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EX-23.1 - Emmaus Life Sciences, Inc. | v208150_ex23-1.htm |
As
filed with the Securities and Exchange Commission on January 14,
2011
|
Registration
No. 333-164613
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 4 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:
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. ¨
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. ¨
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. ¨
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.
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨
(Do
not check if a smaller reporting company
|
Smaller
Reporting Company x
|
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 January 14, 2011
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 January 13, 2011, the last reported sales price of the common
stock on the Over-The-Counter Bulletin Board was $0.40 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
|
5
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
19
|
USE
OF PROCEEDS
|
20
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
20
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
22
|
BUSINESS
|
38
|
MANAGEMENT
|
49
|
EXECUTIVE
COMPENSATION
|
53
|
PRINCIPAL
AND SELLING STOCKHOLDERS
|
62
|
RELATED
PARTY TRANSACTIONS
|
79
|
DESCRIPTION
OF CAPITAL STOCK
|
92
|
PLAN
OF DISTRIBUTION
|
96
|
LEGAL
MATTERS
|
99
|
EXPERTS
|
99
|
WHERE
YOU CAN FIND MORE INFORMATION
|
99
|
INDEX
TO FINANCIAL STATEMENTS
|
100
|
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.
i
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 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.
Our
Business
Overview
We are
a web-based neuroinformatic analysis company with two distinct business
segments. Our primary business is the Neurometric Information Services (formerly
called Laboratory Information Services) business operated by CNS California,
which is focused on neurometric analysis, research, development and the
commercialization of a patented system that provides data to psychiatrists and
other physicians to enable them to make more informed, patient-specific
decisions when treating individual patients with behavioral (psychiatric and/or
addictive) disorders. Our secondary Clinical Services business, operated by our
wholly-owned subsidiary, Neuro-Therapy Clinic (“NTC”), is a full service
psychiatric clinic.
Our
address is 85 Enterprise, Suite 410, Aliso Viejo, CA 92672, our telephone number
is (714) 545-3288 and 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
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,
which often results in multiple ineffective, costly, and often lengthy, courses
of treatment before the effective medications are identified. Some patients
never find effective medications.
We
believe that our technology offers an improvement upon traditional methods for
determining a course of medication for patients suffering from non-psychotic
behavioral disorders because our technology is designed to correlate the success
of courses of medication with the neurophysiological characteristics of a
particular patient. 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 which 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 psychiatrists and other physicians. This patented technology, called
“Referenced-EEG®” or “rEEG®”, represents an innovative approach to identifying
effective medications for patients suffering from debilitating behavioral
disorders.
- 1
-
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 can better determine a treatment strategy with the knowledge
of how other patients having similar brain function have previously responded to
a myriad of different treatment alternatives. Analysis of this complete data set
yielded a platform of 74 neurometric variables that have shown utility in
characterizing patient response to diverse medications. This platform then
allows a new patient to be characterized, based on these 74 neurometric
variables, 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 those patients with similar neurometric brain patterns. It
provides neither a diagnosis nor a specific treatment, but like all lab results,
provides objective, evidenced-based information to help the prescriber in their
decision-making.
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 the acceptance by healthcare providers and
patients of their benefit, the demonstration of the cost-effectiveness of using
our technology, the reimbursement by third-party payers, the expansion of our
sales force and increased marketing efforts.
In
addition to its utility in providing psychiatrists and other
physicians/prescribers with medication sensitivity guidance, rEEG provides us
with significant opportunities in the area of pharmaceutical development. rEEG,
in combination with the information contained in the CNS Database, has the
potential to enable the identification of novel uses for neuropsychiatric
medications currently on the market and in late stages of clinical development,
as well as in aiding 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 pathophysiological markers 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 larger 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.
- 2
-
Financial
Information
Since
our inception, we have generated significant net losses. As of September 30,
2010, we had an accumulated deficit of approximately $33.4 million, and as of
September 30, 2009, our accumulated deficit was approximately $25.2 million. We
incurred operating losses of $6.5 million and $6.7 million for the fiscal years
ended September 30, 2010 and 2009, respectively and incurred net losses of $8.2
million and $8.5 million for those respective periods. 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
scaling up our commercial organization, research and product development and
other general corporate purposes, including the payment of legal fees incurred
as a result of 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
rEEG process, 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
September 30, 2010, our current liabilities of approximately $4.4 million
exceeded our current assets of approximately $0.20 million by approximately $4.2
million, and our net losses will continue for the foreseeable future. As part of
the $4.4 million of current liabilities, we have $1.0 million of secured
convertible debt which is discounted to $0. Since September 30, 2010, we have
raised an additional $2.0 million from the issuance of secured convertible debt;
however, we will need immediate additional funding to continue our operations
plus substantial additional funding before we can increase the 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. Furthermore, 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 the
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.
- 3
-
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 (1)
|
|
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.
|
(1) In
the table above, the number of shares to be outstanding after this offering is
based on 56,023,921 shares outstanding as of December 31, 2010, and assumes the
prior issuance to the selling stockholders of the following additional shares
that are being offered for resale 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
resale under this prospectus:
|
·
|
32,009,727
shares of common stock reserved for the issuance upon conversion or
exercise of convertible debt, warrants and options as of December 31,
2010.
|
- 4
-
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 on our business. The Company’s continued
operating losses and limited capital raise substantial doubt about its ability
to continue as a going concern.
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 September 30,
2010, we had approximately $62,000 in cash and cash equivalents at hand. While
we received approximately $2.0 million from the sale of promissory notes and
warrants in October and November, 2010, as of December 31, 2010, we had only
approximately $697,900 in cash and cash equivalents at hand. We therefore 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. Our
financial statements include an opinion of our auditors that the Company’s
continued operating losses and limited capital raise substantial doubt about its
ability to continue as a going concern.
Our
liabilities exceed our assets; we have a working capital deficit. Our
convertible notes, which are payable during 2011, are secured by all of our
assets.
As of
September 30, 2010 we had liabilities of $4.4 million and assets of only $0.2
million. We had a working capital deficit of $4.2 million. Furthermore, as of
December 31, 2010, we have outstanding convertible notes having an aggregate
principal amount of $3,023,938, which are repayable beginning October 1, 2011
through November 11, 2011. These notes are secured by substantially all of the
assets of the Company. We currently have no resources to repay such notes and we
will be required to either raise additional funds or seek conversion of these
notes to avoid a default. If we default, the holders of the notes will be
entitled to take all of our assets, in satisfaction of the obligation we have to
them, thereby leaving no value for the holders of common stock.
We
have a history of operating losses.
We are
a company with a limited operating history. Since our inception, we have
incurred significant operating losses. As of September 30, 2010, our accumulated
deficit was approximately $33.4 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.
- 5
-
If
our rEEG reports do not gain widespread market acceptance, we will not sell
adequate services to maintain our operations.
We
have developed a methodology that aids psychiatrists and other physicians in
selecting appropriate and effective medications 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 of the usefulness of our rEEG Reports in helping
psychiatrists and other physicians inform their treatment strategies for
patients suffering from behavioral and/or addictive disorders, 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 psychiatrists and other physicians 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.
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
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,
psychiatrists and other physicians 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) believes that our rEEG
service constitutes a medical device, which is subject to regulation by the FDA.
As we continue to market our rEEG service, there is risk that the FDA will seek
enforcement action against us and has informed us that our marketing of our rEEG
services without prior approval or re-classification by the FDA constitutes a
violation of the Federal Food , Drug and Cosmetic Act.
Since
April of 2008, we have been in a dialogue with the FDA regarding its
position 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.
During
the intervening period of time, based upon conversations with FDA, we chose to
submit an application to obtain 510(k) clearance for our rEEG service, without
waiving our right to continue to take the position that our services 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.
- 6
-
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 it can be marketed legally, unless it is otherwise
reclassified.
We
currently plan to continue marketing as a non-device web-based neurometric
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. 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
service is a medical device.
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 other 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 other 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 or
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.
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 other 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.
- 7
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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:
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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;
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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 psychiatrists and other 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
other 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.
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.
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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 psychiatrists and other
physicians 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
no 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 renege on their obligations to us, our
clinical trials may be delayed or unsuccessful.
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.
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.
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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.
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.
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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.
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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.
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.
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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.
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.
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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 other 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 other
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.
Of our
56,023,921 shares of common stock outstanding, 47,095,675 shares are restricted
securities, as that term is defined under the Securities Act of 1933, as
amended. In addition, as of December 31, 2010, 10,264,312 shares may be issued
upon the conversion of our convertible notes, 24,904,308 shares upon the
exercise of our warrants and 15,670,973 shares upon the exercise of stock
options. The registration statement of which this prospectus is a part covers
the resale of 65,879,838 shares, including 18,409,015 shares issuable upon the
exercise of warrants. The sale of shares of our common stock 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 offerings 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 (not including the primary residence) 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
therefore.
In
addition, the SEC has adopted a number of rules to regulate “penny stock” that
restricts 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.
- 16
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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.
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.
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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.
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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:
|
·
|
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.
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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 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
|
$ | 1.15 | $ | 0.40 | ||||
Fourth
Quarter
|
$ | 0.95 | $ | 0.05 | ||||
Year
Ended September 30, 2011
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||||||||
First
Quarter
|
$ | 0.65 | $ | 0.15 |
On
January 13, 2011, the closing sales price of our common stock as reported on the
OTC Bulletin Board was $0.40 per share. On January 13, 2011, there were 364
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.
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Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth certain information regarding our equity compensation
plans as of September 30, 2010.
Plan Category
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
|
Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
|
Number of securities
remaining available for future
issuance under equity
compensation plans
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
15,670,973 | $ | 0.62 | 2,020,350 | ||||||||
Equity
compensation plans not approved by security holders
|
0 | $ | 0 | 0 | ||||||||
Total
|
15,670,973 | $ | 0.62 | 2,020,350 |
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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
consolidated operating results, financial condition and liquidity and cash flows
of CNS Response, Inc. for the fiscal years ended September 30, 2010 and 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. These statements are subject to risks and
uncertainties and are based on the beliefs and assumptions of our management as
of the date hereof based on information currently available to our management.
Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,”
“estimates,” “should,” “forecasts,” “goal,” “likely” or similar expressions,
indicate a forward-looking statement. Forward-looking statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions. Actual results may differ materially from the forward-looking
statements we make. See “Risk Factors” elsewhere in this prospectus for a
discussion of certain risks associated with our business. We disclaim any
obligation to update forward-looking statements for any reason.
Overview
We are
a web-based neuroinformatic analysis company with two distinct business
segments. Our primary business is the Neurometric Information Services (formerly
called Laboratory Information Services) business operated by CNS California,
which is focused on neurometric analysis, research, development and the
commercialization of a patented system that provides data to psychiatrists and
other physicians to enable them to make more informed, patient-specific
decisions when treating individual patients with behavioral (psychiatric and/or
addictive) disorders. Our secondary Clinical Services business, operated by our
wholly-owned subsidiary, Neuro-Therapy Clinic (“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,
which often results in multiple ineffective, costly, and often lengthy,
courses of treatment before the effective medications are identified.
Some patients never find effective medications.
We
believe that our technology offers an improvement upon traditional
methods for determining a course of medication for patients suffering from
non-psychotic behavioral disorders because our technology is designed to
correlate the success of courses of medication with the neurophysiological
characteristics of a particular patient . 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
which 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 psychiatrists and
other physicians. This patented technology, called “Referenced-EEG®” or “rEEG®”,
represents an innovative approach to identifying effective medications for
patients suffering from debilitating behavioral disorders .
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 can better determine a treatment strategy with the knowledge
of how other patients having similar brain function have previously responded to
a myriad of different treatment alternatives. Analysis of this complete data set
yielded a platform of 74 neurometric variables that have shown utility in
characterizing patient response to diverse medications. This platform then
allows a new patient to be characterized, based on these 74 neurometric
variables, 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 those patients with similar neurometric brain patterns. It
provides neither a diagnosis nor a specific treatment, but like all lab results,
provides objective, evidenced-based information to help the prescriber in their
decision-making.
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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 the acceptance by healthcare
providers and patients of their benefit, the demonstration of the
cost-effectiveness of using our technology, the reimbursement by
third-party payers, the expansion of our sales force and increased
marketing efforts.
In
addition to its utility in providing psychiatrists and other
physicians/prescribers with medication sensitivity guidance , rEEG
provides us with significant opportunities in the area of pharmaceutical
development. rEEG, in combination with the information contained in the CNS
Database, has the potential to enable the identification of novel uses
for neuropsychiatric medications currently on the market and in late stages of
clinical development, as well as in aiding 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 pathophysiological markers 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 larger 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.
Business
operations
Since
our inception, we have generated significant net losses. As of September 30,
2010, we had an accumulated deficit of approximately $33.4 million, and as of
September 30, 2009, our accumulated deficit was approximately $25.2 million. We
incurred operating losses of $6.5 million and $6.7 million for the fiscal years
ended September 30, 2010 and 2009, respectively and incurred net losses of $8.2
million and $8.5 million for those respective periods. 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 the
scale-up of our commercial organization, research and product development and
other general corporate purposes, including the payment of legal fees incurred
as a result of 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
rEEG process, 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.
- 23
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As of
September 30, 2010, our current liabilities of approximately $4.4 million
exceeded our current assets of approximately $0.20 million by approximately $4.2
million and our net losses will continue for the foreseeable future. As part of
the $4.4 million of current liabilities we have $1.0 million of secured
convertible debt which is discounted to $0. Since September 30, 2010, we have
raised an additional $2.0 million from the issuance of secured convertible debt;
however, we will need immediate additional funding to continue our operations
plus substantial additional funding before we can increase the 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. Furthermore, 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 the
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.
The 2010 Private
Placement Transactions
From
June 3, through to November 12, 2010, we raised $3.0 million through the sale of
secured convertible notes and warrants. Of such amount $1.75 million was
purchased by members of our Board of Directors or their affiliate
companies. None of these secured convertible notes and warrants
relate to securities that are offered for resale pursuant to the registration
statement of which this prospectus forms a part.
Bridge Notes and
Warrants
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 anti-dilution adjustments, including for issuances of
securities at prices below the then-effective exercise price ) 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.
Deerwood Notes and
Warrants
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. Our director George Kallins and his spouse are the managing members
of these investors. 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
anti-dilution adjustments, including for issuances of securities at prices below
the then-effective exercise price ) 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. 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 anti-dilution adjustments, including for issuances of
securities at prices below the then-effective exercise price ) of $0.56 per
share.
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Each Deerwood Note accrued interest
at a rate of 9% per annum and 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.
October Notes and
Warrants
On October 1, 2010, in
connection with a new private placement of convertible promissory notes (the
“October
Notes”) and
warrants expected to be completed with new independent investors, we
entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”)
with John Pappajohn and SAIL as investors . Pursuant to this
agreement, we issued to the investors 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 these 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 accredited investor previously unrelated to us 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, after paying $12,000
to the placement agent as described below. Monarch Capital Group LLC
(“Monarch”) acted as non-exclusive placement agent with respect to the
October 12 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 was
entitled to receive (a) a cash fee equal to 10% of the gross proceeds raised
from the sale of October 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 October 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 October
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 accredited investor previously unrelated to us 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 that date . We received
approximately $250,000 in net proceeds from the issuance to these
investors.
On
November 3, 2010, three affiliated entities, identified below, 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 ;
and (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
Dr . 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.
- 25
-
On
November 12, 2010, another accredited investor previously unrelated to us
executed the Purchase Agreement. In connection therewith, the Company issued
Notes in the aggregate principal amount of $400,000 and Warrants to purchase up
to 666,666 shares of common stock of the Company, to the investor on such
date. The Company received $352,000 in net proceeds from the
investor. Monarch acted as non-exclusive placement agent with respect
to the placement of the Note in the aggregate principal amount of $400,000 and
related Warrants, pursuant to the abovementioned engagement agreement, dated
September 30, 2010. In connection with the November 12, 2010 closing, Monarch
received a cash fee of $40,000 and a cash expense allowance of $8,000 and will
receive a Placement Agent Warrant to purchase 133,333 shares of the Company’s
common stock at an exercise price of $0.33 per share.
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
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 are furthermore
convertible, at the option of the holder, into securities to be issued in
subsequent financings at the lower of the then-applicable conversion price or
price per share payable by purchasers of such securities. 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. Any provision of the October Notes or related warrants can be
amended, waived or modified upon the written consent of the Company and holders
of a majority of the aggregate principal amount of such notes outstanding. Any
such consent will affect all October Notes or warrants, as the case may be, and
will be binding on all holders thereof.
The
Placement Agent Warrants have an exercise price equal to 110% of the conversion
price of the Notes and an exercise period of five years . 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.
For a
table showing the differences in terms between the October Notes (and related
warrants), on the one hand, and the exchanged Bridge Notes and Deerwood Notes
(and related warrants), on the other hand, please refer to the table below. See
also Notes 3 and 13 to the audited financial statements.
- 26
-
Differences
between October Notes and Bridge Notes/Deerwood Notes
As
disclosed above, (i) Bridge Notes in the aggregate principal amount of $500,000
(and accrued and unpaid interest thereon) and a related warrant to purchase up
to 250,000 shares were exchanged by Mr. Pappajohn for October Notes in the
aggregate principal amount of $511,688 and related warrants to purchase up to
852,812 shares, (ii) Deerwood Notes in the aggregate principal amount of
$500,000 (and accrued and unpaid interest thereon) and a related warrant to
purchase up to 150,000 shares were exchanged by the Deerwood investors for
October Notes in the aggregate principal amount of $512,250 and related warrants
to purchase up to 512,250 shares, and (iii) warrants to purchase 100,000 issued
to SAIL in connection with its guaranties relating to the Deerwood Notes were
exchanged for warrants to purchase 341,498 shares. The terms of the October
Notes (and related warrants) differed from the terms of the Bridge Notes and
Deerwood Notes (and related warrants) as follows:
Term
|
Bridge Note/Deerwood Note
|
October Note
|
||
Maturity
|
December
15, 2010
|
One
year from the date of issuance
|
||
Initial
Conversion Price
|
$0.50,
with any adjustment being subject to a $0.30 floor
|
$0.30
|
||
If
Company issues common stock (or securities convertible, exercisable or
exchangeable for common stock), at a consideration (or conversion,
exercise or exchange price) (the “Offering Price”) less than the
Conversion Price, Conversion Price will be adjusted to match the Offering
Price (“Ratchet”)
|
No
|
Yes
|
||
Prepayment
upon financing with aggregate proceeds of not less than
$3million
|
Yes
|
No
|
||
Noteholder
has Security Interest
|
Yes
(Bridge Note)
No
(Deerwood Note)
|
Yes.
Benefits of security agreement expire on the date that holders of a
majority of aggregate principal amount of notes issued have converted
their Notes in accordance with their terms.
|
||
Events
of Default (Differences only)
|
· General
assignment to creditors
· Bankruptcy
proceeding, which is not dismissed within 60
days
· Entry
of final judgment for the payment of money in excess of $25,000 and
failure to satisfy for 30 days
|
· Voluntary
bankruptcy filing
· Failure
to comply with Use of Proceeds covenant in purchase
agreement
· Court
enters bankruptcy order that is not vacated, set aside or reversed within
60 days
|
||
Option
to convert notes into securities to be issued in subsequent financings at
the lower of conversion price or price per share payable by purchasers of
such securities
|
No
|
Yes
|
||
Amendments,
waivers or modification of the note or related warrants requires written
consent of the holders of a majority of the aggregate principal amount of
the notes outstanding, and such written consent will be binding on all
holders
|
N/A
- single investors
|
Yes
|
- 27
-
Warrant
Coverage
|
25%
(in case of Deerwood Notes, 40% of which was issued to guarantor of
Deerwood Notes)
|
50%
(in case of Deerwood entities, 40% of which was issued to guarantor of
notes issued to Deerwood entities)
|
||
Initial
Exercise Price of Warrants
|
$0.50
(Bridge Note); $0.56 (Deerwood Note)
|
$0.30
|
||
Ratchet
as applied to Warrants (see definition above)
|
|
Results
in a decrease in exercise price
|
|
Results
in a decrease in exercise price and corresponding increase in number of
shares issuable
|
The
exchange for the October Notes did not trigger anti-dilution adjustments to the
conversion prices of the Bridge Notes or Deerwood Notes. Had the warrants issued
in connection with the Bridge Notes and the Deerwood Notes not been exchanged
for new warrants as described above, the exercise price of the warrants so
issued would have been reduced to $0.30 as a result of the issuance of October
Notes and new warrants in accordance with the anti-dilution provisions
of the warrants issued in connection with the Bridge Notes and the Deerwood
Notes.
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.
Clinical
Services 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, the costs associated with external processing, analysis and
consulting review necessary to render an individualized test result and
any 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.
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. We charge all research and development
expenses to operations as they are incurred.
- 28
-
Sales
and Marketing
For our
Neurometric Information Services, our selling and marketing expenses consist
primarily of personnel, media, support and travel costs to inform user
organizations and consumers of our products and services. Additional
marketing expenses are the costs of educating physicians, laboratory personnel,
other healthcare professionals regarding our products a nd
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 2 to our
consolidated financial statements included elsewhere in this report . 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 a 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.
Derivative
accounting for convertible debt and warrants
The Company analyzes all
financial instruments with features of both liabilities and equity under
ASC-480-10 and ASC 815-10 whereby the Company determines the fair market
carrying value of a financial instrument using the Black-Scholes model and
revalues the fair market value on a quarterly basis. Any changes in carrying
value flow through as other income (expense) in the income
statement.
- 29
-
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 enable psychiatrists and other
physician/prescribers to make more informed, patient-specific decisions when
treating individual patients for 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.
Year ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
100
|
%
|
100
|
%
|
||||
Cost
of revenues
|
21
|
19
|
||||||
Gross
profit
|
79
|
81
|
||||||
Research
and development
|
176
|
305
|
||||||
Sales
and marketing
|
136
|
131
|
||||||
General
and administrative expenses
|
785
|
555
|
||||||
Goodwill
impairment
|
0
|
46
|
||||||
Operating
loss
|
(1,018
|
)
|
(956
|
)
|
||||
Other
income (expense), net
|
(262
|
)
|
(261
|
)
|
||||
Net
income (loss)
|
(1,280
|
)%
|
(1217
|
)%
|
Year ended September 30,
|
||||||||||
2010
|
2009
|
Percent
Change
|
||||||||
Neurometric
Service Revenues
|
$
|
136,100
|
$
|
120,400
|
13
|
% | ||||
Clinical
Service Revenues
|
502,400
|
579,700
|
(13
|
)% | ||||||
Total
Revenues
|
$
|
638,500
|
$
|
700,100
|
(
9
|
)% |
Year ended September 30,
|
||||||||||
2010
|
2009
|
Percent
Change
|
||||||||
Cost
of Neurometric Information Services revenues
|
$
|
135,100
|
$
|
131,600
|
3
|
% |
- 30
-
Year ended September 30,
|
||||||||||
2010
|
2009
|
Percent
Change
|
||||||||
Neurometric
Information Services research and development
|
$
|
1,120,500
|
$
|
1,924,100
|
(42
|
)% |
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 year ended September 30, 2010, included the
following: payroll and benefit costs (including stock based
compensation) of $848,300, consultant costs of $201,700 and other
miscellaneous costs of $70,500 which include travel, database and support
costs. There were negligible clinical study patient costs or patient
marketing and recruitment costs incurred for the year ended September 30,
2010. For the comparable period for 2009, research and development costs
included: payroll and benefit costs (including stock based compensation) of
$792,100, consultant costs of $105,700 and other miscellaneous costs of $76,200
which included travel, database and support costs. Additionally, as the
clinical study was in full progress during the 2009 period, research and
development costs included clinical study patient costs of $789,300 and patient
marketing and recruitment costs of $161,100 .
Comparing
the year ended September 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 $96,100: in total $50,200 was spent on research and $151,500 was
spent on product enhancements in the year ended September 30, 2010. Of the
$151,500, $76,100 was spent on consulting resources assisting with the filing of
our 510(k) application with the FDA, while the balance, $75,400, was spent on
programming resources to improve our database and the rEEG process. Payroll
and benefits increased by $56,200 in the 2010 period primarily due to the
reassignment of a staff member between departments and due to the increase in
stock-based compensation.
Year ended September
30,
|
||||||||||
2010
|
2009
|
Percent
Change
|
||||||||
Sales
and Marketing
|
||||||||||
Neurometric
Information Services
|
$
|
853,100
|
$
|
908,500
|
(6
|
)% | ||||
Clinical
Services
|
17,800
|
7,300
|
144
|
% | ||||||
Total
Sales and Marketing
|
$
|
870,900
|
$
|
915,800
|
(5
|
)% |
- 31
-
Comparing
the year ended September 30, 2010, with the same period in 2009; payroll
and benefits decreased by $27,900 in the 2010 period as a result a reduction in
staff and the reassignment of staff to another department. However, in July 2010
we recruited an Executive Vice President and Chief Marketing Officer to lead our
marketing efforts and pursue contracts with key organizations. Advertising and
marketing expenses decreased by $88,500 as advertising was curtailed while the
Company awaited resolution to its 510(k) application with the FDA.
Consequently, in the year ended September 30, 2010, marketing efforts were
largely limited to planning and provider network development, whereas for the
2009 period the Company was actively executing its advertising and marketing
plans. Conference and travel expenses increased by $27,900 in the 2010
period as the Company conducted its first user-group conference in January 2010
and conducted multiple visits to potential clients.
The
Clinical Services sales and marketing expenses consists of advertising to
attract patients to the clinic. During the year ended September 30, 2010,
Clinical Services also invested in re-launching its updated website and in the
development of a new marketing strategy, which accounted for much of the
increase in expenditure. We anticipate a moderate increase in marketing
expenditure to attract new patients to the clinic as the capacity to treat new
patients has increased with the addition of our newly recruited
psychiatrist.
General
and administrative
Year ended September
30,
|
||||||||||
2010
|
2009
|
Percent
Change
|
||||||||
General
and administrative
|
||||||||||
Neurometric
Information Services
|
$
|
4,262,900
|
$
|
3,430,900
|
24
|
% | ||||
Clinical
Services
|
754,100
|
669,600
|
13
|
% | ||||||
Total
General and administrative
|
$
|
5,017,000
|
$
|
4,100,500
|
22
|
% |
With
respect to our Neurometric Information Services business, in the year ended
September 30, 2010, compared to the same period in 2009, payroll and benefit
expenses increased by a net $410,500, of which $410,000 was due to an increase
in stock-based compensation due to the accounting for vested option grants given
to employees, directors, advisors and consultants in March and July of
2010. The balance of the change, $101,300 was due to the change of staff
mix with the former CEO, Mr. Brandt, leaving the Company in April 2009 and the
former President, Mr. Carpenter, becoming 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 $206,600 which was partly due to the mix of consulting services used in
fiscal 2010: these fees included $284,000 associated with financial advisory
services used to obtain funding, $121,000 for accounting services, $62,500 used
for public relations services and $41,000 was used for consultants associated
with the Brandt litigation. Legal fees increased by a net $376,400 which was
made up of a $567,600 increase in litigation fees in defending against actions
brought by Mr. Brandt,
which was partly offset by a reduction of $191,200 in non-litigation
related legal expenses. In total $1,700,700 was directly incurred in the course
of the litigation, of which $566,600 was incurred in fiscal 2009 and $1,134,100
in fiscal 2010. All matters between Mr. Brandt and us have either been dismissed
or adjudicated in our favor. General administrative and occupancy costs
increased by $51,500, in part due to increases in computer and
telecommunications costs. Patent costs declined by $135,800 due to the
timing of patent applications as expenses were primarily associated with patent
maintenance. Marketing and Investor relations expenses increased by $9,900 due
to attendance and presentations at more investor conferences with a view to
raising capital. Conference and travel costs increased by $36,600 as a result of
increased travel associated with raising capital and the litigation
activities.
- 32
-
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 $59,550 to $754,100 in the year ending September 30, 2010
from $669,600 in the fiscal year 2009. This increase is largely due to
the recruiting fees, moving costs, sign-on bonus and salary of our new
psychiatrist who joined NTC in August 2010. Other contributing cost increases
for NTC were due to Clinical Services staff, who had worked on the clinical
study, no longer being reimbursed by the Neurometric Information Services for
their time spent on the study. These increases in cost for NTC were partially
offset by a reduction in rent as a less expensive lease extension was negotiated
with a reduction in sub-leased space as a cost saving measure.
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.
Year ended September
30,
|
||||||||||
2010
|
2009
|
Percent
Change
|
||||||||
Neurometric
Information Services (Expense), net
|
$
|
(1,668,100
|
)
|
$
|
(1,822,700
|
)
|
(8
|
)% | ||
Clinical
Services (Expense)
|
(100
|
)
|
(200
|
)
|
50
|
% | ||||
Total
interest income (expense)
|
$
|
(1,668,200
|
)
|
$
|
(1,822,900
|
)
|
(8
|
)% | ||
*
not meaningful
|
Firstly,
we incurred a non-cash loss on the extinguishment of debt of $1,094,300, which
was due to the fact that the Bridge Notes issued to John Pappajohn on June 3 and
July 25, 2010 and the Deerwood Notes issued to the Deerwood investors on July 5
and August 20, 2010 were subsequently replaced by October Notes (please see Note
3 to the Financial Statements). The modifications of the terms were accounted
for as a debt extinguishment, whereby the difference in the carrying value of
the original notes (i.e., the Bridge Notes and Deerwood Notes) and the carrying
value of the replacement notes (i.e., the related October Notes) were recognized
as losses within the period. Although the replacement notes were issued after
the close of the fiscal year ended September 30, 2010, i.e., on October 1, 2010
(in the case of John Pappajohn) and November 3, 2010 (in the case of the
Deerwood investors), we considered the replacement notes to be outstanding and
effective for the fiscal year ended September 30, 2010 and accordingly recorded
the resultant loss on extinguishment of debt for the year ended September 30,
2010.
Secondly,
we incurred interest expenses of $360,500, which is comprised of a non-cash
charge of $258,900 associated with the value of the beneficial conversion
feature of the Bridge Notes and Deerwood Notes, which were expensed to interest.
Additionally, we incurred a non-cash charge of $77,000 related to the
amortization of warrant discount associated with the warrants issued along with
the Bridge Notes and Deerwood Notes and a further interest charge of $19,700,
which had accrued on the notes themselves. Actual interest paid net of interest
earned was only $4,900.
Lastly,
we incurred a financing premium of $213,400. This comprised a non-cash charge of
$193,400 associated with the warrants issued to SAIL in connection with the
guaranties provided by SAIL in connection with the Deerwood Notes (please see
Note 3 to the Financial Statements). An additional $20,000 was paid for due
diligence work to an entity in anticipation of obtaining financing; no financing
ensued as the terms were ultimately considered to be potentially too dilutive to
our shareholders.
- 33
-
For
fiscal 2009, Neurometric Information Services incurred a $90,000 financing
premium that was paid in connection with the bridge note issued to Mr. Pappajohn
on June 12, 2009 and a $20,900 non-cash interest charge on the bridge notes
issued to Mr. Brandt and Sail Venture Partners. Additionally, a $1,058,000
non-cash charge associated with the valuation of bridge warrants and a $642,000
non-cash charge associated with the value of the beneficial conversion feature
of the bridge notes which was expensed interest upon conversion of the bridge
notes. Furthermore, interest paid net of interest earned was
$3,800.
Year ended September
30,
|
||||||||||
2010
|
2009
|
Percent
Change
|
||||||||
Neurometric
Information Services net loss
|
$
|
(7,904,400
|
)
|
$
|
(8,451,300
|
)
|
(6
|
)% | ||
Clinical
Services net loss
|
(269,600
|
)
|
(70,900
|
)
|
280
|
% | ||||
Total
Net Loss
|
$
|
(8,174,000
|
)
|
$
|
(8,522,200
|
)
|
(4
|
)% |
The
decrease in net loss for our Neurometric Information Services business of
approximately $547 thousand for the year ended September 30, 2010 compared to
the prior fiscal year is primarily due to reductions in our Research and
Development expenditures of $804 thousand as the clinical trial had ended in
fiscal 2009; the reduction of Sales and Marketing costs of $55 thousand; the
non-recurrence of the $320 thousand goodwill write-down of NTC in fiscal 2009;
the reduction of Other Expenses of $155 thousand due to accounting for non-cash
items including the beneficial conversion features of notes and the expensing of
warrant discounts. These decreases were partially offset by an increase in
General and Administration expenses of $832 thousand, which was largely due to
the increase in the Brandt litigation expenses and the increase in accounting
for stock option compensation.
The
increase in the net loss for our Clinical Services business of approximately
$199 thousand was the result of having insufficient psychiatric/prescriber
resources to see a sufficient volume of new patients for the clinic to be
profitable. This situation was exacerbated by the upfront costs of recruiting
and hiring the needed additional psychiatrist who joined Clinical Services in
August 2010, before she could have a significant impact in increasing the
clinic’s revenue.
As of
September 30, 2010, we had approximately $62,000 in cash and cash equivalents
and a working capital deficit of approximately $4.2 million compared to
approximately $0.99 million in cash and cash equivalents and a working capital
balance of approximately $1.1 million at September 30, 2009. The working capital
deficit as of September 30, 2010 includes the $1.0 million of secured
convertible promissory notes (Bridge Notes and Deerwood Notes) outstanding as of
that date. While we received approximately $2.0 million from the sale of
promissory notes and warrants in October and November 2010, as of December 31,
2010, we had only approximately $697,900 in cash and cash equivalents at
hand.
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.
- 34
-
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 September 30, 2010, we had received
proceeds of approximately $13.7 million from the sale of stock, $ 7.7
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.
From
June 3, 2010 through to November 12, 2010, we raised $3.0 million through the
sale of secured convertible notes and warrants. Of such amount, $1.75 million
was purchased by members of our Board of Directors or their affiliate companies.
See Notes 3 and 13 to the
financial statements and “- Overview - The 2010 Private Placement
Transactions.”
Cash
Flows
For
the fiscal year ended September 30, 2009 proceeds from financing activities were
approximately $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 in Note 3 of the financial statements), 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.
- 35
-
Payments due by period
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
Less than 1
year
|
1 to 3 years
|
3-5 years
|
More than 5
years
|
|||||||||||||||
Long-Term
Debt Obligations
|
24,700 | 24,799 | - | - | - | |||||||||||||||
Capital
Lease Obligations
|
5,600 | 2,200 | 3,400 | - | - | |||||||||||||||
Operating
Lease Obligations
|
274,500 | 104,700 | 169,800 | - | - | |||||||||||||||
Total
|
304,800 | 131,600 | 173,200 | - | - |
Derivative
Liability
Current liabilities include $2.1
million of derivative liability. This amount includes:
|
1.
|
$0.9
million, which represents the fair value liability associated with the
warrants issued in conjunction with the October
Notes.
|
|
2.
|
$1.2
million, which represent the fair value liability associated with the
conversion option of the October
Notes.
|
The
carrying value of these derivative liabilities will be reassessed each quarter
and any change in the carrying value will be booked to other income (expense) in
the income statement.
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. We expect that our existing cash
will be used to fund working capital and for capital expenditures and other
general corporate purposes, including the repayment of debt incurred as a result
of our litigation with Brandt. Although since September 30, 2010 we have raised
gross proceeds of $2.0 million through the sale of convertible promissory notes,
we anticipate that our cash on hand (including the proceeds from these
promissory notes) and cash generated through our operations will not be
sufficient to fund our operations the next 12 months. In addition we will have
to repay the outstanding notes plus interest. We therefore anticipate raising
additional funds in the near future.
The
amount of capital we will need to conduct our operations and the time at which
we will require such capital may vary significantly depending upon a number of
factors, such as:
|
·
|
the
amount and timing of costs we incur in connection with our research and
product development activities, including enhancements to our CNS Database
and costs we incur to further validate the efficacy of our rEEG
technology;
|
|
·
|
the
amount and timing of costs we incur in connection with the expansion of
our commercial operations, including our selling and marketing
efforts;
|
|
·
|
whether
we incur additional consulting and legal fees in our efforts to obtain
510(k) clearance from the
FDA.
|
- 36
-
|
·
|
if
we expand our business by acquiring or investing in complimentary
businesses.
|
- 37
-
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.
Our
address is 85 Enterprise, Suite 410, Aliso Viejo, CA 92672 and 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
Overview
CNS
Response is a web-based neuroinformatic company with two distinct business
segments. Our primary business is Neurometric Information Services (formerly
called Laboratory Information Services) operated by CNS California, which is
focused on neurometric analysis, research, development and commercialization of
a patented system that provides data to psychiatrists and other
physicians/prescribers to enable them to make more informed decisions when
treating patients with behavioral (psychiatric and/or addictive) disorders. Our
secondary business is Clinical Services business which is a full service
psychiatric clinic operated by NTC.
Financial
information with respect to our two segments is provided in Note 9 to our
consolidated financial statements appearing elsewhere in this annual report on
Form 10-K.
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 is rarely able to
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 technology offers an improvement upon traditional methods for
determining a course of medication for patients suffering from non-psychotic
behavioral disorders because our technology is designed to correlate the
success of courses of medication, with the neurophysiological characteristics of
a particular patient . 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 psychiatrists and
other physicians. This patented technology, called “Referenced-EEG®” or “rEEG®”
represents an innovative approach to identifying effective medications for
patients suffering from debilitating behavioral disorders.
- 38
-
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 can choose a treatment strategy with 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 neurometric variables that have shown utility in characterizing
patient response to diverse medications. This platform then allows a new patient
to be characterized, based on these 74 neurometrics, 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 those patients with similar brain patterns. It provides neither a
diagnosis nor specific treatment, but like all lab results, provides objective,
evidenced-based information to help the prescriber in their
decision-making .
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 psychiatrists and other
physicians/prescribers with medication sensitivity guidance , rEEG provides
us with significant opportunities in the area of pharmaceutical development.
rEEG, in combination with the information contained in the CNS Database, has
the potential to 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 pathophysiological markers 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 largest customer, NTC, located in Colorado.
Upon the completion of the transaction, NTC became our wholly-owned subsidiary.
At the time, NTC operated one of the largest psychiatric medication management
practices in the state of Colorado, under contract with multiple national health
plans. 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 rEEGs , 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 develop communication
programs which can be generalized to physicians using our services throughout
the country , 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 significantly 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:
- 39
-
|
·
|
More
than $29 billion in spending has been dedicated to the compulsory
utilization of electronic health records and other IT services under the
“HITECH” portion of the American Recovery and Reinvestment Act (ARRA),
with most of that spending to occur between 2011-2013. Currently, less
than 20% of healthcare providers utilize electronic records, yet all
providers will be expected to have adopted such systems by 2015 (or face
economic penalties under Medicare/Medicaid). This extraordinary growth in
the use of medical informatics tools creates a significant and expanding
market for CNS Response.
|
|
·
|
Similarly,
Comparative Effectiveness Research has been made a key feature of 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;
|
|
·
|
The
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;
|
|
·
|
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
|
|
·
|
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.
|
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 neurometric database that
correlates a patient’s response to major drug classes and specific medications
with their individual brain physiology. We developed this tool to improve
pharmacotherapy outcomes, particularly in treatment resistant patients, a
particularly expensive patient population with profound unmet clinical needs.
Our rEEG technology has been used by physicians to guide prescribing 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 improve therapeutic performance. This
approach — commonly referred to as Personalized Medicine, and exemplified by
companies such as Genomic Health (GHDX) — is in the process of transforming both
clinical practice and the pharmaceutical industry. CNS Response brings this
science to behavioral medicine, where the unmet clinical need is
well-documented, expensive, and growing.
The
rEEG® Method
rEEG®
Reports are offered as a service, much like a reference lab, in which
standard electroencephalogram (EEG) readings are referenced to a database to
suggest patient-specific probabilities of response to different medications.
EEG recording devices are widely available, inexpensive to lease, and are
available in most cities by independent mobile EEG providers.
- 40
-
The
service works as follows:
|
·
|
Patients
are directed by an attending physician to a local rEEG® provider,
who performs a standard digital
EEG.
|
|
·
|
EEG
data file is uploaded over the web to our central analytical
database.
|
|
·
|
We
analyze the data against the CNS Database for patients with similar
brain patterns .
|
|
·
|
We
provide a report describing the probability of patient success with
different medication options (much like an antibiotic sensitivity report
commonly used in medicine) .
|
|
·
|
The
rEEG® Report is sent back to the attending physician, usually by the
next business day.
|
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 for 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 that they have
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
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 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 by our clinical
trial.
During
2008, the recruiting for our Depression Efficacy Trial (the Depression Efficacy
Trial is further described under the heading Neurometric Services
Accomplishments below ) 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:
|
·
|
Grow
our focused physician network: We currently have 52 active
practicing physicians utilizing rEEG in their practices, defined as having
paid for testing within the last 12 months. Over the same period 31 new
physicians were trained . 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
ophthalmology , 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.
|
- 41
-
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.
|
·
|
Increase
unit pricing: 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. 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.
|
|
·
|
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.
|
|
·
|
Scalable
platform for delivery: During 2009 and 2010, 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 or iPAD . Currently, we are investing in projects to reduce
or eliminate the remaining manual processes in test production:
including the “artifacting” of EEG data and the Neurologist
review of each case. It is estimated that these processes will, over time,
be replaced with validated algorithms, exception-based reviews
and/or post-facto sampling for quality
assurance.
|
(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 has been a longstanding issue for payers,
but they have 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):
|
·
|
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.
|
- 42
-
|
·
|
Parity: In 2010,
the 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.
|
|
·
|
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.
|
|
·
|
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.
|
(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 firms discussed above, it appears possible to accelerate the
effect of these initiatives in the following ways:
|
·
|
Patient Advocacy:
We believe that some components of the rEEG test may be billable to
payers under the 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.
|
Accordingly,
we intend to follow the example of 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.
|
·
|
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.
|
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:
|
·
|
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
|
|
·
|
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.
|
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 ). Primary clinical outcome measures
included the Quick Inventory of Depression Symptomology (QIDS) and the Quality
of Life Enjoyment and Satisfaction Questionnaire (QLESQ) . Top-line results
were consistent with previous clinical trials of rEEG:
|
·
|
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
( in week 2) and was durable, continuing to grow through week
12.
|
|
·
|
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.
|
|
·
|
Statistical
significance (p < .05) was achieved on all primary and most secondary
endpoints.
|
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 to 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. To this end we have integrated an iPAD
application as the user interface. 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:
|
·
|
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 define individual neurometrics for patients, who
respond better to tricyclics (TCA’s), or combinations of TCA’s and
stimulants, offers the potential for new indications for existing
compounds.
|
|
·
|
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/ cardio-metabolic compound which was denied approval in
the U.S. due to central nervous system 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.
|
|
·
|
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.
|
|
·
|
Decision Support:
Improved understanding supports improved decision making at all
levels of pharmaceutical
development.
|
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:
|
·
|
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.
|
|
·
|
ASPECT
MEDICAL SYSTEMS, INC. (now part of Covidien) is developing a
specific EEG measurement system that indicates a patient's likely response
to some antidepressant medications.
|
|
·
|
BRAIN
RESOURCE COMPANY is an Australian Clinical Research Organization
(CRO) and neurosciences company focused on personalized medicine
solutions for patients, clinicians, pharmaceutical trials and discovery
research.
|
We
believe that we have a competitive advantage with respect to the behavioral
analytics 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.
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.
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During
2009 and 2010 the Company was awarded additional patents for use of rEEG
technology in drug discovery, including clinical trial and drug efficacy
studies. In addition, the company successfully defended its patents by
requesting reexamination of a patent issued to Aspect Medical (now Covidien),
resulting in a reduction and narrowing of claims awarded under the previously
issued Aspect patents.
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 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
Going
forward, 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 neurometrics, refinement of our report
generating system, and by reducing the time to turnaround a report to the
physician. Research and development expenses during the fiscal years ended
September 30, 2010 and 2009 were $1,120,500 and $1,924,100,
respectively.
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Government
Regulation
The FDA informed us that it believes
our rEEG service constitutes a medical device which is subject to regulation by
the FDA, requiring pre-market approval or 510(k) clearance by the FDA pursuant
to the Federal Food, Drug and Cosmetic Act (the “Act”) before our service can be
marketed or sold.
In early 2010 we submitted an
application to obtain 510(k) clearance for our rEEG service, without waiving our
right to continue to take the position that our services 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 in order 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
our rEEG service could be marketed legally, unless it was otherwise
reclassified .
We
currently plan to continue marketing our rEEG service as a non-device web-based
neurometric 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. 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 service is a medical device.
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.
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.
Properties
The Company leases its headquarters
and Neurometric Information Services space, located at 85 Enterprise, Suite 410,
Aliso Viejo, CA 92656, under an operating lease which commenced on February 1,
2010 and terminates on January 30, 2013. 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, located at 7800 East
Orchard Road, Suite 340, Greenwood Village, Co 80111, under an operating lease.
A 37 month extension to the original 2005 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.
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.
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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. 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.
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MANAGEMENT
The
following table sets forth the name, age and position of each of our executive
officers and directors as of December 31 , 2010.
Age
|
Position
|
|
George
Carpenter
|
52
|
Chairman
of the Board, Chief Executive Officer and Secretary
|
Paul
Buck
|
55
|
Chief
Financial Officer
|
Daniel
Hoffman, M.D.
|
62
|
President,
Chief Medical Officer
|
Michael
Darkoch
|
66
|
Executive
Vice President and Chief Marketing Officer
|
John
Pappajohn
|
82
|
Director
|
David
B. Jones
|
67
|
Director
|
Jerome
Vaccaro, M.D.
|
55
|
Director
|
Henry
T. Harbin, M.D
|
64
|
Director
|
George
Kallins, M.D.
|
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 in
October 2007 , 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 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. Prior to joining the Company, Mr. Buck 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.
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Daniel
Hoffman, Chief Medical Officer and President
Dr.
Hoffman 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, and as President of Neuro-Therapy
Clinic, Inc. since he founded it in the 1980’s. Dr. Hoffman owned the clinic
before it was purchased by CNS Response, Inc. Neuro-Therapy Clinic, Inc. is
focused on discovering ways to integrate technology into the creation of better
business practices. 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 50 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 . 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 .
Michael
Darkoch, Executive Vice President and Chief Marketing Officer
Michael
Darkoch became our Executive Vice President and Chief Marketing Officer
on July 6, 2010. Prior to joining the Company, Mr. Darkoch worked as Vice
President of Network Management for MedImpact Health Systems in San Diego since
2004, where he managed new business development for self-insured clients
achieving 25% growth per year, and worked in product development releasing two
major products in one year, and Specialty Pharmacy, a value-added product
generating $20 million in sales in its first year [of commercialization. At the
Company, 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 the Company addresses , 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 experience in the pharmaceutical distribution
field. 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. Mr.
Darkoch holds a Bachelor of Science of Industrial Engineering degree from Lehigh
University and Master of Science in Business from Southern Methodist
University.
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; ConMed Healthcare Management, Inc., Hanover, MD, since 2005.
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.
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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. SAIL Venture Partners, L.P.
engages in investing primarily in cleantech companies, and is deemed to be the
beneficial owner of approximately 17.3% of the Company’s common stock as
determined for purposes of Rule 13d-3 under the Securities Exchange Act. Mr.
Jones also 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. He has served on several boards of
public and private companies and has acted as Chairman and Chairman of the Audit
Committee for two public companies: Birtcher Medical Systems, Inc from 1992 to
1994 and Triquint Semiconductor, Inc. from 1993 to 1995. From 2005 to 2008, he
was a Director of Earthanol, Inc., and from October 2009 to present, he has
served as a director of M2 Renewables, Inc. 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.
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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.
Board
Composition and Committees
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
and George Kallins are independent directors as that term is defined in
Section 5605(a) of the Equity Rules of the NASDAQ Stock Market (the “Nasdaq
Listing Rules”). In addition, our former director Tommy Thompson was
“independent” as that term is defined in Section 5605(a) of 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.
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.
- 52
-
EXECUTIVE
COMPENSATION
Overview
of Compensation Practices
The
Company’s executive compensation program is administered by the Compensation
Committee.
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
- 53
-
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.
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 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.
- 54
-
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
officers other than our PEO who were serving as executive officers
on September 30, 2010, whose total compensation exceeded $100,000; and (iii) up
to two additional individuals for whom disclosure would have been provided under
(ii) but for the fact that they were not serving as executive officers on
September 30, 2010. In this “Executive
Compensation”
section, we refer to the people listed in the table below as our
“named executive officers”.
Name and
Principal Position
|
Fiscal Year
Ended
September
30,
|
Salary
($)
|
Bonus
($)
|
Option
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||||
George
Carpenter (Chief Executive
|
2010
|
213,700 | (9) | 2,167,300 | (1)(5) | 20,800 | (3) | 2,401,800 | ||||||||||||||
Officer,
Principal Executive Officer, Director)
|
2009
|
180,000 | - | - | 20,500 | (3) | 200,500 | |||||||||||||||
Daniel
Hoffman (President, Chief
|
2010
|
150,000 | - | 270,900 | (1)( 6) | 26,000 | (4) | 446,900 | ||||||||||||||
Medical
Officer)
|
2009
|
150,000 | - | - | 33,400 | (4) | 183,400 | |||||||||||||||
Paul
Buck (Chief Financial Officer)
|
2010
|
127,000 | (10) | - | 243,800 | (1)(7) | 94,900 | (11) | 465,700 | |||||||||||||
2009
|
- | - | - | 178,500 | (11) | 178,500 | ||||||||||||||||
Michael
Darkoch (Executive Vice
|
2010
|
52,000 | - | 180,000 | (2)(8) | 6,100 | (3) | 363,400 | ||||||||||||||
President
and Chief Marketing Officer)
|
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.
- 55
-
(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.
(9) $33,700
of Mr. Carpenter’s salary is accrued but payment has been
deferred.
(10) $26,000
of Mr. Buck’s salary is accrued but payment has been deferred. All other
compensation for the year ended September 30, 2010, is made up of 1) $8,500
healthcare insurance premiums paid on his behalf by the Company; 2) Consulting
fees of $86,400 paid to Mr. Buck prior to joining the Company as Chief Financial
Offer. For the fiscal year ended 2009 Mr. Buck was paid $178,500 for his
consulting services.
(11) For
the year ended September 30, 2010, relates to consulting fees of $86,400 and
healthcare insurance premiums of $8,500 paid on behalf of Mr. Buck by the
Company. For the year ended September 30, 2009, relates to consulting fees of
$178,500. 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.
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
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.
Please
refer to the footnotes to the Summary Compensation Table for a description of
the components of All Other Compensation received by the named executive
officers.
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.
- 56
-
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 increased 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
his initial 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. 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.
As of
April 10, 2009, Mr. Carpenter was named Chief Executive Officer and a Director
of the company and Daniel Hoffman became our President.
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.
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.
- 57
-
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 September 30, 2010,
2,124,740 options were exercised and there were 15,670,973 options and 183,937
restricted shares outstanding under the 2006 Plan and 2,020,350 shares
available for issuance of 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.
For a
description of the material terms of the stock options granted to our named
executive officers during the fiscal years ended September 30, 2010 and
September 30, 2009, please refer to the footnotes to the table under “ -
Outstanding Equity Awards at Fiscal Year-End 2010.”
- 58
-
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, 2020
|
|||||||||
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
|
(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
to 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 $0.40 per share. Apart
from these options, non-employee directors did not receive any cash or other
compensation for their service on our board of directors or committees thereof
during the fiscal year ended September 30, 2010. We do not pay management
directors for board service in addition to their regular employee compensation.
The full board of directors has the primary responsibility for reviewing and
considering any revisions to director compensation. As described below, Dr.
Harbin received compensation for consulting services he provided to the company
during our fiscal year ending September 30, 2010 and Mr. Thompson received
compensation for his advisory services.
- 59
-
Non-Employee
Director Compensation
Name
|
Option
Awards ($)
|
All Other
Compensation ($)
|
Total ($)
|
|||||||||
Jerome
Vaccaro M.D. (3)
|
135,500 | (1) | - | 135,500 | ||||||||
Henry
Harbin M.D. (4)
|
342,200 | (1) | 45,000 | 387,200 | ||||||||
John
Pappajohn (5)
|
135,500 | (1) | - | 135,500 | ||||||||
David
Jones (6)
|
135,500 | (1) | - | 135,500 | ||||||||
Tommy
Thompson (7)
|
81,300 | (1) | - | 81,300 | ||||||||
George
Kallins M.D.(8)
|
100,000 | (2) | - | 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.
|
(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 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.
- 60
-
The
aggregate number of option awards outstanding for Dr. Harbin at September 30,
2010 was 806,000.
(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. The aggregate
number of option awards outstanding for Mr. Pappajohn at September 30,
2010 was 250,000.
|
(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. The aggregate number of
option awards outstanding for Mr. Jones at September 30, 2010 was 250,500.
Mr. Jones has assigned his options to SAIL Venture Partners,
L.P.
|
(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. The aggregate number of option awards outstanding for
Mr. Thompson at September 30, 2010 was
150,000.
|
(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. The aggregate number of
option awards outstanding for Dr. Kallins at September 30, 2010 was
250,000.
|
- 61
-
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 December 31 , 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 or warrants issued by us that are
currently exercisable or exercisable within sixty days of December 31,
2010 are deemed to be outstanding and to be beneficially owned by the person
holding the options or warrants 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 December 31, 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
|
2,367,561 | 4.1 | % | 540,000 | 1,827,561 | 3.1 | % | |||||||||||||
Paul
Buck (2)
Chief
Financial Officer
|
382,500 | * | 270,000 | 112,500 | * | |||||||||||||||
Dr.
Daniel Hoffman (3)
President
and Chief Medical Officer
|
1,151,659 | 2.0 | % | 110,545 | 1,041,114 | 1.8 | % | |||||||||||||
Michael
Darkoch (4)
|
75,000 | * | 75,000 | * | ||||||||||||||||
David
B. Jones(5)
Director
|
10,389,855 | 17.3 | % | 8,696,055 | 1,693,800 | 2.8 | % | |||||||||||||
Dr.
Jerome Vaccaro (6)
Director
|
103,344 | * | 103,344 | * |
- 62
-
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
|
|||||||||||||||
Dr.
Henry Harbin (7)
Director
|
383,514 | * | 10,834 | 372,680 | * | |||||||||||||||
John
Pappajohn (8)
Director
|
15,670,454 | 24.8 | % | 11,720,912 | 3,949,542 | 6.2 | % | |||||||||||||
Dr.
George Kallins (9)
Director
|
3,600,159 | 6.0 | % | - | 3,600,159 | 6.0 | % | |||||||||||||
Directors
and officers as a group (9 persons) (10)
|
34,124,046 | 45.7 | % | 21,348,346 | 12,775,700 | 17.1 | % | |||||||||||||
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)
|
10,389,855 | 17.3 | % | 8,696,055 | 1,693,800 | 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 | - | - |
- 63
-
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
V. BiVona (42)
|
250,000 | * | 250,000 | - | - | |||||||||||||||
Maxim
Group LLC (43)
|
965,134 | 1.7 | % | 965,134 | - | - | ||||||||||||||
Monarch
Capital Group (44)
|
115,340 | * | 65,340 | 50,000 | * | |||||||||||||||
Robert
Nathan (45)
|
269,126 | * | 152,460 | 116,666 | * | |||||||||||||||
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)
|
2,435,668 | 4.3 | % | 1,015,459 | 1,420,209 | 2.5 | % | |||||||||||||
W.
Hamlin Emory (57)
|
1,367,103 | 2.4 | % | 117,170 | 1,249,933 | 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)
|
201,872 | * | 187,528 | 14,344 | * | |||||||||||||||
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 | - | - |
- 64
-
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
|
|||||||||||||||
Jonathan
Hodes (89)
|
25,535 | * | 25,535 | - | - | |||||||||||||||
John
McIlvery (90)
|
25,804 | * | 25,804 | - | - | |||||||||||||||
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)
|
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 1,827,561 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)
|
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
112,500 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)
|
Consists
of (a) 98,044 shares of common stock (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 1,041,114
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 for resale
herein were acquired by the investor (i) in the transactions
described under “Related Party Transactions - Transactions with Daniel
Hoffman, M.D. - Transactions Related to Securities Offered for Resale” and
(ii) 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)
|
Consists
of options to acquire 75,000 shares of common stock issuable upon
the exercise of vested and exercisable
options.
|
- 65
-
(5)
|
Consists
of (a) 6,471,067 shares of common stock held by SAIL Venture Partners,
L.P., (b) 852,292 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 83,344 shares of common stock issuable upon the exercise of
vested and exercisable options held by David Jones and assigned to SAIL
Venture Partners, L.P. 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 the securities being registered
for resale herein (i) in the transactions described under “Related Party
Transactions - Transactions with SAIL Venture Partners L.P. - Transactions
Related to Securities Offered for Resale” and (ii) in connection with 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 2,177,342 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
1,419,178 of 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 3161 Michelson Drive,
Suite 750, Irvine, CA 92612.
|
(6)
|
Consists
of options to acquire 103,344 shares of common stock issuable upon the
exercise of vested and exercisable
options.
|
(7)
|
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)
372,680 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 in the 2007 private
placement.
|
(8)
|
Consists
of (a) 8,387,578 shares of common stock, (b) 2,596,720 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) 83,344 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 - Transactions
Related to Securities Offered for Resale .” The address of John
Pappajohn is 2116 Financial Center, Des Moines, IA
50309.
|
(9)
|
Consists
of (a) 38,000 shares of common stock, (b) 2,596,729 shares of
common stock issuable upon the conversion of the Deerwood and BGN
Acquisitions Notes, (c) 928,914 shares of common stock issuable upon
the exercise of warrants and (d) options to acquire 55,568 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 the managing 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)
|
Consists
of (a) 15,543,022 shares of common stock (b) 6,026,687
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) 3,754,455 shares of common stock
issuable upon the exercise of vested and exercisable
options.
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(11)
|
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.
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(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.
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- 67
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(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.
|
(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.
|
- 68
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(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.
|
(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.
|
- 69
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(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.
|
(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 115,340 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 50,000 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 269,126 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 116,666 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.
|
- 70
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(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.
|
(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.
|
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(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 1,193,293 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 347,536 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.
|
- 72
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(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.
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- 73
-
(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.
|
(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.
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(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)
14,344 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.
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(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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- 74
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(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.
|
(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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- 75
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(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.
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(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.
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(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.
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- 76
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(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.
|
(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.
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(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.
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(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.
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(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.
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- 77
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(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.
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(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.
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(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.
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(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.”
Changes
in Control
We do
not have any arrangements which may at a subsequent date result in a change in
control.
- 78
-
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:
|
·
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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, or other stockholder 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
Transactions
Relating to Securities Offered for Resale
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. This
investment was completed with terms identical to those 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 shares of common stock and shares of common stock underlying the warrants
sold in the private placement to Mr. Carpenter.
Other
Transactions with Mr. Carpenter
On
January 4, 2010 Mr. Carpenter’s spouse 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.
Transactions
with SAIL Venture Partners LP (“SAIL”)
Transactions
Relating to Securities Offered for Resale
The
registration statement of which this prospectus forms a part covers the resale
of the following shares of common stock and the shares of common stock
underlying the following warrants previously issued to SAIL:
·
|
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.
|
·
|
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.
|
·
|
On
August 26, 2009, the Company completed an equity financing transaction of
approximately $2 million. As a result of the financing, certain
notes that were held by SAIL and Brandt (and which are described under “-
All Transactions with SAIL” below) were 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
issued on March 30, and May 14, 2009, 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.
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- 79
-
·
|
In
connection with the equity financing referred to above, on August 26,
2009, SAIL furthermore purchased 6 “units” for $324,000. Each
unit consisted 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 were immediately separable
and were issued separately. This investment was completed with
terms identical to those 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.
|
All
Transactions With SAIL
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.
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 accrued interest at the rate of 8% per annum and were 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 were 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 informed us otherwise, we
were required to 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.
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 would 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
Purchase Agreement also provided that, at any time on or after June 30,
2009, and provided that certain conditions are satisfied by us, SAIL
would purchase from us a second Secured Convertible Promissory Note in
the principal sum of $200,000 and would 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 accrued interest at
the rate of 8% per annum and were 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)
were 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 were required
to 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).
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In the
event we consummated 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)
would 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 issued preferred stock that was not part
of an equity financing described above, SAIL was entitled , at its option,
to 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 were 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 issued on
March 30, and May 14, 2009, 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.
In
connection with the equity financing referred to above, on August 26, 2009, SAIL
purchased 6 “units” for $324,000. Each unit consisted
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 were immediately separable and were issued
separately. This investment was completed with terms identical
to those 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 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. Our director George
Kallins and his spouse are the managing members of these
investors. 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
anti-dilution adjustments, including for issuances of securities at prices
below the then-effective exercise price ) 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.
On
October 1, 2010, in
connection with a new private placement of convertible promissory notes (the
"October Notes") and warrants expected to be completed with new independent
investors , we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with John Pappajohn and SAIL as investors. Pursuant to
this agreement, we issued to SAIL 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 after 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 are furthermore convertible, at the
option of the holder, into securities to be issued in subsequent financings at
the lower of the then-applicable conversion price or price per share payable by
purchasers of such securities. 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. As of January 7, 2011, SAIL held $250,000 in aggregate
principal amount of October Notes.
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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 Dr .
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.
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. Any provision
of the October Notes or related warrants can be amended, waived or modified upon
the written consent of the Company and holders of a majority of the aggregate
principal amount of such notes outstanding. Any such consent will
affect all October Notes or warrants, as the case may be, and will be binding on
all holders thereof.
For a
table showing the differences in terms between the October Notes (and related
warrants), on the one hand, and the exchanged Bridge Notes and Deerwood Notes
(and related warrants), on the other hand, please refer to “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Overview - The 2010 Private
Placement Transactions - Differences between October Notes and Bridge
Notes/Deerwood Notes.”
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.
Transactions Relating to Securities
Offered for Resale
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
shares of common stock and the shares of common stock underlying
the warrants sold in this private placement to Dr. Harbin.
Other
Transactions with Dr. Harbin
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.
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Subsequently,
on April 15, 2008, we entered into a consulting agreement with Dr.
Harbin, 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.
Transactions Relating to Securities
Offered for Resale
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 shares of common stock and the shares of common stock underlying the
warrants sold in this private placement to Dr. Hoffman.
Other Transactions with Dr.
Hoffman
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. As of December
31, 2010, the principal amount of such note was fully paid off.
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.
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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.
Transactions
Relating to Securities Offered for Resale
The
registration statement of which this prospectus forms a part covers the resale
of the following shares of common stock and the shares of common stock
underlying the following warrants previously issued to Mr.
Pappajohn:
·
|
On
June 12, 2009, we entered into a Bridge Note and Warrant Purchase
Agreement with Mr. Pappajohn. Pursuant to the Purchase Agreement, on
June 12, 2009, 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 2,333,333 shares of our common stock and issued
to relatives of Mr. 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.
|
·
|
On
August 26, 2009, the Company completed an equity financing transaction of
approximately $2 million. As a result of the financing, a note
held by Mr. Pappajohn and described below under “- All Transactions with
Mr. Pappajohn” was 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.
|
·
|
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.
|
All
Transactions with Mr. Pappajohn
On
June 12, 2009, we entered into a Bridge Note and Warrant Purchase Agreement with
Mr. Pappajohn .
Pursuant
to the Purchase Agreement, on June 12, 2009, 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 2,333,333 shares of
our common stock and issued to relatives of Mr. 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 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 intellectual property). In the event of a
liquidation, dissolution or winding up of the company, unless Mr.
Pappajohn informs 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.
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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 3,333,334 shares of common stock and the
1,666,667 shares of 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.
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 anti-dilution adjustments, including for issuances of
securities at prices below the then-effective exercise price ) 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. 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 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, in
connection with a new private placement of convertible promissory notes (the
"October Notes") and warrants expected to be completed with new independent
investors, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with John Pappajohn and SAIL as investors. Pursuant to
this agreement, we issued to Mr. Pappajohn 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. As of January 7, 2011, Mr. Pappajohn holds
$511,688 in aggregate principal amount of October Notes.
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The
October Notes mature one year after 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 are
furthermore convertible, at the option of the holder, into securities to be
issued in subsequent financings at the lower of the then-applicable conversion
price or price per share payable by purchasers of such
securities. 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. Any provision
of the October Notes or related warrants can be amended, waived or modified upon
the written consent of the Company and holders of a majority of the aggregate
principal amount of such notes outstanding. Any such consent will
affect all October Notes or warrants, as the case may be, and will be binding on
all holders thereof.
For a
table showing the differences in terms between the October Notes (and related
warrants), on the one hand, and the exchanged Bridge Notes and Deerwood Notes
(and related warrants), on the other hand, please refer to “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Overview - The 2010 Private
Placement Transactions - Differences between October Notes and Bridge
Notes/Deerwood Notes.”
On
November 24, 2010 the Board of Directors, excluding Mr. Pappajohn, ratified an
engagement agreement with Equity Dynamics, Inc., a company owned by Mr.
Pappajohn, to provide financial advisory serviced to assist us with our fund
raising efforts. These efforts have included advice and assistance
with the preparation of Private Placement Memoranda, investor presentations,
financing strategies, identification of potential and actual investors, and
introductions to placement agents and investment bankers. The engagement letter
calls for a retainer fee of $10,000 per month starting February 1,
2010. As of September 30, 2010, we have accrued $80,000 for the
services provided by Equity Dynamics. The term of the agreement is
for 12 months from its initiation and can be cancelled by either party, with or
without cause, with 30 days written notice.
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. None of the transactions between Dr. Kallins
and us relate to securities offered for resale pursuant to the registration
statement of which this prospectus forms a part.
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 anti-dilution adjustments, including for issuances of securities
at prices below the then-effective exercise price ) of $0.56 per
share.
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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 anti-dilution
adjustments, including for issuances of securities at prices below the
then-effective exercise price ) 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 would
never be less than $0.30. As of September 30, 2010, Deerwood
Partners LLC and Deerwood Holdings LLC held Deerwood Notes in the aggregate
principal amount of $500,000.
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 with 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.
The
Purchase Agreement pursuant to which the October Notes were issued also provides
that the Company and the holders of the October Notes will 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 after 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 are furthermore convertible, at the option of the holder, into securities
to be issued in subsequent financings at the lower of the then-applicable
conversion price or price per share payable by purchasers of such
securities. 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.
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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. Any provision of the October Notes or related warrants can be
amended, waived or modified upon the written consent of the Company and holders
of a majority of the aggregate principal amount of such notes
outstanding. Any such consent will affect all October Notes or
warrants, as the case may be, and will be binding on all holders
thereof.
For a
table showing the differences in terms between the October Notes (and related
warrants), on the one hand, and the exchanged Bridge Notes and Deerwood Notes
(and related warrants), on the other hand, please refer to “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Overview - The 2010 Private
Placement Transactions - Differences between October Notes and Bridge
Notes/Deerwood Notes.”
Transactions
with Paul Buck
Transactions
Relating to Securities Offered for Resale
On
December 24, 2009, the Company completed a second closing of its private
placement commenced in August 2009 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 shares of common stock and the shares
of common stock underlying the warrants sold in this private
placement to Mr. Buck.
Other
Transactions with Mr. Buck
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.
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.
The
shares underlying these options are not being offered for resale pursuant to the
registration statement of which this prospectus forms a part.
Transaction
with Staff Members of Equity Dynamics, Inc.
On July
5, 2010 the Board granted warrants to purchase 500,000 shares of common stock to
members of staff of Equity Dynamics, Inc. a company owned by Mr. Pappajohn,
for consulting services they had rendered to the Company, advising on and
assisting with fund raising activities. Using the Black-Scholes
model, these warrants were valued at $199,000 and expensed to consulting
fees. 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.
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The
shares underlying such warrants are not being offered for resale pursuant to the
registration statement of which this prospectus forms a part.
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. None of the
securities issued in the transactions described in this subsection “Transactions with Promoters and
Control Persons” relate to securities offered for resale pursuant to the
registration statement of which this prospectus forms a part.
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 the 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 the 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 .
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Transactions
with Other Selling Stockholders (Transaction Relating to Securities Offered
for Resale)
The
following transactions relate to securities offered for resale pursuant to the
registration statement of which this prospectus forms a part.
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” consisted 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 pursuant to the registration statement of which this
prospectus forms a part the shares of common stock and/or shares of common stock
underlying 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 2009 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
2009 private placement.
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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 2009 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 Note 3 in the
Notes to the Financial Statements 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
2009 private placement. The registration statement of which
this prospectus forms a part includes the shares underlying the warrants
obtained by Maxim Group LLC, Monarch Capital Group, Robert Nathan and
Felix Investments, LLC in connection with the 2009 private
placement .
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.
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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
December 31 , 2010, we had 56,023,921 shares of Common Stock issued and
outstanding. In addition, we have reserved 15,274,668 shares
of Common Stock for issuance in respect of options to purchase common stock and
24,904,308 shares of Common Stock were reserved for issuance pursuant to
issued and outstanding warrants to purchase our Common
Stock. Furthermore, 10,264,312 shares of Common Stock were
reserved for promissory notes in the aggregate principal amount of $3,023,938
plus accrued interest at December 31, 2010, which 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
December 31 , 2010, the following warrants were outstanding:
|
·
|
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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|
·
|
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;
|
|
·
|
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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|
·
|
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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|
·
|
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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|
·
|
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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|
·
|
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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|
·
|
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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|
·
|
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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|
·
|
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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|
·
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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
staff members of Equity Dynamics, Inc., who provided consulting
services associated with the Company’s financing activities. Equity
Dynamics, Inc. is owned by Mr.
Pappajohn.
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|
·
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warrants
that will expire in October and November 2017 to purchase
4,939,889 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 $2
million 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 and November , 2015 to purchase
166,666 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 $2
million and exchanged six promissory notes totaling in
aggregate $1 million plus accrued
interest.
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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.
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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
December 31, 2010, 2,124,740 options were exercised and there were
15,250,121 options and 183,937 restricted shares outstanding under the
amended 2006 Plan, leaving 2,441,202 shares available for issuance
pursuant to future awards.
The
following is a summary of the status of options outstanding at December
31 , 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
|
352,974 |
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
|
8,122,920 |
10
years
|
$ | 0.55 | |||||
Total | 15,250,121 | $ | 0.62 |
Anti-Takeover
Provisions
Delaware
has enacted the following legislation that may deter or frustrate takeovers of
Delaware corporations, such as CNS Response:
- 94
-
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
December 31 , 2010 of 3,800 shares per day with no trades occurring
on 180 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.
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.
- 95
-
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:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
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;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
publicly
or privately negotiated
transactions;
|
|
·
|
through
underwriters, brokers or dealers (who may act as agents or principals) or
directly to one or more purchasers;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
In
connection with distributions of the shares or otherwise, the selling
stockholders may:
|
·
|
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;
|
|
·
|
sell
the shares short and redeliver the shares to close out such short
positions;
|
|
·
|
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
|
|
·
|
pledge
shares to a broker-dealer or other financial institution, which, upon a
default, they may in turn resell.
|
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.
- 96
-
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 2009 private placement, 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).
- 97
-
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:
|
·
|
it
intends to take possession of the registered securities or to facilitate
the transfer of such certificates;
|
|
·
|
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
|
|
·
|
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%.
- 98
-
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.
- 99
-
INDEX
TO FINANCIAL STATEMENTS
Page
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
CONSOLIDATED
BALANCE SHEETS AT SEPTEMBER 30, 2010 and 2009
|
F-2
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
F-3
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS
ENDED SEPTEMBER 30, 2010 AND 2009
|
F-4
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR YEARS ENDED SEPTEMBER 30, 2010 AND
2009
|
F-5
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30,
2010 AND 2009
|
F-6
|
- 100
-
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
CNS
Response, Inc.
85
Enterprise, Suite 410
Aliso
Viejo, CA 92656
We have
audited the accompanying consolidated balance sheets of CNS Response, Inc. (the
“Company”) and its subsidiaries as of September 30, 2010 and 2009 , 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, 2010 . 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, 2010 and 2009 , and the results of its operations and its cash flows
for each of the years in the two-year period ended September 30, 2010 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
Irvine ,
California
December
20, 2010
F-1
CNS
RESPONSE, INC.
CONSOLIDATED
BALANCE SHEETS AT SEPTEMBER 30, 2010 and 2009
As at September 30,
|
||||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 62,000 | $ | 988,100 | ||||
Accounts
receivable (net of allowance for doubtful accounts of $10,400 and $11,700
in 2010 and 2009 respectively)
|
48,900 | 61,700 | ||||||
Prepaids
and other
|
84,900 | 89,500 | ||||||
Total
current assets
|
195,800 | 1,139,300 | ||||||
Furniture
& equipment
|
23,000 | 17,500 | ||||||
Other
assets
|
18,700 | 4,100 | ||||||
TOTAL
ASSETS
|
$ | 237,500 | $ | 1,160,900 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable (including $60,800 and $7,000 to related parties in 2010 and 2009
respectively)
|
$ | 1,383,700 | $ | 1,285,600 | ||||
Accrued
liabilities
|
380,700 | 261,400 | ||||||
Other
payable – related party
|
100,000 | - | ||||||
Deferred
compensation (including $81,200 and $81,200 to related parties in
2010 and 2009 respectively)
|
263,600 | 220,100 | ||||||
Accrued
patient costs
|
135,000 | 305,500 | ||||||
Accrued
consulting fees (including $27,000 and $18,000 to related parties in 2010
and 2009, respectively)
|
86,600 | 72,100 | ||||||
Derivative
liability
|
2,061,900 | - | ||||||
Secured
convertible promissory notes-related party (net of discounts $1,023,900 in
2010 and $0 in 2009)
|
- | - | ||||||
Current
portion of long-term debt
|
26,900 | 95,900 | ||||||
Total
current liabilities
|
4,438,400 | 2,240,600 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Note
payable to officer
|
- | 24,800 | ||||||
Capital
lease
|
3,400 | 5,600 | ||||||
Total
long-term liabilities
|
3,400 | 30,400 | ||||||
TOTAL
LIABILITIES
|
4,441,800 | 2,271,000 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
- | - | ||||||
STOCKHOLDERS'
EQUITY:
|
||||||||
Common
stock, $0.001 par value; authorized 750,000,000 shares; 56,023,921
and 41,781,129 shares outstanding as of September 30, 2010 and
2009
|
56,000 | 41,800 | ||||||
Additional
paid-in capital
|
29,109,600 | 24,044,000 | ||||||
Accumulated
deficit
|
(33,369,900 | ) | (25,195,900 | ) | ||||
Total
stockholders' equity
|
(4,204,300 | ) | (1,110,100 | |||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 237,500 | $ | 1,160,900 |
See
accompanying Notes to Consolidated Financial Statements
F-2
CNS
RESPONSE, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER
30, 2010 AND 2009
YEARS ENDED
SEPTEMBER 30,
|
||||||||
2010
|
2009
|
|||||||
REVENUES
|
||||||||
Neurometric
Information Services
|
$ | 136,100 | $ | 120,400 | ||||
Clinical
Services
|
502,400 | 579,700 | ||||||
638,500 | 700,100 | |||||||
OPERATING
EXPENSES:
|
||||||||
Cost
of Neurometric Service revenues
|
135,100 | 131,600 | ||||||
Research
and development
|
1,120,500 | 1,924,100 | ||||||
Sales
and marketing
|
870,900 | 915,800 | ||||||
General
and administrative
|
5,017,000 | 4,100,500 | ||||||
Goodwill
impairment charges
|
- | 320,200 | ||||||
Total
operating expenses
|
7,143,500 | 7,392,200 | ||||||
OPERATING
LOSS
|
(6,505,000 | ) | (6,692,100 | ) | ||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income (expense), net
|
(360,500 | ) | (1,732,900 | ) | ||||
Loss
on extinguishment of debt
|
(1,094,300 | ) | - | |||||
Financing
fees
|
(213,400 | ) | (90,000 | ) | ||||
Total
other income (expense)
|
(1,668,200 | ) | (1,822,900 | ) | ||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(8,173,200 | ) | (8,515,000 | ) | ||||
PROVISION
FOR INCOME TAXES
|
800 | 7,200 | ||||||
NET
LOSS
|
$ | (8,174,000 | ) | $ | (8,522,200 | ) | ||
BASIC
NET LOSS PER SHARE
|
$ | (0.16 | ) | $ | (0.31 | ) | ||
DILUTED
NET LOSS PER SHARE
|
$ | (0.16 | ) | $ | (0.31 | ) | ||
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
||||||||
Basic
|
52,277,119 | 27,778,171 | ||||||
Diluted
|
52,277,119 | 27,778,171 |
See
accompanying Notes to Consolidated Financial Statements
F-3
CNS
RESPONSE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE
YEARS ENDED SEPTEMBER 30, 2010 AND
2009
Additional
|
||||||||||||||||||||
Common Stock
|
Paid-in
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance
at October 1, 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
|
)
|
|||||||||
Stock-
based compensation
|
-
|
-
|
1,302,100
|
-
|
1,302,100
|
|||||||||||||||
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
|
|||||||||||||||
Warrants
issued for consulting services
|
-
|
-
|
199,000
|
-
|
199,000
|
|||||||||||||||
Value
of beneficial conversion feature of bridge notes
|
-
|
-
|
430,700
|
-
|
430,700
|
|||||||||||||||
Issuance
of bridge warrants
|
152,600
|
152,600
|
||||||||||||||||||
Net
loss for the year ended September 30, 2010
|
-
|
-
|
-
|
(8,174,000
|
)
|
(8,174,000
|
)
|
|||||||||||||
Balance
at September 30, 2010
|
56,023,921
|
$
|
56,000
|
$
|
29,109,600
|
$
|
(33,369,900
|
)
|
$
|
(4,204,300
|
)
|
See
accompanying Notes to Consolidated Financial Statements
F-4
CNS
RESPONSE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR YEARS ENDED
SEPTEMBER
30, 2010 AND 2009
YEAR ENDED SEPTEMBER 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(8,174,000
|
)
|
$
|
(8,522,200
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
& amortization
|
9,400
|
9,100
|
||||||
Amortization
of discount on bridge notes issued
|
335,900
|
1,058,000
|
||||||
Value
of beneficial conversion feature of bridge notes
|
-
|
642,000
|
||||||
Stock
based compensation
|
1,302,100
|
850,500
|
||||||
Extinguishment
of debt
|
1,094,300
|
-
|
||||||
Issuance
of warrants for consulting services
|
199,000
|
-
|
||||||
Issuance
of warrants for financing services
|
193,400
|
-
|
||||||
Non-cash
interest expense
|
21,600
|
20,900
|
||||||
Goodwill
impairment
|
-
|
320,200
|
||||||
Write-off
of doubtful accounts
|
12,950
|
22,700
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(150
|
)
|
13,800
|
|||||
Prepaids
and other
|
4,600
|
99,900
|
||||||
Accounts
payable and accrued liabilities
|
231,900
|
1,003,800
|
||||||
Deferred
compensation and others
|
43,500
|
(40,300
|
)
|
|||||
Accrued
patient costs
|
(170,500
|
)
|
(92,000
|
)
|
||||
Security
Deposit on new lease
|
(14,600
|
)
|
-
|
|||||
Net
cash used in operating activities
|
(4,910,600
|
)
|
(4,613,600
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of Furniture & Equipment
|
(14,900
|
)
|
(2,000
|
)
|
||||
Net
cash used in investing activities
|
(14,900
|
)
|
(2,000
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayment
of convertible debt with accrued interest
|
-
|
(92,600
|
)
|
|||||
Repayment
of debt
|
(94,100
|
)
|
(86,700
|
)
|
||||
Repayment
of lease payable
|
(1,900
|
)
|
(1,800
|
)
|
||||
Proceeds
from the sale of common stock, net of offering costs
|
2,995,400
|
1,792,300
|
||||||
Proceeds
from bridge notes
|
1,000,000
|
1,700,000
|
||||||
Proceeds
from related party loan
|
100,000
|
-
|
||||||
Proceeds
from exercise of warrants and options
|
-
|
295,500
|
||||||
Net
cash provided by financing activities
|
3,999,400
|
3,606,700
|
||||||
NET
DECREASE IN CASH
|
(926,100
|
)
|
(1,008,900
|
)
|
||||
CASH-
BEGINNING OF YEAR
|
988,100
|
1,997,000
|
||||||
CASH-
END OF YEAR
|
$
|
62,000
|
$
|
988,100
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash paid
during the period for:
|
||||||||
Interest
|
$
|
7,900
|
$
|
64,100
|
||||
Income
taxes
|
$
|
800
|
$
|
7,200
|
||||
Fair
value of note payable to officer issued for
acquisition
|
$
|
24,700
|
$
|
118,600
|
||||
Fair
value of equipment acquired through lease
|
$
|
6,600
|
$
|
7,600
|
||||
Conversion
of bridge notes and related accrued interest into common
stock
|
$
|
-
|
$
|
1,720,900
|
See
accompanying Notes to Consolidated Financial Statements
F-5
CNS
RESPONSE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER
30, 2010 AND 2009
1.
|
NATURE
OF OPERATIONS
|
Organization
and Nature of Operations
CNS
Response, Inc. (the “Company”) 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, the Company 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 the Company’s wholly-owned subsidiary (“MergerCo”)
pursuant to which the Company 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 a wholly-owned subsidiary of the Company,
and on the same date the corporate name was changed from Strativation, Inc. to
CNS Response, Inc.
The
Company is a web-based neuroinformatic company that utilizes a patented
system that provides data to psychiatrists and other physicians/prescribers to
enable them to make a more informed decision when treating a specific patient
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.
|
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.
F-6
Cash
The
Company deposits its cash with major financial institutions and may at times
exceed federally insured limit of $250,000. At September 30, 2010
cash did not exceed the federally insured limit. 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.
Derivative
Liabilities
The
Company applies ASC Topic 815-40, “Derivatives and Hedging,” which provides a
two-step model to determine whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
scope exception in ASC 815-10-15-74. This standard triggers liability accounting
on all instruments and embedded features exercisable at strike prices based on
future equity-linked instruments issued at a lower rate. Using the
criteria in ASC 815, the Company determines which instruments or embedded
features that require liability accounting and records the fair values as a
derivative liability. The changes in the values of the derivative liabilities
are shown in the accompanying consolidated statements of operations as “gain
(loss) on change in fair value of derivative liabilities.”
On
September 26, 2010, the Company’s board of directors approved a term sheet to
modify the terms of six convertible notes outstanding at that date in order to
induce additional investment in the form of convertible debt. The original
convertible notes were due in December 2010 with accrued interest at 9%,
convertible into common shares at $0.50 per share and had warrants exercisable
at strike price between $0.50 and $0.56. The Company modified the terms of these
notes to be due 12 months from the modification date with accrued interest at
9%, convertible into common shares at $0.30 per share, 50% warrant coverage
exercisable at $0.30 per share and increased the principal for accrued interest
through the modification date. Both the convertible note and warrants contained
ratchet provisions, which under ASC 815 required bifurcation of the conversion
feature and warrants for derivative liability treatment. As of September 30,
2010 the derivative liability was $2,061,900, which was comprised of the warrant
liability of $889,100 and the debt conversion option liability of
$1,172,800.
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-7
The
Company’s warrant liability is carried at fair value totaling $889,100 and $0,
as of September 30, 2010 and 2009, respectively. The Company’s
conversion option liability is carried at fair value totaling $1,172,800 and $0
as of September 30, 2010 and 2009, respectively. The Company used
Level 2 inputs for its valuation methodology for the warrant liability and
conversion option liability as their fair values were determined by using the
Black-Scholes option pricing model using the following
assumptions:
September 30,
2010
|
||||||||
Annual
dividend yield
|
-
|
|
||||||
Expected
life (years)
|
1.0-3.5
|
|||||||
Risk-free
interest rate
|
1.12%-1.27
|
%
|
||||||
Expected
volatility
|
142%-274
|
%
|
Fair Value
|
Fair Value Measurements at
|
|||||||||||||||
As of
|
September 30, 2010
|
|||||||||||||||
September 30,
|
Using Fair Value Hierarchy
|
|||||||||||||||
2010
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Liabilities
|
||||||||||||||||
Warrant
liability
|
$ | 889,100 | $ | - | $ | 889,100 | $ | - | ||||||||
Secured
convertible promissory note
|
1,023,900 | 1,023,900 | ||||||||||||||
Conversion
option liability
|
1,172,800 | - | 1,172,800 | - | ||||||||||||
Total
accrued derivative liabilities
|
$ | 3,085,800 | $ | - | $ | 3,085,800 | $ | - |
As of
September 30, 2010 the Company recognized no gain or loss on change in the fair
value of accrued derivative liabilities and 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 825-10.
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 for the years ended September 2010 and 2009 is
$9,400 and $9,100 respectively. Accumulated depreciation at September
30, 2010 and 2009 was $21,800 and $15,400 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.
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.
F-8
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, 2010 and 2009 .
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.
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, 2010 and 2009 .
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.
F-9
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 Neurometric
Information Service (formerly called Laboratory Information Services) provides
reports (“rEEG Reports”) enable psychiatrist or other physicians/prescribers to
make more informed decisions with a treatment strategy for a specific patient
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 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 as patent costs were previously included
in Research and Development costs. The reclassifications had no
effect on consolidated net income or consolidated assets and
liabilities.
Recent
Accounting Pronouncements
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 audited
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
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 audited 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 audited
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
audited consolidated financial statements.
F-10
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 audited consolidated financial statements.
3.
|
CONVERTIBLE
DEBT AND EQUITY FINANCINGS
|
As of
October 1, 2008, one convertible promissory note, originally issued by CNS
California prior to September 30, 2006, with a principal balance of $49,950
remained 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 a private placement transaction
closed on August 26, 2009, which is fully described in the section
below.
The
Private Placement Transactions
Completion
of First Closing of 2009 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.
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. 3 to the Registration Statement was filed
with the SEC on November 8, 2010.
F-11
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 2009 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-12
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 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 the 2009 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-13
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, the Company 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 the Company’s common stock. The
exercise price of the warrant (subject to anti-dilution adjustments, including
for issuances of securities at prices below the then-effective exercise price)
was $0.50 per share.
Pursuant to a separate agreement that
the Company entered into with Mr. Pappajohn on July 25, 2010, the
Company granted him a right to convert his Bridge Notes into shares of
it’s 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.
On July 5, 2010 and August 20, 2010,
the Company 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 Company’s director George Kallins and his
spouse are the managing members of these investors. The Deerwood Notes
mature on December 15, 2010. The Company 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 the Company’s common stock at an exercise price (subject to
anti-dilution adjustments, including for issuances of securities at prices below
the then-effective exercise price) of $0.56 per share.
SAIL Venture Partners L.P. (“SAIL”),
of which the Company’s 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. The obligations under each guaranty
were independent of the Company’s obligations under the Deerwood Notes and
separate actions could be brought against the guarantor. The Company
entered into an oral agreement to indemnify SAIL and grant to SAIL a security
interest in the Company’s assets in connection with the guaranties. In addition,
on August 20, 2010, the Company granted SAIL warrants to purchase up to an
aggregate of 100,000 shares of common stock at an exercise price (subject to
anti-dilution adjustments, including for issuances of securities at prices below
the then-effective exercise price) of $0.56 per share.
Each Deerwood Note accrued interest
at a rate of 9% per annum and was convertible into shares of the Company’s
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, the Company entered into a Note and Warrant Purchase Agreement
(the “Purchase Agreement”) with John Pappajohn and SAIL as investors, pursuant
to which the Company 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) The Company received $500,000 in gross proceeds
from the issuance to these investors of October Notes in the aggregate principal
amount of $500,000 and related warrants to purchase up to 833,332
shares. (b) The Company 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.
F-14
On
November 3, 2010, three affiliated entities, identified below, executed the
Purchase Agreement. In connection therewith, the Company 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) The
Company received $250,000 in gross proceeds from the issuance to BGN Acquisition
Ltd., LP, an entity controlled by the Company’s 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) The Company 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 Dr. 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 the Company’s 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 the
Company’s obligations under the October Notes and separate actions may be
brought against the guarantor. In connection with its serving as
guarantor, the Company 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 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
are furthermore convertible, at the option of the holder, into securities to be
issued in subsequent financings at the lower of the then-applicable conversion
price or price per share payable by purchasers of such
securities. 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. The aggregate
number of shares of common stock underlying the principal amount of the October
Notes, which were accounted for as being outstanding at September 30, 2010, is
3,413,126 at a conversion price of $0.30 per share.
The
Company’s 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 the Company
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. Any provision of the October Notes or related warrants can be
amended, waived or modified upon the written consent of the Company and holders
of a majority of the aggregate principal amount of such notes
outstanding. Any such consent will affect all October Notes or
warrants, as the case may be, and will be binding on all holders
thereof.
ASC
470-50-40 “Extinguishments of
Debt” requires modifications to debt instruments to be evaluated to
assess whether the modifications are considered “substantial modifications”. A
substantial modification of terms shall be accounted for like an extinguishment.
For extinguished debt, a difference between the re-acquisition price and the net
carrying amount of the extinguished debt shall be recognized currently in income
of the period of extinguishment as losses or gains. The Company evaluated the
change in terms between the Bridge Notes and Deerwood Notes, on the one hand,
and the October Notes, on the other hand, under ASC 470, noting that they met
the criteria for substantial modification and accordingly treated the
modification as extinguishment of the original convertible notes (i.e., the
Bridge Notes and Deerwood Notes), replaced by the new convertible notes (i.e.,
the October Notes) with modified terms. Although the replacement notes were
issued after the close of the fiscal year ended September 30, 2010, i.e., in
October and November 2010, the Company considered the replacement notes to
be outstanding and effective for the fiscal year ended September 30,
2010 and accordingly recorded a loss on extinguishment of debt of $1,094,300 for
the year ended September 30, 2010.
F-15
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.
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.
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 at some time 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. No options have been granted to non-accredited investors at
this time.
On
July 5, 2010, the Board of Directors also approved an additional grant of
800,000 options to a new member of the executive management team, a new member
of the board of directors and a new advisor to the Company. The
respective vesting periods are the same as those for the abovementioned March 3,
2010 grants. The effective grant date for these accredited investors
was July 5, 2010 and the exercise price of $0.40 per share was based on the
quoted closing share price of the Company’s stock on July 2, 2010 as markets
were closed for the 4th of July
holiday weekend.
F-16
As of
September 30, 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 of
future awards.
The
Company has adopted ASC 718-20 (formerly, SFAS No. 123R -revised 2004,
“Share-Based Payment”), and related interpretations. Under ASC 718-10,
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
|
||||||
March
2010
|
0 | % | 3.62 | % | 215 | % |
5
years
|
||||||
July
2010
|
0 | % | 1.81 | % | 536 | % |
5
years
|
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 September 30, 2010 and 2009 is as follows:
For the fiscal year ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Operations
|
$ | 18,000 | $ | 16,100 | ||||
Research
and development
|
341,600
|
260,800 | ||||||
Sales
and marketing
|
197,200 | 137,500 | ||||||
General
and administrative
|
745,300 | 436,100 | ||||||
Total
|
$ | 1,302,100 | $ | 850,500 |
Total
unrecognized compensation as of September 30, 2010 amounted to
$4,549,700.
A
summary of stock option activity is as follows:
Number of
Shares
|
Weighted Average
Exercise Price
|
|||||||
Outstanding
at October 1, 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 | |||||
Granted
|
9,450,000 | $ | 0.54 | |||||
Exercised
|
- | $ | ||||||
Forfeited
|
(441,041 | ) | $ | 0.81 | ||||
Outstanding
at September 30, 2010
|
15,670,973 | $ | 0.62 | |||||
Weighted
average fair value of options granted during:
|
||||||||
Year
ended September 30, 2009
|
$ | 0.43 | ||||||
Year
ended September 30, 2010
|
$ | 0.54 |
F-17
Following
is a summary of the status of options outstanding at September 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
|
856,000
|
10
years
|
$
|
0.40
|
|||||
$0.55
|
8,400,000
|
10
years
|
$
|
0.55
|
|||||
Total
|
15,670,973
|
$
|
0.62
|
Warrants
to Purchase Common Stock
At
October 1, 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
3
|
||
3,333,333
shares
|
$
|
0.30
|
A
$1,000,000 bridge note with Pappajohn on June 12, 2009 as described
in Note 3
|
||
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
3
|
||
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
3
|
||
274,867
shares
|
$
|
0.33
|
The
placement agent for private placement as described in Note
3
|
F-18
At
September 30, 2009, there were warrants outstanding to purchase 15,537,485
shares. During the year ended September 30, 2010, a further
9,300,161 warrants were granted, of which 500,000 were cancelled and replaced
with 1,706,560 warrants pursuant to the Note and Warrant Purchase agreement
dated October 1, 2010 as described below and in note 3. Furthermore
3,333,333 warrants were exercised. The warrant activity is described
as follows:
Warrants to Purchase
|
Exercise
Price
|
Issued in Connection With:
|
|||
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 3
|
||
1,200,267
shares
|
$ | 0.33 |
Associated
with warrants for the lead and secondary placement agents for private
placement as described in Note 3
|
||
|
|||||
(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.
|
||
500,000
shares
|
$ | 0.30 |
These
warrants were granted to individual staff members of Equity Dynamics, Inc.
a Company owned by Mr. Pappajohn, for their efforts in providing
consulting services associated with the Company’s financing
activities.
|
||
852,812
shares
|
$ | 0.30 |
These
warrants were issued to Mr. John Pappajohn, a Director of the Company,
pursuant to the October 1, 2010 Note and Warrant Purchase agreement
described in note 3; whereby two outstanding convertible notes of $250,000
each, issued on June 3 and July 25, 2010 respectively, and 250,000
outstanding warrants issued on July 25, 2010, with an exercise price of
$0.50 were cancelled and exchanged on October 1, 2010 for two
new notes of $250,000 each plus unpaid interest and warrants to purchase
852,812 shares of common stock.
|
||
256,125
shares
|
$ | 0.30 |
These
warrants were issued to Deerwood Partners, LLC which is controlled by Dr.
George Kallins, a Director of the Company, pursuant to the October 1, 2010
Note and Warrant Purchase agreement described in note 3; whereby two
outstanding convertible notes of $125,000 each, issued on July 5 and
August 20, 2010 respectively, and 75,000 outstanding warrants issued on
August 20, 2010, with an exercise price of $0.56 were cancelled and
exchanged on November 3, 2010 for two new notes of $125,000 each plus
unpaid interest and warrants to purchase 256,125 shares of common
stock.
|
||
256,125
shares
|
$ | 0.30 |
These
warrants were issued to Deerwood Holdings, LLC which is controlled by Dr.
George Kallins, a Director of the Company, pursuant to the October 1, 2010
Note and Warrant Purchase agreement described in note 3; whereby two
outstanding convertible notes of $125,000 each, issued on July 5 and
August 20, 2010 respectively, and 75,000 outstanding warrants issued on
August 20, 2010, with an exercise price of $0.56 were cancelled and
exchanged on November 3, 2010 for two new notes of $125,000 each plus
unpaid interest and warrants to purchase 256,125 shares of common
stock.
|
||
341,498
shares
|
$ | 0.30 |
These
warrants were issued to SAIL, of which Mr. David Jones, a Director of the
Company, is a managing partner. SAIL had undertaken to
guarantee the four abovementioned Deerwood notes which were issued on July
5 and August 20, 2010. For this guarantee SAIL was issued
100,000 warrants on August 20, 2010 with an exercise price of
$0.56. Upon the cancellation and exchange of the Deerwood notes
on November 3, 2010, SAIL undertook to guarantee the four new Deerwood
notes in exchange for the cancellation of the SAIL’s 100,000 outstanding
warrants which were replaced with new
341,498.
|
F-19
At
September 30, 2010, there were warrants outstanding to purchase
21,504,313 shares of the Company’s common stock which includes a net
1,206,560 shares which were the result of the cancellation and reissuance of
warrants in accordance with the Note and Warrant Purchase Agreement of October
1, 2010 detailed above and in Note 3. The exercise price of the
outstanding warrants range from $0.01 to $1.812 with a weighted average exercise
price of $0.56. 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. The Company provides a valuation allowance to reduce the
Company’s 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:
2010
|
2009
|
|||||||
Federal
income tax (benefit) at statutory rates
|
(34 | )% | (34 | )% | ||||
Stock-based
compensation
|
0 | % | 0 | % | ||||
Non
deductible interest expense
|
5 | % | 0 | % | ||||
Extinguishment
of debt
|
5 | % | 0 | % | ||||
Change
in valuation allowance
|
30 | % | 37 | % | ||||
Goodwill
write off
|
0 | % | (3 | )% | ||||
State
tax benefit
|
(6 | )% | 0 | % |
Temporary
differences between the financial statement carrying amounts and bases of assets
and liabilities that give rise to significant portions of deferred taxes relate
to the following at September 30, 2010 and 2009:
2010
|
2009
|
|||||||
Deferred
income tax assets:
|
||||||||
Net
operating loss carryforward
|
$ | 10,451,700 | $ | 8,765,900 | ||||
Deferred
interest, consulting and compensation liabilities
|
1,776,800 | 987,500 | ||||||
Amortization
|
(34,400 | ) | (24,300 | ) | ||||
Deferred
income tax assets – other
|
15,000 | 7,800 | ||||||
12,209,100 | 9,736,900 | |||||||
Deferred
income tax liabilities—other
|
- | - | ||||||
Deferred
income tax asset—net before valuation allowance
|
12,209,100 | 9,736,900 | ||||||
Valuation
allowance
|
(12,209,100 | ) | (9,736,900 | ) | ||||
Deferred
income tax asset—net
|
$ | - | $ | - |
F-20
Current
and non-current deferred taxes have been recorded on a net basis in the
accompanying balance sheet. As of September 30, 2010, the Company has net
operating loss carryforwards of approximately $24.7 million. The net operating
loss carryforwards expire by 2029. 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.
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, 2010 and September 30, 2009 the note has an outstanding
principal balance in the amount of $24,700 and $118,600
respectively. The entire balance is current as of September
30, 2010.
8.
|
RELATED
PARTY TRANSACTIONS
|
As at
September 30, 2010 accrued consulting fees included the $27,000 due to a
director in accordance with a 12 month consulting agreement, the term of which
ends on December 31, 2010. In January, 2010 a payment of $24,000 was
made to that same director for the 12 month consulting agreement, the term of
which ended on December 31, 2009 and $36,000 was paid, with board approval, to
the spouse 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, the Company 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 3 above.
On
July 5, 2010 and August 20, 2010, the Company issued unsecured promissory notes
(each, a “Deerwood Note”) in the aggregate principal amount of $500,000 to
Deerwood Partners LLC and Deerwood Holdings LLC, which are entities controlled
by Dr George Kallins. For further detail, please refer to the section
2010 Promissory Note
Transactions in Note 3 above.
F-21
On
July 5, 2010 the Board granted warrants to purchase 500,000 shares of common
stock to members of staff of Equity Dynamics, Inc, a company owned by Mr.
Pappajohn, for consulting services they had rendered to the Company, advising on
and assisting with fund raising activities. Using the Black-Scholes
model, these warrants were valued at $199,000 and expensed to consulting
fees. 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.
On
November 24, 2010 the Board of Directors, excluding Mr. Pappajohn, resolved to
ratify an engagement agreement with Equity Dynamics, Inc. a company owned by Mr.
Pappajohn, to provide financial advisory serviced to assist the Company with the
Company’s fund raising efforts. These efforts have included advice
and assistance with the preparation of Private Placement Memoranda, investor
presentations, financing strategies, identification of potential and actual
investors, and introductions to placement agents and investment bankers. The
engagement letter calls for a retainer fee of $10,000 per month starting
February, 1, 2010. As of September 30, 2010 the Company has accrued
$80,000 for the services provided by Equity Dynamics. The term of the
agreement is for 12 months from its initiation and can be cancelled by either
party, with or without cause, with 30 days written notice.
9.
|
REPORTABLE
SEGMENTS
|
The
Company operates in two business segments: reference neurometric
and clinic. Neurometric Information Services (formerly called
Laboratory Information Services) provides data to psychiatrists and other
physicians/prescribers to enable them to make a more informed decision when
treating a specific patient with mental, behavioral and/or addictive disorders
provides reports (“rEEG Reports”). 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:
Year ended September 30, 2010
|
||||||||||||||||
Reference
Neurometric
|
Clinic
|
Eliminations
|
Total
|
|||||||||||||
Revenues
|
156,000 | 535,700 | (53,200 | ) | 638,500 | |||||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of revenues
|
135,100 | 19,900 | (19,900 | ) | 135,100 | |||||||||||
Research
and development
|
1,120,500 | - | - | 1,120,500 | ||||||||||||
Sales
and marketing
|
853,100 | 17,800 | - | 870,900 | ||||||||||||
General
and administrative
|
4,296,200 | 754,100 | (33,300 | ) | 5,017,000 | |||||||||||
Goodwill
impairment charges
|
- | - | - | - | ||||||||||||
Total
operating expenses
|
6,404,900 | 791,800 | (53,200 | ) | 7,143,500 | |||||||||||
Loss
from operations
|
$ | (6,248,900 | ) | $ | (256,100 | ) | $ | 0 | $ | (6,505,000 | ) |
Year ended September 30,2009
|
||||||||||||||||
Reference
Neurometric
|
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
|
1,924,100 | - | - | 1,924,100 | ||||||||||||
Sales
and marketing
|
908,500 | 7,300 | - | 915,800 | ||||||||||||
General
and administrative
|
3,479,400 | 669,600 | (48,500 | ) | 4,100,500 | |||||||||||
Goodwill
impairment charges
|
320,200 | - | - | 320,200 | ||||||||||||
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 | ) |
F-22
The
following table includes selected segment financial information as of
September 30, 2010, related to total assets:
Reference
Neurometric
|
Clinic
|
Total
|
||||||||||
Total
assets
|
$
|
203,900
|
$
|
33,600
|
$
|
237,500
|
10.
|
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, 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 years ended September 30, 2010 and 2009 is as
follows:
2010
|
2009
|
|||||||
Net
loss for computation of basic net income (loss) per
share
|
$
|
(8,174,000
|
)
|
$
|
(8,522,200
|
)
|
||
Net
income (loss) for computation of dilutive net income (loss) per
share
|
$
|
(8,174,000
|
)
|
$
|
(8,522,200
|
)
|
||
Basic
net income (loss) per share
|
$
|
(0.16
|
)
|
$
|
(0.31
|
)
|
||
Diluted
net income (loss) per share
|
$
|
(0.16
|
)
|
$
|
(0.31
|
)
|
||
Basic
weighted average shares outstanding
|
52,277,119
|
27,778,171
|
||||||
Dilutive
common equivalent shares
|
-
|
-
|
||||||
Diluted
weighted average common shares
|
52,277,119
|
27,778,171
|
||||||
Anti-dilutive
common equivalent shares not included in the
computation
of dilutive net loss per share:
|
||||||||
Convertible
debt
|
214,561
|
-
|
||||||
Warrants
|
19,194,806
|
8,318,310
|
||||||
Options
|
11,242,729
|
8,548,206
|
11.
|
COMMITMENTS
AND CONTINGENT
LIABILITIES
|
Litigation
From time
to time, the Company may be involved in litigation relating to claims
arising out of the Company’s operations in the ordinary course of
business. Other than as set forth below, the Company are not currently
party to any legal proceedings, the adverse outcome of which, in the
Company’s management’s opinion, individually or in the aggregate, would have
a material adverse effect on the Company’s results of operations or
financial position.
F-23
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 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 the Company’s
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, the Company filed an action in the United States District Court for
the Central District of California against Mr. Brandt and certain
others. The Company’s 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 the Company
or the Company’s officers and directors in connection with Mr. Brandt’s
proxy and consent solicitations. On March 10, 2010, the Company
dismissed the Company’s claims against EAC, and EAC dismissed its claims
against the Company 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.
The
Company has expended substantial resources to pursue the defense of legal
proceedings initiated by Mr. Brandt. The Company does not
know whether Mr. Brandt will institute new claims against the
Company 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 Neurometric 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
Neurometric 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 remaining lease obligation totals $112,200: being
$46,500, $49,000 and $16,600 for fiscal years 2011, 2012 and 2013
respectively.
The
Company leases space for its Clinical Services operations under an operating
lease. The base rental as of September 30, 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 remaining lease obligation totals $162,300:
being $58,200, $65,400 and $38,700 for fiscal years 2011, 2012 and 2013
respectively.
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.
F-24
The
Company incurred rent expense of $121,100 and $141,700 for the year
ended September 30, 2010 and 2009 .
12.
|
SIGNIFICANT
CUSTOMERS
|
For
the year ended September 30, 2010, four customers accounted for 48% of
Neurometric Information Services revenue and two customers 27% of accounts
receivable at September 30, 2010
For
the year ended September 30, 2009, three customers accounted for 39% of
Neurometric Information Services revenue and 45% of accounts receivable at
September 30, 2009.
13.
|
SUBSEQUENT
EVENTS
|
Events
subsequent to September 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 September 30, 2010.
Subsequent
to September 30, 2010 and through December 17, 2010 the company had raised an
additional $2,000,000 through the sale of secured convertible promissory notes
and warrants. At the December 17, 2010 the Company had a cash balance of
$930,000.
On
October 1, 2010, the Company entered into a Note and Warrant Purchase Agreement
(the “Purchase Agreement”) with John Pappajohn and SAIL as investors, pursuant
to which the Company 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) The Company received $500,000 in gross proceeds
from the issuance to these investors of October Notes in the aggregate principal
amount of $500,000 and related warrants to purchase up to 833,332
shares. (b) The Company 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 accredited investor,
respectively, executed the Purchase Agreement. In connection
therewith, the Company 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. The Company received
$588,000 in net proceeds from these investors, after paying $12,000 to the
placement agent as described below. Monarch Capital Group LLC
(“Monarch”) acted as non-exclusive placement agent with respect to the October
12 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 the Company and Monarch. Under the engagement agreement, in
return for its services as non-exclusive placement agent, Monarch was entitled
to receive (a) a cash fee equal to 10% of the gross proceeds raised from the
sale of October 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
October 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 October 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. The terms of
the Placement Agent Warrant, except for the exercise price and period, are
identical to the terms of the Warrants.
On
October 21, 2010 and October 28, a fifth and sixth accredited investor,
respectively, executed the Purchase Agreement. In connection
therewith, the Company 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. The Company received approximately $250,000
in net proceeds from the issuance to these investors.
F-25
On
November 3, 2010, three affiliated entities, identified below, executed the
Purchase Agreement. In connection therewith, the Company 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) The
Company received $250,000 in gross proceeds from the issuance to BGN Acquisition
Ltd., LP, an entity controlled by the Company’s 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) The Company 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 Dr. Kallins, in exchange for the
cancellation of the Deerwood Notes originally issued on July 5, 2010 and August
20, 2010 (see note 3) 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 the Company’s 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 the
Company’s obligations under the October Notes and separate actions may be
brought against the guarantor. In connection with its serving as
guarantor, the Company 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.
On
November 12, a tenth accredited investor executed the Purchase
Agreement. In connection therewith, the Company issued Notes in the
aggregate principal amount of $400,000 and Warrants to purchase up to 666,666
shares of common stock of the Company, to the investor on such
date. The Company received $352,000 in net proceeds from the
investor. Monarch acted as non-exclusive placement agent with
respect to the placement of the Note in the aggregate principal amount of
$400,000 and related Warrants, pursuant to the abovementioned engagement
agreement, dated September 30, 2010. In connection with the November
12, 2010 closing, Monarch received a cash fee of $40,000 and a cash expense
allowance of $8,000 and will receive a Placement Agent Warrant to purchase
133,333 shares of the Company’s common stock at an exercise price of $0.33 per
share.
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 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
are furthermore convertible, at the option of the holder, into securities to be
issued in subsequent financings at the lower of the then-applicable conversion
price or price per share payable by purchasers of such
securities. 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.
The
Company’s 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 the Company
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. Any provision of the October Notes or related warrants can be
amended, waived or modified upon the written consent of the Company and holders
of a majority of the aggregate principal amount of such notes
outstanding. Any such consent will affect all October Notes or
warrants, as the case may be, and will be binding on all holders
thereof.
F-26
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
|
$ | 2,616 | ||
Legal
fees and expenses
|
$ | 100,000 | ||
Accounting
fees and expenses
|
$ | 20,000 | ||
Miscellaneous
expenses
|
$ | 20,000 | ||
Total
|
$ | 142,616 |
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.
2007
Private Placement Transaction
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.
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 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 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 accredited 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
accredited investors. At the third closing, we sold eight 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 accredited investors. At this
fourth closing, we sold two 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 3 to the audited 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 3 of the audited consolidated financial
statements.
2010
Private Placement Transactions
During
2010 we entered into a series of Bridge Note and Warrant Purchase Agreements as
described in detail below. On September 26, 2010, the Company’s Board
approved an approximate aggregate offering amount of $3 million by January 31,
2011, including for the exchange of Bridge Notes and Deerwood Notes and interest
on those notes. The fund raising efforts were successful and new
notes in the aggregate principal amount of approximately $3 million were issued
by November 12, 2010.
Bridge Notes and
Warrants
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 anti-dilution
adjustments, including for issuances of securities at prices below the
then-effective exercise price ) was $0.50 per share.
II-3
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.
Deerwood Notes and
Warrants
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. Our director George Kallins and his spouse are the managing
members of these investors. 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 anti-dilution adjustments, including for issuances
of securities at prices below the then-effective exercise price ) 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. 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 anti-dilution adjustments, including
for issuances of securities at prices below the then-effective exercise
price ) of $0.56 per share.
Each Deerwood Note accrued interest
at a rate of 9% per annum and 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.
October Notes and
Warrants
On October 1, 2010, in
connection with a new private placement of convertible promissory notes (the
"October Notes") and warrants expected to be completed with new independent
investors, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with John Pappajohn and SAIL as investors. Pursuant
to this agreement, we issued to the investors 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 these 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 accredited investor previously unrelated to
us 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, after paying $12,000 to the placement agent as described
below. Monarch Capital Group LLC (“Monarch”) acted as non-exclusive
placement agent with respect to the October 12 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 was entitled to receive (a) a cash fee equal to 10% of the
gross proceeds raised from the sale of October 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 October 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 October 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 accredited investor previously unrelated to us 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 that date . We received
approximately $250,000 in net proceeds from the issuance to these
investors.
II-4
On
November 3, 2010, three affiliated entities , identified below , 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 ; and (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 Dr . 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.
On
November 12, 2010, another accredited investor previously unrelated to us
executed the Purchase Agreement. In connection therewith, the Company
issued Notes in the aggregate principal amount of $400,000 and Warrants to
purchase up to 666,666 shares of common stock of the Company, to the investor on
such date. The Company received $352,000 in net proceeds from
the investor. Monarch acted as non-exclusive placement agent
with respect to the placement of the Note in the aggregate principal amount of
$400,000 and related Warrants, pursuant to the abovementioned engagement
agreement, dated September 30, 2010. In connection with the November
12, 2010 closing, Monarch received a cash fee of $40,000 and a cash expense
allowance of $8,000 and will receive a Placement Agent Warrant to purchase
133,333 shares of the Company’s common stock at an exercise price of $0.33 per
share.
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 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 are
furthermore convertible, at the option of the holder, into securities to be
issued in subsequent financings at the lower of the then-applicable conversion
price or price per share payable by purchasers of such
securities. 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. Any provision of the October Notes or related warrants can
be amended, waived or modified upon the written consent of the Company and
holders of a majority of the aggregate principal amount of such notes
outstanding. Any such consent will affect all October Notes or
warrants, as the case may be, and will be binding on all holders
thereof.
II-5
The
Placement Agent Warrants have an exercise price equal to 110% of the conversion
price of the Notes and an exercise period of five years . 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.
For a
table showing the differences in terms between the October Notes (and related
warrants), on the one hand, and the exchanged Bridge Notes and Deerwood Notes
(and related warrants), on the other hand, please refer to “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Overview - The 2010 Private Placement Transactions - Differences between October
Notes and Bridge Notes/Deerwood Notes” in the accompanying
prospectus.
In issuing the securities described
in this section without registration under the Securities Act, the Company
relied upon the exemption from registration contained in Section 4(2) of
the Securities Act and in Regulation D promulgated thereunder, as the
securities were issued to accredited investors, without a view to
distribution, and were not issued through any general solicitation or
advertisement.
July
5, 2010 Grant of Warrants to Consultants
On
July 5, 2010, the Board granted warrants to purchase 500,000 shares of common
stock to staff members of Equity Dynamics for consulting services rendered to
the Company in connection with fund raising activities. Equity
Dynamics, Inc. is 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.
The
warrants issued to staff members of Equity Dynamics were not registered under
the Securities Act. 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 exemption
from registration contained in Section 4(2) of the Securities
Act.
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.
|
II-6
Exhibit
Number
|
Exhibit Title
|
|
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.
|
|
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.*
|
II-7
Exhibit
Number
|
Exhibit Title
|
|
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.
|
|
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.
|
II-8
Exhibit
Number
|
Exhibit Title
|
|
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.
|
|
10.30
|
Form
of Registration Rights Agreement dated August 26, 2009 between the
Registrant and Maxim Group, LLC. Incorporated by reference to
Exhibit 10.30 to the Registrant’s Registration Statement on Form S-1/A
(File No. 333-164613) filed with the Commission on November 8,
2010.
|
|
10.31
|
Form
of Amendment No.1 to Placement Agent Agreement dated July 21, 2010 between
the Registrant and Maxim Group LLC. Incorporated by reference
to Exhibit 10.31 to the Registrant’s Registration Statement on Form S-1/A
(File No. 333-164613) filed with the Commission on November 8,
2010.
|
|
10.32
|
Form
of Amendment No.1 to Form of Warrant issued to Placement Agent dated July
21, 2010. Incorporated by reference to Exhibit 10.32 to
the Registrant’s Registration Statement on Form S-1/A (File No.
333-164613) filed with the Commission on November 8,
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.
|
II-9
Exhibit
Number
|
Exhibit Title
|
|
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. Incorporated by refrence to Exhibit 10.43 to the
Registrant’s Registration Statement on Form S-1/A (File No. 333-164613)
filed with the Commission on November 8, 2010.
|
|
10.44
|
Form
of Guaranty, dated as of November 3, 2010, by SAIL Venture Partners, LP in
favor of [Deerwood Holdings, LLC][Deerwood Partners,
LLC]. Incorporated by reference to Exhibit 10.44 to the
Registrant’s Annual Report on Form 10-K (File No. 000-26285) filed with
the Commission on December 21, 2010.
|
|
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).
|
II-10
Exhibit
Number
|
Exhibit Title
|
|
24
|
Power
of Attorney (included in the signature page to the Registration Statement
on Form S-1 (File Number 164613) filed with the Commission on
February 1, 2010).
|
*
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) 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.
II-11
(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-12
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 January 14, 2011 .
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)
|
January
14, 2011
|
||
George
Carpenter
|
||||
/s/ Paul Buck
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
January
14, 2011
|
||
Paul
Buck
|
||||
*
|
Director
|
January
14, 2011
|
||
David
B. Jones
|
||||
*
|
Director
|
January
14, 2011
|
||
Jerome
Vaccaro, M.D.
|
||||
*
|
Director
|
January
14, 2011
|
||
Henry
T. Harbin, M.D.
|
||||
*
|
Director
|
January
14, 2011
|
||
John
Pappajohn
|
||||
Director
|
||||
George
Kallins, M.D.
|
||||
/s/
George Carpenter
|
||||
*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.
|
Exhibit
Number
|
Exhibit Title
|
|
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.
|
|
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.
|
Exhibit
Number
|
Exhibit Title
|
|
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.
|
|
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.
|
Exhibit
Number
|
Exhibit Title
|
|
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.
|
|
10.30
|
Form
of Registration Rights Agreement dated August 26, 2009 between the
Registrant and Maxim Group, LLC. Incorporated by reference to
Exhibit 10.30 to the Registrant’s Registration Statement on Form S-1/A
(File No. 333-164613) filed with the Commission on November 8,
2010.
|
|
10.31
|
Form
of Amendment No.1 to Placement Agent Agreement dated July 21, 2010 between
the Registrant and Maxim Group LLC. Incorporated by reference
to Exhibit 10.31 to the Registrant’s Registration Statement on Form S-1/A
(File No. 333-164613) filed with the Commission on November 8,
2010.
|
|
10.32
|
Form
of Amendment No.1 to Form of Warrant issued to Placement Agent dated July
21, 2010. Incorporated by reference to Exhibit 10.32 to
the Registrant’s Registration Statement on Form S-1/A (File No.
333-164613) filed with the Commission on November 8,
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.
|
Exhibit
Number
|
Exhibit Title
|
|
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. Incorporated by refrence to Exhibit 10.43 to the
Registrant’s Registration Statement on Form S-1/A (File No. 333-164613)
filed with the Commission on November 8, 2010.
|
|
10.44
|
Form
of Guaranty, dated as of November 3, 2010, by SAIL Venture Partners, LP in
favor of [Deerwood Holdings, LLC][Deerwood Partners,
LLC]. Incorporated by reference to Exhibit 10.44 to the
Registrant’s Annual Report on Form 10-K (File No. 000-26285) filed with
the Commission on December 21, 2010.
|
|
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).
|
|
24
|
Power
of Attorney (included in the signature page to the Registration Statement
on Form S-1 (File Number 164613) filed with the Commission on
February 1,
2010).
|
*
Indicates a management contract or compensatory plan.