, 2017 and are
exercisable for shares of common stock of the Company at an exercise price of
$0.30. Exercise price and number of shares issuable upon exercise are
subject to adjustment (1) upon the subdivision or combination of, or stock
dividends paid on, the common stock; (2) in case of any reclassification,
capital reorganization or change in capital stock and (3) upon the completion of
a financing at a price below the exercise price then in effect.
93
Transactions
with George Kallins M.D.
On July
5, 2010, our Board of Directors appointed George J. Kallins, M.D. to serve as a
member of the Board. In connection with his appointment, Dr. Kallins
was granted a stock option to purchase 250,000 shares of our common stock at an
exercise price of $0.40. The stock option vests in 36 equal monthly
installments over a three year period commencing on July 5, 2010.
On
July 5, 2010 and August 20, 2010, we issued unsecured promissory notes (each, a
“Deerwood Note”) in the aggregate principal amount of $500,000 to Deerwood
Partners LLC and Deerwood Holdings LLC, with each investor purchasing two notes
in the aggregate principal amount of $250,000. The managing members of each of
Deerwood Partners LLC and Deerwood Holdings LLC are George J. Kallins, M.D., who
joined the Company’s Board of Directors on July 5, 2010, and his spouse Bettina
Kallins. We received $250,000 in gross proceeds from the issuance of the first
two notes on July 5, 2010 and another $250,000 in gross proceeds from the
issuance of the second two notes on August 20, 2010. In connection
with the August 20, 2010 transaction, each of the two investors also received a
warrant to purchase up to 75,000 shares of our common stock at an exercise price
(subject to customary anti-dilution adjustments) of $0.56 per
share.
SAIL
Venture Partners L.P. (“SAIL”), of which our director David Jones is a managing
partner, issued unconditional guaranties to each of these investors,
guaranteeing the prompt and complete payment when due of all principal, interest
and other amounts under each Deerwood Note. The obligations under
each guaranty were independent of our obligations under the Deerwood Notes and
separate actions could be brought against the guarantor. We entered
into an oral agreement to indemnify SAIL and grant to SAIL a security interest
in our assets in connection with the guaranties. In addition, on
August 20, 2010, we granted SAIL warrants to purchase up to an aggregate of
100,000 shares of common stock at an exercise price (subject to customary
anti-dilution adjustments) of $0.56 per share.
Each
Deerwood Note accrued interest at a rate of 9% per annum, which was payable
together with the repayment of the principal amount, unless earlier converted,
at the earliest of (i) the maturity date; (ii) prepayment of the Deerwood Note
at our option (iii) closing of a financing in which the aggregate proceeds to us
are not less than $3,000,000 or (iv) the occurrence of an Event of Default (as
defined in the Deerwood Note). Each Deerwood Note was convertible
into shares of our common stock at a conversion price of $0.50. The
conversion price was subject to customary anti-dilution adjustments, but will
never be less than $0.30.
On
November 3, 2010, we issued October Notes in the aggregate principal amount of
$762,250 and warrants to purchase up to 1,270,414 shares of common stock to
three investors affiliated wit Dr. Kallins. We received $250,000 in
gross proceeds from the issuance to BGN Acquisition Ltd., LP, an entity
controlled by Dr. Kallins, of October Notes in the aggregate principal amount of
$250,000 and related warrants to purchase up to 416,666 shares. We
also issued October Notes in the aggregate principal amount of $512,250, and
related warrants to purchase up to 512,250 shares, to Deerwood Holdings LLC and
Deerwood Partners LLC in exchange for the cancellation of the Deerwood Notes
originally issued on July 5, 2010 and August 20, 2010 in the aggregate principal
amount of $500,000 (and accrued and unpaid interest on those notes) and warrants
to purchase an aggregate of up to 150,000 shares originally issued on August 20,
2010. The related guaranties and oral indemnification and
security agreement that had been entered into in connection with the
Deerwood Notes were likewise terminated. SAIL, of which our
director David Jones is a managing partner, issued unconditional guaranties to
each of the Deerwood investors in connection with the October Notes. In
connection with the November 3 transactions, SAIL and the Deerwood investors
entered into a Purchase Option Agreement pursuant to which SAIL has the option,
which is exercisable at any time through March 31, 2011, to purchase any or all
of the October Notes issued to the Deerwood investors in exchange for the
Deerwood Notes from time to time at a price equal to the aggregate principal
amount plus all accrued but unpaid interest.
The
Purchase Agreement pursuant to which the October Notes were issued also provides
that the Company and the holders of the October Notes will work in good faith
to enter into a registration rights agreement covering the registration of
the resale of the shares underlying the October Notes and the related
warrants.
The
October Notes mature one year from the date of issuance (subject
to earlier conversion or prepayment), earn interest equal to 9% per year with
interest payable at maturity, and are convertible into shares of common stock of
the Company at a conversion price of $0.30. The conversion price is
subject to adjustment upon (1) the subdivision or combination of, or stock
dividends paid on, the common stock; (2) the issuance of cash dividends and
distributions on the common stock; (3) the distribution of other capital stock,
indebtedness or other non-cash assets; and (4) the completion of a financing at
a price below the conversion price then in effect. The October Notes
can be declared due and payable upon an event of default, defined in the October
Notes to occur, among other things, if the Company fails to pay principal and
interest when due, in the case of voluntary or involuntary bankruptcy or if the
Company fails to perform any covenant or agreement as required by the October
Note.
94
Our
obligations under the terms of the October Notes are secured by a security
interest in the tangible and intangible assets of the Company, pursuant to a
Security Agreement, dated as of October 1, 2010, by and between us and John
Pappajohn, as administrative agent for the holders of the October
Notes. The agreement and corresponding security interest terminate if
and when holders of a majority of the aggregate principal amount of October
Notes issued have converted their October Notes into shares of common
stock.
The
warrants related to the October Notes expire at various times in September and
October, 2017 and are exercisable for shares of common stock of the Company at
an exercise price of $0.30. Exercise price and number of shares
issuable upon exercise are subject to adjustment (1) upon the subdivision or
combination of, or stock dividends paid on, the common stock; (2) in case of any
reclassification, capital reorganization or change in capital stock and (3) upon
the completion of a financing at a price below the exercise price then in
effect.
Transactions
with Paul Buck
On March
3, 2010, the Board granted options to purchase 450,000 shares to Paul
Buck. Each of the options have an exercise price of $0.55 per share,
vest in equal monthly installments over a period of four years and have a term
of 10 years from the date of grant.
Prior to
his employment by the Company, Mr. Buck had been working with the Company as an
independent consultant since December 2008, assisting management with finance
and accounting matters as well as the Company’s filings with the Securities and
Exchange Commission. Mr. Buck earned $260,800 in consulting services
rendered to the Company.
On
December 24, 2009, the Company completed a second closing of its private
placement in which it received gross proceeds of approximately $3 million, which
included $54,000 invested by Mr. Buck. In exchange for his
investment, the Company issued to Mr. Buck 180,000 shares of its common stock
and a five year non-callable warrant to purchase 90,000 shares of its common
stock at an exercise price of $0.30 per share. This investment was
completed with the identical terms as received by all other investors in the
Company’s private placement closings that took place on August 26, 2009,
December 24, 2009, December 31, 2009 and January 4, 2010. The
registration statement, of which this prospectus forms a part, covers the resale
of the common stock and the common stock underlying the warrants sold in the
2009 private placement to Mr. Buck.
Transactions
with Non-Executive Directors
On March
3, 2010, the Board granted options to purchase 250,000 shares to each
non-executive Director (Dr. Harbin, Mr. Jones, Mr. Pappajohn, Mr. Thompson, and
Dr. Vaccaro) for their board service. Each of the options have an
exercise price of $0.55 per share, vest in equal monthly installments over a
period of three years and have a term of 10 years from the date of
grant.
As Mr.
Thompson has subsequently resigned from the board, he has forfeited the option
to purchase the 250,000 shares granted to him. However, on March 3,
2010, the Board also granted options to Mr. Thompson to purchase 150,000 shares
for his services as an advisor to the Company. Each of the options
have an exercise price of $0.55 per share, vest in equal monthly installments
over a period of three years and have a term of 10 years from the date of
grant.
Transaction
with a Staff Member of Equity Dynamics, Inc.
On July
5, 2010 the Board granted warrants to purchase 500,000 shares of common stock to
Mr. Brian Thompson for consulting services he had rendered to the Company,
advising on and assisting with fund raising activities. Mr. Thompson
is an employee of Equity Dynamics, Inc, a company owned by Mr.
Pappajohn. These warrants have an exercise price of $0.30 cents per
share, are exercisable from the date of grant and have a term of 10 years from
the date of grant.
95
Transactions
with Promoters and Control Persons
Prior to
our merger with CNS California, which closed on March 7, 2007, Strativation,
Inc. (now called CNS Response, Inc.) existed as a “shell company” with nominal
assets whose sole business was to identify, evaluate and investigate various
companies to acquire or with which to merge.
Shares
for Debt Agreement
Prior to
our merger with CNS California, on January 11, 2007, we entered into a Shares
For Debt Agreement with Richardson & Patel LLP (“R&P”), our former legal
counsel, pursuant to which we agreed to issue and R&P agreed to accept
645,846 restricted shares of our common stock (the “Shares”) as full and
complete settlement of a portion of the total outstanding debt in the amount of
$261,202 that we owed to R&P for legal services (the “Partial
Debt”). On January 15, 2007, the company and R&P agreed to amend
and restate the Shares for Debt Agreement to increase the number of Shares to be
issued in settlement of such Partial Debt to 656,103 restricted shares of our
common stock, which then represented 75.5% of our issued and outstanding common
stock.
Registration
Rights Agreement
On
January 11, 2007, we entered into a Registration Rights Agreement in connection
with the above referenced Shares For Debt Agreement with R&P and various
other stockholders of the Company signatory thereto (“Majority Stockholders”) in
connection with the shares of the company acquired pursuant to the Shares For
Debt Agreement and certain other transactions that took place on or around July
18, 2006. On January 15, 2007, the company and the Majority
Stockholders agreed to amend and restate the Registration Rights Agreement to
provide registration rights to the Majority Stockholders for up to 767,101
shares of our common stock held or to be acquired by them.
Merger
Agreement
On
January 16, 2007, we entered into an Agreement and Plan of Merger with CNS
Response, Inc., a California corporation (or CNS California), and CNS Merger
Corporation, a California corporation and our wholly-owned subsidiary that was
formed to facilitate the acquisition of CNS California (the “Merger
Agreement”). On March 7, 2007, the merger with CNS California closed,
CNS California became our wholly-owned subsidiary, and we changed our name from
Strativation, Inc. to CNS Response, Inc.. At the Effective Time of
the Merger (as defined in the Merger Agreement, as amended on February 23,
2007), MergerCo was merged with and into CNS California, the separate existence
of MergerCo ceased, and CNS California continued as the surviving corporation at
the subsidiary level. We issued an aggregate of 17,744,625 shares of
our common stock to the stockholders of CNS California in exchange for 100%
ownership of CNS California. Additionally, we assumed an aggregate of
8,407,517 options to purchase shares of common stock and warrants to purchase
shares of common stock on the same terms and conditions as previously issued by
CNS California. Pursuant to the Merger Agreement, our former sole
director and executive officer, Silas Phillips, resigned as a director and
executive officer of our company effective as of the closing of the merger, and
the directors and officers of CNS California were appointed to serve as
directors and officer of our company. Except for the Merger
Agreement, as amended, and the transactions contemplated by that agreement,
neither CNS California, nor the directors and officers of CNS California serving
prior to the consummation of the Merger, nor any of their associates, had any
material relationship with us, or any of our directors and officers, or any of
our associates prior to the merger. Following the merger, the
business conducted by the company is the business conducted by CNS
California.
Pursuant
to the terms of the Merger Agreement, we paid an advisory fee of $475,000 to
Richardson & Patel, LLP, our former legal counsel and a principal
shareholder, immediately upon the closing of the merger.
96
Transactions
with Selling Stockholders
2007
Private Placement
On March
7, 2007, simultaneous with the closing of the Merger, we received gross proceeds
of approximately $7,008,450 in the first closing of a private placement
transaction with institutional investors and other high net worth individuals
(“Investors”). Pursuant to Subscription Agreements entered into with
these Investors, we sold 5,840,368 Investment Units, at $1.20 per Investment
Unit. Each “Investment Unit” consists of one share of our common
stock, and a five year non-callable warrant to purchase three-tenths of one
share of our common Stock, at an exercise price of $1.80 per share (the
“Investor Warrant”). On May 16, 2007, we completed a second closing
of the private placement for an additional 664,390 Investment
Units. The additional gross proceeds to us amounted to
$797,300.
Brean
Murray Carret & Co. (“Brean Murray”) acted as placement agent and corporate
finance advisor in connection with the private placement. For their
services as placement agent and financial advisor, pursuant to the terms of an
Engagement Agreement between CNS California and Brean Murray, Brean Murray
received a retainer in the form of 83,333 shares of our common stock (having a
deemed value of $100,000) upon the closing of the private
placement. We also paid Brean Murray a fee equal to 8% of the funds
raised in the private placement, or approximately $624,500 of the gross proceeds
from the financing. In addition, Brean Murray received warrants (the
“Placement Agent Warrants”) to purchase shares of our common stock in amounts
equal to (i) 8% of the shares of common stock sold by Brean Murray in the
private placement (520,380 warrants at an exercise price of $1.44 per share),
and (ii) 8% of the shares underlying the Investor Warrants sold by Brean Murray
in the private placement (156,114 warrants at an exercise price of $1.80 per
share). The Placement Agent Warrants are fully vested and have a term
of 5 years. We also paid $87,700 in costs, fees and expenses incurred
by Brean Murray in connection with the private placement. After
payment of commissions and expenses associated with the offering, we received
net proceeds of approximately $6.9 million in the private placement
financing.
The
holders of the shares (i) sold in our 2007 private placement, (ii) issuable upon
exercise of the Investor Warrants sold in the 2007 private placement, (iii)
issuable upon exercise of the Placement Agent Warrants or otherwise under the
engagement agreement with Brean Murray, and (iv) issued upon conversion of CNS
California Series A Preferred Stock, CNS California Series B Preferred Stock and
certain shares of CNS California Common Stock under the terms of the Merger
Agreement, each have piggy-back registration rights with respect to such
shares. For holders who have elected to participate, we are including
for resale on this registration statement of which this prospectus forms a part
the shares of common stock and/or shares of common stock purchasable under
warrants issued in the above mentioned transactions that are held by such
holders.
2009
Private Placement
On
August 26, December 24 and December 31, 2009 and January 4, 2010, the Company
completed a first, second, third and fourth and final closing of its private
placement, resulting in gross proceeds to the Company of $2,000,000, $2,996,000,
$432,000 and $108,000, respectively, from accredited
investors. Pursuant to Subscription Agreements entered into with the
investors, we sold approximately 103 Investment Units at $54,000 per Investment
Unit. Each “Investment Unit” consists of 180,000 shares of our Common
Stock and a five year non-callable warrant to purchase 90,000 shares of our
Common Stock at an exercise price of $0.30 per share. After
commissions and expenses, we received net proceeds of approximately $4,920,000
in the private placement.
Pursuant
to a Registration Rights Agreements entered into with each investor and the
placement agent, we agreed to file a registration statement covering the resale
of the Common Stock and the Common Stock underlying the warrants sold in the
2009 private placement, as well as the Common Stock underlying the warrants
issued to the placement agent (as further described below) by the later of
October 26, 2009 or the 20th calendar day after the termination of the
offering. The Registration Rights agreement with the investors was
subsequently amended to allow the filing of the registration statement by the
later of 10 business days following the Company’s filing of its Annual Report on
Form 10-K for its September 30, 2009 year end or the 20th calendar day after
termination of the offering. The initial registration
statement was filed on February 1, 2010. In addition, the Company
agreed to use its best efforts to have the registration statement declared
effective no later than 180 days following the final closing of the offering and
maintain such effectiveness until the earlier of the second anniversary of the
date of such effectiveness or the date that all of the securities covered by the
registration statement may be sold without restriction. The
registration statement of which this prospectus forms a part, covers the resale
of the Common Stock and the Common Stock underlying the warrants sold in the
private placement.
97
Pursuant
to a Placement Agent Agreement entered into with Maxim Group LLC dated as of
August 3, 2009 and as amended on July 21, 2010, Maxim Group LLC served as lead
placement agent in our private placement with closings on August 26, December
24, December 31, 2009 and January 4, 2010, and received, in addition to cash
commissions and a non-accountable expense allowance (see pages F-29 to F-32 for
further details), warrants to purchase an aggregate of 965,134 shares of our
Common Stock with an exercise price of $0.33 per share. Monarch
Capital Group, Robert Nathan and Felix Investments, LLC also acted as placement
agents in this private placement and received cash commissions and a
non-accountable expense allowance of $65,340 (Monarch Capital Group), $0 (Robert
Nathan) and $87,660 (Felix Investments, LLC). In addition, each such
placement agent received warrants to purchase shares of our common stock at an
exercise price of $0.33 per share, with Monarch Capital Group receiving 65,340
warrants, Robert Nathan receiving 152,460 warrants and Felix Investments, LLC
receiving 292,200 warrants. None of Monarch Capital Group, Robert
Nathan or Felix Investments, LLC executed an agreement with the Company in
connection with the private placement. The registration statement of
which this prospectus forms a part includes the shares underlying the warrants
held by Maxim Group LLC, Monarch Capital Group, Robert Nathan and Felix
Investments, LLC.
The
warrants held by each placement agent expire between August 26, 2014 and January
4, 2015, corresponding to five years after the closing of each tranche of the
private placement in compliance with FINRA Rule 5110(f)(2)(H). All
shares of Common Stock issued or issuable upon conversion of placement agent
warrants received by each placement agent are restricted from sale, transfer,
assignment, pledge or hypothecation or from being the subject of any hedging,
short sale, derivative, put, or call transaction that would result in the
effective economic disposition of the securities by any person for a period of
180 days immediately following the effective date of the registration statement
of which this prospectus forms a part, except transfers of the warrants to
officers or partners each respective placement agent as allowed under FINRA Rule
5110 (g)(1) and (2).
The Form
of Subscription Agreement, Form of Warrant issued to investors, the Registration
Rights Agreement with the investors, Amendment No. 1 to the Registration Rights
Agreement with the investors, the Placement Agent Agreement, a Form of Warrant
issued to the Placement Agent, a Form of Registration Rights Agreement with the
Placement Agent, Amendment No.1 to the Placement Agent Agreement, and Amendment
No.1 to the Form of Warrant issued to the Placement Agent associated with our
2009 private placement are referenced at Exhibits 10.18, 10.19, 10.20, 10.21,
10.28,10.29, 10.30,10.31 and 10.32 to this registration statement of which this
prospectus forms a part.
98
DESCRIPTION
OF CAPITAL STOCK
The
information set forth below is a general summary of our capital stock
structure. As a summary, this Section is qualified by, and not a
substitute for, the provisions of our Certificate of Incorporation, as amended,
and Bylaws, as amended.
Authorized
Capital Stock
Our
authorized capital stock consists of 750,000,000 shares of Common Stock, par
value $0.001 per share.
Common
Stock
As of
November 4, 2010, we had 56,023,921 shares of Common Stock issued and
outstanding. In addition, we have reserved 15,670,973 shares of
Common Stock for issuance in respect of options to purchase common stock
and 24,104,307 shares of Common Stock were reserved for issuance pursuant
to issued and outstanding warrants to purchase our Common
Stock. Furthermore, 8,921,205 shares of Common Stock were
reserved for $2,676,362 worth of promissory notes and accrued interest that are
convertible at $0.30 per share.
Dividend
Rights
The
holders of outstanding shares of Common Stock are entitled to receive dividends
out of funds legally available at the times and in the amounts that our Board
may determine.
Voting
Rights
Each
holder of Common Stock is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders.
No
Preemptive or Similar Rights
Holders
of Common Stock do not have preemptive rights, and Common Stock is not
convertible or redeemable.
Right
to Receive Liquidation Distributions
Upon our
dissolution, liquidation or winding-up, the assets legally available for
distribution to our stockholders are distributable ratably among the holders of
Common Stock.
Warrants
At
October 28, 2010, the following warrants were outstanding:
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·
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warrants
that will expire at various times through 2012 to purchase an aggregate of
189,146 shares of our common stock at an exercise price per share of
$0.01, which were granted in connection with the issuance of convertible
promissory notes;
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·
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warrants
that will expire at various times through 2015 to purchase an aggregate of
1,427,022 shares of our common stock at an exercise price per share of
$0.59 which were granted in connection with the issuance of convertible
promissory notes;
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·
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warrants
that will expire at various times through 2011 to purchase an aggregate of
1,143,587 shares of our common stock at an exercise price per share of
$1.51 which were issued to investors in connection with the private
placement completed in November
2006;
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99
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·
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warrants
that will expire in 2011 to purchase 7,921 shares of our common stock at
an exercise price per share of $1.01 which were granted to the placement
agent in connection with the private placement completed in November
2006;
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·
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warrants
that will expire in 2011 to purchase an aggregate of 4,752 shares of our
common stock at an exercise price per share of $1.812 which were granted
to the placement agent in connection with the private placement completed
in November 2006;
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·
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warrants
that will expire in 2012 to purchase 1,951,445 shares of our common stock
at an exercise price per share of $1.80 which were issued to investors in
connection with the private placement which was completed concurrently
with the Merger on March 7, 2007;
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·
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warrants
that will expire in 2012 to purchase 520,380 shares of our common stock at
an exercise price per share of $1.44 which were issued to the placement
agent in connection with the private placement which was completed
concurrently with the Merger on March 7,
2007;
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·
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warrants
that will expire in 2012 to purchase 156,114 shares of our common stock at
an exercise price per share of $1.80 which were issued to the placement
agent in connection with the private placement which was completed
concurrently with the Merger on March 7,
2007.
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·
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warrants
that will expire in 2016 to purchase 100,000 shares of our common stock at
an exercise price per share of $0.25 which were issued to SAIL Venture
Partners, LLC in connection with the a bridge note of $200,000 which was
executed on May 14, 2009.
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·
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warrants
that will expire in 2014 through January 2015 to purchase 12,322,252
shares of our common stock at an exercise price per share of $0.30 which
were issued to investors who participated in our private placement in
which we raised gross proceeds of $5,579,000 between August, 2009 and
January 2010.
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·
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warrants
that will expire in 2014 through January 2015 to purchase 1,475,134 shares
of our common stock at an exercise price per share of $0.33 which were
issued to the placement agents in connection with the private placement in
which we raised gross proceeds of $5,579,000 between August 2009 and
January 2010.
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warrants
that will expire on July 2, 2017 to purchase 500,000 shares of our common
stock at an exercise price per share of $0.30, which were issued to Mr.
Brian Thompson, who provided consulting work associated with
the Company’s financing activities. Mr. Thompson is an employee
of Equity Dynamics, Inc., a Company owned by Mr.
Pappajohn.
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·
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warrants
that will expire on August 19, 2017 to purchase an aggregate of 250,000
shares of our common stock at an exercise price per share of $0.56, which
were issued to Deerwood Holdings, LLC, Deerwood Partners, LLC and
SAIL.
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·
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warrants
that will expire at various times in October and November, 2017
to purchase 4,273,221 shares of our common stock at an exercise price
per share of $0.30 which were issued to investors who participated in our
October 2010 private placement in which we raised gross proceeds of
$1,600,000 and exchanged six promissory notes totaling in aggregate
$1 million plus accrued
interest.
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·
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warrants
that will expire in October 11, 2015 to purchase 33,333 shares of our
common stock at an exercise price per share of $0.33 which were issued to
the placement agent in connection with the October 2010 private placement
in which we raised gross proceeds of $1,350,000 and exchanged two
promissory notes totaling in aggregate $500,000 plus accrued
interest.
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100
Options
On August
3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan
(the “Stock Option Plan”). The Stock Option Plan provides for the
issuance of awards in the form of restricted shares, stock options (which may
constitute incentive stock options (ISO) or non-statutory stock options (NSO)),
stock appreciation rights and stock unit grants to eligible employees, directors
and consultants and is administered by the board of directors.
The
option price for each share of stock subject to an option shall be (i) no less
than the fair market value of a share of stock on the date the option is
granted, if the option is an ISO, or (ii) no less than 85% of the fair market
value of the stock on the date the option is granted, if the option is a NSO;
provided, however, if the option is an ISO granted to an eligible employee who
is a 10% shareholder, the option price for each share of stock subject to such
ISO shall be no less than 110% of the fair market value of a share of stock on
the date such ISO is granted. Stock options have a maximum term of
ten years from the date of grant, except for ISOs granted to an eligible
employee who is a 10% shareholder, in which case the maximum term is five years
from the date of grant. ISOs may be granted only to eligible
employees. The Company has adopted ASC 718-20 (formerly, SFAS No.
123R - revised 2004, “Share-Based Payment”), and related
interpretations. Under ASC 718-20, share-based compensation cost is
measured at the grant date based on the calculated fair value of the
award. The Company estimates the fair value of each option on the
grant date using the Black-Scholes model. Stock-based compensation
expense is recognized over the employees’ or service provider’s requisite
service period, generally the vesting period of the award.
Originally,
a total of 10 million shares of common stock were reserved for issuance under
the 2006 Plan. The 2006 Plan also originally provided that in any
calendar year, no eligible employee or director shall be granted an award to
purchase more than 3 million shares of stock. On March 3, 2010, the
Board of Directors approved an amendment to the 2006 Plan which increased the
number of shares of common stock reserved for issuance under the 2006 Plan from
10 million to 20 million shares and increased the limit on shares underlying
awards granted within a calendar year to any eligible employee or director from
3 million to 4 million shares of common stock. The amendment was
approved by shareholders at the annual meeting held on April 27,
2010.
On March
3, 2010, the Board of Directors also approved the grant of 9,450,000 options to
staff members, directors, advisors and consultants. For staff members
the options will vest equally over a 48 month period while for directors,
advisors and consultants the options will vest equally over a 36 month
period.
On July
5, 2010, the Board of Directors further approved the grant of 800,000 options to
staff members, directors and advisors with similar vesting periods as the March
3, 2010 options mentioned above.
As of
November 4, 2010, 2,124,740 options were exercised and there were 15,670,973
options and 183,937 restricted shares outstanding under the amended 2006 Plan,
leaving 2,020,350 shares available for issuance pursuant to future
awards.
The
following is a summary of the status of options outstanding at October 28,
2010:
Exercise
Price
|
Number
of Shares
|
Weighted
Average
Contractual
Life
|
Weighted
Average
Exercise
Price
|
|||||
$
|
0.12
|
859,270
|
10
years
|
$
|
0.12
|
|||
$
|
0.132
|
987,805
|
7
years
|
$
|
0.132
|
|||
$
|
0.30
|
135,700
|
10
years
|
$
|
0.30
|
|||
$
|
0.59
|
28,588
|
10
years
|
$
|
0.59
|
|||
$
|
0.80
|
140,000
|
10
years
|
$
|
0.80
|
|||
$
|
0.89
|
968,875
|
10
years
|
$
|
0.89
|
|||
$
|
0.96
|
496,746
|
10
years
|
$
|
0.96
|
|||
$
|
1.09
|
2,513,549
|
10
years
|
$
|
1.09
|
|||
$
|
1.20
|
243,253
|
5
years
|
$
|
1.20
|
|||
$
|
0.51
|
41,187
|
10
years
|
$
|
0.51
|
|||
$
|
0.40
|
856,000
|
10
years
|
$
|
0.40
|
|||
$
|
0.55
|
8,400,000
|
10
years
|
$
|
0.55
|
|||
Total
|
15,670,973
|
$
|
0.62
|
101
Anti-Takeover
Provisions
Delaware
has enacted the following legislation that may deter or frustrate takeovers of
Delaware corporations, such as CNS Response:
Section 203 of the Delaware General
Corporation Law. Section 203 provides, with some exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of the person, who is an
“interested stockholder” for a period of three years from the date that the
person became an interested stockholder unless: (i) the transaction
resulting in a person becoming an interested stockholder, or the business
combination, is approved by the board of directors of the corporation before the
person becomes an interested stockholder; (ii) the interested stockholder
acquires 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes it an interested stockholder, excluding shares owned
by persons who are both officers and directors of the corporation, and shares
held by some employee stock ownership plans; or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation’s board of directors and by the holders of at least 66 2/3%
of the corporation’s outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An “interested
stockholder” is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person is
an interested stockholder.
Authorized but Unissued
Stock. The authorized but unissued shares of our common stock
are available for future issuance without shareholder approval. These
additional shares may be used for a variety of corporate purposes, including
future public offering to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued
shares of common stock may enable our Board to issue shares of stock to persons
friendly to existing management, which may deter or frustrate a takeover of the
company.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company. The address of American Stock Transfer &
Trust Company is 59 Maiden Lane, New York, New York, and the phone number is
(718) 921-8201.
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters.
The
Company’s shares trade on the Nasdaq Over-the-Counter bulletin board market (OTC
BB) under the symbol CNSO.OB. These shares are very thinly traded,
with an average daily volume for the twelve months ended September 30, 2010 of
1122 shares per day with no trades occurring on 172 out of 252 trading
days. Consequently, management believes that the prices quoted on the
OTC BB may not accurately reflect the value of the Company’s common
shares. In addition, certain members of management have made open
market purchases of the Company’s shares, including approximately 500 shares in
February 20, 2009.
We have
never paid dividends on our common stock. CNS California has never
paid dividends on its common stock. We intend to retain any future
earnings for use in our business.
102
PLAN
OF DISTRIBUTION
We are
registering the shares of common stock on behalf of the selling security
holders. The shares covered by this prospectus may be offered and
sold from time to time by the selling stockholders. The term “selling
stockholder” includes pledgees, donees, transferees or other successors in
interest selling shares received after the date of this prospectus from each
selling stockholder as a pledge, gift, partnership distribution or other
non-sale related transfer. The number of shares beneficially owned by
a selling stockholder will decrease as and when it effects any such
transfers. The plan of distribution for the selling stockholders’
shares sold hereunder will otherwise remain unchanged, except that the
transferees, pledgees, donees or other successors will be selling stockholders
hereunder. To the extent required, we may amend and supplement this
prospectus from time to time to describe a specific plan of
distribution.
The
selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. The selling
stockholders may make these sales at prices and under terms then prevailing or
at prices related to the then current market price. The selling
stockholders may also make sales in negotiated transactions. The
selling stockholders may offer their shares from time to time pursuant to one or
more of the following methods:
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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·
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one
or more block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the
transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
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an
exchange distribution in accordance with the rules of the applicable
exchange;
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publicly
or privately negotiated
transactions;
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through
underwriters, brokers or dealers (who may act as agents or principals) or
directly to one or more purchasers;
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a
combination of any such methods of sale;
and
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any
other method permitted pursuant to applicable
law.
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In
connection with distributions of the shares or otherwise, the selling
stockholders may:
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enter
into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the shares in the
course of hedging the positions they
assume;
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sell
the shares short and redeliver the shares to close out such short
positions;
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enter
into option or other transactions with broker-dealers or other financial
institutions which require the delivery to them of shares offered by this
prospectus, which they may in turn resell;
and
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pledge
shares to a broker-dealer or other financial institution, which, upon a
default, they may in turn resell.
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In
addition to the foregoing methods, the selling stockholders may offer their
shares from time to time in transactions involving principals or brokers not
otherwise contemplated above, in a combination of such methods or described
above or any other lawful methods. The selling stockholders may also
transfer, donate or assign their shares to lenders, family members and others
and each of such persons will be deemed to be a selling stockholder for purposes
of this prospectus. The selling stockholders or their successors in
interest may from time to time pledge or grant a security interest in some or
all of the shares of common stock, and if the selling stockholders default in
the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from to time under this
prospectus; provided however in the event of a pledge or then default on a
secured obligation by the selling stockholder, in order for the shares to be
sold under this registration statement, unless permitted by law, we must
distribute a prospectus supplement and/or amendment to this registration
statement amending the list of selling stockholders to include the pledgee,
secured party or other successors in interest of the selling stockholder under
this prospectus.
103
The
selling stockholders may also sell their shares pursuant to Rule 144 under the
Securities Act, which permits limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions.
Sales
through brokers may be made by any method of trading authorized by any stock
exchange or market on which the shares may be listed or quoted, including block
trading in negotiated transactions. Without limiting the foregoing,
such brokers may act as dealers by purchasing any or all of the shares covered
by this prospectus, either as agents for others or as principals for their own
accounts, and reselling such shares pursuant to this prospectus. The
selling stockholders may effect such transactions directly, or indirectly
through underwriters, broker-dealers or agents acting on their
behalf. In effecting sales, broker-dealers or agents engaged by the
selling stockholders may arrange for other broker-dealers to
participate. Broker-dealers or agents may receive commissions,
discounts or concessions from the selling stockholders, in amounts to be
negotiated immediately prior to the sale (which compensation as to a particular
broker-dealer might be in excess of customary commissions for routine market
transactions).
In
offering the shares covered by this prospectus, the selling stockholders, and
any broker-dealers and any other participating broker-dealers who execute sales
for the selling stockholders, may be deemed to be “underwriters” within the
meaning of the Securities Act in connection with these sales. Any
profits realized by the selling stockholders and the compensation of such
broker-dealers may be deemed to be underwriting discounts and
commissions.
The
Company is required to pay all fees and expenses incident to the registration of
the shares.
The
Company has agreed to indemnify the selling stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities
Act.
Each
of Maxim Group LLC, Monarch Capital Group, Robert Nathan, and Felix Investments,
LLC are registered broker dealers and FINRA members and are listed as selling
shareholders in this prospectus. Maxim Group LLC served as lead
placement agent in our private placement with closings on August 26, December 24
and December 31, 2009 and January 4, 2010, and received, in addition to cash
commissions and a non-accountable expense allowance, warrants to purchase an
aggregate of 965,134 shares of our Common Stock with an exercise price of $0.33
per share. Monarch Capital Group, Robert Nathan and Felix
Investments, LLC also acted as placement agents in this private placement and
received cash commissions and a non-accountable expense allowance of $65,340
(Monarch Capital Group), $0 (Robert Nathan) and $87,660 (Felix Investments,
LLC). In addition, each such placement agent received warrants to
purchase shares of our common stock at an exercise price of $0.33 per share,
with Monarch Capital Group receiving 65,340 warrants, Robert Nathan receiving
152,460 warrants and Felix Investments, LLC receiving 292,200
warrants. None of Monarch Capital Group, Robert Nathan or Felix
Investments, LLC executed an agreement with the Company in connection with the
private placement. The registration statement of which this
prospectus forms a part includes the shares underlying the warrants held by
Maxim Group LLC, Monarch Capital Group, Robert Nathan and Felix Investments,
LLC.
The
warrants held by each placement agent expire between August 26, 2014 and January
4, 2015, corresponding to five years after the closing of each tranche of the
private placement in compliance with FINRA Rule 5110(f)(2)(H). All
shares of Common Stock issued or issuable upon conversion of placement agent
warrants received by each placement agent are restricted from sale, transfer,
assignment, pledge or hypothecation or from being the subject of any hedging,
short sale, derivative, put, or call transaction that would result in the
effective economic disposition of the securities by any person for a period of
180 days immediately following the effective date of the registration statement
of which this prospectus forms a part, except transfers of the warrants to
officers or partners each respective placement agent as allowed under FINRA Rule
5110 (g)(1) and (2).
104
Maxim
Group LLC has indicated to us its willingness to act as selling agent on behalf
of certain of the selling shareholders named in the prospectus under the section
titled “Principal and Selling Stockholders” that purchased our privately placed
securities. All shares sold, if any, on behalf of selling
shareholders by Maxim Group LLC would be in transactions executed by Maxim Group
LLC on an agency basis and commissions charged to its customers in connection
with each transaction shall not exceed a maximum of 5% of the gross
proceeds. Maxim Group LLC does not have an underwriting agreement
with us and/or the selling shareholders and no selling shareholders are required
to execute transactions through Maxim Group LLC. Further, other than
any existing brokerage relationship as customers with Maxim Group LLC, no
selling shareholder has any pre-arranged agreement, written or otherwise, with
Maxim Group LLC to sell their securities through Maxim Group LLC.
FINRA
Rule 5110 requires members firms (unless an exemption applies) to satisfy the
filing requirements of Rule 5110 in connection with the resale, on behalf of
selling shareholders, of the securities on a principal or agency
basis. NASD Notice to Members 88-101 states that in the event a
selling shareholder intends to sell any of the shares registered for resale in
this prospectus through a member of FINRA participating in a distribution of our
securities, such member is responsible for insuring that a timely filing, if
required, is first made with the Corporate Finance Department of FINRA and
disclosing to FINRA the following:
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it
intends to take possession of the registered securities or to facilitate
the transfer of such certificates;
|
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·
|
the
complete details of how the selling shareholders’ shares are and will be
held, including location of the particular
accounts;
|
|
·
|
whether
the member firm or any direct or indirect affiliates thereof have entered
into, will facilitate or otherwise participate in any type of payment
transaction with the selling shareholders, including details regarding any
such transactions; and
|
|
·
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in
the event any of the securities offered by the selling shareholders are
sold, transferred, assigned or hypothecated by any selling shareholder in
a transaction that directly or indirectly involves a member firm of FINRA
or any affiliates thereof, that prior to or at the time of said
transaction the member firm will timely file all relevant documents with
respect to such transaction(s) with the Corporate Finance Department of
FINRA for review.
|
No FINRA
member firm may receive compensation in excess of that allowable under FINRA
rules, including Rule 5110, in connection with the resale of the securities by
the selling shareholders, which total compensation may not exceed
8%.
105
LEGAL
MATTERS
Stubbs
Alderton & Markiles, LLP (“SAM LLP”), has rendered a legal opinion, attached
hereto as Exhibit 5.1, as to the validity of the shares of the common stock to
be registered hereby. SAM LLP was the holder of 61,880 shares of
common stock and warrants to purchase 37,128 shares of common stock at an
exercise price of $1.51 of CNS Response, Inc., a California corporation, which
converted into 61,880 shares of our common stock and warrants to purchase 37,128
shares of our common stock at an exercise price of $1.51 upon the closing of the
merger on March 7, 2007. In addition, SAM Venture Partners invested
$162,600 in the Private Placement that closed on March 7, 2007, and in exchange
received 135,500 shares of our common stock, and warrants to purchase 40,652
shares of our common stock at an exercise price of $1.80 per
share. Subsequent to the Private Placement, SAM Venture Partners
distributed the aforementioned shares and warrants to its partners, each of whom
is a partner in SAM LLP.
EXPERTS
The
consolidated financial statements included in this prospectus have been audited
by Cacciamatta Accountancy Corporation, independent certified public
accountants, to the extent and for the periods set forth in their reports
appearing elsewhere herein, and are included in reliance on such reports given
upon the authority of said firm as experts in auditing and
accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC. We have also filed with the SEC under the Securities
Act a registration statement on Form S-1 with respect to the common stock
offered by this prospectus. This prospectus, which constitutes part
of the registration statement, does not contain all the information set forth in
the registration statement or the exhibits and schedules which are part of the
registration statement, portions of which are omitted as permitted by the rules
and regulations of the SEC. Statements made in this prospectus
regarding the contents of any contract or other document are summaries of the
material terms of the contract or document. With respect to each
contract or document filed as an exhibit to the registration statement,
reference is made to the corresponding exhibit. For further
information pertaining to us and the common stock offered by this prospectus,
reference is made to the registration statement, including the exhibits and
schedules thereto, copies of which may be inspected without charge at the Public
Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 on
official business days during the hours of 10 a.m. to 3 p.m.. Copies
of all or any portion of the registration statement may be obtained from the SEC
at prescribed rates. Information on the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The web site can be accessed
at http://www.sec.gov . The internet address of CNS
Response is http://www.cnsresponse.com.
106
INDEX
TO FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
CONSOLIDATED
BALANCE SHEETS AT SEPTEMBER 30, 2009 and 2008
|
F-2
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008
|
F-3
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR
THE
YEARS ENDED SEPTEMBER 30, 2009 AND 2008
|
F-4
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR YEARS ENDED SEPTEMBER 30, 2009
AND
2008
|
F-5
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER
30,
2009 AND 2008
|
F-6
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
F-23
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
F-24
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
F-25
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
|
F-26
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
|
F-27
|
107
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
CNS
Response, Inc.
2755
Bristol St., Suite 285
Costa
Mesa, CA 92626
We have
audited the accompanying consolidated balance sheets of CNS Response, Inc. (the
“Company”) and its subsidiaries as of September 30, 2009 and 2008, and the
related consolidated statements of operations, changes in stockholders’ equity
(deficit), and cash flows for each of the years in the two-year period ended
September 30, 2009. CNS Response, Inc.’s management is responsible for these
financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, 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. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of September
30, 2009 and 2008, and the results of its operations and its cash flows for each
of the years in the two-year period ended September 30, 2009 in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company’s continued operating
losses and limited capital raise substantial doubt about its ability to continue
as a going concern. Management’s plans in regard to this matter are
also described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/
Cacciamatta Accountancy Corporation
Santa
Ana, California
December
29, 2009
F-1
CNS
RESPONSE, INC.
CONSOLIDATED
BALANCE SHEETS AT SEPTEMBER 30, 2009 and 2008
As at September 30,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$
|
988,100
|
$
|
1,997,000
|
||||
Accounts
receivable (net of allowance for doubtful accounts of $11,700 and $17,200
in 2009 and 2008 respectively)
|
61,700
|
98,200
|
||||||
Prepaids
and other
|
89,500
|
189,400
|
||||||
Total
current assets
|
1,139,300
|
2,284,600
|
||||||
Other
Assets
|
21,600
|
28,700
|
||||||
Goodwill
|
-
|
320,200
|
||||||
TOTAL
ASSETS
|
$
|
1,160,900
|
$
|
2,633,500
|
||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable (including $7,000 and $6,800 to related parties in 2009 and 2008
respectively)
|
$
|
1,285,600
|
$
|
335,700
|
||||
Accrued
liabilities
|
261,400
|
207,500
|
||||||
Deferred
compensation (including $81,200 and $107,000 to related parties in
2009 and 2008 respectively)
|
220,100
|
264,900
|
||||||
Accrued
patient costs
|
305,500
|
397,500
|
||||||
Accrued
consulting fees (including $18,000 and $0 to related parties in 2009 and
2008, respectively)
|
72,100
|
67,600
|
||||||
Accrued
interest
|
-
|
42,600
|
||||||
Convertible
promissory notes
|
-
|
50,000
|
||||||
Current
portion of long-term debt
|
95,900
|
88,500
|
||||||
Total
current liabilities
|
2,240,600
|
1,454,300
|
||||||
LONG-TERM
LIABILITIES
|
||||||||
Note
payable to officer
|
24,800
|
118,600
|
||||||
Capital
lease
|
5,600
|
7,700
|
||||||
Total
long-term liabilities
|
30,400
|
126,300
|
||||||
TOTAL
LIABILITIES
|
2,271,000
|
1,580,600
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
-
|
-
|
||||||
STOCKHOLDERS'
EQUITY:
|
||||||||
Common
stock, $0.001 par value; authorized 750,000,000 shares; 41,781,129
and 25,299,547 shares outstanding as of September 30, 2009 and
2008
|
41,800
|
25,300
|
||||||
Additional
paid-in capital
|
24,044,000
|
17,701,300
|
||||||
Accumulated
deficit
|
(25,195,900
|
)
|
(16,673,700
|
)
|
||||
Total
stockholders' equity
|
(1,110,100
|
)
|
1,052,900
|
|||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
1,160,900
|
$
|
2,633,500
|
See
accompanying Notes to Consolidated Financial Statements
F-2
CNS
RESPONSE, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
YEARS ENDED
SEPTEMBER 30,
|
||||||||
2009
|
2008
|
|||||||
REVENUES
|
||||||||
Laboratory
Information Services
|
120,400
|
178,500
|
||||||
Clinical
Services
|
579,700
|
595,000
|
||||||
$
|
700,100
|
$
|
773,500
|
|||||
OPERATING
EXPENSES:
|
||||||||
Cost
of Laboratory Service revenues
|
131,600
|
163,200
|
||||||
Research
and development
|
2,137,200
|
2,097,300
|
||||||
Sales
and marketing
|
915,800
|
881,400
|
||||||
General
and administrative
|
3,887,400
|
3,105,700
|
||||||
Goodwill
impairment charges
|
320,200
|
-
|
||||||
Total
operating expenses
|
7,392,200
|
6,247,600
|
||||||
OPERATING
LOSS
|
(6,692,100
|
)
|
(5,474,100
|
)
|
||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income (expense), net
|
(1,732,900
|
)
|
104,000
|
|||||
Financing
premium
|
(90,000
|
)
|
-
|
|||||
Total
other income (expense)
|
(1,822,900
|
)
|
104,000
|
|||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(8,515,000
|
)
|
(5,370,100
|
)
|
||||
PROVISION
FOR INCOME TAXES
|
7,200
|
1,400
|
||||||
NET
LOSS
|
$
|
(8,522,200
|
)
|
$
|
(5,371,500
|
)
|
||
BASIC
NET LOSS PER SHARE
|
$
|
(0.31
|
)
|
$
|
(0.21
|
)
|
||
DILUTED
NET LOSS PER SHARE
|
$
|
(0.31
|
)
|
$
|
(0.21
|
)
|
||
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
||||||||
Basic
|
27,778,171
|
25,299,547
|
||||||
Diluted
|
27,778,171
|
25,299, 547
|
F-3
CNS
RESPONSE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008
Additional
|
||||||||||||||||||||
Common Stock
|
Paid-in
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance
at October 1, 2007
|
25,299,547
|
$
|
25,300
|
$
|
16,630,000
|
$
|
(11,302,200
|
)
|
$
|
5,353,100
|
||||||||||
Stock-
based compensation
|
-
|
-
|
1,071,300
|
-
|
1,071,300
|
|||||||||||||||
Net
loss for the year ended September 30, 2008
|
-
|
-
|
-
|
(5,371,500
|
)
|
(5,371,500
|
)
|
|||||||||||||
Balance
at September 30, 2008
|
25,299,547
|
$
|
25,300
|
$
|
17,701,300
|
$
|
(16,673,700
|
)
|
$
|
1,052,900
|
||||||||||
Stock-
based compensation
|
-
|
-
|
850,500
|
-
|
850,500
|
|||||||||||||||
Issuance
of 3,433,333 bridge warrants
|
-
|
-
|
1,058,000
|
-
|
1,058,000
|
|||||||||||||||
Exercise
of 1,498,986 $0.01 warrants
|
1,498,986
|
1,500
|
13,500
|
-
|
15,000
|
|||||||||||||||
Exercise
of 2,124,740 $0.132 options
|
2,124,740
|
2,100
|
278,400
|
-
|
280,500
|
|||||||||||||||
Issuance
of stock in connection with the Maxim PIPE net of offering costs of
$250,700
|
6,810,002
|
6,800
|
1,785,500
|
-
|
1,792,300
|
|||||||||||||||
Value
of beneficial conversion feature of bridge notes
|
-
|
-
|
642,000
|
-
|
642,000
|
|||||||||||||||
Issuance
of stock on conversion $1,720,900 of bridge notes and accrued
interest
|
6,047,854
|
6,100
|
1,714,800
|
-
|
1,720,900
|
|||||||||||||||
Warrants
issued in association with the Maxim PIPE
|
-
|
-
|
1,607,000
|
-
|
1,607,000
|
|||||||||||||||
Offering
cost pertaining to the Maxim PIPE
|
-
|
-
|
(1,607,000
|
)
|
-
|
(1,607,000
|
)
|
|||||||||||||
Net
loss for the year ended September 30, 2009
|
-
|
-
|
(8,522,200
|
)
|
(8,522,200
|
)
|
||||||||||||||
Balance
at September 30, 2009
|
41,781,129
|
$
|
41,800
|
$
|
24,044,000
|
$
|
(25,195,900
|
)
|
$
|
(1,110,100
|
)
|
See
accompanying Notes to Consolidated Financial Statements
F-4
CNS
RESPONSE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
YEAR ENDED SEPTEMBER 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(8,522,200
|
)
|
$
|
(5,371,500
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
& amortization
|
9,100
|
6,300
|
||||||
Discount
on bridge notes issued
|
1,058,000
|
-
|
||||||
Value
of beneficial conversion feature of bridge notes
|
642,000
|
-
|
||||||
Stock
based compensation
|
850,500
|
1,071,300
|
||||||
Non-cash
interest expense
|
20,900
|
-
|
||||||
Goodwill
impairment
|
320,200
|
-
|
||||||
Write-off
of doubtful accounts
|
22,700
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
13,800
|
(39,000
|
)
|
|||||
Prepaids
and other
|
99,900
|
(30,400
|
)
|
|||||
Accounts
payable and accrued liabilities
|
1,003,800
|
116,300
|
||||||
Deferred
compensation and others
|
(40,300
|
)
|
192,600
|
|||||
Accrued
patient costs
|
(92,000
|
)
|
397,500
|
|||||
Net
cash used in operating activities
|
(4,613,600
|
)
|
(3,656,900
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Deferred
offering relating to acquisition
|
-
|
(43,700
|
)
|
|||||
Furniture
& Fixtures
|
(2,000
|
)
|
(30,900
|
)
|
||||
Net
cash used in investing activities
|
(2,000
|
)
|
(74,600
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayment
of convertible debt with accrued interest
|
(92,600
|
)
|
-
|
|||||
Repayment
of debt
|
(86,700
|
)
|
(60,600
|
)
|
||||
Repayment
of lease payable
|
(1,800
|
)
|
(1,000
|
)
|
||||
Proceeds
from the sale of common stock, net of offering costs
|
1,792,300
|
-
|
||||||
Proceeds
from bridge notes
|
1,700,000
|
-
|
||||||
Proceeds
from exercise of warrants and options
|
295,500
|
-
|
||||||
Net
cash provided (used) by financing activities
|
3,606,700
|
(61,600
|
)
|
|||||
NET
INCREASE (DECREASE) IN CASH
|
(1,008,900
|
)
|
(3,793,100
|
)
|
||||
CASH-
BEGINNING OF YEAR
|
1,997,000
|
5,790,100
|
||||||
CASH-
END OF YEAR
|
$
|
988,100
|
$
|
1,997,000
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash paid
during the period for:
|
||||||||
Interest
|
$
|
64,100
|
$
|
22,440
|
||||
Income
taxes
|
$
|
7,200
|
$
|
5,972
|
||||
Fair
value of note payable to officer issued for acquisition
|
$
|
118,600
|
$
|
265,900
|
||||
Fair
value of equipment acquired through lease
|
$
|
7,600
|
$
|
10,500
|
||||
Conversion
of bridge notes and related accrued interest into common
stock
|
$
|
1,720,900
|
$
|
-
|
F-5
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
1.
|
NATURE
OF OPERATIONS
|
Organization
and Nature of Operations
CNS
Response, Inc. (the “Company”) was incorporated in Delaware on July 10, 1984.
The Company utilizes a patented system that guides psychiatrists and other
physicians to determine a proper treatment for patients with mental, behavioral
and/or addictive disorders. The Company also intends to identify,
develop and commercialize new indications of approved drugs and drug candidates
for this patient population.
In
addition, as a result of its acquisition of Neuro-Therapy Clinic, Inc. (“NTC”)
on January 15, 2008, the Company provides behavioral health care
services. NTC is a center for highly-advanced testing and treatment
of neuropsychiatric problems, including learning, attentional and behavioral
challenges, mild head injuries, as well as depression, anxiety, bipolar and all
other common psychiatric disorders. Through this acquisition, the Company
expects to advance neurophysiology data collection, beta-test planned
technological advances in rEEG, advance physician training in rEEG and
investigate practice development strategies associated with rEEG.
Going
Concern Uncertainty
The
Company has a limited operating history and its operations are subject to
certain problems, expenses, difficulties, delays, complications, risks and
uncertainties frequently encountered in the operation of a new business. These
risks include the failure to develop or supply technology or services to meet
the demands of the marketplace, the ability to obtain adequate financing on a
timely basis, the failure to attract and retain qualified personnel, competition
within the industry, government regulation and the general strength of regional
and national economies.
To date,
the Company has financed its cash requirements primarily from debt and equity
financings. It will be necessary for the Company to raise additional
funds. The Company’s liquidity and capital requirements depend on
several factors, including the rate of market acceptance of its services, the
future profitability of the Company, the rate of growth of the Company’s
business and other factors described elsewhere in this Annual
Report. The Company is currently exploring additional sources of
capital but there can be no assurances that any financing arrangement will be
available in amounts and terms acceptable to the Company.
2.
|
CONVERTIBLE
DEBT AND EQUITY FINANCINGS
|
Prior to
September 30, 2006, CNS California issued convertible promissory notes with
detachable warrants from time to time to fund its operations. The
notes bear interest at 8% per year, compounded annually, and are payable on
demand. The terms of the notes provide for the (i) conversion of
principal and accrued interest into the same type of securities issued by CNS
California upon a qualified institutional financing, the amount of which
financing varies between notes and ranges from $1 to $4 million, and (ii)
conversion price to be equal to the same price as the shares sold in the
financing. The notes provide for an aggregate of $2,196,000 in
principal to convert automatically and $920,700 to convert at the note holders’
options based upon certain financing requirements (as defined).
In
October 2006, CNS California and the note holders of certain convertible
promissory notes converted notes with an aggregate outstanding balance of
$3,061,700 and related accrued and unpaid interest of $1,005,300 at September
30, 2006 into 5,993,515 shares of CNS California Series A Preferred
Stock. In addition, the exercise price of warrants to purchase
1,062,116 shares of the CNS California common stock issued to such note holders
was changed to $0.59 per share. Upon completion of the reverse merger
pursuant to which CNS California became a subsidiary of the Company, the
preferred shares were converted into 5,993,515 shares of the Company’s
common stock and the warrants were converted into warrants to purchase 1,062,116
shares of the Company’s common stock at an exercise price of $0.59 per
share. The consolidated financial statements of the Company presented
reflect the issuance of these shares as common stock.
F-6
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
As of
September 30, 2008, one note issued by CNS California with a principal
balance of $49,950 was outstanding. In May 2009, the Company entered into a
settlement and release agreement with this note holder and fully repaid the
promissory note with accrued interest on June 30, 2009.
Between
March 30 and June 12, 2009 the Company entered into three rounds of bridge
financings in the form of secured convertible promissory notes. These
three rounds are referred to as:
|
(a)
|
the
March 30, 2009 SAIL/Brandt Notes
|
|
(b)
|
the
May 14, 2009 SAIL Note
|
|
(c)
|
the
June 12, 2009 Pappajohn Note
|
All these
notes were converted to equity as a result of the private placement transaction
that closed on August 26, 2009 and are fully described in the section
below.
The
Private Placement Transaction
On
August 26, 2009, CNS Response, Inc. (the “Company”) received gross proceeds of
approximately $2,043,000 in a private placement transaction (the “Private
Placement”) with six investors. Pursuant to Subscription Agreements
entered into with the investors, the Company sold approximately 38 Investment
Units at $54,000 per Investment Unit. Each “Investment Unit” consists
of 180,000 shares of the Company’s common stock and a five year non-callable
warrant to purchase 90,000 shares of the Company’s common stock at an exercise
price of $0.30 per share. After commissions and expenses, the Company
received net proceeds of approximately $1,792,300 in the Private
Placement. These funds were used to repay outstanding liabilities,
fund the Company’s recent clinical trial and for general working capital
purposes.
A
FINRA member firm, the Maxim Group LLC (“Maxim Group”), acted as lead placement
agent in connection with the Private Placement. For its services in
connection with the first closing of the offering, Maxim Group received (i) a
cash fee of $ 55,980, (ii) a cash expense allowance of $40,860, and (iii) a five
year non-callable warrant to purchase 274,867 shares of the Company’s common
stock at an exercise price of $0.33 per share, first exercisable no earlier than
February 26, 2010.
Pursuant
to a Registration Rights agreement entered into with each investor, the Company
agreed to file a registration statement covering the resale of the common stock
and the common stock underlying the warrants sold in the Private Placement, as
well as the common stock underlying the warrants issued to Maxim Group by the
later of October 26, 2009 or the 20th calendar day after the termination of the
offering. The Registration Rights agreement was subsequently amended
to permit the filing of the registration statement no later than 10
business days following the Company’s filing of its Annual Report on Form 10-K
for its September 30, 2009 year end, or the 20th
calendar day after termination of the private offering.
In
addition, the Company agreed to use its best efforts to have the registration
statement declared effective no later than 180 days following the final closing
of the offering and maintain such effectiveness until the earlier of the second
anniversary of the date of such effectiveness or the date that all of the
securities covered by the registration statement may be sold without
restriction.
F-7
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Events
Relating to Private Placement Transaction
(a)
|
Conversion
of the March 30, 2009 SAIL/Brandt
Notes
|
On March
30, 2009, the Company entered into two Senior Secured Convertible Promissory
Notes, each in the principal amount of $250,000 (each a “March Note” and,
collectively, the “March Notes”), with Brandt Ventures, GP (“Brandt”) and SAIL
Venture Partners, LP (“SAIL”). Leonard Brandt, a former member of the Company’s
board of directors, is the general partner of Brandt and David B. Jones, a
current member of the Company’s board of directors, is a managing member of Sail
Venture Partners, LLC, which is the general partner of SAIL. The terms of the
March Notes provided that in the event the Company consummates an equity
financing transaction of at least $1,500,000 (excluding any and all other debt
that is converted), then the principal and all accrued, but unpaid interest
outstanding under the notes shall be automatically converted into the securities
issued in the equity financing by dividing such amount by 90% of the per share
price paid by the investors in such financing. In accordance with the
terms of the March Notes, at the closing of the Private Placement, the Company
issued to each of Brandt and SAIL 956,164 shares of common stock and a five year
non-callable warrant to purchase 478,082 shares of its common stock at an
exercise price of $0.30 per share.
(b)
|
Conversion
of the May 14, 2009 SAIL Note
|
On May
14, 2009, the Company entered into a Bridge Note and Warrant Purchase Agreement
(the “SAIL Purchase Agreement”) with SAIL. Pursuant to the SAIL Purchase
Agreement, on May 14, 2009 SAIL purchased a Secured Promissory Note in the
principal amount of $200,000 from the Company (the “May SAIL
Note”). In order to induce SAIL to purchase the note, the Company
issued to SAIL a warrant to purchase up to 100,000 shares of the Company’s
common stock at a purchase price equal to $0.25 per share. The
warrant expires on May 31, 2016.
The terms
of the May SAIL Note provided that in the event the Company consummates an
equity financing transaction of at least $1,500,000 (excluding any and all other
debt that is converted), then the principal and all accrued, but unpaid interest
outstanding under the note shall be automatically converted into the securities
issued in the equity financing by dividing such amount by 85% of the per share
price paid by the investors in such financing. In accordance with the
terms of the May SAIL Note, at the first closing of the Private Placement on
August 26, 2009, the Company issued to SAIL 802,192 shares of its common stock
and a five year non-callable warrant to purchase 401,096 shares of its common
stock at an exercise price of $0.30 per share.
(c)
|
Conversion
of the June 12, 2009 Pappajohn Note
|
On June
12, 2009, John Pappajohn entered into a Bridge Note and Warrant Purchase
Agreement (the “Pappajohn Purchase Agreement”) with the
Company. Pursuant to the Pappajohn Purchase Agreement, Mr. Pappajohn
purchased a Secured Convertible Promissory Note in the principal amount of
$1,000,000 from the Company. In order to induce Mr. Pappajohn to
purchase the note, the Company issued to Mr. Pappajohn a warrant to purchase up
to 3,333,333 shares of the Company’s common stock at a purchase price equal to
$0.30 per share. The warrant expires on June 30, 2016.
The note
issued pursuant to the Pappajohn Purchase Agreement provided that the principal
amount of $1,000,000 together with a single payment of $90,000 (the “Premium
Payment”) would be due and payable, unless sooner converted into shares of the
Company’s common stock (as described below), upon the earlier to occur of: (i) a
declaration by Mr. Pappajohn on or after June 30, 2010 or (ii) an Event of
Default (as defined in the note). The note was secured by a lien on
substantially all of the assets (including all intellectual property) of the
Company. In the event of a liquidation, dissolution or winding up of
the Company, unless Mr. Pappajohn informed the Company otherwise, the Company
was required to pay Mr. Pappajohn an amount equal to the product of 250%
multiplied by the then outstanding principal amount of the note and the Premium
Payment.
F-8
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
The
Pappajohn Purchase Agreement also provided that in the event the Company
consummated an equity financing transaction of at least $1,500,000 (excluding
any and all other debt that is converted), the then outstanding principal amount
of the note (but excluding the Premium Payment, which would be repaid in cash at
the time of such equity financing) would be automatically converted into the
securities issued in the equity financing by dividing such amount by the per
share price paid by the investors in such financing. The note also
provided that the securities issued upon conversion of the note would be
otherwise issued on the same terms as such shares are issued to the lead
investor that purchases shares of the Company in the qualified
financing.
On August
26, 2009, at the closing of the Private Placement, the Company paid the Premium
Payment to Mr. Pappajohn, and the outstanding principal amount of Mr.
Pappajohn’s note ($1,000,000 as of August 26, 2009) converted into 3,333,334
shares of the Company’s common stock. In addition, in accordance with the terms
of his note, Mr. Pappajohn was issued a five year non-callable warrant to
purchase 1,666,667 shares of the Company’s common stock at an exercise price of
$0.30 per share.
Upon the
abovementioned conversions, the Company evaluated the terms and calculated the
fair value of the common stocks (by using the close market price at the
respective original issuance date of the convertible notes) and warrants (by
running the Black-Scholes Model) issued upon the conversions and so determined
that the notes were converted with a beneficial conversion feature amounting to
$642,000. As a result, for the year ended September 30, 2009, the Company
recorded $642,000 as interest expense.
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Consolidation
The
consolidated financial statements include the accounts of CNS Response, Inc., an
inactive parent company, and its wholly owned subsidiaries CNS California and
NTC. All significant intercompany transactions have been eliminated
in consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expense, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its estimates, including
those related to revenue recognition, doubtful accounts, intangible assets,
income taxes, valuation of equity instruments, contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from these estimates.
Cash
The
Company deposits its cash with major financial institutions and may at times
exceed federally insured limit of $250,000. At September 30, 2009
cash exceeded the federally insured limit by $819,600. The Company believes that
the risk of loss is minimal. To date, the Company has not experienced any losses
related to cash deposits with financial institutions.
F-9
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Fair
Value of Financial Instruments
ASC
825-10 (formerly SFAS 107, “Disclosures about Fair Value of Financial
Instruments”) defines financial instruments and requires disclosure of the fair
value of financial instruments held by the Company. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable and accrued liabilities, to approximate their fair values because of the
short period of time between the origination of such instruments and their
expected realization.
The
Company also analyzes all financial instruments with features of both
liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity”), ASC 815-10 (formerly SFAS No 133, “Accounting for Derivative
Instruments and Hedging Activities”) and ASC 815-40 (formerly EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”).
The
Company adopted ASC 820-10 (formerly SFAS 157, “Fair Value Measurements”) on
January 1, 2008. ASC 820-10 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The three levels are defined as
follow:
|
·
|
Level
1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
|
|
·
|
Level
2 inputs to the valuation methodology include quoted
prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or
indirectly, for substantially the full term of the financial
instruments.
|
|
·
|
Level
3 inputs to the valuation methodology are unobservable
and significant to the fair value.
|
As of
September 30, 2009 the Company did not identify any assets or liabilities that
are required to be presented on the balance sheet at fair value in accordance
with ASC 820-10.
Accounts
Receivable
The
Company estimates the collectability of customer receivables on an ongoing basis
by reviewing past-due invoices and assessing the current creditworthiness of
each customer. Allowances are provided for specific receivables
deemed to be at risk for collection.
Fixed
Assets
Fixed
assets, which are recorded at cost, consist of office furniture and equipment
and are depreciated over their estimated useful life on a straight-line
basis. The useful life of these assets is estimated to be from 3 to 5
years. Depreciation and accumulated depreciation for the years ended
September 2009 and 2008 is $9,100 and $6,300 respectively.
Goodwill
In
accordance with ASC 350-20 (formerly Statement of Financial Accounting Standards
(“SFAS” ) No. 142, Goodwill
and Other Intangible Assets ) (“ASC 350-10”) , goodwill is not amortized
but instead is measured for impairment at least annually, or more frequently if
certain indicators are present.
F-10
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
The
Company measures for impairment by applying fair value-based tests at the
reporting unit level. If the fair value of the reporting unit exceeds the
carrying value of the net assets assigned to that unit, then goodwill is not
impaired and no further testing is performed. The Company, if necessary,
measures the amount of impairment by applying fair value-based tests to
individual assets and liabilities within each reporting unit. If the carrying
value of a reporting unit’s goodwill exceeds its implied fair value, the Company
records an impairment loss equal to the difference.
To
determine the reporting unit’s fair values, the Company uses the income
approach. The income approach provides an estimate of fair value based on
discounted expected future cash flows (“DCF”). Estimates and assumptions with
respect to the determination of the fair value of the Company’s reporting units
using the income approach include the Company’s operating forecasts, revenue
growth rates and risk-commensurate discount rates.
The
Company’s estimates of revenues and costs are based on historical data, various
internal estimates and a variety of external sources, and are developed by the
Company’s regular long-range planning process.
During
the fourth quarter of fiscal year 2009, the Company conducted a goodwill
impairment test and determined that the amount of the recorded goodwill related
to the NTC acquisition was fully impaired. Accordingly, the Company recorded a
goodwill impairment charge of $320,200 for the year ended September 30,
2009.
Long-Lived
Assets
As
required by ASC 350-30 (formerly SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ) (“ASC 350-30”), the Company reviews the
carrying value of its long-lived assets whenever events or changes in
circumstances indicate that the historical cost-carrying value of an asset may
no longer be appropriate. The Company assesses recoverability of the carrying
value of the asset by estimating the future net cash flows expected to result
from the asset, including eventual disposition. If the future net cash flows are
less than the carrying value of the asset, an impairment loss is recorded equal
to the difference between the asset’s carrying value and fair value. No
impairment loss, apart from the abovementioned goodwill impairment, was recorded
for the years ended September 30, 2009 and 2008.
Revenues
The
Company recognizes revenue as the related services are delivered.
Research
and Development Expenses
The
Company charges all research and development expenses to operations as
incurred.
Advertising
Expenses
The
Company charges all advertising expenses to operations as incurred.
Stock-Based
Compensation
The
Company has adopted ASC 718-20 (formerly SFAS No. 123R, Share-Based Payment -revised
2004) (“ASC718-20”) and related interpretations which establish the accounting
for equity instruments exchanged for employee services. Under ASC 718-20,
share-based compensation cost is measured at the grant date based on the
calculated fair value of the award. The expense is recognized over the
employees’ requisite service period, generally the vesting period of the
award.
F-11
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Income
Taxes
The
Company accounts for income taxes to conform to the requirements of ASC 740-20
(formerly SFAS No. 109, Accounting for Income Taxes )
(“ASC 740-20”). Under the provisions of ASC_740-20, an entity recognizes
deferred tax assets and liabilities for future tax consequences of events that
have already been recognized in the Company's financial statements or tax
returns. The measurement of deferred tax assets and liabilities is based on
provisions of the enacted tax law. The effects of future changes in tax laws or
rates are not anticipated. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be
realized.
Comprehensive
Income (Loss)
ASC
220-10 (formerly, SFAS No. 130, Reporting Comprehensive
Income ) (“ASC 220-10”), requires disclosure of all components of
comprehensive income (loss) on an annual and interim
basis. Comprehensive income (loss) is defined as the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company’s comprehensive
income (loss) is the same as its reported net income (loss) for the years ended
September 30, 2009 and 2008.
Income
(Loss) per Share
Basic and
diluted net income (loss) per share has been computed using the weighted average
number of shares of common stock outstanding during the period.
Segment
Information
The
Company uses the management approach for determining which, if any, of its
products and services, locations, customers or management structures constitute
a reportable business segment. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of any reportable segments. Management uses
two measurements of profitability and does disaggregate its business for
internal reporting and therefore operates two business segments which are
comprised of a reference laboratory and a clinic. The Reference
Laboratory provides reports (“rEEG Reports”) that assist physicians with
treatment strategies for patients with behavioral (psychiatric and/or addictive)
disorders based on the patient’s own physiology. The Clinic operates
NTC, a full service psychiatric practice.
Reclassifications
Certain
amounts in prior years have been reclassified to conform to current year
presentation. These reclassifications had no effect on previously
reported operating loss or net income.
Recent
Accounting Pronouncements
In April
2009, the FASB issued ASC 825-10 (formerly FASB Staff Position No. FAS 107-1 and
APB 28-1, Interim Disclosures about Fair Value of Financial Instruments) (“ASC
825”) , which requires that the fair value disclosures required for all
financial instruments within the scope of SFAS 107, “Disclosures about Fair
Value of Financial Instruments”, be included in interim financial statements.
This FSP also requires entities to disclose the method and significant
assumptions used to estimate the fair value of financial instruments on an
interim and annual basis and to highlight any changes from prior periods. FSP
107-1 was effective for interim periods ending after June 15, 2009, with early
adoption permitted. The adoption of FSP 107-1 did not have a material impact on
the Company’s consolidated financial statements.
F-12
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
In May
2009, the FASB issued ASC 855-10 (formerly Statement No. 165, Subsequent Events)
(“ASC 855”). ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In accordance
with this Statement, entities should apply the requirements to interim or annual
financial periods ending after June 15, 2009. The adoption of this
statement did not have a material impact on the Company’s consolidated financial
statements.
In June
2009, the FASB approved its Accounting Standards Codification, or Codification,
as the single source of authoritative United States accounting and reporting
standards applicable for all non-governmental entities, with the exception of
the SEC and its staff. The Codification, which changes the referencing of
financial standards, is effective for interim or annual financial periods ending
after September 15, 2009. Therefore, starting from fiscal year end 2009, all
references made to US GAAP will use the new Codification numbering system
prescribed by the FASB. As the Codification is not intended to change or alter
existing US GAAP, it did not have any impact on the Company’s consolidated
financial statements.
As a
result of the Company’s implementation of the Codification during the year ended
September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current annual financial statements,
the Company will provide reference to both new and old guidance to assist in
understanding the impact of recently adopted accounting literature, particularly
for guidance adopted since the beginning of the current fiscal year but prior to
the Codification.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05),
“Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at
Fair Value.” ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and
Disclosures – Overall,” and provides clarification for the fair value
measurement of liabilities. ASU 2009-05 is effective for the first reporting
period including interim period beginning after issuance. The Company does not
expect the adoption of ASU 2009-05 to have a material impact on its consolidated
financial statements.
4.
|
STOCKHOLDERS’
EQUITY
|
Common
and Preferred Stock
As of
September 30, 2009 the Company is authorized to issue 750,000,000 shares of
common stock.
As of
September 30, 2009, CNS California is authorized to issue 100,000,000 shares of
two classes of stock, 80,000,000 of which was designated as common shares and
20,000,000 of which was designated as preferred shares.
As of
September 30, 2009, Colorado CNS Response, Inc. is authorized to issue 1,000,000
shares of common stock.
As of
September 30, 2009, Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of
Colorado CNS Response, Inc., is authorized to issue ten thousand (10,000) shares
of common stock, no par value per share.
F-13
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Stock-Option
Plan
On August
3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan
(the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form
of restricted shares, stock options (which may constitute incentive stock
options(ISO) or non-statutory stock options (NSO)), stock appreciation rights
and stock unit grants to eligible employees, directors and consultants and is
administered by the board of directors. A total of 10 million shares of stock
are reserved for issuance under the 2006 Plan. As of September 30,
2009, 2,124,740 options were exercised and there were 6,662,014 options and
183,937 restricted shares outstanding under the 2006 Plan and 1,029,309 shares
available for issuance of awards.
The 2006
Plan provides that in any calendar year, no eligible employee or director shall
be granted an award to purchase more than 3 million shares of stock. The option
price for each share of stock subject to an option shall be (i) no less than the
fair market value of a share of stock on the date the option is granted, if the
option is an ISO, or (ii) no less than 85% of the fair market value of the stock
on the date the option is granted, if the option is a NSO; provided, however, if
the option is an ISO granted to an eligible employee who is a 10% shareholder,
the option price for each share of stock subject to such ISO shall be no less
than 110% of the fair market value of a share of stock on the date such ISO is
granted. Stock options have a maximum term of ten years from the date of grant,
except for ISOs granted to an eligible employee who is a 10% shareholder, in
which case the maximum term is five years from the date of grant. ISOs may be
granted only to eligible employees. The Company has adopted ASC 718-20
(formerly, SFAS No. 123R -revised 2004, “Share-Based Payment”), and related
interpretations. Under ASC 718-20, share-based compensation cost is measured at
the grant date based on the calculated fair value of the award. The Company
estimates the fair value of each option on the grant date using the
Black-Scholes model. The following assumptions were made in
estimating the fair value:
Options granted in:
|
Dividend
Yield
|
Risk-free
interest rate
|
Expected
volatility
|
Expected life
|
||||||||||
Fiscal
2006
|
0 | % | 5.46 | % | 100 | % |
5
years
|
|||||||
November
2006
|
0 | % | 5.00 | % | 100 | % |
10
years
|
|||||||
August
2007
|
0 | % | 4.72 | % | 91 | % |
5
years
|
|||||||
October
2007
|
0 | % | 4.60 | % | 105 | % |
5
years
|
|||||||
December
2007
|
0 | % | 4.00 | % | 113 | % |
5
years
|
|||||||
April
2008
|
0 | % | 3.78 | % | 172 | % |
5
years
|
|||||||
September
2008
|
0 | % | 3.41 | % | 211 | % |
5
years
|
|||||||
October
2008
|
0 | % | 3.77 | % | 211 | % |
5
years
|
|||||||
March
2009
|
0 | % | 3.00 | % | 385 | % |
5
years
|
The
expense is recognized over the employees’ requisite service period, generally
the vesting period of the award. Stock-based compensation expense
included in the accompanying statements of operations for the years ended
September 30, 2009 and 2008 is as follows:
For
the fiscal year ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Operations
|
$ | 16,100 | $ | 16,100 | ||||
Research
and development
|
260,800 | 321,100 | ||||||
Sales
and marketing
|
137,500 | 83,100 | ||||||
General
and administrative
|
436,100 | 651,000 | ||||||
Total
|
$ | 850,500 | $ | 1,071,300 |
Total
unrecognized compensation as of September 30, 2009 amounted to
$1,094,100.
F-14
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
A summary
of stock option activity is as follows:
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding
at September 30, 2007
|
7,436,703 | $ | 0.57 | |||||
Granted
|
1,880,621 | $ | 0.85 | |||||
Exercised
|
- | - | ||||||
Forfeited
|
(352,757 | ) | $ | 1.09 | ||||
Outstanding
at September 30, 2008
|
8,964,567 | $ | 0.60 | |||||
Granted
|
80,000 | $ | 0.43 | |||||
Exercised
|
(2,124,740 | ) | $ | 0.132 | ||||
Forfeited
|
(257,813 | ) | $ | 0.51 | ||||
Outstanding
at September 30, 2009
|
6,662,014 | $ | 0.76 | |||||
Weighted
average fair value of options granted during:
|
||||||||
Year
ended September 30, 2008
|
$ | 0.73 | ||||||
Year
ended September 30, 2009
|
$ | 0.43 |
Following
is a summary of the status of options outstanding at September 30,
2009:
Exercise
Price
|
Number
of Shares
|
Weighted
Average
Contractual
Life
|
Weighted
Average
Exercise
Price
|
|||||||
$ |
0.12
|
859,270 |
10
years
|
$ | 0.12 | |||||
$ |
0.132
|
987,805 |
7 years
|
$ | 0.132 | |||||
$ |
0.30
|
135,700 |
10
years
|
$ | 0.30 | |||||
$ |
0.59
|
28,588 |
10
years
|
$ | 0.59 | |||||
$ |
0.80
|
140,000 |
10
years
|
$ | 0.80 | |||||
$ |
0.89
|
968,875 |
10
years
|
$ | 0.89 | |||||
$ |
0.96
|
496,746 |
10
years
|
$ | 0.96 | |||||
$ |
1.09
|
2,614,232 |
10
years
|
$ | 1.09 | |||||
$ |
1.20
|
333,611 |
5
years
|
$ | 1.20 | |||||
$ |
0.51
|
275,000 |
10
years
|
$ | 0.51 | |||||
$ |
0.40
|
56,000 |
10
years
|
$ | 0.40 | |||||
Total
|
6,662,014 | $ | 0.76 |
Warrants
to Purchase Common Stock
At
September 30, 2007, there were warrants outstanding to purchase 6,899,353 shares
of the Company’s common stock at exercise prices ranging from $0.01 to $1.812
with a weighted average exercise price of $1.04. The warrants expire
at various times through 2017. No warrants were issued or exercised
during the 12 months ended September 30, 2008.
During
the year ended September 30, 2009, 1,498,986 warrants with an exercise price of
$0.01 were exercised.
During
the year ended September 30, 2009, the following additional 10,137,118 warrants
were granted and are outstanding as of September 30, 2009:
F-15
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Warrants
to
Purchase
|
Exercise
Price
|
Issued
in Connection With:
|
|||
100,000
shares
|
$ | 0.25 |
A
$200,000 bridge note with SAIL on May 14, 2009 as described in Note
2
|
||
3,333,333
shares
|
$ | 0.30 |
A
$1,000,000 bridge note with Pappajohn on June 12, 2009 as described in
Note 2
|
||
3,404,991
shares
|
$ | 0.30 |
Associated
with the private placement transaction of 6,810,002 shares at $0.30 with
50% warrant coverage as described in Note 2
|
||
956,164
shares
|
$ | 0.27 |
Associated
with the automatic conversion of
|
||
401,096
shares
|
$ | 0.255 |
$1,700,000
of convertible promissory notes and
|
||
1,666,667
shares
|
$ | 0.30 |
$20,900
accrued interest upon completion an equity
|
||
financing
in excess of $1,500,000 as described in Note
2
|
|||||
274,867
shares
|
$ | 0.33 |
The
placement agent for private placement as described in Note
2
|
At
September 30, 2009, there were warrants outstanding to purchase 15,537,485
shares of the Company’s common stock at exercise prices ranging from $0.01 to
$1.812 with a weighted average exercise price of $0.65. The warrants
expire at various times through 2017.
5.
|
INCOME
TAXES
|
The
Company accounts for income taxes under the liability method. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. We provide a valuation allowance to reduce our deferred tax
assets to their estimated realizable value.
Reconciliations
of the provision (benefit) for income taxes to the amount compiled by applying
the statutory federal income tax rate to profit (loss) before income taxes is as
follows for each of the years ended September 30:
2009
|
2008
|
|||||||
Federal
income tax (benefit) at statutory rates
|
(34 | )% | (34 | )% | ||||
Stock-based
compensation
|
0 | % | 20 | % | ||||
Non
deductible interest expense
|
0 | % | 0 | % | ||||
Change
in valuation allowance
|
37 | % | 14 | % | ||||
Goodwill
write off
|
(3 | )% | 0 | % |
F-16
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities that give rise to significant portions of deferred taxes
relate to the following at September 30, 2009 and 2008:
2009
|
2008
|
|||||||
Deferred
income tax assets:
|
||||||||
Net
operating loss carryforward
|
$ | 8,765,900 | $ | 4,953,000 | ||||
Deferred
interest, consulting and compensation liabilities
|
987,500 | 17,000 | ||||||
Amortization
|
(24,300 | ) | 223,300 | |||||
Deferred
income tax assets - other
|
7,800 | - | ||||||
9,736,900 | 5,193,300 | |||||||
Deferred
income tax liabilities—other
|
- | (12 ,300 | ) | |||||
Deferred
income tax asset—net before valuation allowance
|
9,736,900 | 5,181,000 | ||||||
Valuation
allowance
|
(9,736,900 | ) | (5,181,000 | ) | ||||
Deferred
income tax asset—net
|
$ | - | $ | - |
Current
and non-current deferred taxes have been recorded on a net basis in the
accompanying balance sheet. As of September 30, 2009, the Company has net
operating loss carryforwards of approximately $20.8 million. The net operating
loss carryforwards expire by 2028. Utilization of net operating losses and
capital loss carryforwards may be subject to the limitations imposed by Section
382 of the Internal Revenue Code. The Company has placed a valuation allowance
against the deferred tax assets in excess of deferred tax liabilities due to the
uncertainty surrounding the realization of such excess tax assets. Management
periodically evaluates the recoverability of the deferred tax assets and the
level of the valuation allowance. At such time as it is determined that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced accordingly.
6. ACQUISITION OF NEURO THERAPY CLINIC,
PC
On
January 15, 2008, the Company, through its wholly owned subsidiary, Colorado CNS
Response, Inc., acquired all of the outstanding common stock of Neuro-Therapy
Clinic, PC (“NTC”) in exchange for a non-interest bearing note payable of
$300,000 payable in equal monthly installments over 36 months. Upon
the completion of the acquisition, the sole shareholder of NTC was appointed
Chief Medical Officer of the Company. Prior to the acquisition, NTC
was the Company’s largest customer.
The
acquisition was accounted under the purchase method of accounting, and
accordingly, the purchase price was allocated to NTC’s net tangible assets based
on their estimated fair values as of January 15, 2008. The excess purchase price
over the value of the net tangible assets was recorded as
goodwill. The purchase price and the allocation thereof are as
follows:
Fair
value of note payable issued
|
$ | 265,900 | ||
Direct
transaction costs
|
43,700 | |||
Purchase
price
|
309,600 | |||
Allocated
to net tangible liabilities, including cash of $32,100
|
(10,600 | ) | ||
Allocated
to goodwill
|
$ | 320,200 |
The
acquisition was not material, and accordingly, no pro forma results are
presented. As of September 30, 2009, goodwill was measured and
determined to be fully impaired and consequently written off.
F-17
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
7.
|
LONG-TERM
DEBT
|
As
described in Note 6 above, during the year ended September 30, 2008 the Company
issued a note payable to an officer in connection with the acquisition of
NTC. The note is non-interest bearing and the Company determined its
fair value by imputing interest at an annual rate of 8%. As of
September 30, 2009 the note has an outstanding principal balance in the amount
of $118,600, of which $93,800 is current.
8.
|
REPORTABLE
SEGMENTS
|
The
Company operates in two business segments: reference laboratory and
clinic. Reference laboratory provide reports (“rEEG Reports”) that
assist physicians with treatment strategies for patients with behavioral
(psychiatric and/or addictive) disorders based on the patient’s own
physiology. Clinic operates NTC, a full service psychiatric
practice.
The
following tables show operating results for our reportable segments, along with
reconciliation from segment gross profit to (loss) from operations, the most
directly comparable measure in accordance with generally accepted accounting
principles in the United States, or GAAP:
Year
ended September 30,2009
|
||||||||||||||||
Reference
Laboratory
|
Clinic
|
Eliminations
|
Total
|
|||||||||||||
Revenues
|
138,900 | 628,200 | (67,000 | ) | 700,100 | |||||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of revenues
|
131,600 | 18,500 | (18,500 | ) | 131,600 | |||||||||||
Research
and development
|
2,137,200 | - | - | 2,137,200 | ||||||||||||
Sales
and marketing
|
908,500 | 7,300 | - | 915,800 | ||||||||||||
General
and administrative
|
3,266,300 | 669,600 | (48,500 | ) | 3,887,400 | |||||||||||
Goodwill
impairment charges
|
320,000 | - | - | 320,000 | ||||||||||||
Total
operating expenses
|
6,763,800 | 695,400 | (67,000 | ) | 7,392,200 | |||||||||||
Loss
from operations
|
$ | (6,624,900 | ) | $ | (67,200 | ) | $ | 0 | $ | (6,692,100 | ) |
The following table
includes selected segment financial information as of September 30, 2009,
related to goodwill and total assets:
Reference
Laboratory
|
Clinic
|
Total
|
||||||||||
Goodwill
|
$ | - | $ | - | $ | - | ||||||
Total
assets
|
$ | 1,118,000 | $ | 42,900 | $ | 1,160,900 |
9.
|
EARNINGS
PER SHARE
|
In
accordance with ASC 260-10 (formerly SFAS 128, “Computation of Earnings Per
Share”), basic net income (loss) per share is computed by dividing the net
income (loss) to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing the net income (loss) for the period by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. For the years ended September 30, 2009
and 2008, the Company has excluded all common equivalent shares from the
calculation of diluted net loss per share as such securities are
anti-dilutive.
F-18
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
A summary
of the net income (loss) and shares used to compute net income (loss) per share
for the years ended September 30, 2009 and 2008 is as follows:
2009
|
2008
|
|||||||
Net
loss for computation of basic net income (loss) per share
|
$ | (8,522,200 | ) | $ | (5,371,500 | ) | ||
Net
income (loss) for computation of dilutive net income (loss) per
share
|
$ | (8,522,200 | ) | $ | (5,371,500 | ) | ||
Basic
net income (loss) per share
|
$ | (0.31 | ) | $ | (0.21 | ) | ||
Diluted
net income (loss) per share
|
$ | (0.31 | ) | $ | (0.21 | ) | ||
Basic
weighted average shares outstanding
|
27,778,171 | 25,299,547 | ||||||
Dilutive
common equivalent shares
|
- | - | ||||||
Diluted
weighted average common shares
|
27,778,171 | 25,299,547 | ||||||
Anti-dilutive
common equivalent shares not included in the computation of dilutive net
loss per share:
|
||||||||
Convertible
debt
|
- | 4,995,000 | ||||||
Warrants
|
8,318,310 | 6,899,353 | ||||||
Options
|
8,548,206 | 8,767,212 |
10.
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
Litigation
From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the ordinary course of business. Other than as set forth above, we
are not currently party to any legal proceedings, the adverse outcome of which,
in our management’s opinion, individually or in the aggregate, would have a
material adverse effect on our results of operations or financial
position.
Since
June of 2009, the Company has been involved in litigation against Leonard J.
Brandt, a stockholder, former director and the Company’s former Chief Executive
Officer (“Brandt”) in both the Delaware Chancery Court and the United States
District Court for the Central District of California. For a full
description of the events associated with the Brandt Litigation please refer to
the section called “Business” under the heading “Legal Proceedings” contained
elsewhere in this prospectus which is incorporated herein by
reference.
Lease
Commitments
The
Company’s lease for its headquarters and Laboratory Information Services
business, located at 2755 Bristol St., Suite 285, Costa Mesa, California,
expired in November 2009. The Company continues to lease this space
on a month to month basis at a cost of $4,410 per month.
The
Company leases space for its Clinical Services operations under an operating
lease. The base rental as of September 2009 is $6,021 per month. This
lease terminates on February 28, 2010.
F-19
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
The
Company also sub-leases space for its Clinical Services operations on a
month-to-month basis for $1,075 per month.
The
Company leases a copier for $216 per month which it accounts for as a capital
lease with an interest rate of 9% per year. The lease terminates in February
2013 at which time the copier can be purchased at fair value.
Future
Minimum Lease Payment and Debt Maturities
At
September 30, 2009, the estimated future minimum lease payment under
non-cancelable operating and capital leases and debt maturities were as
follows:
Year
ending September 30,
|
Operating
Leases
|
Capital
Lease
|
Debt
Maturities
|
Total
|
||||||||||||
2010
|
36,000 | 2,600 | 100,000 | 138,600 | ||||||||||||
2011
|
- | 2,600 | 25,000 | 27,600 | ||||||||||||
2012
|
- | 2,600 | 2,600 | |||||||||||||
2013
|
- | 1,100 | 1,100 | |||||||||||||
Total
|
$ | 36,000 | $ | 8,900 | $ | 125,000 | $ | 169,900 | ||||||||
Less
interest
|
(700 | ) | (1,200 | ) | (6,400 | ) | (8,300 | ) | ||||||||
Net
present value
|
35,300 | 7,700 | 118,600 | 161,600 | ||||||||||||
Less
current portion
|
(35,300 | ) | (2,100 | ) | (93,800 | ) | (131,200 | ) | ||||||||
Long-term
debt and lease obligation
|
$ | - | $ | 5,600 | $ | 24,800 | $ | 30,400 |
11.
|
SIGNIFICANT
CUSTOMERS
|
For the
year ended September 30, 2009, three customers accounted for 39% of Laboratory
Information Services revenue and 45% of accounts receivable at September 30,
2009.
For the
year ended September 30, 2008, two customers accounted for 29% of Laboratory
Information Services revenue and 24% of accounts receivable at September 30,
2008.
12.
|
SUBSEQUENT
EVENTS
|
The
following key events occurred after the end of the fiscal year dated September
30, 2009:
Results
of Clinical Trial Announced
On
November 2, 2009, the Company reported the results of its landmark study
presented by Charles DeBattista, D.M.H, M.D., at the U.S. Psychiatric and Mental
Health Congress. The poster presentation, titled Referenced-EEG®
(rEEG) Efficacy Compared to STAR*D For Patients With Depression Treatment
Failure: First Look At Final Results, highlighted a dramatic
improvement in personalized medicine technology for use in treatment of patients
with depression. In this study, rEEG proved effective at predicting
medication response for treatment-resistant patients approximately 65 percent of
the time.
The study
included 114 patients in 12 medical centers, including Harvard, Stanford,
Cornell, UCI and Rush. The 12-week study found that rEEG
significantly outperformed the modified STAR*D treatment
algorithm. The difference, or separation, between rEEG and the
control group was 50 and 100 percent for the study’s two primary
endpoints. Typically, separation between a new treatment and a
control group is less than 10 percent in antidepressant
studies.
F-20
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
The
study, the largest in the Company’s history, was a randomized, blinded,
controlled, parallel group, multicenter study. The patients in the
study experienced depression treatment failure of one or more SSRIs and/or had
failure with at least two classes of antidepressants. The patients
fell into two groups: 1) those treated with rEEG medication guidance,
and 2) those treated with the modified STAR*D treatment algorithm.
Ruling from Delaware Chancery Court
in Relation to Company’s Litigation with Leonard Brandt
On
December 2, 2009, the Delaware Chancery Court dismissed complaints brought
against the Company by Brandt. At the conclusion of a two-day trial
that commenced December 1, the Chancery Court entered judgment for the Company
and dismissed with prejudice Brandt's action brought pursuant to Section 225 of
the Delaware General Corporation Law. The Chancery Court thereby
found that the purported special meeting of stockholders convened by Brandt on
September 4, 2009 was not valid and that the directors purportedly elected at
that meeting will not be seated. On January 4, 2010, Brandt filed an
appeal with the Supreme Court of the State of Delaware in relation to the case,
which the Company believes is without merit and intends to vigorously
defend. For a full description of the events associated with the
Brandt Litigation please refer to the heading “Legal Proceedings” on page 48 of
this prospectus.
Completion
of Second Closing of Private Placement Transaction
On
December 24, 2009, the Company completed a second closing of its private
placement (the first closing having occurred on August 26, 2009), resulting in
additional gross proceeds to the Company of approximately $3.0 million from
accredited investors.
Pursuant
to Subscription Agreements entered into with the investors, the Company sold
approximately 55 Investment Units at $54,000 per Investment Unit. Each
“Investment Unit” consists of 180,000 shares of the Company’s common stock and a
five year non-callable warrant to purchase 90,000 shares of the Company’s common
stock at an exercise price of $0.30 per share.
After
commissions and expenses, the Company received net proceeds of approximately
$2.65 million at the second closing. The Company intends to use the
proceeds from the second closing of its private placement for general corporate
purposes, including clinical trial expenses, research and development expenses,
and general and administrative expenses, including the payment of accrued legal
expenses incurred in connection with the Company’s litigation with Leonard
Brandt.
A FINRA
member firm acted as lead placement agent (the “Placement Agent”) in connection
with the second closing of the private placement. For its services in
connection with the second closing, the Placement Agent received (i) a cash fee
of $195,200, (ii) a cash expense allowance of $59,920, and (iii) a five year
non-callable warrant to purchase 672,267 shares of the Company’s common stock at
an exercise price of $ 0.33 per share, first exercisable no earlier than June
24, 2010.
In
connection with the second closing of the Company’s private placement, each
investor who participated in the financing became party to the Registration
Rights agreement described above under Note 2 and will receive the same rights
and benefits as the investors in the first closing of the Company’s Private
Placement on August 26, 2009.
Completion
of Third and Fourth Closings of Private Placement Transcation
The
Company completed a third and fourth closing of its private placement, on
December 31, 2009 and January 4, 2010, respectively, resulting in gross proceeds
to the Company of approximately $540,000, thereby completing its Private
Placement.
F-21
CNS
RESPONSE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
Pursuant
to Subscription Agreements entered into with the investors, the Company sold 10
Investment Units at $54,000 per Investment Unit. Each “Investment Unit” consists
of 180,000 shares of the Company’s common stock and a five year non-callable
warrant to purchase 90,000 shares of the Company’s common stock at an exercise
price of $0.30 per share.
After
commissions and expenses, the Company received net proceeds of approximately
$480,000 in the Private Placement. The Company intends to use the net
proceeds from the Private Placement for general corporate purposes, including
clinical trial expenses, research and development expenses, and general and
administrative expenses, including the payment of accrued legal expenses
incurred in connection with the Company’s litigation with Leonard
Brandt.
A FINRA
member firm acted as lead placement agent (the “Placement Agent”) in connection
with the Private Placement. For its services in connection with the
December 31, 2009 closing of the Private Placement, the Placement Agent received
(i) a cash fee of $4,320, (ii) a cash expense allowance of $8,640, and (iii) a
five year non-callable warrant to purchase 14,400 shares of the Company’s common
stock at an exercise price of $.33 per share.
For its
services in connection with the January 4, 2010 closing of the Private
Placement, the lead Placement Agent received (i) a cash fee of $1,080, (ii) a
cash expense allowance of $2,160, and (iii) a five year non-callable warrant to
purchase 3,600 shares of the Company’s common stock at an exercise price of $.33
per share.
In
connection with the third and fourth closings of the Company’s Private
Placement, each investor who participated in the financing became party to the
Registration Rights agreement described above under Note 2 and will receive the
same rights and benefits as the investors in the earlier closings of the
Company’s Private Placement.
Receipt
of letter from Food and Drug Administration
On
December 28, 2009, the Company's regulatory counsel received a letter (“the
Letter”) from the FDA in response to its prior correspondence relating to the
possible classification of the Company's rEEG, as a medical device. The Company
will continue its ongoing dialogue with the FDA regarding its rEEG (which may be
subject to pre-market review). If pre-market review is required the Company’s
revenue could be negatively impacted until such review is completed and
clearance to market or approval is obtained. The Letter does not have any impact
on the consolidated financial statements as of and for the years ended September
30, 2009 and 2008. See “Government Regulation” section for detailed
discussion.
F-22
CNS
RESPONSE, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For
the three months ended
June
30,
|
For
the nine months ended
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
REVENUES
|
||||||||||||||||
Laboratory
Information Services
|
$ | 39,900 | $ | 26,700 | $ | 96,700 | $ | 86,300 | ||||||||
Clinical
Services
|
119,300 | 133,700 | 384,300 | 441,900 | ||||||||||||
159,200 | 160,400 | 481,000 | 528,200 | |||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Cost
of laboratory services revenues
|
32,800 | 30,700 | 101,900 | 99,800 | ||||||||||||
Research
and development
|
302,400 | 480,800 | 843,600 | 1,628,500 | ||||||||||||
Sales
and marketing
|
201,600 | 161,300 | 603,800 | 708,100 | ||||||||||||
General
and administrative
|
1,081,700 | 867,500 | 3,639,900 | 2,360,100 | ||||||||||||
Total
operating expenses
|
1,618,500 | 1,540,300 | 5,189,200 | 4,796,500 | ||||||||||||
OPERATING
LOSS
|
(1,459,300 | ) | (1,379,900 | ) | (4,708,200 | ) | (4,268,300 | ) | ||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
income (expense), net
|
(40,900 | ) | (126,300 | ) | (42,600 | ) | (129,900 | ) | ||||||||
Financing
premium (expense), net
|
- | (90,000 | ) | - | (90,000 | ) | ||||||||||
Total
other income
|
(40,900 | ) | (216,300 | ) | (42,600 | ) | (219,900 | ) | ||||||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(1,500,200 | ) | (1,596,200 | ) | (4,750,800 | ) | (4,488,200 | ) | ||||||||
Income
taxes
|
- | 4,300 | 2,400 | 7,200 | ||||||||||||
NET
LOSS
|
$ | (1,500,200 | ) | $ | (1,600,500 | ) | $ | (4,753,200 | ) | $ | (4,495,400 | ) | ||||
NET
LOSS PER SHARE:
|
||||||||||||||||
Basic
|
$ | (0.03 | ) | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.18 | ) | ||||
Diluted
|
$ | (0.03 | ) | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.18 | ) | ||||
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
||||||||||||||||
Basic
|
56,023,921 | 25,782,277 | 51,028,185 | 25,460,457 | ||||||||||||
Diluted
|
56,023,921 | 25,782,277 | 51,028,185 | 25,460,457 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-23
CNS
RESPONSE, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
June 30,
2010
|
September 30,
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$ | 35,100 | $ | 988,100 | ||||
Accounts receivable (net
of allowance for doubtful accounts of $11,100 (unaudited)
as of June 30, 2010 and $11,200 as
of September 30, 2009)
|
56,300 | 61,700 | ||||||
Prepaid
and other
|
105,600 | 89,500 | ||||||
Total
current assets
|
197,000 | 1,139,300 | ||||||
Furniture
and Fittings
|
19,200 | 17,500 | ||||||
Other
Assets
|
18,700 | 4,100 | ||||||
TOTAL
ASSETS
|
$ | 234,900 | $ | 1,160,900 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable (including amounts due to related parties of $25,600 (unaudited) as
of June 30, 2010 and $7,000 as of September 30,
2009)
|
$ | 1,116,300 | $ | 1,285,600 | ||||
Accrued
liabilities
|
325,700 | 261,400 | ||||||
Deferred compensation
(including $92,000 (unaudited) and $81,200 to related parties as
of June 30, 2010 and September 30, 2009
respectively)
|
237,600 | 220,100 | ||||||
Accrued
patient costs
|
144,000 | 305,500 | ||||||
Accrued
consulting fees (including $18,000 (unaudited) and $18,000 to related
parties as of June 30, 2010 and September 30, 2009
respectively)
|
75,000 | 72,100 | ||||||
Accrued
Interest
|
1,800 | - | ||||||
Secured
convertible promissory note, net of discount of $187,500
|
62,500 | - | ||||||
Current
portion of long-term debt
|
51,000 | 95,900 | ||||||
Total
current liabilities
|
2,013,900 | 2,240,600 | ||||||
LONG
–TERM LIABILITIES
|
||||||||
Note
payable to officer
|
- | 24,800 | ||||||
Capital
lease
|
4,000 | 5,600 | ||||||
Total
long term liabilities
|
4,000 | 30,400 | ||||||
TOTAL
LIABILITIES
|
2,017,900 | 2,271,000 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
Stockholders’
equity (deficit):
|
||||||||
Common stock, $0.001 par value;
authorized, 750,000,000 shares,
issued and, 56,023,921 and 41,781,129 shares outstanding as of
June 30, 2010 and September 30, 2009 respectively
|
56,000 | 41,800 | ||||||
Additional
paid-in capital
|
28,110,100 | 24,044,000 | ||||||
Accumulated
deficit
|
(29,949,100 | ) | (25,195,900 | ) | ||||
Total
stockholders’ equity (deficit)
|
(1,783,000 | ) | (1,110,100 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 234,900 | $ | 1,160,900 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-24
CNS
RESPONSE, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended
June 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$ | (4,753,200 | ) | $ | (4,495,400 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and Amortization
|
7,200 | 6,700 | ||||||
Amortization
of note discount
|
37,500 | 107,500 | ||||||
Stock-based
compensation
|
859,900 | 644,200 | ||||||
Write-off
of doubtful accounts
|
13,400 | 22,700 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(8,000 | ) | (27,300 | ) | ||||
Prepaids
and other current assets
|
(16,100 | ) | (12,000 | ) | ||||
Accounts
payable
|
(169,300 | ) | 437,200 | |||||
Accrued
liabilities
|
69,000 | 112,700 | ||||||
Deferred
compensation
|
17,500 | (48,800 | ) | |||||
Accrued
patient costs
|
(161,500 | ) | 126,700 | |||||
Security
deposits on leases
|
(14,600 | ) | - | |||||
Net
cash used in operating activities
|
(4,118,200 | ) | (3,125,800 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Acquisition
of office furniture
|
(8,900 | ) | (2,000 | ) | ||||
Net
cash used in investing activities
|
(8,900 | ) | (2,000 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Cash
from Secured Convertible notes
|
250,000 | 1,700,000 | ||||||
Repayment
of note
|
(69,800 | ) | (114,400 | ) | ||||
Repayment
of lease
|
(1,500 | ) | (1,400 | ) | ||||
Funds
pending exercise of options
|
- | 280,500 | ||||||
Cash
from exercise of warrants
|
- | 14,400 | ||||||
Proceeds
from sale of common stock, net of offering costs
|
2,995,400 | - | ||||||
Net
cash provided by financing activities
|
3,174,100 | 1,879,100 | ||||||
Net
decrease in cash
|
(953,000 | ) | (1,248,700 | ) | ||||
Cash,
beginning of period
|
988,100 | 1,997,000 | ||||||
Cash,
end of period
|
$ | 35,100 | $ | 748,300 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 8,200 | $ | 61,500 | ||||
Income
taxes
|
$ | 2,400 | $ | 7,200 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-25
CNS
RESPONSE, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
|
Common
Stock
|
Additional
Paid-in
|
Accumulated
|
|||||||||||||||||
For
the nine months ended June 30, 2010
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
|||||||||||||||
BALANCE
- September 30, 2009
|
41,781,129 | $ | 41,800 | $ | 24,044,000 | $ | (25,195,900 | ) | $ | (1,110,100 | ) | |||||||||
Stock-
based compensation
|
- | - | 859,900 | - | 859,900 | |||||||||||||||
Issuance
of stock in connection with the Maxim PIPE net of offering costs of
$540,600
|
11,786,666 | 11,800 | 2,983,600 | - | 2,995,400 | |||||||||||||||
Warrants
issued in association with the Maxim PIPE
|
- | - | 7,615,100 | - | 7,615,100 | |||||||||||||||
Offering
cost pertaining to the Maxim PIPE
|
- | - | (7,615,100 | ) | - | (7,615,100 | ) | |||||||||||||
Value
of warrants surrendered for cashless exercise
|
- | - | (415,800 | ) | - | (415,800 | ) | |||||||||||||
Stock
issued for cashless exercise
|
2,456,126 | 2,400 | 413,400 | - | 415,800 | |||||||||||||||
Beneficial
conversion feature
-
Secured convertible promissory note
|
- | - | 225,000 | - | 225,000 | |||||||||||||||
Net
loss for the nine months ended June 30, 2010
|
- | - | - | (4,753,200 | ) | (4,753,200 | ) | |||||||||||||
Balance
at June 30, 2010
|
56,023,921 | $ | 56,000 | $ | 28,110,100 | $ | (29,949,100 | ) | $ | (1,783,000 | ) |
|
Common
Stock
|
Additional
Paid-in
|
Accumulated
|
|||||||||||||||||
For
the nine months ended June 30, 2009
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
|||||||||||||||
BALANCE
- September 30, 2008
|
25,299,547 | $ | 25,300 | $ | 17,701,300 | $ | (16,673,700 | ) | $ | 1,052,900 | ||||||||||
Exercise
of $0.01 warrants in June, 2009
|
1,448,189 | 1,400 | 13,000 | - | 14,400 | |||||||||||||||
Issuance
of 3,433,333 warrants associated with bridge financings valued
at
|
- | - | 1,058,000 | - | 1,058,000 | |||||||||||||||
Stock-
based compensation
|
- | - | 644,200 | - | 644,200 | |||||||||||||||
Net
loss for the nine months ended June 30, 2009
|
- | - | - | (4,495,400 | ) | (4,495,400 | ) | |||||||||||||
Balance
at June 30, 2009
|
26,747,736 | $ | 26,700 | $ | 19,416,500 | $ | (21,169,100 | ) | $ | (1,725,900 | ) |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-26
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
1.
|
NATURE
OF OPERATIONS AND BASIS OF
PRESENTATION
|
Organization
and Nature of Operations
CNS
Response, Inc. (the “Company”) was incorporated as Strativation, Inc. in
Delaware on July 10, 1984. In connection with a merger on March 7,
2007 with CNS Response, Inc., a California corporation, the Company changed its
name to its current name and commenced its current operations. The
Company utilizes a patented system that guides psychiatrists and other
physicians to determine a personalized regimen for patients with mental,
behavioral and/or addictive disorders. The Company also intends to
identify, develop and commercialize new indications of approved drugs and drug
candidates for this patient population.
In
addition, as a result of its acquisition of Neuro-Therapy Clinic, Inc. (“NTC”)
on January 11, 2008, the Company provides behavioral health care
services. NTC is a center for highly-advanced testing and treatment
of neuropsychiatric problems, including learning, attentional and behavioral
challenges, mild head injuries, as well as depression, anxiety, bipolar and all
other common psychiatric disorders. Through this acquisition, the Company
expects to advance neurophysiology data collection, beta-test planned
technological advances in rEEG, advance physician training in rEEG and
investigate practice development strategies associated with rEEG.
Going
Concern Uncertainty
The
accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America which contemplate continuation of the company as a
going concern. The Company has a limited operating history and its
operations are subject to certain problems, expenses, difficulties, delays,
complications, risks and uncertainties frequently encountered in the operation
of a new business. These risks include the failure to develop or supply
technology or services to meet the demands of the marketplace, the ability to
obtain adequate financing on a timely basis, the failure to attract and retain
qualified personnel, competition within the industry, government regulation and
the general strength of regional and national economies.
To date,
the Company has financed its cash requirements primarily from debt and equity
financings. It will be necessary for the Company to raise additional
funds. The Company’s liquidity and capital requirements depend on
several factors, including the rate of market acceptance of its services, the
future profitability of the Company, the rate of growth of the Company’s
business and other factors described elsewhere in this Quarterly
Report. The Company is currently exploring additional sources of
capital but there can be no assurances that any financing arrangement will be
available in amounts and on terms acceptable to the Company.
Basis
of Presentation
The
unaudited condensed consolidated financial statements of CNS Response, Inc.
(“CNS,” “we,” “us,” “our” or the “Company”) have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission and include all
the accounts of CNS and its wholly owned subsidiaries CNS California and
NTC. Certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted pursuant to such
rules and regulations. The unaudited condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments, necessary
for a fair statement of our financial position as of June 30, 2010 and our
operating results, cash flows, and changes in stockholders’ equity for the
interim periods presented. The September 30, 2009 balance sheet was derived from
our audited consolidated financial statements but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. These unaudited condensed consolidated financial statements
and the related notes should be read in conjunction with our consolidated
financial statements and notes for the year ended September 30, 2009 which are
included in our current report on Form 10-K, filed with the Securities and
Exchange Commission on December 30, 2009.
F-27
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and revenues and expenses in the
financial statements. Examples of estimates subject to possible revision based
upon the outcome of future events include, among others, recoverability of
long-lived assets and goodwill, stock-based compensation, the allowance for
doubtful accounts, the valuation of equity instruments, use and other taxes.
Actual results could differ from those estimates.
The
results of operations for the nine months ended June 30, 2010 are not
necessarily indicative of the results that may be expected for future periods or
for the year ending September 30, 2010.
Reclassifications
Certain
amounts previously reported have been reclassified to conform to the current
period presentation. The reclassifications were made to change the income
statement presentation to provide the users of the financial statements
additional information related to the operating results of the Company. These
reclassifications include reclassifying the Company’s patent costs to General
and Administrative costs which were previously included in Research and
Development costs. The reclassifications had no effect on
consolidated net income or consolidated assets and liabilities.
Fair
Value of Financial Instruments
ASC
825-10 (formerly SFAS 107, “Disclosures about Fair Value of Financial
Instruments”) defines financial instruments and requires disclosure of the fair
value of financial instruments held by the Company. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable and accrued liabilities, to approximate their fair values because of the
short period of time between the origination of such instruments and their
expected realization.
The
Company also analyzes all financial instruments with features of both
liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity”), ASC 815-10 (formerly SFAS No 133, “Accounting for Derivative
Instruments and Hedging Activities”) and ASC 815-40 (formerly EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”).
The
Company adopted ASC 820-10 (formerly SFAS 157, “Fair Value Measurements”) on
January 1, 2008. ASC 820-10 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The three levels are defined as
follow:
·
|
Level
1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
|
·
|
Level
2 inputs to the valuation methodology include quoted
prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or
indirectly, for substantially the full term of the financial
instruments.
|
·
|
Level
3 inputs to the valuation methodology are unobservable
and significant to the fair value.
|
F-28
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
During
the six months ended June 30, 2010, the Company issued a secured promissory
convertible note of $250,000. As of June 30, 2010, the carrying value of this
convertible note was $62,500, net of discount of $187,500. The Company used
level 3 inputs for its valuation methodology and the fair value was determined
to be approximately $257,000 using cash flows discounted at relevant market
interest rates in effect at the period close since there is no observable market
price.
As of
June 30, 2010 the Company did not identify any other assets or liabilities that
are required to be presented on the balance sheet at fair value in accordance
with ASC 820-10.
Recent
Accounting Pronouncements
In April
2009, the FASB issued ASC 825-10 (formerly FASB Staff Position No. FAS 107-1 and
APB 28-1, Interim Disclosures about Fair Value of Financial Instruments) (“ASC
825”) , which requires that the fair value disclosures required for all
financial instruments within the scope of SFAS 107, "Disclosures about Fair
Value of Financial Instruments", be included in interim financial statements.
This FSP also requires entities to disclose the method and significant
assumptions used to estimate the fair value of financial instruments on an
interim and annual basis and to highlight any changes from prior periods. FSP
107-1 was effective for interim periods ending after June 15, 2009, with early
adoption permitted. The adoption of FSP 107-1 did not have a material impact on
the Company’s unaudited consolidated financial statements.
In May
2009, the FASB issued ASC 855-10 (formerly Statement No. 165, Subsequent Events)
(“ASC 855”). ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In accordance
with this Statement, entities should apply the requirements to interim or annual
financial periods ending after June 15, 2009. The adoption of this
statement did not have a material impact on the Company’s unaudited consolidated
financial statements.
In June
2009, the FASB approved its Accounting Standards Codification, or Codification,
as the single source of authoritative United States accounting and reporting
standards applicable for all non-governmental entities, with the exception of
the SEC and its staff. The Codification, which changes the referencing of
financial standards, is effective for interim or annual financial periods ending
after September 15, 2009. Therefore, starting from fiscal year end 2009, all
references made to US GAAP will use the new Codification numbering system
prescribed by the FASB. As the Codification is not intended to change or alter
existing US GAAP, it did not have any impact on the Company’s unaudited
consolidated financial statements.
As a
result of the Company’s implementation of the Codification during the year ended
September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current interim financial
statements, the Company will provide reference to both new and old guidance to
assist in understanding the impact of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05),
“Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at
Fair Value.” ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and
Disclosures – Overall,” and provides clarification for the fair value
measurement of liabilities. ASU 2009-05 is effective for the first reporting
period including interim period beginning after issuance. The adoption of ASU
2009-05 did not have a material impact on the Company’s unaudited consolidated
financial statements.
F-29
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
In
January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU
2010-06), “Fair Value Measurements and Disclosures (Topic 820) – Improving
Disclosures About Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10
that requires new disclosures and provides clarification of existing
disclosures. ASU 2010-06 also includes conforming amendments to the guidance on
employers’ disclosures about postretirement benefit plans assets (Subtopic
715-20). ASU 2010-06 is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is evaluating the impact of the adoption of ASU 2010-06 on
its unaudited consolidated financial statements.
In
February 2010, the FASB issued Accounting Standards Update No. 2010-09 (“ASU
2010-09”) as amendments to certain recognition and disclosure requirements. The
amendments remove the requirement for an SEC filer to disclose a date in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. Those amendments remove potential
conflicts with the SEC’s literature. All of the amendments in ASU 2010-09 were
effective upon issuance for interim and annual periods. The adoption of ASU
2010-09 did not have a material impact on the Company’s unaudited consolidated
financial statements.
In April
2010, the FASB issued Accounting Standards Update 2010-12 (“ASU 2010-12”),
“Income Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health
Care Reform Acts”. After consultation with the FASB, the SEC stated
that it “would not object to a registrant incorporating the effects of the
Health Care and Education Reconciliation Act of 2010 when accounting for the
Patient Protection and Affordable Care Act.” The Company does not expect the
provisions of ASU 2010-12 to have a material impact on the Company’s unaudited
consolidated financial statements.
In April
2010, the FASB issued Accounting Standards Update 2010-13 (“ASU 2010-13”),
Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise
Price of a Share-Based Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task
Force. The amendments in this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2010. Earlier application is permitted. The Company
does not expect the provisions of ASU 2010-13 to have a material impact on the
Company’s unaudited consolidated financial statements.
2.
|
CONVERTIBLE
DEBT AND EQUITY FINANCING
|
Between
March 30 and June 12, 2009 the Company entered into three rounds of bridge
financings in the form of secured convertible promissory notes. These
three rounds are referred to as:
(a)
|
the
March 30, 2009 SAIL/Brandt Notes
|
(b)
|
the
May 14, 2009 SAIL Note
|
(c)
|
the
June 12, 2009 Pappajohn Note
|
All these
notes were converted to equity as a result of a private placement transaction
that closed on August 26, 2009, which is fully described in the section
below.
The
Private Placement Transactions
Completion
of First Closing of Private Placement Transaction
On
August 26, 2009, the Company received gross proceeds of approximately $2,043,000
in a private placement transaction (the “Private Placement”) with six
investors. Pursuant to Subscription Agreements entered into with the
investors, the Company sold approximately 38 Investment Units at $54,000 per
Investment Unit. Each “Investment Unit” consists of 180,000 shares of
the Company’s common stock and a five year non-callable warrant to purchase
90,000 shares of the Company’s common stock at an exercise price of $0.30 per
share. After commissions and expenses, the Company received net
proceeds of approximately $1,792,300 in the Private Placement. These
funds were used to repay outstanding liabilities, fund the Company’s recent
clinical trial and for general working capital purposes.
F-30
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
A FINRA
member firm, the Maxim Group LLC (“Maxim Group”), acted as lead placement agent
in connection with the Private Placement. For its services in
connection with the first closing of the offering, Maxim Group received (i) a
cash fee of $ 55,980, (ii) a cash expense allowance of $40,860, and (iii) a five
year non-callable warrant to purchase 274,867 shares of the Company’s common
stock at an exercise price of $0.33 per share. By agreement dated July 23, 2010,
the Company and Maxim Group agreed, among other things, to amend the five year
exercise period to begin on the date that the registration statement covering
the resale of the shares of common stock issuable upon exercise of the placement
agent warrants (among other securities) is declared effective.
A
secondary placement agent who participated in the first closing of the private
placement received cash fees of $29,200 and five year non-callable warrants to
purchase 97,200 shares of the Company’s common stock at an exercise price of $
0.33 per share. The Company has agreed to amend the five year exercise period
applicable to these warrants to begin on the effective date of the registration
statement, as described above.
Pursuant
to a Registration Rights agreement entered into with each investor, the Company
agreed to file a registration statement covering the resale of the common stock
and the common stock underlying the warrants sold in the Private Placement, as
well as the common stock underlying the warrants issued to Maxim Group by the
later of October 26, 2009 or the 20th calendar day after the termination of the
offering. The Registration Rights agreement was subsequently amended
to permit the filing of the registration statement no later than 10 business
days following the Company’s filing of its Annual Report on Form 10-K for its
September 30, 2009 year end, or the 20th calendar day after termination of the
private offering. The Registration Statement was filed with the
Securities and Exchange Commission (SEC) on February 1,
2010. Amendment No. 1 to the Registration Statement was filed with
the SEC on July 6, 2010.
In
addition, the Company agreed to use its best efforts to have the registration
statement declared effective no later than 180 days following the final closing
of the offering, or July 3, 2010, and maintain such effectiveness until the
earlier of the second anniversary of the date of such effectiveness or the date
that all of the securities covered by the registration statement may be sold
without restriction. The registration statement has not yet been
declared effective.
Events
Relating to Private Placement Transaction
(a)
|
Conversion
of the March 30, 2009 SAIL/Brandt
Notes
|
On March
30, 2009, the Company entered into two Senior Secured Convertible Promissory
Notes, each in the principal amount of $250,000 (each a “March Note” and,
collectively, the “March Notes”), with Brandt Ventures, GP (“Brandt”) and SAIL
Venture Partners, LP (“SAIL”). Leonard Brandt, a former member of the Company’s
board of directors, is the general partner of Brandt and David B. Jones, a
current member of the Company’s board of directors, is a managing member of SAIL
Venture Partners, LLC, which is the general partner of SAIL. The terms of the
March Notes provided that in the event the Company consummates an equity
financing transaction of at least $1,500,000 (excluding any and all other debt
that is converted), then the principal and all accrued, but unpaid interest
outstanding under the notes shall be automatically converted into the securities
issued in the equity financing by dividing such amount by 90% of the per share
price paid by the investors in such financing. In accordance with the
terms of the March Notes, at the closing of the Private Placement, the Company
issued to each of Brandt and SAIL 956,164 shares of common stock and a five year
non-callable warrant to purchase 478,082 shares of its common stock at an
exercise price of $0.30 per share.
F-31
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
(b)
|
Conversion
of the May 14, 2009 SAIL Note
|
On May
14, 2009, the Company entered into a Bridge Note and Warrant Purchase Agreement
(the “SAIL Purchase Agreement”) with SAIL. Pursuant to the SAIL Purchase
Agreement, on May 14, 2009 SAIL purchased a Secured Promissory Note in the
principal amount of $200,000 from the Company (the “May SAIL
Note”). In order to induce SAIL to purchase the note, the Company
issued to SAIL a warrant to purchase up to 100,000 shares of the Company’s
common stock at a purchase price equal to $0.25 per share. The
warrant expires on May 31, 2016.
The terms
of the May SAIL Note provided that in the event the Company consummates an
equity financing transaction of at least $1,500,000 (excluding any and all other
debt that is converted), then the principal and all accrued, but unpaid interest
outstanding under the note shall be automatically converted into the securities
issued in the equity financing by dividing such amount by 85% of the per share
price paid by the investors in such financing. In accordance with the
terms of the May SAIL Note, at the first closing of the Private Placement on
August 26, 2009, the Company issued to SAIL 802,192 shares of its common stock
and a five year non-callable warrant to purchase 401,096 shares of its common
stock at an exercise price of $0.30 per share.
(c)
|
Conversion
of the June 12, 2009 Pappajohn Note
|
On June
12, 2009, John Pappajohn entered into a Bridge Note and Warrant Purchase
Agreement (the “Pappajohn Purchase Agreement”) with the
Company. Pursuant to the Pappajohn Purchase Agreement, Mr. Pappajohn
purchased a Secured Convertible Promissory Note in the principal amount of
$1,000,000 from the Company. In order to induce Mr. Pappajohn to
purchase the note, the Company issued to Mr. Pappajohn a warrant to purchase up
to 3,333,333 shares of the Company’s common stock at a purchase price equal to
$0.30 per share. The warrant expires on June 30, 2016.
The
note issued pursuant to the Pappajohn Purchase Agreement provided that the
principal amount of $1,000,000 together with a single payment of $90,000 (the
“Premium Payment”) would be due and payable, unless sooner converted into shares
of the Company’s common stock (as described below), upon the earlier to occur
of: (i) a declaration by Mr. Pappajohn on or after June 30, 2010 or (ii) an
Event of Default (as defined in the note). The note was secured by a
lien on substantially all of the assets (including all intellectual property) of
the Company. In the event of a liquidation, dissolution or winding up
of the Company, unless Mr. Pappajohn informed the Company otherwise, the Company
was required to pay Mr. Pappajohn an amount equal to the product of 250%
multiplied by the then outstanding principal amount of the note and the Premium
Payment.
The
Pappajohn Purchase Agreement also provided that in the event the Company
consummated an equity financing transaction of at least $1,500,000 (excluding
any and all other debt that is converted), the then outstanding principal amount
of the note (but excluding the Premium Payment, which would be repaid in cash at
the time of such equity financing) would be automatically converted into the
securities issued in the equity financing by dividing such amount by the per
share price paid by the investors in such financing. The note also
provided that the securities issued upon conversion of the note would be
otherwise issued on the same terms as such shares are issued to the lead
investor that purchases shares of the Company in the qualified
financing.
On August
26, 2009, at the closing of the Private Placement, the Company paid the Premium
Payment to Mr. Pappajohn, and the outstanding principal amount of Mr.
Pappajohn’s note ($1,000,000 as of August 26, 2009) converted into 3,333,334
shares of the Company’s common stock. In addition, in accordance with the terms
of his note, Mr. Pappajohn was issued a five year non-callable warrant to
purchase 1,666,667 shares of the Company’s common stock at an exercise price of
$0.30 per share.
F-32
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
Upon the
abovementioned conversions, the Company evaluated the terms and calculated the
fair value of the common stock (by using the closing market price on the
respective original issuance dates of the convertible notes) and warrants
(through the use of the Black-Scholes Model) issued upon the conversions and
determined that the notes were converted with a beneficial conversion feature
amounting to $642,000. As a result, for the year ended September 30, 2009, the
Company recorded $642,000 as interest expense.
Completion
of Second, Third and Fourth Closings of Private Placement
Transaction
On
December 24 and 31, 2009 and January 4, 2010, the Company completed a second,
third and fourth and final closing of its private placement (the first closing
having occurred on August 26, 2009), resulting in additional gross proceeds to
the Company of $2,996,000, $432,000 and $108,000 respectively from accredited
investors.
Pursuant
to Subscription Agreements entered into with the investors, the Company sold
approximately 65 Investment Units in the three closings at $54,000 per
Investment Unit. Each “Investment Unit” consists of 180,000 shares of the
Company’s common stock and a five year non-callable warrant to purchase 90,000
shares of the Company’s common stock at an exercise price of $0.30 per
share.
After
commissions and expenses, the Company received net proceeds of approximately
$2,650,400 million at the second closing, $380,200 at the third and $95,000 at
the fourth and final closing. The Company intends to use the proceeds
from these closings of its private placement for general corporate purposes,
including clinical trial expenses, research and development expenses, and
general and administrative expenses, including the payment of accrued legal
expenses incurred in connection with the Company’s litigation with Mr.
Brandt.
A FINRA
member firm, the Maxim Group acted as lead placement agent in connection with
the second, third and fourth closings of the private placement. For
its services in connection with the second closing, the Maxim Group received (i)
a cash fee of $195,200, (ii) a cash expense allowance of $59,920, and (iii) a
five year non-callable warrant to purchase 672,267 shares of the Company’s
common stock at an exercise price of $ 0.33 per share. For the third closing the
Maxim Group received (i) a cash fee of $4,300, (ii) a cash expense allowance of
$8,600, and (iii) a five year non-callable warrant to purchase 14,400 shares of
the Company’s common stock at an exercise price of $ 0.33 per share. For the
fourth closing the Maxim Group received (i) a cash fee of $1,100, (ii) a cash
expense allowance of $2,100, and (iii) a five year non-callable warrant to
purchase 3,600 shares of the Company’s common stock at an exercise price of $
0.33 per share. By agreement dated July 23, 2010, the Company and Maxim Group
agreed, among other things, to amend the five year exercise period applicable to
the placement agent warrants in the second, third and fourth closings of the
private placement to begin on the date that the registration statement covering
the resale of the shares of common stock issuable upon exercise of the placement
agent warrants (among other securities) is declared effective.
Secondary
placement agents who participated in the second closing of the private placement
received cash fees of $75,200 and five year non-callable warrants to purchase
250,800 shares of the Company’s common stock at an exercise price of $ 0.33 per
share. For the third closing, the secondary placement agents received
cash fees of $38,900 and five year non-callable warrants to purchase 129,600
shares of the Company’s common stock at an exercise price of $ 0.33 per
share. For the fourth closing, the secondary placement agents
received cash fees of $9,700 and five year non-callable warrants to purchase
32,400 shares of the Company’s common stock at an exercise price of $ 0.33 per
share. The Company has agreed to amend the five year exercise period applicable
to these warrants to begin on the effective date of the registration statement,
as described above.
F-33
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
In
connection with the second, third and fourth closing of the Company’s private
placement, each investor who participated in the financing became party to the
abovementioned Registration Rights agreement, which was filed with the
Securities and Exchange Commission on February 1, 2010, and received the same
rights and benefits as the investors in the first closing of the Company’s
Private Placement on August 26, 2009.
2010
Promissory Note Transactions
On June
3, 2010, we entered into a Bridge Note and Warrant Purchase Agreement with John
Pappajohn to purchase two secured promissory notes (each, a “Bridge Note”) in
the aggregate principal amount of $500,000, with each Bridge Note in the
principal amount of $250,000 maturing on December 2, 2010. On June 3,
2010, Mr. Pappajohn loaned the Company $250,000 in exchange for the first Bridge
Note (there were no warrants issued in connection with this first note) and on
July 25, 2010, Mr. Pappajohn loaned the Company $250,000 in exchange for the
second Bridge Note. In connection with his purchase of the second
Bridge Note, Mr. Pappajohn received a warrant to purchase up to 250,000 shares
of our common stock. The exercise price of the warrant (subject to
customary anti-dilution adjustments) is $0.50 per share.
Pursuant
to a separate agreement that we entered into with Mr. Pappajohn on July 25,
2010, we have granted him a right to convert his Bridge Notes into shares of our
common stock at a conversion price of $0.50. The conversion price is
subject to customary anti-dilution adjustments, but will never be less than
$0.30. We have also agreed to enter into a registration rights
agreement covering the securities issuable upon exercise of the warrant and
conversion of the Bridge Notes. The beneficial conversion feature of
the June 3, 2010 Bridge Note was valued at $225,000 which is amortized over the
six-month period of the note. The Bridge Note is shown as a secured convertible
promissory note net of the unamortized discount of $187,500.
Each
Bridge Note accrues interest at a rate of 9% per annum which will be paid
together with the repayment of the principal amount at the earliest of (i) the
maturity date; (ii) prepayment of the Bridge Note at the option of the Company
(iii) closing of a financing in which the aggregate proceeds to the Company are
not less than $3,000,000 or (iv) the occurrence of an Event of Default (as
defined in the Bridge Note). The Purchase Agreement and each Bridge
Note grants the investor a senior security interest in and to all of the
Company’s existing and future right, title and interest in its tangible and
intangible property.
3.
|
STOCKHOLDERS’
EQUITY
|
Common
and Preferred Stock
As of
June 30, 2010 the Company is authorized to issue 750,000,000 shares of common
stock.
As of
June 30, 2010, CNS California is authorized to issue 100,000,000 shares of two
classes of stock, 80,000,000 of which was designated as common shares and
20,000,000 of which was designated as preferred shares.
As of
June 30, 2010, Colorado CNS Response, Inc. is authorized to issue 1,000,000
shares of common stock.
As of
June 30, 2010, Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of Colorado
CNS Response, Inc., is authorized to issue ten thousand (10,000) shares of
common stock, no par value per share.
F-34
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
Stock-Option
Plan
On August
3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan
(the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form
of restricted shares, stock options (which may constitute incentive stock
options (ISO) or non-statutory stock options (NSO), stock appreciation rights
and stock unit grants to eligible employees, directors and consultants and is
administered by the board of directors. A total of 10 million shares of stock
were initially reserved for issuance under the 2006 Plan.
The 2006
Plan initially provided that in any calendar year, no eligible employee or
director shall be granted an award to purchase more than 3 million shares of
stock. The option price for each share of stock subject to an option shall be
(i) no less than the fair market value of a share of stock on the date the
option is granted, if the option is an ISO, or (ii) no less than 85% of the fair
market value of the stock on the date the option is granted, if the option is a
NSO; provided, however, if the option is an ISO granted to an eligible employee
who is a 10% shareholder, the option price for each share of stock subject to
such ISO shall be no less than 110% of the fair market value of a share of stock
on the date such ISO is granted. Stock options have a maximum term of ten years
from the date of grant, except for ISOs granted to an eligible employee who is a
10% shareholder, in which case the maximum term is five years from the date of
grant. ISOs may be granted only to eligible employees. The Company has adopted
ASC 718-20 (formerly, SFAS No. 123R-revised 2004, “Share-Based Payment”), and
related interpretations. Under ASC 718-20, share-based compensation cost is
measured at the grant date based on the calculated fair value of the award. The
Company estimates the fair value of each option on the grant date using the
Black-Scholes model.
On March
3, 2010, the Board of Directors approved an amendment to the 2006 Plan which
increased the number of shares reserved for issuance under the 2006 Plan from 10
million to 20 million shares of stock. The amendment also increased
the limit on shares issued within a calendar year to any eligible employee or
director from 3 million to 4 million shares of stock. The amendment
was approved by shareholders at the annual meeting held on April 27,
2010.
On March
3, 2010, the Board of Directors also approved the grant of 9,150,000 options to
staff members, directors, advisors and consultants, of which 8,650,000 were in
fact granted. For staff members the options will vest equally over a
48 month period while for directors, advisors and consultants the options will
vest equally over a 36 month period. The effective grant date for
accredited investors was March 3, 2010 and the exercise price of $0.55 per share
was based on the quoted closing share price of the Company’s stock at the time
of grant. For non-accredited investors the grant date will be
determined after obtaining a permit from the State of California allowing the
granting of options to non-accredited investors. This permit was
granted by the State of California in July 2010.
As of
June 30, 2010, 2,124,740 options were exercised and there were 14,870,973
options and 183,937 restricted shares outstanding under the amended 2006 Plan
leaving 2,820,350 shares available for issuance of future awards.
Stock-based
compensation expense is recognized over the employees’ or service provider’s
requisite service period, generally the vesting period of the award. Stock-based
compensation expense included in the accompanying statements of operations for
the periods ended June 30, 2010 and 2009 is as follows:
For
the three months ended
June
30,
|
||||||||
2010
|
2009
|
|||||||
Cost
of laboratory services revenues
|
$
|
6,600
|
$
|
4,000
|
||||
Research
and development
|
107,000
|
65,200
|
||||||
Sales
and marketing
|
58,700
|
27,000
|
||||||
General
and administrative
|
267,200
|
106,500
|
||||||
Total
|
$
|
439,500
|
$
|
202,700
|
F-35
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
For
the nine months ended
June
30,
|
||||||||
2010
|
2009
|
|||||||
Cost
of laboratory services revenues
|
$
|
15,500
|
$
|
12,100
|
||||
Research
and development
|
250,700
|
195,600
|
||||||
Sales
and marketing
|
123,900
|
107,000
|
||||||
General
and administrative
|
469,800
|
329,500
|
||||||
Total
|
$
|
859,900
|
$
|
644,200
|
Total
unrecognized compensation expense as of June 30, 2010 amounted to
$4,640,200
A summary
of stock option activity is as follows:
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding
at September 30, 2009
|
6,662,014
|
$
|
0.76
|
|||||
Granted
|
-
|
$
|
-
|
|||||
Exercised
|
-
|
-
|
||||||
Forfeited
|
(191,041
|
)
|
$
|
1.14
|
||||
Outstanding
at December 31, 2009
|
6,470,973
|
$
|
0.74
|
|||||
Granted
|
8,650,000
|
$
|
0.55
|
|||||
Exercised
|
-
|
-
|
||||||
Forfeited
|
(250,000
|
)
|
0.55
|
|||||
Outstanding
at March 31, 2010
|
14,870,973
|
$
|
0.63
|
|||||
Granted
|
-
|
-
|
||||||
Exercised
|
-
|
-
|
||||||
Forfeited
|
-
|
-
|
||||||
Outstanding
at June 30, 2010
|
14,870,973
|
$
|
0.63
|
|||||
Weighted
average fair value of options granted during:
|
||||||||
Three
months ended June 30, 2010
|
-
|
|||||||
Nine
months ended June 30, 2010
|
$
|
0.55
|
The
following is a summary of the status of options outstanding at June 30,
2010:
Exercise
Price
|
Number
of Shares
|
Weighted
Average
Contractual
Life
|
Weighted
Average
Exercise
Price
|
||||||||
$ | 0.12 |
859,270
|
10
years
|
$
|
0.12
|
||||||
$ | 0.132 |
987,805
|
7
years
|
$
|
0.132
|
||||||
$ | 0.30 |
135,700
|
10
years
|
$
|
0.30
|
||||||
$ | 0.59 |
28,588
|
10
years
|
$
|
0.59
|
||||||
$ | 0.80 |
140,000
|
10
years
|
$
|
0.80
|
||||||
$ | 0.89 |
968,875
|
10
years
|
$
|
0.89
|
||||||
$ | 0.96 |
496,746
|
10
years
|
$
|
0.96
|
||||||
$ | 1.09 |
2,513,549
|
10
years
|
$
|
1.09
|
||||||
$ | 1.20 |
243,253
|
5
years
|
$
|
1.20
|
||||||
$ | 0.51 |
41,187
|
10
years
|
$
|
0.51
|
||||||
$ | 0.40 |
56,000
|
10
years
|
$
|
0.40
|
||||||
$ | 0.55 |
8,400,000
|
10
years
|
$
|
0.55
|
||||||
Total
|
14,870,973
|
$
|
0.63
|
F-36
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
Warrants
to Purchase Common Stock
At
September 30, 2008, there were warrants outstanding to purchase 6,899,353 shares
of the Company’s common stock at exercise prices ranging from $0.01 to $1.812
with a weighted average exercise price of $1.04. The warrants expire
at various times through 2017.
During
the year ended September 30, 2009, 1,498,986 warrants with an exercise price of
$0.01 were exercised.
During
the year ended September 30, 2009, the following additional 10,137,118 warrants
were granted as follows:
Warrants
to Purchase
|
Exercise
Price
|
Issued
in Connection With:
|
|||
100,000
shares
|
$
|
0.25
|
A
$200,000 bridge note with SAIL on May 14, 2009 as described in Note
2
|
||
3,333,333
shares
|
$
|
0.30
|
A
$1,000,000 bridge note with Pappajohn on June 12, 2009 as described in
Note 2
|
||
3,404,991
shares
|
$
|
0.30
|
Associated
with the August 26, 2009 private placement transaction of 6,810,002 shares
at $0.30 with 50% warrant coverage as described in Note
2
|
||
3,023,927
shares
|
$
|
0.30
|
Associated
with the automatic conversion of
|
||
$1,700,000
of convertible promissory notes and
|
|||||
$20,900
accrued interest upon completion an equity
|
|||||
financing
in excess of $1,500,000 as described in Note
2
|
|||||
274,867
shares
|
$
|
0.33
|
The
placement agent for private placement as described in Note
2
|
At
September 30, 2009, there were warrants outstanding to purchase 15,537,485
shares. During the nine months ended June 30, 2010, a further
7,093,601 warrants were granted and 3,333,333 warrants were exercised as
follows:
5,893,334
shares
|
$
|
0.30
|
Associated
with the second, third and fourth closing of the private placement
transaction of 11,786,667 shares at $0.30 with 50% warrant coverage as
described in Note 2
|
||
1,200,267
shares
|
$
|
0.33
|
Associated
with warrants for the lead and secondary placement agents for private
placement as described in Note 2
|
||
(3,333,333)
shares
|
$
|
0.30
|
These
warrants were surrendered in a net issue exercise and 2,456,126 shares
were issued in lieu of
cash.
|
F-37
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
At June
30, 2010, there were warrants outstanding to purchase 19,297,753 shares of the
Company’s common stock at exercise prices ranging from $0.01 to $1.812 with a
weighted average exercise price of $0.59. The warrants expire at
various times through 2017.
4. RELATED
PARTY TRANSACTIONS
As at
June 30, 2010 accounts payable included the following: $18,000 of accrued fees
due to a director in accordance with a consulting agreement. During
the nine months ended June 30, 2010 a payment of $24,000 was made to a director
for consulting services per an agreement and $36,000 was paid, with board
approval, to a family member of the Company’s Chief Executive Officer, who
provided data discovery consulting services in support of the Company’s
litigation with Mr. Brandt.
On June
3, 2010, we entered into a Bridge Note and Warrant Purchase Agreement with John
Pappajohn to purchase two secured promissory notes in the aggregate principal
amount of $500,000. For further detail, please refer to the section 2010 Promissory Note Transactions
in Note 2 above.
5. LONG-TERM DEBT
During
the year ended September 30, 2008 the Company issued a note payable to an
officer in connection with the acquisition of NTC. The note is
non-interest bearing and the Company determined its fair value by imputing
interest at an annual rate of 8%. As of June 30, 2010 and September
30, 2009 the note has an outstanding principal balance in the amount of $48,900
and $118,600 respectively. The entire balance is current as of June
30, 2010.
6. REPORTABLE
SEGMENTS
The
Company operates in two business segments: Laboratory Information Services and
Clinic. Laboratory Information Services provide reports (“rEEG
Reports”) that assist physicians with treatment strategies for patients with
behavioral (psychiatric and/or addictive) disorders based on the patient’s own
physiology. Clinic operates NTC, a full service psychiatric
practice.
The
following tables show operating results for the Company’s reportable segments,
along with reconciliation from segment gross profit to (loss) from operations,
the most directly comparable measure in accordance with generally accepted
accounting principles in the United States, or GAAP:
Three
Months ended June 30, 2010
|
||||||||||||||||
Laboratory
Information
Services
|
Clinic
|
Eliminations
|
Total
|
|||||||||||||
Revenues
|
45,300 | 119,300 | (5,400 | ) | 159,200 | |||||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of revenues
|
32,800 | 5,400 | (5,400 | ) | 32,800 | |||||||||||
Research
and development
|
302,400 | - | 302,400 | |||||||||||||
Sales
and marketing
|
187,500 | 14,100 | - | 201,600 | ||||||||||||
General
and administrative
|
899,600 | 182,100 | - | 1,081,700 | ||||||||||||
Total
operating expenses
|
1,422,300 | 201,600 | (5,400 | ) | 1,618,500 | |||||||||||
Income
(Loss) from operations
|
(1,377,000 | ) | (82,300 | ) | - | (1,459,300 | ) |
F-38
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
Three
Months ended June 30, 2009
|
||||||||||||||||
Laboratory
Information
Services
|
Clinic
|
Eliminations
|
Total
|
|||||||||||||
Revenues
|
$ | 32,000 | $ | 133,700 | $ | (5,300 | ) | $ | 160,400 | |||||||
Operating
expenses:
|
||||||||||||||||
Cost
of revenues
|
30,700 | 5,300 | (5,300 | ) | 30,700 | |||||||||||
Research
and development
|
480,800 | - | - | 480,800 | ||||||||||||
Sales
and marketing
|
159,600 | 1,700 | - | 161,300 | ||||||||||||
General
and administrative
|
683,100 | 184,400 | - | 867,500 | ||||||||||||
Total
operating expenses
|
$ | 1,354,200 | $ | 191,400 | $ | (5,300 | ) | $ | 1,540,300 | |||||||
Income
(Loss) from operations
|
$ | (1,322,200 | ) | $ | (57,700 | ) | $ | - | $ | (1,379,900 | ) |
Nine
Months ended June 30, 2010
|
||||||||||||||||
Laboratory
Information
Services
|
Clinic
|
Eliminations
|
Total
|
|||||||||||||
Revenues
|
112,100 | 417,600 | (48,700 | ) | 481,000 | |||||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of revenues
|
101,900 | 15,400 | (15,400 | ) | 101,900 | |||||||||||
Research
and development
|
843,600 | - | - | 843,600 | ||||||||||||
Sales
and marketing
|
587,800 | 16,000 | - | 603,800 | ||||||||||||
General
and administrative
|
3,150,900 | 522,300 | (33,300 | ) | 3,639,900 | |||||||||||
Total
operating expenses
|
4,684,200 | 553,700 | (48,700 | ) | 5,189,200 | |||||||||||
Income
(Loss) from operations
|
(4,572,200 | ) | (136,100 | ) | - | (4,708,200 | ) |
Nine
Months ended June 30, 2009
|
||||||||||||||||
Laboratory
Information
Services
|
Clinic
|
Eliminations
|
Total
|
|||||||||||||
Revenues
|
$ | 98,800 | $ | 463,400 | $ | (34,000 | ) | $ | 528,200 | |||||||
Operating
expenses:
|
||||||||||||||||
Cost
of revenues
|
99,800 | 12,500 | (12,500 | ) | 99,800 | |||||||||||
Research
and development
|
1,628,500 | - | - | 1,628,500 | ||||||||||||
Sales
and marketing
|
702,500 | 5,600 | - | 708,100 | ||||||||||||
General
and administrative
|
1,879,800 | 501,800 | (21,500 | ) | 2,360,100 | |||||||||||
Total
operating expenses
|
$ | 4,310,600 | $ | 519,900 | $ | (34,000 | ) | $ | 4,796,500 | |||||||
Income
(Loss) from operations
|
$ | (4,211,800 | ) | $ | (56,500 | ) | $ | - | $ | (4,268,300 | ) |
The
following table includes selected segment financial information as of June 30,
2010, related to goodwill and total assets:
Laboratory
Information
Services
|
Clinic
|
Total
|
||||||||||
Goodwill
|
$ | - | $ | - | $ | - | ||||||
Total
assets
|
$ | 181,200 | $ | 53,700 | $ | 234,900 |
F-39
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
7.
|
EARNINGS
PER SHARE
|
In
accordance with ASC 260-10 (formerly SFAS 128, “Computation of Earnings Per
Share”), basic net income (loss) per share is computed by dividing the net
income (loss) to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing the net income (loss) for the period by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. For the three months and nine months
ended June 30, 2010 and 2009, the Company has excluded all common equivalent
shares from the calculation of diluted net loss per share as such securities are
anti-dilutive.
A summary
of the net income (loss) and shares used to compute net income (loss) per share
for the three months and nine months ended June 30, 2010 and 2009 are as
follows:
For
the Three Months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Net
loss for computation of basic net loss per share
|
$ | (1,500,200 | ) | $ | (1,600,500 | ) | ||
Net
loss for computation of dilutive net loss per share
|
$ | (1,500,200 | ) | $ | (1,600,500 | ) | ||
Basic
net loss per share
|
$ | (0.03 | ) | $ | (0.06 | ) | ||
Diluted
net loss per share
|
$ | (0.03 | ) | $ | (0.06 | ) | ||
Basic
weighted average shares outstanding
|
56,023,921 | 25,782,277 | ||||||
Dilutive
common equivalent shares
|
- | - | ||||||
Diluted
weighted average common shares
|
56,023,921 | 25,782,277 | ||||||
For
the Nine Months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Net
loss for computation of basic net loss per share
|
$ | (4,753,200 | ) | $ | (4,495,400 | ) | ||
Net
loss for computation of dilutive net loss per share
|
$ | (4,753,200 | ) | $ | (4,495,400 | ) | ||
Basic
net loss per share
|
$ | (0.09 | ) | $ | (0.18 | ) | ||
Diluted
net loss per share
|
$ | (0.09 | ) | $ | (0.18 | ) | ||
Basic
weighted average shares outstanding
|
51,028,185 | 25,460,457 | ||||||
Dilutive
common equivalent shares
|
- | - | ||||||
Diluted
weighted average common shares
|
51,028,185 | 25,460,457 | ||||||
Anti-dilutive
common equivalent shares not included in the computation of dilutive net
loss per share:
|
||||||||
For
the Three Months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Convertible
Debt
|
150,000 | - | ||||||
Warrants
|
19,297,753 | 7,594,401 | ||||||
Options
|
14,870,973 | 8,869,545 |
F-40
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
For
the Nine Months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Convertible
Debt
|
50,000 | - | ||||||
Warrants
|
18,904,516 | 7,131,036 | ||||||
Options
|
9,781,463 | 8,885,551 |
8.
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
Litigation
From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the ordinary course of business. Other than as set forth below, we
are not currently party to any legal proceedings, the adverse outcome of which,
in our management’s opinion, individually or in the aggregate, would have a
material adverse effect on our results of operations or financial
position.
Since
June of 2009, we have been involved in litigation against Leonard J. Brandt, a
stockholder, former director and our former Chief Executive Officer (“Brandt”)
in the Delaware Chancery Court and the United States District Court for the
Central District of California. At the conclusion of a two-day trial
that commenced December 1, 2009, the Chancery Court entered judgment for the
Company and dismissed with prejudice Brandt's action brought pursuant to Section
225 of the Delaware General Corporation Law, which sought to oust the incumbent
directors other than Brandt. The Chancery Court thereby found that
the purported special meeting of stockholders convened by Brandt on September 4,
2009 was not valid and that the directors purportedly elected at that meeting
are not entitled to be seated. On January 4, 2010, Brandt filed an
appeal with the Supreme Court of the State of Delaware in relation to the
case. On April 20, 2010, the Delaware Supreme Court affirmed the
ruling of the Chancery Court.
The
Chancery Court also denied an injunction sought by Mr. Brandt to prevent the
voting of shares issued by the Company in connection with our bridge financing
in June 2009, and securities offering in August 2009, and dismissed Brandt's
claims regarding those financings and stock issuances. On January 4,
2010, Brandt also filed an appeal in relation to this ruling with the Delaware
Supreme Court which, on April 20, 2010, affirmed the ruling of the Chancery
Court.
The
Chancery Court also dismissed with prejudice another action brought by Mr.
Brandt, in which he claimed he had not been provided with information owed to
him.
In July
2009, we filed an action in the United States District Court for the Central
District of California against Mr. Brandt and certain others. Our
complaint alleged a variety of violations of federal securities laws, including
anti-fraud based claims under Rule 14a-9, solicitation of proxies in violation
of the filing and disclosure dissemination requirements of Regulation 14A, and
material misstatements and omissions in and failures to promptly file amendments
to Schedule 13D. Mr. Brandt and the other defendants filed
counterclaims against us, alleging violations of federal securities laws
relating to alleged actions and statements taken or made by us or our officers
and directors in connection with Mr. Brandt’s proxy and consent
solicitations. On March 10, 2010, we dismissed the Company’s claims
against EAC, and EAC dismissed its claims against us and Mr.
Carpenter. On April 10, 2010, Mr. Brandt's attorneys moved to
withdraw from representing Mr. Brandt in the case. On July 7, 2010,
Mr. Brandt moved to dismiss his counterclaims against the Company and the
Company consented to dismiss its complaint against Mr. Brandt. On
July 13, 2010, all of the Company’s claims and Mr. Brandt’s counterclaims in
such action were dismissed. This resolved all pending actions between
the Company and Mr. Brandt.
F-41
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
We have
expended substantial resources to pursue the defense of legal proceedings
initiated by Mr. Brandt. We do not know whether Mr. Brandt will
institute new claims against us and the defense of any such claims could involve
the expenditure of additional resources by the Company.
Lease
Commitments
The
Company leased its headquarters and Laboratory Information Services space under
an operating lease which terminated on November 30, 2009. The Company continued
to lease the space on a month-to-month basis through January 22, 2010 at which
time the Company moved to its new premises.
On
December 30, 2009 the Company entered a three year lease, commencing February 1,
2010 and terminating on January 30, 2013 for its new Headquarters and Laboratory
Information Services business premises located at 85 Enterprise, Aliso Viejo,
California 92656. The 2,023 square foot facility has an average cost
for the lease term of $3,600 per month.
The
Company leases space for its Clinical Services operations under an operating
lease. The base rental as of December 31, 2009 was $6,000 per
month. This lease terminated on February 28, 2010 and a 37 month
extension to the lease was negotiated commencing April 1, 2010 and terminating
April 30, 2013. The 3,542 square foot facility has an average cost for the lease
term of $5,100 per month.
The
Company also sub-leased space for its Clinical Services operations on a
month-to-month basis for $1,000 per month up until March 2010 when it terminated
this sub-lease and gave up the space.
The
Company leases a copier for $200 per month which it accounts for as a capital
lease with an interest rate of 9% per year. The lease terminates in February
2013, at which time the copier can be purchased at fair value.
The
Company incurred rent expense of $19,600 and $38,500 for the three months ended
June 30, 2010 and 2009 and $83,000 and $108,400 for the nine months ended June
30, 2010 and 2009
9. SUBSEQUENT
EVENTS
Events
subsequent to June 30, 2010 have been evaluated through the date these financial
statements were issued, to determine whether they should be disclosed to keep
the financial statements from being misleading. The following events
have occurred since June 30, 2010.
Publication
of our results
On July
3, 2010, a paper with the results of our study, which had been peer-reviewed by
the Journal of Psychiatric Research, was published on-line at its website while
awaiting hard-copy publication. The study, the largest in our history, was a
randomized, single blinded, controlled, parallel group, multicenter
study. The patients in the study experienced depression treatment
failure of one or more selective serotonin reuptake inhibitors (SSRIs) and/or
had failure with at least two classes of antidepressants. The
patients fell into two groups: 1) those treated with rEEG medication
guidance, and 2) those treated with the modified STAR*D treatment algorithm. The
12-week study, which included 114 patients at 12 medical sites, including
Harvard, Stanford, Cornell, UCI and Rush, found that rEEG significantly
outperformed the modified STAR*D treatment algorithm. The difference,
or separation, between rEEG and the control group was 50 and 100 percent for the
study’s two primary endpoints. Typically, separation between a new
treatment and a control group is less than 10 percent in antidepressant
studies.
F-42
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
Secured
Convertible Debt Financings
On July
5, 2010, we issued two unsecured promissory notes (each, a “Deerwood Note”) in
the aggregate principal amount of $250,000 to Deerwood Partners LLC and Deerwood
Holdings LLC, with each investor purchasing a note in the aggregate principal
amount of $125,000. The Deerwood Notes mature on December 15,
2010. We received $250,000 in gross proceeds from the issuance of
these notes. SAIL Venture Partners L.P. (“SAIL”), of which our
director David Jones is a managing partner, issued an unconditional guaranty to
each of these investors, guaranteeing the prompt and complete payment when due
of all principal, interest and other amounts under each Deerwood
Note. We have agreed to indemnify SAIL and grant to SAIL a security
interest in our assets in connection with the guaranties.
Each
Deerwood Note accrues interest at a rate of 9% per annum which will be paid
together with the repayment of the principal amount at the earliest of (i) the
maturity date; (ii) prepayment of the Deerwood Note at our option (iii) closing
of a financing in which the aggregate proceeds to us are not less than
$3,000,000 or (iv) the occurrence of an Event of Default (as defined in the
Deerwood Note). In addition, pursuant to a separate agreement that we
entered into with each of the Deerwood investors, each investor will have the
right to convert its note into shares of our common stock at a conversion price
of $0.50. The conversion price is subject to customary anti-dilution
adjustments, but will never be less than $0.30.
The
managing members of each of Deerwood Partners LLC and Deerwood Holdings LLC are
George J. Kallins, M.D., who joined the Company’s Board of Directors on July 5,
2010, and his spouse Bettina Kallins.
On June
3, 2010, we had entered into a Bridge Note and Warrant Purchase Agreement with
John Pappajohn, pursuant to which Mr. Pappajohn agreed to purchase two secured
promissory notes (each, a “Bridge Note”) in the aggregate principal amount of
$500,000, with each Bridge Note in the principal amount of $250,000 maturing on
December 2, 2010. On June 3, 2010, Mr. Pappajohn loaned the Company
$250,000 in exchange for the first Bridge Note (there were no warrants issued in
connection with this first note) and on July 25, 2010, Mr. Pappajohn loaned the
Company $250,000 in exchange for the second Bridge Note. In
connection with his purchase of the second Bridge Note, Mr. Pappajohn received a
warrant to purchase up to 250,000 shares of our common stock in accordance with
the Bridge Note and Warrant Purchase Agreement. The exercise price of
the warrant (subject to customary anti-dilution adjustments) is $0.50 per
share.
Pursuant
to a separate agreement that we entered into with Mr. Pappajohn on July 25,
2010, we have granted him a right to convert his Bridge Notes into shares of our
common stock at a conversion price of $0.50. The conversion price is
subject to customary anti-dilution adjustments, but will never be less than
$0.30. We have also agreed to enter into a registration rights
agreement covering the securities issuable upon exercise of the warrant and on
conversion of the Bridge Notes.
Each Bridge Note accrues interest at a
rate of 9% per annum which will be paid together with the repayment of the
principal amount at the earliest of (i) the maturity date; (ii) prepayment of
the Bridge Note at the option of the Company (iii) closing of a financing in
which the aggregate proceeds to the Company are not less than $3,000,000 or (iv)
the occurrence of an Event of Default (as defined in the Bridge
Note). The Purchase Agreement and each Bridge Note grants the
investor a senior security interest in and to all of the Company’s existing and
future right, title and interest in its tangible and intangible
property.
Grant
of Warrants and Options to purchase common stock
On July
5, 2010, the Board of Directors granted warrants to purchase 500,000 shares of
common stock to Mr. Brian Thompson for consulting services he had rendered to
the Company, advising on and assisting with fund raising
activities. Mr. Thompson is an employee of Equity Dynamics, Inc., a
company owned by Mr. Pappajohn. These warrants have an exercise
price of $0.30 cents per share, are exercisable from the date of grant and have
a term of 10 years from the date of grant. At the same meeting, the
Board also approved the grant of 800,000 options in total to a new member of
management, Michael Darkoch, EVP and Chief Marketing Officer, a new director,
Dr. Kallins, and a new advisor to the Company. The options have an exercise
price of $0.40 and a term of 10 years. In the case of Mr. Darkoch,
the options, the grant of which took effect upon commencement of his employment
on July 6, 2010, vest evenly over a period of 48 months. The options
for Dr. Kallins and the advisor vest evenly over a 36 month period.
F-43
CNS
RESPONSE, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
Letter
from the FDA
On July
27, 2010, we received a letter from the FDA division that was reviewing our
510(k) submission. This letter informed us that the FDA had
determined that our rEEG service was not substantially equivalent ("NSE") to the
predicate devices that had been granted 510(k) clearance. The FDA
concluded that the rEEG service had new indications for use, which alters the
diagnostic effect and impacts safety and effectiveness. Consequently,
the FDA suggests that the rEEG service is a class III device which requires an
approved premarket approval application (PMA) before it can be marketed legally,
unless it is otherwise reclassified. A statement of classification as
a class III device is standard procedure for any 510(k) submission that receives
an NSE letter, and does not represent a final FDA action classifying the product
into class III.
We
currently plan to continue marketing as a non-device laboratory information
service, while continuing to discuss alternative approaches with the
FDA. Alternative approaches, which are not mutually exclusive, may
consist of (1) filing a request for reconsideration of the NSE letter and/or (2)
submitting a new 510(k) with revised claims for rEEG and/or additional
information about the predicate devices. There is some risk
that the FDA will seek to take enforcement action against rEEG based upon the
agency's position that rEEG is a medical device if we continue to market our
service. The Company and its advisors continue to believe that the
Company’s activities consist of medication sensitivity reference testing, as is
performed by commercial laboratories and clinical review organizations, which is
not subject to regulation by the FDA.
F-44
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. Other Expenses of Issuance and Distribution.
The
Registrant will bear all expenses of registration incurred in connection with
this offering. The selling shareholders whose shares are being
registered will bear all selling and other expenses. The following
table itemizes the expenses incurred by the Registrant in connection with the
offering. All the amounts shown are estimates except the Securities
and Exchange Commission registration fee.
Amount
|
||||
Registration
fee – Securities and Exchange Commission
|
$ | 2,422 | ||
Legal
fees and expenses
|
$ | 40,000 | ||
Accounting
fees and expenses
|
$ | 20,000 | ||
Miscellaneous
expenses
|
$ | 5,000 | ||
Total
|
$ | 67,422 |
ITEM
14. Indemnification of Directors and Officers.
The
Delaware General Corporation Law and certain provisions of our certificate of
incorporation and bylaws under certain circumstances provide for indemnification
of our officers, directors and controlling persons against liabilities which
they may incur in such capacities. A summary of the circumstances in
which such indemnification is provided for is contained herein, but this
description is qualified in its entirety by reference to our certificate of
incorporation, bylaws and to the statutory provisions.
In
general, any officer, director, employee or agent may be indemnified against
expenses, fines, settlements or judgments arising in connection with a legal
proceeding to which such person is a party, if that person’s actions were in
good faith, were believed to be in our best interest, and with respect to any
criminal action or proceeding, such person had no reasonable cause to believe
their actions were unlawful. Unless such person is successful upon
the merits in such an action, indemnification may be awarded only after a
determination by independent decision of the board of directors, by legal
counsel, or by a vote of the stockholders, that the applicable standard of
conduct was met by the person to be indemnified.
The
circumstances under which indemnification is granted in connection with an
action brought on our behalf is generally the same as those set forth above;
however, with respect to such actions, indemnification is granted only with
respect to expenses actually incurred in connection with the defense or
settlement of the action. In such actions, unless the court
determines otherwise, the person to be indemnified must have acted in good faith
and in a manner believed to have been in our best interest, and have not been
adjudged liable to the corporation.
Indemnification
may also be granted pursuant to the terms of agreements which we are currently
party to with each of our directors and executive officers, agreements which we
may enter into in the future or pursuant to a vote of stockholders or
directors. Delaware law and our certificate of incorporation also
grant the power to us to purchase and maintain insurance which protects our
officers and directors against any liabilities incurred in connection with their
service in such a position, and such a policy may be obtained by
us.
A
stockholder’s investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers as required
by these indemnification provisions. At present we are reimbursing
SAIL Venture Partners, LLP, $107,600 and Equity Dynamics, Inc $55,200 for their
costs incurred in defending Mr. Jones and Mr. Pappajohn and their respective
organizations in the course of the Brandt Litigation. Apart from our
litigation with Brandt, there is no pending litigation or proceeding involving
any of our directors, officers or employees regarding which indemnification by
us is sought, nor are we aware of any threatened litigation that may result in
claims for indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the SEC,
this indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
II-1
Reference
is made to the following documents filed as exhibits to this Registration
Statement regarding relevant indemnification provisions described above and
elsewhere herein:
Exhibit
|
Number
|
|
Certificate
of Incorporation of Registrant, as amended
|
3.1.1
|
|
Bylaws
of Registrant
|
3.2
|
|
Form
of Indemnification Agreement
|
10.22
|
ITEM
15. Recent Sales of Unregistered Securities.
Reference
is made to the Shares for Debt Agreement entered into on January 11, 2007
described above in the section entitled Certain Relationships and Related
Transaction, which is hereby incorporated by reference.
Merger
with CNS California
On
January 16, 2007, we entered into an Agreement and Plan of Merger with CNS
Response, Inc., a California corporation (or CNS California), and CNS Merger
Corporation, a California corporation and our wholly-owned subsidiary that was
formed to facilitate the acquisition of CNS California. On March 7,
2007, the merger with CNS California closed, CNS California became our
wholly-owned subsidiary, and we changed our name from Strativation, Inc. to CNS
Response, Inc. At the Effective Time of the Merger (as defined in the
Merger Agreement, as amended on February 23, 2007), MergerCo was merged with and
into CNS California, the separate existence of MergerCo ceased, and CNS
California continued as the surviving corporation at the subsidiary
level. We issued an aggregate of 17,744,625 shares of our common
stock to the stockholders of CNS California in exchange for 100% ownership of
CNS California. Additionally, we assumed an aggregate of 8,407,517
options to purchase shares of common stock and warrants to purchase shares of
common stock on the same terms and conditions as previously issued by CNS
California.
Securities
Issued in 2007 Private Placement
On March
7, 2007, simultaneous with the closing of the Merger, we received gross proceeds
of approximately $7,008,450 in the first closing of a private placement
transaction (the “Private Placement”) with institutional investors and other
high net worth individuals (“Investors”). Pursuant to Subscription
Agreements entered into with these Investors, we sold 5,840,368 Investment
Units, at $1.20 per Investment Unit. Each “Investment Unit” consists
of one share of our common stock, and a five year non-callable warrant to
purchase three-tenths of one share of our common Stock, at an exercise price of
$1.80 per share (the “Investor Warrant”). On May 16, 2007, we
completed a second closing of the Private Placement for an additional 664,390
Investment Units. The additional gross proceeds to us amounted to
$797,300.
Brean
Murray Carret & Co. (“Brean Murray”) acted as placement agent and corporate
finance advisor in connection with the Private Placement. For their
services as placement agent and financial advisor, pursuant to the terms of an
Engagement Agreement between CNS California and Brean Murray, Brean Murray
received a retainer in the form of 83,333 shares of our common stock (having a
deemed value of $100,000) upon the closing of the Private
Placement. We also paid Brean Murray a fee equal to 8% of the funds
raised in the Private Placement, or approximately $624,500 of the gross proceeds
from the financing. In addition, Brean Murray received warrants (the
“Placement Agent Warrants”) to purchase shares of our common stock in amounts
equal to (i) 8% of the shares of common stock sold by Brean Murray in the
Private Placement (520,381 warrants at an exercise price of $1.44 per share),
and (ii) 8% of the shares underlying the Investor Warrants sold by Brean Murray
in the Private Placement (156,114 warrants at an exercise price of $1.80 per
share). The Placement Agent Warrants are fully vested and have a term
of 5 years. We also paid $87,700 in costs, fees and expenses incurred
by Brean Murray in connection with the Private Placement. We
expressly assumed CNS California’s agreement with Brean Murray upon the closing
of the Merger. Pursuant to this agreement, Brean Murray had a right
of first refusal to represent us in certain corporate finance transactions for a
period of one year following the closing of the Private
Placement. After payment of commissions and expenses associated with
the offering, we received net proceeds of approximately $6.9 million in the
private placement financing.
II-2
In
connection with the above stock issuances, except as otherwise disclosed we did
not pay any underwriting discounts or commissions. None of the sales
of securities described or referred to above was registered under the Securities
Act of 1933, as amended (the “Securities Act”). Each of the
purchasers fell into one or more of the categories that follow: one
of our existing shareholders, one of our creditors, one of our current or former
officers or directors, one of our employees, one of our service providers, or an
accredited investor with whom we or one of our affiliates had a prior business
relationship. As a result, no general solicitation or advertising was
used in connection with the sales. In making the sales without
registration under the Securities Act, the company relied upon one or more of
the exemptions from registration contained in Sections 4(2) of the Securities
Act, and in Regulation D promulgated under the Securities Act.
Securities
Issued in 2009-2010 Private Placement
Pursuant
to a Placement Agent Agreement entered into with Maxim Group LLC dated as of
August 3, 2009 and as amended on July 21, 2010, Maxim Group LLC served as lead
placement agent in our recently completed private placement offering and
received, in addition to cash commissions and a non-accountable expense
allowance, warrants to purchase an aggregate of 965,134 shares of our Common
Stock with an exercise price of $0.33 per share. Monarch Capital
Group, Robert Nathan and Felix Investments, LLC also acted as placement agents
in this private placement and received cash commissions and a non-accountable
expense allowance of $65,340 (Monarch Capital Group), $0 (Robert Nathan) and
$87,660 (Felix Investments, LLC). In addition, each such placement
agent received warrants to purchase shares of our common stock at an exercise
price of $0.33 per share, with Monarch Capital Group receiving 65,340 warrants,
Robert Nathan receiving 152,460 warrants and Felix Investments, LLC receiving
292,200 warrants. None of Monarch Capital Group, Robert Nathan or
Felix Investments, LLC executed an agreement with the Company in connection with
the private placement. The registration statement of which this
prospectus forms a part includes the shares underlying the warrants held by
Maxim Group LLC, Monarch Capital Group, Robert Nathan and Felix Investments,
LLC.
The
warrants held by each placement agent expire between August 26, 2014 and January
4, 2015, corresponding to five years after the closing of each tranche of the
private placement in compliance with FINRA Rule 5110(f)(2)(H). All
shares of Common Stock issued or issuable upon conversion of placement agent
warrants received by each placement agent are restricted from sale, transfer,
assignment, pledge or hypothecation or from being the subject of any hedging,
short sale, derivative, put, or call transaction that would result in the
effective economic disposition of the securities by any person for a period of
180 days immediately following the effective date of this registration
statement, except transfers of the warrants to officers or partners each
respective placement agent as allowed under FINRA Rule 5110 (g)(1) and
(2).
First
Closing: August 26, 2009
On
August 26, 2009, we received gross proceeds of approximately $2,000,000 in the
first closing of our private placement transaction from six accredited
investors. Pursuant to Subscription Agreements entered into with the
investors, we sold approximately 38 Investment Units at $54,000 per Investment
Unit. Each “Investment Unit” consists of 180,000 shares of our Common
Stock and a five year non-callable warrant to purchase 90,000 shares of our
Common Stock at an exercise price of $0.30 per share. After
commissions and expenses, we received net proceeds of approximately $1,792,300
in the Private Placement. These funds were used to repay outstanding
liabilities, fund the clinical trial and for working capital. Maxim
Group LLC acted as lead placement agent in connection with the Private
Placement. Monarch Capital Group, Robert Nathan and Felix
Investments, LLC also acted as placement agents in this private
placement. For their services in connection with the Private
Placement, Maxim received (i) a cash fee of $55,980, (ii) a cash expense
allowance of $40,860, and (iii) a five year non-callable warrant to purchase
274,867 shares of our Common Stock at an exercise price of $0.33 per share, that
expires on August 26, 2014. Monarch received a cash fee of
$29,160. Monarch and Robert Nathan received five year non-callable
warrant to purchase 29,160 and 69,040 shares respectively of our Common Stock at
an exercise price of $0.33 per share, that expires on August 26, None
of Monarch Capital Group, Robert Nathan or Felix Investments, LLC executed an
agreement with the Company in connection with the private
placement. The registration statement of which this prospectus forms
a part includes the shares underlying the warrants held by Maxim Group LLC,
Monarch Capital Group, Robert Nathan and Felix Investments,
LLC.
Pursuant
to a Registration Rights Agreement entered into with each investor, we agreed to
file a registration statement covering the resale of the Common Stock and the
Common Stock underlying the warrants sold in the private placement, as well as
the Common Stock underlying the warrants issued to the placement
agents by the later of October 26, 2009 or the 20th calendar day
after the termination of the offering. The Registration Rights
Agreement was subsequently amended to allow the filing of the registration
statement by the later of 10 business days following the Company’s filing of its
Annual Report on Form 10-K for its September 30, 2009 year end or the 20
th calendar day after termination of the offering.
II-3
In
addition, the Company agreed to use its best efforts to have the registration
statement declared effective no later than 180 days following the final closing
of the offering and maintain such effectiveness until the earlier of the second
anniversary of the date of such effectiveness or the date that all of the
securities covered by the registration statement may be sold without
restriction.
In
issuing the shares and warrants to the investors without registration under the
Securities Act of 1933, as amended (the “Securities Act”), we relied upon one or
more of the exemptions from registration contained in Sections 4(2) of the
Securities Act, and in Regulation D promulgated thereunder, as the shares and
warrants were issued to accredited investors, without a view to distribution,
and were not issued through any general solicitation or
advertisement. We made this determination based on the
representations of each investor which included, in pertinent part, that such
investor is an “accredited investor” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, that such investor was
acquiring the shares and the warrant for investment purposes for its own
account, and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act, and that such investor understood that the shares, the warrant and the
securities issuable upon exercise thereof may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
The Form
of Subscription Agreement, Form of Warrant issued to investors, the Registration
Rights Agreement with the investors, Amendment No. 1 to the Registration Rights
Agreement with the investors, the Placement Agent Agreement, a Form of Warrant
issued to the Placement Agent, a Form of Registration Rights Agreement with the
Placement Agent, Amendment No.1 to the Placement Agent Agreement, and Amendment
No.1 to the Form of Warrant issued to the Placement Agent associated with our
2009 private placement are referenced at Exhibits 10.18, 10.19, 10.20, 10.21,
10.28, 10.29, 10.30,10.31 and 10.32 to this registration statement.
Events
Relating to First Closing of Private Placement Transaction
(a) Conversion
of March Notes
On March
30, 2009, we entered into two Senior Secured Convertible Promissory Notes, each
in the principal amount of $250,000 (each a “March Note” and, collectively, the
“March Notes”), with Brandt Ventures, GP (“Brandt”) and SAIL Venture Partners,
LP (“SAIL”). Leonard Brandt, a former member of our board of
directors, is the general partner of Brandt and David B. Jones, a current member
of our board of directors, is a managing member of Sail Venture Partners, LLC,
which is the general partner of SAIL. The terms of the March Notes
provided that in the event we consummate an equity financing transaction of at
least $1,500,000 (excluding any and all other debt that is converted), then the
principal and all accrued, but unpaid interest outstanding under the notes shall
be automatically converted into the securities issued in the equity financing by
dividing such amount by 90% of the per share price paid by the investors in such
financing. In accordance with the terms of the March Notes, at the
first closing of the private placement, we issued to each of Brandt and SAIL
956,164 shares of common stock and a five year non-callable warrant to purchase
478,082 shares of our common stock at an exercise price of $0.30 per
share.
(b) Conversion
of May SAIL Note
On May
14, 2009, we entered into a Bridge Note and Warrant Purchase Agreement (the
“SAIL Purchase Agreement”) with SAIL. Pursuant to the SAIL Purchase
Agreement, on May 14, 2009 SAIL purchased a Secured Promissory Note in the
principal amount of $200,000 from us (the “May SAIL Note”). In order
to induce SAIL to purchase the note, we issued to SAIL a warrant to purchase up
to 100,000 shares of our common stock at a purchase price equal to $0.25 per
share. The warrant expires on the earlier to occur of May 31, 2016 or
a change of control of the company. The terms of the May SAIL Note
provided that in the event we consummate an equity financing transaction of at
least $1,500,000 (excluding any and all other debt that is converted), then the
principal and all accrued, but unpaid interest outstanding under the note shall
be automatically converted into the securities issued in the equity financing by
dividing such amount by 85% of the per share price paid by the investors in such
financing. In accordance with the terms of the May SAIL Note, at the
first closing of the private placement, we issued to SAIL 802,192 shares of our
common stock and a five year non-callable warrant to purchase 401,096 shares of
our common stock at an exercise price of $0.30 per share.
II-4
(c)
Conversion of Pappajohn Note
On June
12, 2009, Mr. Pappajohn entered into a Bridge Note and Warrant Purchase
Agreement (the “Pappajohn Purchase Agreement”) with us. Pursuant to
the Pappajohn Purchase Agreement, Mr. Pappajohn purchased a Secured Convertible
Promissory Note in the principal amount of $1,000,000 from us. In
order to induce Mr. Pappajohn to purchase the note, we issued to Mr. Pappajohn a
warrant to purchase up to 3,333,333 shares of our common stock at a purchase
price equal to $0.30 per share. The warrant expires on June 30,
2016.
The note
issued pursuant to the Pappajohn Purchase Agreement provided that the principal
amount of $1,000,000 together with a single payment of $90,000 (the “Premium
Payment”) would be due and payable, unless sooner converted into shares of our
common stock (as described below), upon the earlier to occur of: (i)
a declaration by Mr. Pappajohn on or after June 30, 2010 or (ii) an Event of
Default (as defined in the note). The note was secured by a lien on
substantially all of our assets (including all of our intellectual
property). In the event of a liquidation, dissolution or winding up
of the company, unless Mr. Pappajohn informed us otherwise, we were required to
pay Mr. Pappajohn an amount equal to the product of 250% multiplied by the then
outstanding principal amount of the note and the Premium Payment.
The
Pappajohn Purchase Agreement also provided that in the event we consummated an
equity financing transaction of at least $1,500,000 (excluding any and all other
debt that is converted), the then outstanding principal amount of the note (but
excluding the Premium Payment, which would be repaid in cash at the time of such
equity financing) would be automatically converted into the securities issued in
the equity financing by dividing such amount by the per share price paid by the
investors in such financing. The note also provided that the
securities issued upon conversion of the note would be otherwise issued on the
same terms as such shares are issued to the lead investor that purchases shares
of the company in the qualified financing.
At the
first closing of the private placement, we paid the Premium Payment to Mr.
Pappajohn, and the outstanding principal amount of Mr. Pappajohn’s note
($1,000,000 as of August 26, 2009) converted into 3,333,334 shares of our common
stock. In addition, in accordance with the terms of his note, Mr.
Pappajohn was issued a five year non-callable warrant to purchase 1,666,667
shares of our common stock at an exercise price of $0.30 per share.
In
issuing the shares and warrants described above without registration under the
Securities Act, we relied upon one or more of the exemptions from registration
contained in Sections 4(2) of the Securities Act, and in Regulation D
promulgated thereunder, as such shares and warrants were issued to accredited
investors, without a view to distribution, and were not issued through any
general solicitation or advertisement. We made this determination
based on the representations of each note holder which included, in pertinent
part, that such note holder is an “accredited investor” within the meaning of
Rule 501 of Regulation D promulgated under the Securities Act, that such note
holder was acquiring the shares and warrants for investment purposes for its own
account, and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act, and that such note holder understood that the shares, the warrants and the
securities issuable upon exercise thereof may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
Second
Closing: December 24, 2009
On
December 24, 2009, we completed a second closing of our private placement (as
described above, the first closing of our private placement occurred on August
26, 2009), resulting in additional gross proceeds to us of approximately $3.0
million.
Pursuant
to Subscription Agreements entered into with investors, we sold approximately 55
Investment Units at $54,000 per Investment Unit. Each “Investment
Unit” consists of 180,000 shares of our common stock and a five year
non-callable warrant to purchase 90,000 shares of our common stock at an
exercise price of $0.30 per share.
II-5
After
commissions and expenses, we received net proceeds of approximately $2.65
million in connection with the second closing of our private
placement. We intend to use (or have used) the proceeds from the
second closing for general corporate purposes, including clinical trial
expenses, research and development expenses, and general and administrative
expenses, including the payment of accrued legal expenses incurred in connection
with successfully defending the company from actions brought by Leonard
Brandt.
Maxim
Group LLC acted as lead placement agent in connection with the second closing of
our private placement. Monarch Capital Group, Robert Nathan and Felix
Investments, LLC also acted as placement agents. For their services
in connection with the second closing, the Maxim received (i) a cash fee of
$195,200, (ii) a cash expense allowance of $59,920, and (iii) a five year
non-callable warrant to purchase 672,267 shares of our common stock at an
exercise price of $ 0.33 per share, that expires on December 24,
2014. The cash fees received by the secondary placement agents were
$30,240 (Monarch Capital Group), and 45,000 (Felix Investments) and five year
non-callable warrant to purchase 30,240 (Monarch Capital Group), 70,560 (Robert
Nathan) and 150,000 (Felix Investments) shares of our common stock at an
exercise price of $ 0.33 per share, that expires on December 24,
2014
In
connection with the second closing of our private placement, each investor who
participated in the financing became party to the Registration Rights agreement
described above and will receive the same rights and benefits as the investors
in the first closing of our private placement.
In
issuing the shares and warrants to the investors without registration under the
Securities Act of 1933, as amended (the “Securities Act”), we relied upon one or
more of the exemptions from registration contained in Sections 4(2) of the
Securities Act, and in Regulation D promulgated thereunder, as the shares and
warrants were issued to accredited investors, without a view to distribution,
and were not issued through any general solicitation or
advertisement. We made this determination based on the
representations of each investor which included, in pertinent part, that such
investor is an “accredited investor” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, that such investor was
acquiring the shares and the warrant for investment purposes for its own
account, and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act, and that such investor understood that the shares, the warrant and the
securities issuable upon exercise thereof may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
Third
and Fourth Closings: December 31, 2009 and January 4,
2010
The
Company completed a third and fourth closing of its private placement, on
December 31, 2009 and January 4, 2010, respectively, resulting in gross proceeds
to the Company of approximately $540,000, thereby completing our private
placement.
Pursuant
to Subscription Agreements entered into with the investors, the Company sold 10
Investment Units at $54,000 per Investment Unit. Each “Investment
Unit” consists of 180,000 shares of the Company’s common stock and a five year
non-callable warrant to purchase 90,000 shares of the Company’s common stock at
an exercise price of $0.30 per share.
After
commissions and expenses, the Company received net proceeds of approximately
$480,000 in the third and fourth closings of the private
placement. The Company intends to use (or has used) the net proceeds
from the Private Placement for general corporate purposes, including clinical
trial expenses, research and development expenses, and general and
administrative expenses, including payment of accrued legal expenses incurred in
connection with successfully defending the Company from actions brought by the
Company’s former CEO, Leonard Brandt.
Maxim
Group LLC acted as lead placement agent (the “Placement Agent”) in connection
with the private placement. Monarch Capital Group, Robert Nathan and
Felix Investments, LLC also acted as placement agents. For their
services in connection with the December 31, 2009 closing of the private
placement, Maxim received (i) a cash fee of $4,320, (ii) a cash expense
allowance of $8,640, and (iii) a five year non-callable warrant to purchase
14,400 shares of the Company’s common stock at an exercise price of $.33 per
share that expires on December 31, 2014. The cash fees received by
the secondary placement agents were $5,940 (Monarch Capital Group), and $32,940
(Felix Investments) and five year non-callable warrant to purchase 5,940
(Monarch Capital Group), 13,860 (Robert Nathan) and 109,800 (Felix Investments)
shares of our common stock at an exercise price of $ 0.33 per share, that
expires on December 31, 2014.
II-6
For
its services in connection with the January 4, 2010 closing of the private
placement, Maxim received (i) a cash fee of $1,080, (ii) a cash expense
allowance of $2,160, and (iii) a five year non-callable warrant to purchase
3,600 shares of the Company’s common stock at an exercise price of $.33 per
share that expires on January 4, 2015. The cash fees received by the
secondary placement agent, Felix Investments, was $9,720 and a five year
non-callable warrant to purchase 32,400 shares of our common stock at an
exercise price of $ 0.33 per share, that expires on January 4,
2015.
In
connection with the third and fourth closings of our private placement, each
investor who participated in the financing became party to the Registration
Rights agreement described above and will receive the same rights and benefits
as the investors in the earlier closings of our private placement.
In
issuing the shares and warrants to the investors without registration under the
Securities Act of 1933, as amended (the “Securities Act”), the Company relied
upon one or more of the exemptions from registration contained in Sections 4(2)
of the Securities Act, and in Regulation D promulgated thereunder, as the shares
and warrants were issued to accredited investors, without a view to
distribution, and were not issued through any general solicitation or
advertisement. The Company made this determination based on the
representations of each investor which included, in pertinent part, that such
investor is an “accredited investor” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, that such investor was
acquiring the shares and the warrant for investment purposes for its own
account, and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act, and that such investor understood that the shares, the warrant and the
securities issuable upon exercise thereof may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
June
3, 2010 and July 25, 2010 Bridge Financing
On
June 3, 2010, we entered into a Bridge Note and Warrant Purchase Agreement with
John Pappajohn to purchase two secured promissory notes (each, a “Bridge Note”)
in the aggregate principal amount of $500,000, with each Bridge Note in the
principal amount of $250,000 maturing on December 2, 2010. On June 3,
2010, Mr. Pappajohn loaned the Company $250,000 in exchange for the first Bridge
Note (there were no warrants issued in connection with this first note) and on
July 25, 2010, Mr. Pappajohn loaned us $250,000 in exchange for the second
Bridge Note. In connection with his purchase of the second Bridge
Note, Mr. Pappajohn received a warrant to purchase up to 250,000 shares of our
common stock. The exercise price of the warrant (subject to customary
anti-dilution adjustments) was $0.50 per share.
We
agreed to grant a right to Mr. Pappajohn to convert his notes into shares of our
common stock at a conversion price of $0.50, subject to customary anti-dilution
adjustments.
Each
Bridge Note accrued interest at a rate of 9% per annum which would have been
paid together with the repayment of the principal amount at the earliest of (i)
the maturity date; (ii) prepayment of the Bridge Note at the option of the
Company (iii) closing of a financing in which the aggregate proceeds to the
Company are not less than $3,000,000 or (iv) the occurrence of an Event of
Default (as defined in the Bridge Note). The Purchase Agreement and
each Bridge Note grants the investor a senior security interest in and to all of
the Company’s existing and future right, title and interest in its tangible and
intangible property.
The
Purchase Agreement, form of Note, and form of Warrant are referenced at Exhibits
10.25, 10.26 and 10.27 hereto.
In
issuing the Notes and Warrant to Mr. Pappajohn without registration under the
Securities Act, we relied upon one or more of the exemptions from registration
contained in Sections 4(2) of the Securities Act, and in Regulation D
promulgated thereunder, as the Notes and Warrant were issued to an accredited
investor, without a view to distribution, and were not issued through any
general solicitation or advertisement. We made this determination
based on the representations of Mr. Pappajohn which included, in pertinent part,
that Mr. Pappajohn is an “accredited investor” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, that Mr. Pappajohn was
acquiring the Notes and Warrant for investment purposes for his own account, and
not with a view to, or for resale in connection with, any distribution or public
offering thereof within the meaning of the Securities Act, and that Mr.
Pappajohn understood that the securities issuable pursuant to the Notes and
Warrant may not be sold or otherwise disposed of without registration under the
Securities Act or an applicable exemption therefrom.
II-7
July
5, 2010 and August 20, 2010 Bridge Financing
On July
5, 2010 and August 20, 2010, we issued unsecured promissory notes (each, a
“Deerwood Note”) in the aggregate principal amount of $500,000 to Deerwood
Partners LLC and Deerwood Holdings LLC, with each investor purchasing two notes
in the aggregate principal amount of $250,000. The Deerwood Notes
mature on December 15, 2010. We received $250,000 in gross proceeds
from the issuance of the first two notes on July 5, 2010 and another $250,000 in
gross proceeds from the issuance of the second two notes on August 20,
2010. In connection with the August 20, 2010 transaction, each of the
two investors also received a warrant to purchase up to 75,000 shares of our
common stock at an exercise price (subject to customary anti-dilution
adjustments) of $0.56 per share.
SAIL
Venture Partners L.P. (“SAIL”), of which our director David Jones is a managing
partner, issued unconditional guaranties to each of these investors,
guaranteeing the prompt and complete payment when due of all principal, interest
and other amounts under each Deerwood Note. The obligations under
each guaranty are independent of our obligations under the Deerwood Notes and
separate actions may be brought against the guarantor. We have
entered into an oral agreement to indemnify SAIL and grant to SAIL a security
interest in our assets in connection with the guaranties. In
addition, on August 20, 2010, we granted SAIL warrants to purchase up to an
aggregate of 100,000 shares of common stock at an exercise price (subject to
customary anti-dilution adjustments) of $0.56 per share.
Each
Deerwood Note accrues interest at a rate of 9% per annum which will be paid
together with the repayment of the principal amount, unless earlier converted,
at the earliest of (i) the maturity date; (ii) prepayment of the Deerwood Note
at our option (iii) closing of a financing in which the aggregate proceeds to us
are not less than $3,000,000 or (iv) the occurrence of an Event of Default (as
defined in the Deerwood Note). Each Deerwood Note is convertible into
shares of our common stock at a conversion price of $0.50. The
conversion price is subject to customary anti-dilution adjustments, but will
never be less than $0.30.
The
managing members of each of Deerwood Partners LLC and Deerwood Holdings LLC are
George J. Kallins, M.D., who joined the Company’s Board of Directors on July 5,
2010, and his spouse Bettina Kallins.
In
issuing the Deerwood Notes without registration under the Securities Act, we
relied upon one or more of the exemptions from registration contained in
Sections 4(2) of the Securities Act, and in Regulation D promulgated thereunder,
as the notes were issued to accredited investors, without a view to
distribution, and were not issued through any general solicitation or
advertisement. We made this determination based on the
representations of the investors which included, in pertinent part, that such
note holders are “accredited investors” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, that such note holders were
acquiring the notes for investment purposes for their own account, and not with
a view to, or for resale in connection with, any distribution or public offering
thereof within the meaning of the Securities Act, and that the investors
understood that the securities may not be sold or otherwise disposed of without
registration under the Securities Act or an applicable exemption
therefrom.
July
5, 2010 Grant of Warrants to Consultant
On July
5, 2010, the Board granted warrants to purchase 500,000 shares of common stock
to Mr. Thompson for consulting services rendered to the Company in connection
with fund raising activities. Mr. Thompson is an employee of Equity
Dynamics, Inc, a company owned by Mr. Pappajohn. These warrants have
an exercise price of $0.30 cents per share, are exercisable from the date of
grant and have a term of 10 years from the date of grant.
II-8
The
warrants issued to Mr. Thompson were not registered under the Securities
Act. Mr. Thompson is a service provider and an accredited
investor. As a result, no general solicitation or advertising was
used in connection with the grant. In making the grant without
registration under the Securities Act, the Company relied upon the exemptions
from registration contained in Section 4(2) of the Securities Act and Regulation
D promulgated under the Securities Act.
October
2010 Bridge Financing
On
October 1, 2010, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with John Pappajohn and SAIL as investors, pursuant to
which we issued to the investors secured convertible promissory notes (the
“October Notes”) in the aggregate principal amount of $1,011,688 and warrants to
purchase up to 1,686,144 shares of common stock.
The
Company received $500,000 in gross proceeds from the issuance to the investors
of October Notes in the aggregate principal amount of $500,000 and related
warrants to purchase up to 833,332 shares. We also issued October
Notes in the aggregate principal amount of $511,688, and related warrants to
purchase up to 852,812 shares, to Mr. Pappajohn in exchange for the cancellation
of the two Bridge Notes originally issued to him on June 3, 2010 and July 25,
2010 in the aggregate principal amount of $500,000 (and accrued and unpaid
interest on those notes) and a warrant to purchase up to 250,000 shares
originally issued to him on July 25, 2010. The transaction closed on
October 1, 2010.
On
October 7 and October 12, 2010, a third and fourth investor, respectively,
executed the Purchase Agreement. In connection therewith, we issued
October Notes in the aggregate principal amount of $600,000 and warrants to
purchase up to 999,999 shares of common stock of the Company, to such investors
on those dates. We received $588,000 in net proceeds from these
investors. Monarch Capital Group LLC (“Monarch”) acted as
non-exclusive placement agent with respect to the placement of October Notes in
the aggregate principal amount of $100,000 and related warrants, pursuant to an
engagement agreement, dated September 30, 2010, between us and
Monarch. Under the engagement agreement, in return for its services
as non-exclusive placement agent, Monarch is entitled to receive (a) a cash fee
equal to 10% of the gross proceeds raised from the sale of Notes to investors
introduced to the Company by Monarch; (b) a cash expense allowance equal to 2%
of the gross proceeds raised from the sale of Notes to such investors; and (c)
five-year warrants (the “Placement Agent Warrants”) to purchase common stock of
the Company equal to 10% of the shares issuable upon conversion of Notes issued
to such investors. In connection with the October 12, 2010 closing,
Monarch received a cash fee of $10,000 and a cash expense allowance of $2,000
and, on October 25, 2010, received Placement Agent Warrants to purchase 33,333
shares of the Company’s common stock at an exercise price of $0.33 per
share.
On
October 21, 2010 and October 28, a fifth and sixth investor, respectively,
executed the Purchase Agreement. In connection therewith, we issued
October Notes in the aggregate principal amount of $250,000 and warrants to
purchase up to 416,666 shares of common stock to such investors on such
dates. We received approximately $250,000 in net proceeds from the
issuance to these investors.
On
November 3, 2010, three affiliated entities executed the Purchase
Agreement. In connection therewith, we issued October Notes in the
aggregate principal amount of $762,250 and warrants to purchase up to 1,270,414
shares of common stock. We received $250,000 in gross proceeds from
the issuance to BGN Acquisition Ltd., LP, an entity controlled by our director
George Kallins, of October Notes in the aggregate principal amount of $250,000
and related warrants to purchase up to 416,666 shares. We also issued
October Notes in the aggregate principal amount of $512,250, and related
warrants to purchase up to 512,250 shares, to Deerwood Holdings LLC and Deerwood
Partners LLC, two entities controlled by Mr. Kallins, in exchange for the
cancellation of the Deerwood Notes originally issued on July 5, 2010 and August
20, 2010 in the aggregate principal amount of $500,000 (and accrued and unpaid
interest on those notes) and warrants to purchase an aggregate of up to 150,000
shares originally issued on August 20, 2010. The related guaranties
and oral indemnification and security agreement that had been entered into in
connection with the Deerwood Notes were likewise terminated. SAIL, of
which our director David Jones is a managing partner, issued unconditional
guaranties to each of the Deerwood investors, guaranteeing the prompt and
complete payment when due of all principal, interest and other amounts under the
October Notes issued to such investors. The obligations under each
guaranty are independent of our obligations under the October Notes and separate
actions may be brought against the guarantor. In connection with its
serving as guarantor, we granted SAIL warrants to purchase up to an aggregate of
341,498 shares of common stock. The warrants to purchase 100,000
shares of common stock previously granted to SAIL on August 20, 2010 were
canceled.
II-9
The
Purchase Agreement provides for the issuance and sale of October Notes, for cash
or in exchange for outstanding convertible notes, in the aggregate principal
amount of up to $3,000,000 plus an amount corresponding to accrued and unpaid
interest on any exchanged notes, and warrants to purchase a number of shares
corresponding to 50% of the number of shares issuable on conversion of the
October Notes. The agreement provides for multiple closings, but
mandates that no closings may occur after January 31, 2011. The
Purchase Agreement also provides that the Company and the holders of the October
Notes will work in good faith to enter into a registration rights
agreement covering the registration of the resale of the shares underlying the
October Notes and the related warrants.
The
October Notes mature one year from the date of issuance, 2011 (subject
to earlier conversion or prepayment), earn interest equal to 9% per year with
interest payable at maturity, and are convertible into shares of common stock of
the Company at a conversion price of $0.30. The conversion price is
subject to adjustment upon (1) the subdivision or combination of, or stock
dividends paid on, the common stock; (2) the issuance of cash dividends and
distributions on the common stock; (3) the distribution of other capital stock,
indebtedness or other non-cash assets; and (4) the completion of a financing at
a price below the conversion price then in effect. The October Notes
can be declared due and payable upon an event of default, defined in the October
Notes to occur, among other things, if the Company fails to pay principal and
interest when due, in the case of voluntary or involuntary bankruptcy or if the
Company fails to perform any covenant or agreement as required by the October
Note.
Our
obligations under the terms of the October Notes are secured by a security
interest in the tangible and intangible assets of the Company, pursuant to a
Security Agreement, dated as of October 1, 2010, by and between us and John
Pappajohn, as administrative agent for the holders of the October
Notes. The agreement and corresponding security interest terminate if
and when holders of a majority of the aggregate principal amount of October
Notes issued have converted their October Notes into shares of common
stock.
The
warrants related to the October Notes expire on September 20, 2017 and are
exercisable for shares of common stock of the Company at an exercise price of
$0.30. Exercise price and number of shares issuable upon exercise are
subject to adjustment (1) upon the subdivision or combination of, or stock
dividends paid on, the common stock; (2) in case of any reclassification,
capital reorganization or change in capital stock and (3) upon the completion of
a financing at a price below the exercise price then in effect.
The
Placement Agent Warrants have an exercise price equal to 110% of the conversion
price of the Notes. The terms of the Placement Agent Warrants, except
for the exercise price and period, are identical to the terms of the warrants
related to the October Notes.
In
issuing the October Notes, related warrants and Placement Agent Warrants, we
relied upon one or more of the exemptions from registration contained in
Sections 4(2) of the Securities Act, and in Regulation D promulgated thereunder,
as such notes and warrants were issued to accredited investors, without a view
to distribution, and were not issued through any general solicitation or
advertisement. We made this determination based on the
representations of the investors which included, in pertinent part, that
such holders are “accredited investors” within the meaning of Rule
501 of Regulation D promulgated under the Securities Act, that such note holders
were acquiring the notes for investment purposes for their own account, and not
with a view to, or for resale in connection with, any distribution or public
offering thereof within the meaning of the Securities Act, and that the
investors understood that the securities may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
II-10
ITEM
16. Exhibits and Financial Statement Schedules.
(a)
|
The following exhibits are filed herewith: | |
Exhibit
Number
|
Exhibit
Title
|
|
2.1
|
Agreement
and Plan of Merger between Strativation, Inc., CNS Merger Corporation and
CNS Response, Inc. dated as of January 16, 2007. Incorporated
by reference to Exhibit No. 10.1 to the Registrant’s Current Report on
Form 8-K (File No. 000-26285) filed with the Commission on January 22,
2007.
|
|
2.2
|
Amendment
No. 1 to Agreement and Plan of Merger by and among Strativation, Inc., CNS
Merger Corporation, and CNS Response, Inc. dated as of February 28,
2007. Incorporated by reference to Exhibit No. 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 1, 2007.
|
|
3.1.1
|
Certificate
of Incorporation, dated March 17, 1987. Incorporated by
reference to Exhibit No. 3(i) to the Registrant’s Form 10-SB (File No.
000-26285) filed with the Commission on June 7,
1999.
|
|
3.1.2
|
Certificate
of Amendment of Certificate of Incorporation, dated June 1,
2004. Incorporated by reference to Exhibit 16 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on June 8, 2004.
|
|
3.1.3
|
Certificate
of Amendment of Certificate of Incorporation, dated August 2,
2004. Incorporated by reference to Exhibit 16 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on August 5, 2004.
|
|
3.1.4
|
Certificate
of Amendment of Certificate of Incorporation, dated September 7,
2005. Incorporated by reference to Exhibit 4.4 to the
Registrant’s Registration Statement on Form S-8 (File No. 333-150398)
filed with the Commission on April 23, 2008.
|
|
3.1.5
|
Certificate
of Amendment of Certificate of Incorporation, dated January 8,
2007. Incorporated by reference to Exhibit 3.1.5 to the
Registrant’s Registration Statement on Form S-1/A (File No. 333-164613)
filed with the Commission on July 6, 2010.
|
|
3.1.6
|
Certificate
of Ownership and Merger Merging CNS Response, Inc., a Delaware
corporation, with and into Strativation, Inc., a Delaware corporation,
dated March 7, 2007. Incorporated by reference to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
|
|
3.2.1
|
Bylaws. Incorporated
by reference to Exhibit No. 3(ii) to the Registrant’s Form 10-SB (File No.
000-26285) filed with the Commission on June 7,
1999.
|
|
3.2.2
|
Amendment
No. 1 to Bylaws of CNS Response, Inc. Incorporated by reference
to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on July 2,
2009.
|
|
3.2.3
|
Amendment
No. 2 to Bylaws of CNS Response, Inc. Incorporated by reference
to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on July 23,
2009.
|
|
4.1
|
Amended
and Restated 2006 Stock Incentive Plan. Incorporated by
reference to Appendix A to the Registrant’s Definitive Proxy Statement on
Schedule 14A (File No. 000-26285) filed with the Commission on April 1,
2010.*
|
|
5.1
|
Opinion
of Stubbs, Alderton & Markiles, LLP. Incorporated by
reference to Exhibit 5.1 to the Registrant’s Registration Statement on
Form S-1/A (File No. 333-164613) filed with the Commission on July 6,
2010.
|
|
10.1
|
Amended
and Restated Registration Rights Agreement, dated January 16, 2007 by and
among the Registrant and the stockholders signatory
thereto. Incorporated by reference to Exhibit No. 10.2 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on January 16, 2007.
|
|
10.2
|
Form
of Subscription Agreement between the Registrant and certain investors,
dated March 7, 2007. Incorporated by reference to Exhibit 10.4
to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed
with the Commission on March 13, 2007.
|
|
II-11
Exhibit
Number
|
Exhibit
Title
|
|
10.3
|
Form
of Indemnification Agreement by and among the Registrant, CNS Response,
Inc., a California corporation, and certain individuals, dated March 7,
2007. Incorporated by reference to Exhibit 10.5 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
|
|
10.4
|
Form
of Registration Rights Agreement by and among the Registrant and certain
Investors signatory thereto dated March 7, 2007. Incorporated
by reference to Exhibit 10.6 to the Registrant’s Current Report on Form
8-K (File No. 000-26285) filed with the Commission on March 13,
2007.
|
|
10.5
|
Form
of Registration Rights Agreement by and among the Registrant and certain
stockholders of the Company signatory thereto dated March 7,
2007. Incorporated by reference to Exhibit 10.7 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
|
|
10.6
|
Employment
Agreement by and between the Registrant and George Carpenter dated October
1, 2007. Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on October 3, 2007.*
|
|
10.7
|
Employment
Agreement by and between the Registrant and Daniel Hoffman dated January
11, 2008. Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on January 17, 2008.*
|
|
10.8
|
Stock
Purchase Agreement by and among Colorado CNS Response, Inc.,
Neuro-Therapy, P.C. and Daniel A. Hoffman, M.D. dated January 11,
2008. Incorporated by reference to the Registrant’s Annual
Report on Form 10-K (File No. 000-26285) filed with the Commission on
January 13, 2009.
|
|
10.9
|
Form
of Warrant issued to Investors in Private
Placement. Incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
|
|
10.10
|
Senior
Secured Convertible Promissory Note, dated March 30, 2009, by and between
the Company and Brandt Ventures, GP. Incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on April 3, 2009.
|
|
10.11
|
Senior
Secured Convertible Promissory Note, dated March 30, 2009, by and between
the Company and SAIL Venture Partners, LP. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File No. 000-26285) filed with the Commission on April 3
2009.
|
|
10.12
|
Bridge
Note and Warrant Purchase Agreement, dated May 14, 2009 by and between the
Company and SAIL Venture Partners, LP. Incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on May 20, 2009.
|
|
10.13
|
Form
of Secured Convertible Promissory Note. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on May 20, 2009.
|
|
10.14
|
Form
of Warrant to Purchase Shares. Incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on May 20,
2009.
|
|
10.15
|
Bridge
Note and Warrant Purchase Agreement, dated June 12, 2009, by and between
the Company and John Pappajohn. Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on June 18,
2009.
|
II-12
Exhibit
Number
|
Exhibit
Title
|
|
10.16
|
Form
of Secured Convertible Promissory Note. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on June 18, 2009.
|
|
10.17
|
Form
of Warrant to Purchase Shares. Incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on June 18,
2009.
|
|
10.18
|
Form
of Subscription Agreement. Incorporated by reference to Exhibit
10.18 to the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on December
30, 2009.
|
|
10.19
|
Form
of Warrant. Incorporated by reference to Exhibit 10.19 to the
Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed with
the Securities and Exchange Commission on December 30,
2009.
|
|
10.20
|
Registration
Rights Agreement. Incorporated by reference to Exhibit 10.20 to
the Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed
with the Securities and Exchange Commission on December 30,
2009.
|
|
10.21
|
Amendment
No. 1 to Registration Rights Agreement. Incorporated by
reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on December 30, 2009.
|
|
10.22
|
Form
of Indemnification Agreement. Incorporated by reference to
Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on December
30, 2009.
|
|
10.23
|
Employment
Agreement by and between the Registrant and Paul Buck effective as of
February 18, 2010. Incorporated by reference to Exhibit 10.23
to the Registrant’s Registration Statement on Form S-1/A (File No.
333-164613) filed with the Commission on July 6,
2010.*
|
|
10.24
|
Consulting
Agreement by and among CNS Response, Inc. and Henry T. Harbin, effective
January 1, 2010. Incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q (File Number 000-26285)
filed with the Securities and Exchange Commission on May 14,
2010.
|
|
10.25
|
Bridge
Note and Warrant Purchase Agreement, dated as of June 3, 2010, between CNS
Response, Inc. and John Pappajohn. Incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on June 7, 2010.
|
|
10.26
|
Form
of Note. Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on June 7,
2010.
|
|
10.27
|
Form
of Warrant. Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on June 7,
2010.
|
|
10.28
|
Placement
Agent Agreement dated August 3, 2009 between the Registrant and Maxim
Group LLC. Incorporated by reference to Exhibit 10.28 to the
Registrant’s Registration Statement on Form S-1/A (File No. 333-164613)
filed with the Commission on July 6, 2010.
|
|
10.29
|
Form
of Warrant issued to Placement Agent. Incorporated by reference
to Exhibit 10.29 to the Registrant’s Registration Statement on Form S-1/A
(File No. 333-164613) filed with the Commission on July 6,
2010.
|
II-13
Exhibit
Number
|
Exhibit
Title
|
|
10.30
|
Registration
Rights Agreement dated August 26, 2009 between the Registrant and Maxim
Group, LLC.
|
|
10.31
|
Amendment
No.1 to Placement Agent Agreement dated July 21, 2010 between the
Registrant and Maxim Group LLC.
|
|
10.32
|
Amendment
No.1 to Form of Warrant issued to Placement Agent dated July 23,
2010.
|
|
10.33
|
Form
of Unsecured Promissory Note. Incorporated by reference to
Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on July 9,
2010.
|
|
10.34
|
Form
of Guaranty. Incorporated by reference to Exhibit 4.2 to the
Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on July 9,
2010.
|
|
10.35
|
Form
of Deerwood Note. Incorporated by reference to Exhibit 4.1 to
the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed
with the Securities and Exchange Commission on August 24,
2010.
|
|
10.36
|
Form
of Deerwood Warrant. Incorporated by reference to Exhibit 4.2
to the Registrant’s Current Report on Form 8-K (File Number 000-26285)
filed with the Securities and Exchange Commission on August 24,
2010.
|
|
10.37 |
Engagement
Agreement, dated September 30, 2010, between the Registrant and Monarch
Capital Group, LLC, as Placement Agent. Incorporated by
reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on October 13, 2010.
|
|
10.38 |
Form
of Note and Warrant Purchase Agreement, dated October 1, 2010, by and
between the Registrant and the Investors party
thereto. Incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on October 7,
2010.
|
|
10.39 |
Security
Agreement, dated October 1, 2010, by and between the Registrant and John
Pappajohn, as administrative agent for the secured
parties. Incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on October 7,
2010.
|
|
10.40 |
Form
of October Note. Incorporated by reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K (File Number 000-26285) filed
with the Securities and Exchange Commission on October 7,
2010.
|
|
10.41 |
Form
of October Warrant. Incorporated by reference to Exhibit 4.2 to
the Registrant's Current Report on Form 8-K (File Number 000-26285) filed
with the Securities and Exchange Commission on October 7,
2010.
|
|
10.42 |
Form
of Placement Agent Warrant issued to Monarch Capital Group,
LLC. Incorporated by reference to Exhibit 4.3 to the
Registrant's Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on October 27,
2010.
|
|
10.43* |
Employment
Agreement, dated July 6, 2010, by and between the Registrant and Michael
Darkoch."
|
|
21.1
|
Subsidiaries
of the Registrant. Incorporated by reference to the
Registrant’s Annual Report on Form 10-K (File No. 000-26285) filed with
the Commission on January 13, 2009.
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
23.2
|
Consent
of Stubbs, Alderton & Markiles, LLC (included in Exhibit
5.1).
|
*
Indicates a management contract or compensatory plan.
(b) Financial
Statement Schedules
Schedules
not listed above have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
ITEM
17. Undertakings.
(a) Rule 415
Offering. The undersigned registrant hereby
undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Actof
1933;
II-14
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in the effective
registration statement.
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(5)(ii) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
(h) Request
for Acceleration of Effective Date or filing of registration statement becoming
effective upon filing.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-15
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Aliso Viejo, State of
California, on November 5, 2010.
CNS RESPONSE,
INC.
(Registrant)
|
|||
|
By:
|
/s/ George Carpenter | |
George
Carpenter
|
|||
Chief
Executive Officer and Secretary
|
|||
(Principal
Executive Officer)
|
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
stated.
Signature
|
Title
|
Date
|
||
/s/
George Carpenter
|
Chief
Executive Officer and Secretary, and Chairman of the
Board
(Principal
Executive Officer)
|
November
5, 2010
|
||
George
Carpenter
|
||||
/s/
Paul Buck
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
November
5, 2010
|
||
Paul
Buck
|
||||
*
|
Director
|
November
5, 2010
|
||
David
B. Jones
|
||||
*
|
Director
|
November
5, 2010
|
||
Jerome
Vaccaro, M.D.
|
||||
*
|
Director
|
November
5, 2010
|
||
Henry
T. Harbin, M.D.
|
||||
*
|
Director
|
November
5, 2010
|
||
John
Pappajohn
|
||||
Director
|
||||
George
Kallins, M.D.
|
||||
*By
: George Carpenter
|
||||
George
Carpenter
|
||||
As
Attorney-In-Fact
|
EXHIBIT
INDEX
Exhibit
Number
|
Exhibit
Title
|
|
2.1
|
Agreement
and Plan of Merger between Strativation, Inc., CNS Merger Corporation and
CNS Response, Inc. dated as of January 16, 2007. Incorporated
by reference to Exhibit No. 10.1 to the Registrant’s Current Report on
Form 8-K (File No. 000-26285) filed with the Commission on January 22,
2007.
|
|
2.2
|
Amendment
No. 1 to Agreement and Plan of Merger by and among Strativation, Inc., CNS
Merger Corporation, and CNS Response, Inc. dated as of February 28,
2007. Incorporated by reference to Exhibit No. 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 1, 2007.
|
|
3.1.1
|
Certificate
of Incorporation, dated March 17, 1987. Incorporated by
reference to Exhibit No. 3(i) to the Registrant’s Form 10-SB (File No.
000-26285) filed with the Commission on June 7,
1999.
|
|
3.1.2
|
Certificate
of Amendment of Certificate of Incorporation, dated June 1,
2004. Incorporated by reference to Exhibit 16 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on June 8, 2004.
|
|
3.1.3
|
Certificate
of Amendment of Certificate of Incorporation, dated August 2,
2004. Incorporated by reference to Exhibit 16 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on August 5, 2004.
|
|
3.1.4
|
Certificate
of Amendment of Certificate of Incorporation, dated September 7,
2005. Incorporated by reference to Exhibit 4.4 to the
Registrant’s Registration Statement on Form S-8 (File No. 333-150398)
filed with the Commission on April 23, 2008.
|
|
3.1.5
|
Certificate
of Amendment of Certificate of Incorporation, dated January 8,
2007. Incorporated by reference to Exhibit 3.1.5 to the
Registrant’s Registration Statement on Form S-1/A (File No. 333-164613)
filed with the Commission on July 6, 2010.
|
|
3.1.6
|
Certificate
of Ownership and Merger Merging CNS Response, Inc., a Delaware
corporation, with and into Strativation, Inc., a Delaware corporation,
dated March 7, 2007. Incorporated by reference to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
|
|
3.2.1
|
Bylaws. Incorporated
by reference to Exhibit No. 3(ii) to the Registrant’s Form 10-SB (File No.
000-26285) filed with the Commission on June 7,
1999.
|
|
3.2.2
|
Amendment
No. 1 to Bylaws of CNS Response, Inc. Incorporated by reference
to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on July 2,
2009.
|
|
3.2.3
|
Amendment
No. 2 to Bylaws of CNS Response, Inc. Incorporated by reference
to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on July 23,
2009.
|
|
4.1
|
Amended
and Restated 2006 Stock Incentive Plan. Incorporated by
reference to Appendix A to the Registrant’s Definitive Proxy Statement on
Schedule 14A (File No. 000-26285) filed with the Commission on April 1,
2010.*
|
|
5.1
|
Opinion
of Stubbs, Alderton & Markiles, LLP. Incorporated by
reference to Exhibit 5.1 to the Registrant’s Registration Statement on
Form S-1/A (File No. 333-164613) filed with the Commission on July 6,
2010.
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EX-1
Exhibit
Number
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Exhibit
Title
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10.1
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Amended
and Restated Registration Rights Agreement, dated January 16, 2007 by and
among the Registrant and the stockholders signatory
thereto. Incorporated by reference to Exhibit No. 10.2 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on January 16, 2007.
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10.2
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Form
of Subscription Agreement between the Registrant and certain investors,
dated March 7, 2007. Incorporated by reference to Exhibit 10.4
to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed
with the Commission on March 13, 2007.
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10.3
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Form
of Indemnification Agreement by and among the Registrant, CNS Response,
Inc., a California corporation, and certain individuals, dated March 7,
2007. Incorporated by reference to Exhibit 10.5 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
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10.4
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Form
of Registration Rights Agreement by and among the Registrant and certain
Investors signatory thereto dated March 7, 2007. Incorporated
by reference to Exhibit 10.6 to the Registrant’s Current Report on Form
8-K (File No. 000-26285) filed with the Commission on March 13,
2007.
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10.5
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Form
of Registration Rights Agreement by and among the Registrant and certain
stockholders of the Company signatory thereto dated March 7,
2007. Incorporated by reference to Exhibit 10.7 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
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10.6
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Employment
Agreement by and between the Registrant and George Carpenter dated October
1, 2007. Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on October 3, 2007.*
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10.7
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Employment
Agreement by and between the Registrant and Daniel Hoffman dated January
11, 2008. Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on January 17, 2008.*
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10.8
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Stock
Purchase Agreement by and among Colorado CNS Response, Inc.,
Neuro-Therapy, P.C. and Daniel A. Hoffman, M.D. dated January 11,
2008. Incorporated by reference to the Registrant’s Annual
Report on Form 10-K (File No. 000-26285) filed with the Commission on
January 13, 2009.
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10.9
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Form
of Warrant issued to Investors in Private
Placement. Incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with
the Commission on March 13, 2007.
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10.10
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Senior
Secured Convertible Promissory Note, dated March 30, 2009, by and between
the Company and Brandt Ventures, GP. Incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
000-26285) filed with the Commission on April 3, 2009.
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10.11
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Senior
Secured Convertible Promissory Note, dated March 30, 2009, by and between
the Company and SAIL Venture Partners, LP. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File No. 000-26285) filed with the Commission on April 3
2009.
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10.12
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Bridge
Note and Warrant Purchase Agreement, dated May 14, 2009 by and between the
Company and SAIL Venture Partners, LP. Incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on May 20, 2009.
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EX-2
Exhibit
Number
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Exhibit
Title
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10.13
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Form
of Secured Convertible Promissory Note. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on May 20, 2009.
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10.14
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Form
of Warrant to Purchase Shares. Incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on May 20,
2009.
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10.15
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Bridge
Note and Warrant Purchase Agreement, dated June 12, 2009, by and between
the Company and John Pappajohn. Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on June 18,
2009.
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10.16
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Form
of Secured Convertible Promissory Note. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on June 18, 2009.
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10.17
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Form
of Warrant to Purchase Shares. Incorporated by reference to
Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on June 18,
2009.
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10.18
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Form
of Subscription Agreement. Incorporated by reference to Exhibit
10.18 to the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on December
30, 2009.
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10.19
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Form
of Warrant. Incorporated by reference to Exhibit 10.19 to the
Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed with
the Securities and Exchange Commission on December 30,
2009.
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10.20
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Registration
Rights Agreement. Incorporated by reference to Exhibit 10.20 to
the Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed
with the Securities and Exchange Commission on December 30,
2009.
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10.21
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Amendment
No. 1 to Registration Rights Agreement. Incorporated by
reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on December 30, 2009.
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10.22
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Form
of Indemnification Agreement. Incorporated by reference to
Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K (File Number
000-26285) filed with the Securities and Exchange Commission on December
30, 2009.
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10.23
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Employment
Agreement by and between the Registrant and Paul Buck effective as of
February 18, 2010. Incorporated by reference to Exhibit 10.23
to the Registrant’s Registration Statement on Form S-1/A (File No.
333-164613) filed with the Commission on July 6, 2010.*
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10.24
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Consulting
Agreement by and among CNS Response, Inc. and Henry T. Harbin, effective
January 1, 2010. Incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q (File Number 000-26285)
filed with the Securities and Exchange Commission on May 14,
2010.
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10.25
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Bridge
Note and Warrant Purchase Agreement, dated as of June 3, 2010, between CNS
Response, Inc. and John Pappajohn. Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on June 7,
2010.
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EX-3
Exhibit
Number
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Exhibit
Title
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10.26
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Form
of Note. Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on June 7,
2010.
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10.27
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Form
of Warrant. Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on June 7,
2010.
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10.28
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Placement
Agent Agreement dated August 3, 2009 between the Registrant and Maxim
Group LLC. Incorporated by reference to Exhibit 10.28 to the
Registrant’s Registration Statement on Form S-1/A (File No. 333-164613)
filed with the Commission on July 6, 2010.
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10.29
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Form
of Warrant issued to Placement Agent. Incorporated by reference
to Exhibit 10.29 to the Registrant’s Registration Statement on Form S-1/A
(File No. 333-164613) filed with the Commission on July 6,
2010.
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10.30
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Registration
Rights Agreement dated August 26, 2009 between the Registrant and Maxim
Group, LLC.
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10.31
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Amendment
No.1 to Placement Agent Agreement dated July 21, 2010 between the
Registrant and Maxim Group LLC.
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10.32
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Amendment
No.1 to Form of Warrant issued to Placement Agent dated July 23,
2010.
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10.33
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Form
of Unsecured Promissory Note. Incorporated by reference to
Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File Number
000-26285) filed with the Securities and Exchange Commission on July 9,
2010.
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10.34
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Form
of Guaranty. Incorporated by reference to Exhibit 4.2 to the
Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on July 9,
2010.
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10.35
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Form
of Deerwood Note. Incorporated by reference to Exhibit 4.1 to
the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed
with the Securities and Exchange Commission on August 24,
2010.
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10.36
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Form
of Deerwood Warrant. Incorporated by reference to Exhibit 4.2
to the Registrant’s Current Report on Form 8-K (File Number 000-26285)
filed with the Securities and Exchange Commission on August 24,
2010.
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10.37 |
Engagement
Agreement, dated September 30, 2010, between the Registrant and Monarch
Capital Group, LLC, as Placement Agent. Incorporated by
reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K
(File Number 000-26285) filed with the Securities and Exchange Commission
on October 13, 2010.
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10.38 |
Form
of Note and Warrant Purchase Agreement, dated October 1, 2010, by and
between the Registrant and the Investors party
thereto. Incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on October 7,
2010.
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10.39 |
Security
Agreement, dated October 1, 2010, by and between the Registrant and John
Pappajohn, as administrative agent for the secured
parties. Incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on October 7,
2010.
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10.40 |
Form
of October Note. Incorporated by reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K (File Number 000-26285) filed
with the Securities and Exchange Commission on October 7,
2010.
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10.41 |
Form
of October Warrant. Incorporated by reference to Exhibit 4.2 to
the Registrant's Current Report on Form 8-K (File Number 000-26285) filed
with the Securities and Exchange Commission on October 7,
2010.
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10.42 |
Form
of Placement Agent Warrant issued to Monarch Capital Group,
LLC. Incorporated by reference to Exhibit 4.3 to the
Registrant's Current Report on Form 8-K (File Number 000-26285) filed with
the Securities and Exchange Commission on October 27,
2010.
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10.43* |
Employment
Agreement, dated July 6, 2010, by and between the Registrant and Michael
Darkoch."
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21.1
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Subsidiaries
of the Registrant. Incorporated by reference to the
Registrant’s Annual Report on Form 10-K (File No. 000-26285) filed with
the Commission on January 13, 2009.
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23.1
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Consent
of Independent Registered Public Accounting Firm.
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23.2
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Consent
of Stubbs, Alderton & Markiles, LLC (included in Exhibit
5.1).
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*
Indicates a management contract or compensatory plan.
EX-4