As filed with the Securities and Exchange
Commission on February 5, 2008 Registration No. 333-143139
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-----------------
CNS RESPONSE, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 8734
(State or Jurisdiction of (Primary Standard Industrial
Incorporation or Organization) Classification Code Number)
87-0419387
(I.R.S Employer
Identification No.)
2755 BRISTOL ST., SUITE 285
COSTA MESA, CA 92626
(714) 545-3288
(Address and Telephone Number of Principal Executive Offices)
2755 BRISTOL ST., SUITE 285
COSTA MESA, CA 92626
(Address of Principal Place of Business or intended Place of Business)
LEONARD BRANDT, CHIEF EXECUTIVE OFFICER
CNS RESPONSE, INC.
2755 BRISTOL ST., SUITE 285
COSTA MESA, CA 92626
(714) 545-3288
Copy to:
SCOTT ALDERTON, ESQ.
STUBBS ALDERTON & MARKILES, LLP
15260 VENTURA BOULEVARD, 20TH FLOOR
SHERMAN OAKS, CALIFORNIA 91403
(818) 444-4500
(Name, Address and Telephone Number 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 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. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
====================================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED AMOUNT OF
OF SECURITIES AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED (1) PER UNIT (2) OFFERING PRICE (2) FEE (3)
- ------------------------------------------- --------------- ---------------- ------------------ -------------
Common Stock, par value $.001 per share.... 7,350,737 $1.05 $7,718,273.85 $84.90
- ------------------------------------------- --------------- ---------------- ------------------ -------------
Common Stock, par value $.001 per share
issuable upon exercise of warrants ........ 2,627,939 $1.05 $2,759,335.95 $30.35
- ------------------------------------------- --------------- ---------------- ------------------ -------------
TOTAL 9,978,676 $10,477,609.80 $115.25
- ------------------------------------------- --------------- ---------------- ------------------ -------------
(1) In the event of a stock split, stock dividend, or other similar
transaction involving the Registrant's common stock, in order to
prevent dilution, the number of shares registered shall automatically
be increased to cover the additional shares in accordance with Rule
416(a) under the Securities Act.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, using the
average of the high and low price as reported on the Over-the-Counter
Bulletin Board on February 1, 2008.
(3) A registration fee of $505.70 was paid with respect to 9,983,138 shares
with the initial filing of the Registration Statement.
THIS POST EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT NO. 333-143139
SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(C) OF THE
SECURITIES ACT OF 1933 ON SUCH DATE THAT THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(C), MAY DETERMINE.
================================================================================
Subject to Completion, Dated February 5, 2008
CNS RESPONSE, INC.
9,978,676 SHARES COMMON STOCK
This prospectus relates to the offer and sale from time to time of up
to 9,978,676 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 February 1, 2008, the last reported sales price of the
common stock on the Over-The-Counter Bulletin Board was $1.05 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 4.
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 PAGE
---- ----
Prospectus Summary................ 1 Executive Compensation............. 64
Risk Factors...................... 4 Principal and Selling Stockholders. 70
Cautionary Note Regarding Forward- Related Party Transactions......... 79
looking Statements............. 21 Description of Capital Stock....... 83
Corporate Background and Merger Plan of Distribution............... 87
Transaction ................... 22 Legal Matters...................... 89
Use of Proceeds................... 28 Experts............................ 89
Market for Common Equity and Where You Can Find
Related Stockholder Matters.... 28 More Information................ 89
Management's Discussion and Index to Financial
Analysis of Financial Condition Statements...................... F-1
and Results of Operations...... 29
Business.......................... 38
Management........................ 59
You should rely only on the information contained in this prospectus or
any supplement. We have not authorized anyone to provide information that is
different from that contained in this prospectus. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of our common stock.
Except as otherwise indicated, information in this prospectus reflects
a one-for-fifty reverse stock split of our common stock which took effect on
January 10, 2007.
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED IN GREATER
DETAIL ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE
INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD
READ THE ENTIRE PROSPECTUS CAREFULLY BEFORE MAKING AN INVESTMENT DECISION,
INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE
RELATED NOTES. REFERENCES IN THIS PROSPECTUS TO "CNS RESPONSE, INC," THE
"COMPANY," "WE," "OUR" AND "US" REFER TO CNS RESPONSE, INC. AND OUR CONSOLIDATED
SUBSIDIARY.
OUR BUSINESS
We are a life sciences company focused on the commercialization of a
patented system that guides psychiatrists and other physicians in the
identification and determination of appropriate and effective medications for
patients with certain behavioral (mental or addictive) disorders. 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
which are contained in a proprietary outcomes database. This methodology, called
"Referenced-EEG" or "rEEG" represents an innovative approach to identifying
effective medications for patients suffering from debilitating behavioral
disorders.
In addition, rEEG provides us with significant opportunities in the
area of pharmaceutical development. Using the rEEG methodology in combination
with our proprietary outcomes database, we believe we have the potential to
identify new uses for existing drugs and drug combinations. We intend to enter
into relationships with established drug and biotechnology companies to further
explore these opportunities.
OUR HISTORY AND CONTACT INFORMATION
Our company was originally incorporated on July 10, 1984, under the
name Mammon Oil & Gas, Inc. in the state of Utah. In February 1986, our
shareholders approved proposals to change our business direction to the business
of health care including research, development and marketing, and a name change
to Volt Research, Inc. From August 1986 to August 1988, we engaged in operating
clinics dedicated to Retin-A skin therapy. In August 1988, our management
decided to phase out our clinic operations and concentrate on selling our
expertise and skin care products directly to physicians. On January 1, 2004, we
discontinued our business activities and operations and, since that date until
our acquisition of NBD Marketing, Inc., ProspectWorks, Inc., SalesWare, Inc. and
xSellsys, Inc. (collectively "Acquired Companies") in June 2004, we had no
revenues or earnings from operations.
In a series of transactions consummated in June 2004, we acquired all
of the outstanding capital stock of NBD Marketing, Inc., a California
corporation, or NBD, and SalesWare Inc., a Nevada corporation, or SalesWare, and
formed an acquisition subsidiary, xSellsys, Inc., a California corporation to
acquire substantially all of the assets and liabilities of CRM SalesWare, Inc.,
a California corporation. As a result of the consummation of the above
transactions, SalesWare, NBD, and xSellsys became our wholly-owned subsidiaries
and ProspectWorks, Inc., a Nevada corporation and a subsidiary of NBD,
ProspectWorks, became an indirect, wholly-owned subsidiary of the Company. In
connection with the acquisition of SalesWare, Inc., on August 2, 2004, we
changed our corporate name to "SalesTactix, Inc."
On October 6, 2004, the Acquired Companies, William Noonan, Vincent
Michael Keyes III, and Thomas Ketchum filed a complaint in Orange County
Superior Court, Case No. 04CC00669 against us, Scott Absher, George LeFevre and
Mark Absher. On November 15, 2004, we entered into a settlement agreement with
the plaintiffs whereby (i) the acquisition agreements by and among the parties
were rescinded including an asset purchase agreement and certain stock purchase
agreements; (ii) certain assets owned by SalesTaxtix, Inc. and xSellsys were
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transferred to certain plaintiffs; (iii) certain trademarks and tradenames were
transferred to CRM SalesWare; and (iv) our outstanding shares owned by the
plaintiffs were canceled. The Settlement Agreement essentially unwound the
acquisition and restored the parties to their prior positions, as if the
acquisitions had never occurred. The claim was dismissed in the fourth quarter
of 2004 pursuant to the terms of the settlement agreement. In connection with
the settlement agreement, we changed our name to Strativation, Inc. in September
2005.
As a result of our lack of revenue generation and the rescission of the
acquisition, we reassessed our business plan and determined to seek out other
business opportunities capable of increasing stockholder value.
On July 18, 2006, we entered into a stock purchase agreement with
seventeen accredited investors pursuant to which we issued 3,800,000 shares of
our common stock (76,000 shares of our common stock after taking into account
our 1-for-50 reverse stock split which became effective on January 10, 2007) in
consideration for an aggregate of $237,669.00 in cash. In addition, these
investors acquired shares in private transactions with certain of our
stockholders, and acquired a majority stake in our issued and outstanding
shares. In connection with these transactions, effective July 18, 2006, Mr.
Scott Absher and Mr. George LeFevre resigned as officers and members of the
board of directors, and Mr. Silas Philips was appointed our Chief Executive
Officer, Chief Financial Officer, Secretary, and sole director.
On March 7, 2007, we acquired CNS Response, Inc., a California
corporation ("CNS California") through a merger of CNS California with a
wholly-owned subsidiary that we formed for the purpose of facilitating this
transaction. Upon the closing of this merger transaction, CNS California became
our wholly-owned subsidiary, and we changed our name to CNS Response, Inc. The
merger was accounted for as a "reverse acquisition," and for accounting
purposes, CNS California was demed to be the "accounting acquirer" in the
"reverse acquisition."
In addition, in connection with the closing of the merger with CNS
California, we received gross proceeds of approximately $7.8 million in a
private placement with institutional investors and other high net worth
individuals. Pursuant to subscription agreements entered into with these
investors, we sold 6,504,758 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. After broker commissions and expenses
and legal and other expenses, we received net proceeds of approximately $6.7
million in the private placement financing.
In connection with the private placement, we agreed to file a
registration statement covering the resale of the common stock and the common
stock underlying the warrants sold in the private placement financing. This
prospectus is part of Post-Effective Amendment No. 1 to Form SB-2 Registration
Statement that we filed pursuant to the terms of our agreement with the
investors in the private placement financing. Post Effective Amendment No. 1 to
Form SB-2 Registration Statement and this prospectus also covers the resale of
common stock held by other security holders named in the "Selling Stockholders"
section of this prospectus.
The address of our principal executive office is 2755 Bristol St.,
Suite 285, Costa Mesa CA 92626, and our telephone number is (714) 545-3288.
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THE OFFERING
Common stock offered.............. Up to 9,978,676 shares by the selling
stockholders
Common stock outstanding
before this offering.............. 25,299,547
Common stock to be outstanding
after this offering............ Up to 27,927,486 shares
Use of proceeds................... We will not receive any of the proceeds from
the sale of shares of our common stock by
the selling stockholders. See "Use of
Proceeds."
Over-the-Counter Bulletin
Board symbol................... CNSO.OB
Risk Factors...................... See "Risk Factors" beginning on page 4 for a
discussion of factors that you should
consider carefully before deciding to
purchase our common stock.
In the table above, the number of shares to be outstanding after this
offering is based on 25,299,547 shares outstanding as of February 1, 2008, and
assumes the issuance to the selling stockholders of the following additional
shares which are being offered for sale under the prospectus:
o 2,627,939 shares issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $1.73 per
share.
In the table above, the number of shares to be outstanding after this
offering does not reflect the issuance of the following shares, which are not
being offered for sale under this prospectus:
o 12,816,992 shares of common stock reserved for issuance upon
exercise of warrants and options, as of February 1, 2008.
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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 RELATING TO OUR BUSINESS
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY BASED ON CUSTOMER ACCEPTANCE
OF OUR PRODUCTS.
Management expects that we will experience substantial variations in
our net sales and operating results from quarter to quarter due to customer
acceptance of our products. If customers don't accept our products, our sales
and revenues would decline, resulting in an increase in our net loss.
WE HAVE A LIMITED OPERATING HISTORY, MAKING IT DIFFICULT TO EVALUATE OUR FUTURE
PERFORMANCE.
Our operating subsidiary,CNS California, which we acquired in the
merger, was incorporated in 2000 and therefore has a limited operating history.
Therefore, investors have limited substantive financial information on our prior
operations to evaluate our stock as an investment. Our potential must be viewed
in light of the problems, expenses, difficulties, delays and complications often
encountered in the operation of a new business. We will be subject to the risks
inherent in the ownership and operation of a company with a limited operating
history such as fluctuations in expenses, competition, the general strength of
regional and national economies, and governmental regulation. Any failure to
successfully address these risks and uncertainties would seriously harm our
business and prospects.
WE CURRENTLY DEPEND ON SALES OF OUR rEEG REPORTS FOR SUBSTANTIALLY ALL OF OUR
REVENUE, AND IF OUR REPORTS DO NOT GAIN WIDESPREAD MARKET ACCEPTANCE, THEN OUR
REVENUES MAY NOT EXCEED OUR EXPENSES.
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 physicians inform their treatment strategies for patients
suffering from behavioral and/or addictive disorders. Because we currently
depend on the sale of rEEG Reports for all or our revenue, and we have no other
significant products or services, if we fail to achieve widespread market
acceptance for our rEEG Reports, we will not be able to sustain or grow our
revenues.
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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o 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.
o the effectiveness of new marketing and sales programs.
o turnover among our employees.
o changes in management.
o the introduction of products or services that are viewed in
the marketplace as substitutes for the services we provide.
o communications published by industry organizations or other
professional entities in the psychiatric and physician
community that are unfavorable to our business.
o the introduction of regulations which impose additional costs
on or impede our business.
o 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.
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 THE ESTIMATES WE MAKE, AND THE ASSUMPTIONS ON WHICH WE RELY IN PREPARING OUR
FINANCIAL STATEMENTS PROVE INACCURATE, OUR ACTUAL RESULTS MAY VARY FROM THOSE
REFLECTED IN OUR FINANCIAL STATEMENTS.
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of our assets, liabilities, revenues and expenses,
the amounts of charges accrued by us and related disclosure of contingent assets
and liabilities. This includes estimates and judgments regarding revenue
recognition, allowances for doubtful accounts, valuation of derivatives,
warrants and other equity transactions. We base our estimates and judgments on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances at the time such estimates and judgments were
made. There can be no assurance, however, that our estimates and judgments, or
the assumptions underlying them, will be correct.
WE MAY NEED ADDITIONAL FUNDING TO SUPPORT OUR OPERATIONS AND CAPITAL
EXPENDITURES, WHICH MAY NOT BE AVAILABLE TO US AND WHICH LACK OF AVAILABILITY
COULD ADVERSELY AFFECT OUR BUSINESS.
We have not generated significant revenues or become profitable, may
never do so, and may not generate sufficient working capital to cover costs of
operations. We intend to fund our operations and capital expenditures from
revenues, our cash on hand and the net proceeds of our private placement that we
concluded in May of 2007. As a result of our private placement, we believe that
we will have sufficient funds to finance the cost of our operations, our
operating and management infrastructure, and planned expansion for the next 9
months. However, in the event we expand our operations more aggressively then we
currently anticipate, we may need to raise additional cash through private
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equity offerings, debt financings, borrowings or strategic collaborations until
we can generate a sufficient amount of product revenues to finance our cash
requirements. In addition, we may need to raise additional funds to pursue
business opportunities (such as acquisitions of complementary businesses), to
react to unforeseen difficulties, such as the need to defend or enforce our
intellectual property rights, to respond to competitive pressures, or to obtain
regulatory approvals needed to market our services and/or products.
We currently have no committed sources of additional capital, and there
can be no assurance that any financing arrangements will be available in amounts
or on terms acceptable to us, if at all. Furthermore, the sale of additional
equity or convertible debt securities may result in additional dilution to
existing stockholders. If adequate additional funds are not available, we may be
required to delay, reduce the scope of or eliminate material parts of the
implementation of our business strategy. This limitation could substantially
harm our business, results of operations and financial condition.
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.
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, could decline substantially and therefore harm our operating
results and stock price.
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, OUR SALES MAY DECLINE OR WE MAY BE UNABLE TO INCREASE OUR
SALES, AND IN SUCH INSTANCES OUR PROFITABILITY WOULD BE HARMED.
Purchases by psychiatrists and physicians of our rEEG Reports currently
account for substantially all of our revenue. Consequently, our relationships
with psychiatrists and physicians are critical to our continued growth. 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 such as the American Psychiatric
Association annual meeting. Any actual or perceived diminution in our reputation
or the quality of our rEEG Reports, or our failure or inability to maintain our
commitment to the behavioral health market and our other marketing and product
promotion efforts could damage our current relationships, or prevent us from
forming new relationships, with psychiatrists and other physicians and cause our
growth to be limited and our business to be harmed.
To sell our rEEG Reports, psychiatric professionals must recommend and
endorse them. We may not obtain the necessary recommendations or endorsements
from this community. Acceptance of our rEEG Reports depends on educating
psychiatrists and physicians as to the benefits, clinical efficacy, ease of use,
6
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. Any combination of these factors could further increase our cost of doing
business and adversely affect our financial position, results of operations and
cash flows.
IF WE DO NOT SUCCESSFULLY GENERATE ADDITIONAL PRODUCTS AND SERVICES FROM OUR
PATENTED METHODOLOGY AND PROPRIETARY DATABASE, OR IF SUCH PRODUCTS AND SERVICES
ARE DEVELOPED BUT NOT SUCCESSFULLY COMMERCIALIZED, THEN WE COULD LOSE REVENUE
OPPORTUNITIES.
Currently, our primary business is the sale of rEEG Reports to
psychiatrists and 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.
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.
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
7
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:
o 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;
o delays in enrolling patients and volunteers into clinical
trials;
o lower than anticipated retention rates of patients and
volunteers in clinical trials;
o negative results from clinical trials for any of our potential
products; and
o failure of our clinical trials to demonstrate the efficacy or
clinical utility of our potential products.
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.
IF WE DO NOT DEVELOP AND IMPLEMENT A SUCCESSFUL SALES AND MARKETING STRATEGY, WE
MAY NOT EXPAND OUR BUSINESS SUFFICIENTLY TO COVER OUR EXPENSES.
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 physicians and higher
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.
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
8
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 INCUR SIGNIFICANT EXPENSES OR BE PREVENTED FROM COMMERCIALIZING OR
DEVELOPING PRODUCTS AS A RESULT OF AN INTELLECTUAL PROPERTY INFRINGEMENT CLAIM.
Our commercial success depends, in part, on our ability to operate
without infringing the patents and proprietary rights of third parties.
Infringement proceedings are long, costly and time-consuming and their outcome
is uncertain.
If we become involved in any patent infringement litigation,
interference or other administrative proceedings related to our products, we
will incur substantial expenses and the time and effort of our management and
scientific personnel, will be significantly diverted. As a result of such
litigation or proceedings, we could lose our proprietary position, and be
restricted from selling, manufacturing or distributing the affected product(s),
incur substantial damage awards, including punitive damages, or be required to
seek third party licenses at terms that may be unattractive, or we may fail to
acquire the license.
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 critical
to our business prospects. We currently have two issued U.S. patents, 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.
9
We also utilize processes and technology that constitute trade secrets,
such as our outcomes 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.
ALTHOUGH WE BELIEVE WE ARE NOT CURRENTLY SUBJECT TO REGULATORY APPROVAL FOR THE
SALE OF OUR rEEG REPORTS, REGULATIONS ARE CONSTANTLY CHANGING, AND IN THE FUTURE
OUR BUSINESS MAY BE SUBJECT TO REGULATION.
Currently, we do not believe that sales of our rEEG Reports are subject
to regulatory approval. However, 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
order to sell our rEEG Reports. 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
revenues from our rEEG Reports may be reduced, or potentially eliminated.
IN THE FUTURE, WE INTEND TO SEEK REGULATORY APPROVAL FOR MEDICATIONS OR
COMBINATIONS OF MEDICATIONS FOR NEW INDICATIONS, AND THERE IS NO GUARANTEE THAT
WE WILL RECEIVE SUCH APPROVALS.
We intend to seek approval for medications or combinations of
medications for new indications, either with corporate partners, or potentially,
on our own. We are currently not authorized to market such medications in any
jurisdiction, and we may never receive such authorization. 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. We have no prior experience, as
a company, in conducting clinical trials. Clinical trials are expensive and can
take years to complete, and have uncertain outcomes. In addition, the regulatory
and approval procedures vary from country to country, and additional testing may
be required in some jurisdictions. It may take several years to complete the
10
clinical trials, and a product may fail at any stage of testing. Difficulties
and risks associated with clinical trials may result in our, or our partners'
inability to achieve regulatory approval to market medications for central
nervous system disorders. The FDA, other regulatory agencies, our collaborators,
or we may suspend or terminate clinical trials at any time.
Delays or failures in obtaining regulatory approval may delay or
prevent the commercialization of any product that we may develop for new
indications, diminish any competitive advantage, reduce or eliminate revenues,
milestone payments or royalties from collaborators, and adversely affect our
ability to attract new collaborators. The results of earlier clinical trials do
not necessarily predict the results of later clinical trials. Medications in
later clinical trials may fail to show desired safety and efficacy traits in the
indication we are seeking approval for, despite prior success in clinical trials
for other indications. Even if we and/or our collaborators and partners believe
the data collected from such clinical trials are promising, such data may not
support approval by the FDA or any other regulatory authorities. In addition,
the FDA or other regulatory authority may interpret the data differently than we
do, which could delay, limit or prevent regulatory approval. We expect to rely,
in part, on clinical trials that were performed by third-party physicians. These
trial results may not be predictive of the results of clinical trials we intend
to perform for new indications. In addition, the results of prior clinical
trials may not now be acceptable to the FDA or other regulatory authorities
because the data may be incomplete, outdated, or otherwise unacceptable for
inclusions in ours or our partners' regulatory submissions for approval of
medications for new indications.
IN THE EVENT WE OBTAIN REGULATORY APPROVAL FOR NEW INDICATIONS FOR EXISTING
MEDICATIONS, WE WILL STILL BE SUBJECT TO EXTENSIVE REGULATION BY THE FDA AND
OTHER AGENCIES, AND IF WE FAIL TO COMPLY WITH SUCH REGULATIONS, THE SALE OF OUR
PRODUCTS MAY BE RESTRICTED.
If we, or our collaborators, obtain regulatory approval for new
indications for existing medications, we will still be subject to extensive
regulation by the FDA and/or other regulatory agencies. We and our collaborators
will be required to conduct extensive post-market surveillance of products. Our,
or our collaborators', failure to comply with applicable FDA and other
regulatory requirements, or the later discovery of unknown problems, may result
in restrictions on the marketing or sale of such products that will negatively
impact sales and/or collaboration revenue, and may result in denial of authority
to market the medication product(s).
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 Leonard
Brandt, our Chief Executive Officer and Secretary, Horace Hertz, our Chief
Financial Officer, 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.
We intend to carry key man life insurance on Leonard Brandt in an
amount of $2.0 million, payable to the company. We do not carry key man life
insurance on any of our other key employees. We do not have employment
agreements in place with most of our executives and key employees, and each may
terminate their employment upon notice and without cause or good reason. 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 Leonard
Brandt or any other key member of management could have a material adverse
effect on our ability to manage our business.
11
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL OR IF WE DO NOT MAINTAIN GOOD
RELATIONSHIPS WITH OUR EMPLOYEES, 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, as well as personnel with experience in clinical testing and
matters relating to obtaining regulatory approvals. If we are not able to
attract and retain skilled personnel, we will not be able to continue our
development and commercialization activities.
In addition, we may be subject to claims that we engage in
discriminatory or inappropriate practices with respect to our hiring,
termination, promotion and compensation processes for our employees. Such
claims, with or without merit, could be time consuming, distracting and
expensive to defend, could divert attention of our management from other tasks
important to the success of our business and could adversely affect our
reputation as an employer.
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 do not treat patients or determine whether
treatment that is guided by rEEG Reports that we provide is appropriate for any
particular patient, and 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.
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 MAY BE HARMED.
Our future revenue growth will depend in part upon the availability of
reimbursement from third-party payers for psychiatrists and physicians who use
our rEEG Reports to guide the treatment of their patients. Such third-party
12
payers include government health programs such as Medicare and Medicaid, managed
care providers, private health insurers and other organizations. These
third-party payers are increasingly attempting to contain healthcare costs by
demanding price discounts or rebates and limiting both coverage on which
procedures they will pay for and the amounts that they will pay for new
procedures. As a result, they may not cover or provide adequate payment for
treatments that are guided by our rEEG Reports, which will discourage
psychiatrists and physicians from utilizing the information services we provide.
We may need to conduct studies 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.
OUR BUSINESS PROSPECTS AND PROFITABILITY COULD BE NEGATIVELY IMPACTED IF WE HAVE
OVER-ESTIMATED THE DEMAND FOR OUR rEEG REPORTS.
We are focused on the market for behavioral health disorders. The
projected demand for our rEEG Reports could materially differ from actual demand
if our assumptions regarding this market and its trends and acceptance of our
rEEG Reports by the psychiatric community prove to be incorrect or do not
materialize or if other products or services gain more widespread acceptance,
which in each case would adversely affect our business prospects and
profitability.
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.
13
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. 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
14
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 by providing administrative and ancillary services in
connection with our rEEG Reports, or that selling our rEEG Reports for a portion
of the patient fees constitutes improper fee-splitting, in which case we could
be subject to civil and criminal penalties, our contracts could be found legally
invalid and unenforceable, in whole or in part, or we could be required to
restructure our contractual arrangements. There can be no assurance that this
will not occur or, if it does, that we would be able to restructure our
contractual arrangements on favorable terms.
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
15
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, we may
collect, use, maintain and transmit patient information in ways that will be
subject to many of the numerous state, federal and international laws and
regulations governing the collection, dissemination, use and confidentiality of
patient-identifiable health information, including the federal Health Insurance
Portability and Accountability Act (HIPAA) and related rules. The three rules
that were promulgated pursuant to HIPAA that could most significantly affect our
business are the Standards for Electronic Transactions, or Transactions Rule;
the Standards for Privacy of Individually Identifiable Health Information, or
Privacy Rule; and the Health Insurance Reform: Security Standards, or Security
Rule. HIPAA applies to covered entities, which include most healthcare
facilities and health plans that may contract for the use of our services. The
HIPAA rules require covered entities to bind contractors like us to compliance
with certain burdensome HIPAA rule requirements.
The HIPAA Transactions Rule establishes format and data content
standards for eight of the most common healthcare transactions. If we perform
billing and collection services on behalf of psychiatrists and physicians, we
may be engaging in one of more of these standard transactions and will be
required to conduct those transactions in compliance with the required
standards. The HIPAA Privacy Rule restricts the use and disclosure of patient
information, requires entities to safeguard that information and to provide
certain rights to individuals with respect to that information. The HIPAA
Security Rule establishes elaborate requirements for safeguarding patient
information transmitted or stored electronically. We may be required to make
costly system purchases and modifications to comply with the HIPAA rule
requirements that are imposed on us and our failure to comply may result in
liability and adversely affect our business.
Numerous other federal and state laws protect the confidentiality of
personal and patient information. These laws in many cases are not preempted by
the HIPAA rules and may be subject to varying interpretations by courts and
government agencies, creating complex compliance issues for us and the
psychiatrists and physicians who purchase our services, and potentially exposing
us to additional expense, adverse publicity and liability.
RISKS RELATING TO INVESTMENT IN OUR COMMON STOCK
WE HAVE A LIMITED TRADING VOLUME AND SHARES ELIGIBLE FOR FUTURE SALE BY OUR
CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE.
16
Bid and ask prices for shares of our Common Stock are quoted on NASD's
OTC 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 reduces the liquidity of our Common Stock. Also, as a result of
this lack of trading activity, the quoted price for our Common Stock on NASD's
OTC Bulletin Board is not necessarily a reliable indicator of its fair market
value. Further, 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:
o quarterly variations in our revenues and operating expenses;
o developments in the financial markets and worldwide or
regional economies;
o announcements of innovations or new products or services by us
or our competitors;
o announcements by the government relating to regulations that
govern our industry;
o significant sales of our Common Stock or other securities in
the open market;
o variations in interest rates;
o changes in the market valuations of other comparable
companies; and
o changes in accounting principles.
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.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL.
Upon the effectiveness of the Registration Statement, 9,978,676 shares
of Common Stock will become eligible for sale, including 2,627,939 shares of our
Common Stock issuable upon the exercise of certain warrants. The sale of these
shares could depress the market price of our Common Stock. A reduced market
price for our shares could make it more difficult to raise funds through future
offering of Common Stock.
Other holders of our Common Stock have piggy-back registration rights
with respect to such shares effective September 7, 2007, and demand registration
rights with respect to such shares effective March 7, 2008.
Moreover, as additional shares of Common Stock become available for
resale in the open market (including shares issuable upon the exercise of the
Company's outstanding options and warrants), the supply of our publicly traded
shares will increase. This could decrease their price.
17
Some of our shares may also be offered from time to time in the open
market pursuant to Rule 144, and these sales may have a depressive effect on the
market for our shares. In general, a person who has held restricted shares for a
period of one year may, upon filing with the Securities & Exchange Commission
(the "SEC") a notification on Form 144, sell into the market shares up to an
amount equal to 1% of the outstanding shares. The SEC has recently adopted
revisions to Rule 144 which will, among other things, reduce the holding period
for non-affiliates to six months. Upon the effectiveness of the revisions to
Rule 144, a substantial majority of the outstanding shares of our common stock
will become eligible for resale under Rule 144.
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 could
result in dilution to our existing stockholders as a direct result of our
issuance of additional shares of our capital stock. In addition, our business
strategy may include expansion through internal growth, by acquiring
complementary businesses, by acquiring or licensing additional products and
services, or by establishing strategic relationships with targeted customers and
suppliers. In order to do so, or to finance the cost of our other activities, we
may issue additional equity securities that could dilute our stockholders' stock
ownership. We may also assume additional debt and incur impairment losses
related to goodwill and other tangible assets if we acquire another company and
this could negatively impact our earnings and results of operations.
THE TRADING OF OUR COMMON STOCK ON THE OVER-THE-COUNTER BULLETIN BOARD AND THE
POTENTIAL DESIGNATION OF OUR COMMON STOCK AS A "PENNY STOCK" COULD IMPACT THE
TRADING MARKET FOR OUR COMMON STOCK.
Our securities, as traded on the Over-the-Counter Bulletin Board, may
be subject to SEC rules that impose special sales practice requirements on
broker-dealers who sell these securities to persons other than established
customers or accredited investors. For the purposes of the rule, the phrase
"accredited investors" means, in general terms, institutions with assets in
excess of $5,000,000, or individuals having a net worth in excess of $1,000,000
or having an annual income that exceeds $200,000 (or that, when combined with a
spouse's income, exceeds $300,000). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction before the
sale. Consequently, the rule may affect the ability of broker-dealers to sell
our securities and also may affect the ability of purchasers to sell their
securities in any market that might develop therefore.
In addition, the SEC has adopted a number of rules to regulate "penny
stock" that restrict transactions involving these securities. Such rules include
Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under
the Securities and Exchange Act of 1934, as amended. These rules may have the
effect of reducing the liquidity of penny stocks. "Penny stocks" generally are
equity securities with a price of less than $5.00 per share (other than
securities registered on certain national securities exchanges or quoted on the
NASDAQ Stock Market if current price and volume information with respect to
transactions in such securities is provided by the exchange or system). Because
our securities may constitute "penny stock" within the meaning of the rules, the
rules would apply to us and to our securities. If our securities become subject
to the penny stock rules, our stockholders may find it more difficult to sell
their securities.
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)
18
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 60% 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 60% 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
19
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.
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. In addition, these provisions could limit the price investors
would be willing to pay in the future for shares of our Common Stock.
20
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:
o our inability to raise additional funds to support operations
and capital expenditures;
o our inability to achieve greater and broader market acceptance
of our products and services in existing and new market
segments;
o our inability to successfully compete against existing and
future competitors;
o our inability to manage and maintain the growth of our
business;
o our inability to protect our intellectual property rights; and
o 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.
21
CORPORATE BACKGROUND AND MERGER TRANSACTION
CORPORATE HISTORY
CNS Response, Inc., a Delaware corporation, was originally incorporated
on July 10, 1984, under the name Mammon Oil & Gas, Inc. in the state of Utah. In
February 1986, our shareholders approved proposals to change our business
direction to the business of health care including research, development and
marketing, and a name change to Volt Research, Inc. From August 1986 to August
1988, we engaged in operating clinics dedicated to Retin-A skin therapy. In
August 1988, our management decided to phase out our clinic operations and
concentrate on selling our expertise and skin care products directly to
physicians. On January 1, 2004, we discontinued our business activities and
operations and, since that date until our acquisition of NBD Marketing, Inc.,
ProspectWorks, Inc., SalesWare, Inc. and xSellsys, Inc. (collectively "Acquired
Companies") in June 2004, we had no revenues or earnings from operations.
In a series of transactions consummated in June 2004, we acquired all
of the outstanding capital stock of NBD Marketing, Inc., a California
corporation, or NBD, and SalesWare Inc., a Nevada corporation, or SalesWare, and
formed an acquisition subsidiary, xSellsys, Inc., a California corporation to
acquire substantially all of the assets and liabilities of CRM SalesWare, Inc.,
a California corporation. As a result of the consummation of the above
transactions, SalesWare, NBD, and xSellsys became our wholly-owned subsidiaries
and ProspectWorks, Inc., a Nevada corporation and a subsidiary of NBD,
ProspectWorks, became an indirect, wholly-owned subsidiary of the Company. In
connection with the acquisition of SalesWare, Inc., on August 2, 2004, we
changed our corporate name to "SalesTactix, Inc."
On October 6, 2004, the Acquired Companies, William Noonan, Vincent
Michael Keyes III, and Thomas Ketchum filed a complaint in Orange County
Superior Court, Case No. 04CC00669 against us, Scott Absher, George LeFevre and
Mark Absher. On November 15, 2004, we entered into a settlement agreement with
the plaintiffs whereby (i) the acquisition agreements by and among the parties
were rescinded including an asset purchase agreement and certain stock purchase
agreements; (ii) certain assets owned by SalesTaxtix, Inc. and xSellsys were
transferred to certain plaintiffs; (iii) certain trademarks and tradenames were
transferred to CRM SalesWare; and (iv) our outstanding shares owned by the
plaintiffs were canceled. The Settlement Agreement essentially unwound the
acquisition and restored the parties to their prior positions, as if the
acquisitions had never occurred. The claim was dismissed in the fourth quarter
of 2004 pursuant to the terms of the settlement agreement. In connection with
the settlement agreement, we changed our name to Strativation, Inc. in September
2005. After this time, we 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 July 18, 2006, we entered into a stock purchase agreement with
seventeen accredited investors pursuant to which we issued 3,800,000 shares of
our common stock (76,000 shares after accounting for our one-for-fifty reverse
stock split which became effective on January 10, 2007) in consideration for an
aggregate of $237,669.00 in cash. In addition, these investors acquired shares
in private transactions with certain of our stockholders, and acquired a
majority stake in our issued and outstanding shares. In connection with these
transactions, effective July 18, 2006, Mr. Scott Absher and Mr. George LeFevre
resigned as officers and members of the board of directors, and Mr. Silas
Philips was appointed our Chief Executive Officer, Chief Financial Officer,
Secretary, and sole director.
On January 11, 2007, we entered into a Shares For Debt Agreement (the
"Shares For Debt Agreement") with Richardson & Patel LLP ("R&P"), 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 $261,201.84 that we owed to R&P for
legal services (the "Partial Debt"). On January 15, 2007, the company and R&P
22
agreed to amend and restate the Shares for Debt Agreement (the "Amended and
Restated 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.
MERGER WITH CNS RESPONSE, INC.
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.
PRINCIPAL TERMS OF THE MERGER
At the Effective Time of the Merger (as defined in the Merger
Agreement, as amended on February 23, 2007), MergerCo was merged with and into
CNS California, the separate existence of MergerCo ceased, and CNS California
continued as the surviving corporation at the subsidiary level. We issued an
aggregate of 17,744,625 shares of our common stock to the stockholders of CNS
California in exchange for 100% ownership of CNS California. Additionally, we
assumed an aggregate of 8,407,517 options to purchase shares of common stock and
warrants to purchase shares of common stock on the same terms and conditions as
previously issued by CNS California. Pursuant to the merger agreement, our
former sole director and executive officer, Silas Phillips, resigned as a
director and executive officer of our company effective as of the closing of the
Merger, and the directors and officers of CNS California were appointed to serve
as directors and officer of our company. Except for the Merger Agreement, as
amended, and the transactions contemplated by that agreement, neither CNS
California, nor the directors and officers of CNS California serving prior to
the consummation of the Merger, nor any of their associates, had any material
relationship with us, or any of our directors and officers, or any of our
associates prior to the merger. Following the Merger, the business conducted by
the company is the business conducted by CNS California.
Immediately prior to the closing of the Merger, we had outstanding
868,890 shares of common stock. Immediately after the closing of the Merger, and
without taking into consideration the Private Placement offering described
below, we had 18,696,948 outstanding shares of common stock, and options and
warrants to purchase 8,407,517 shares of common stock.
PRIVATE PLACEMENT FINANCING
On March 7, 2007, simultaneous with the closing of the Merger, we
received gross proceeds of approximately $7.0 million from the first closing of
a private placement transaction (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.
We agreed to file a registration statement covering the resale of the
common stock and the common stock underlying the warrants sold in the Private
Placement within 75 days of the closing of the Merger pursuant to the
Subscription Agreement entered into with each Investor.
23
After commissions and expenses, we received net proceeds of
approximately $6.7 million in the Private Placement.
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 has 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.
REGISTRATION RIGHTS AGREEMENTS
Under the terms of the Subscription Agreements between us and the
Investors in the Private Placement, we were obligated to file a Registration
Statement on Form SB-2 with the Securities and Exchange Commission (the "SEC")
within 75 days following the closing (the "Registration Statement") to permit
the resale of the shares of common stock sold in the Private Placement and
purchasable under the warrants sold in the Private Placement. The Company's
Registration Statement on Form SB-2 was filed on May 22, 2007 with the
Securities and Exchange Commission.
The Subscription Agreements also require us to use our reasonable best
efforts to obtain the effectiveness of the Registration Statement not later than
150 days after the closing of the Private Placement, subject to certain
exceptions. After obtaining the effectiveness of the Registration Statement, we
are further obligated to use our reasonable best efforts to maintain the
effectiveness of the Registration Statement until all such shares registered
thereby may be sold without restriction pursuant to Rule 144(k) promulgated
under the Securities Act of 1933, except that investors may not be able to sell
their shares under the Registration Statement during periods when we may be
required to update the information contained in that Registration Statement
under applicable securities laws. If we fail to satisfy our obligations for
obtaining effectiveness of the Registration Statement within 150 days after the
closing of the Private Placement we must pay liquidated cash damages to the
investors in the offering in an aggregate amount equal to 1% of the Investment
Unit purchase price for each share registered, per month that elapses after such
failure until the earlier of (a) the date the Registration Statement is filed or
becomes effective, as applicable, or (b) the date that is one year from the
closing of the Private Placement. The Company's Registration Statement on Form
SB-2 became effective on June 22, 2007.
Under the terms of a Registration Rights Agreement entered into between
us and the majority stockholders of our common stock immediately prior to the
Merger, we were also obligated to include up to 767,103 shares of our common
stock on the Registration Statement described above. The registration rights
attaching to the shares held by these stockholders are not transferable with
such shares. Our former majority stockholders have identical registration rights
to those provided to the investors, except they do not have the right to
liquidated damages as provided in the Subscription Agreements. A total of
24
484,250 shares of our Common Stock held by one of our former majority
shareholders were registered for resale on our registration statement on Form
SB-2.
In addition to the registration rights described above, the holders of
the shares (i) sold in the Private Placement, (ii) issuable upon exercise of the
Investor Warrants, (iii) held by the our majority stockholders prior to the
Merger, (iv) issuable upon exercise of the Placement Agent Warrants or otherwise
under the Engagement Agreement with the Placement Agent, and (v) issued upon
conversion of CNS Series A Preferred Stock, CNS Series B Preferred Stock and
certain shares of CNS Common Stock under the terms of the Merger Agreement, each
have piggy-back registration rights with respect to such shares effective
September 7, 2007, and demand registration rights with respect to such shares
effective March 7, 2008.
This prospectus relates to the resale of common stock and common stock
underlying warrants issued in connection with the Private Placement financing
that closed concurrently with the merger, as well as shares of our common stock
(i) held by our majority stockholders prior to the Merger and (ii) issuable upon
exercise of the Placement Agent Warrants or otherwise under the Engagement
Agreement with the Placement Agent. Pursuant to our obligations under the
subscription agreements between us and the investors in the private placement
financing, we filed with the SEC a registration statement on Form SB-2 with
respect to the common stock offered by this prospectus.
CNS CALIFORNIA FUNDINGS PRIOR TO THE MERGER
Since its inception, CNS California has raised approximately $8.2
million in equity financing. This amount includes the Senior Secured Debt
Financings, Settlement Agreement Financing, Mezzanine Financing, and the Note
Conversion Transaction discussed below.
SENIOR SECURED DEBT FINANCING
From January 2000 through July 2006 CNS California was primarily
financed through the sale of promissory notes secured by substantially all of
the assets of CNS California and warrants to purchase CNS California common
stock pursuant to the terms of Note Warrant and Purchase Agreements between
investors and CNS California. Through 2006, CNS California received proceeds of
approximately $3,120,000 from the sale of these notes and warrants.
Substantially all of these notes were converted into CNS California common stock
in October 2006. See the section below captioned "NOTE CONVERSION TRANSACTION."
NOTE CONVERSION TRANSACTION
In October 2006, CNS California and the holders of certain promissory
notes agreed to convert such notes with an aggregate outstanding balance of
$3,061,700 and related accrued and unpaid interest of $1,005,300 at September
30, 2006, into 5,189,294 shares of CNS California's Series A-1 Preferred Stock,
and 804,221 shares of CNS California's Series A-2 Preferred Stock. At the
closing of the Merger, the aforementioned shares converted into an aggregate of
5,993,515 shares of our common stock.
SETTLEMENT AGREEMENT FINANCING
In August and September 2006, certain employees and consultants to whom
CNS California owed an aggregate of $3,199,400 forgave approximately 80% of the
debt and accepted 5,834,117 shares of CNS California's common stock, and
warrants and options to purchase an aggregate of 270,638 shares of CNS
California's common stock at $0.59 per share in full settlement of CNS
California's remaining obligations. At the closing of the Merger, the
25
aforementioned shares and warrants were converted into 5,834,117 shares of our
common stock and warrants and options to purchase an aggregate of 270,638 shares
of our common stock at $0.59 per share.
MEZZANINE FINANCING
In October 2006, CNS California sold 1,905,978 units (each, a
"Mezzanine Unit") in a private financing resulting in net proceeds of
$1,925,000. Each Mezzanine Unit consisted of one share of CNS California's
Series B Preferred Stock and a 5-year warrant to purchase 0.6 shares of CNS
California's common stock at $1.51 per share. At the closing of the Merger, the
aforementioned shares and warrants were converted into 1,905,978 shares of our
common stock and a warrant to purchase an aggregate of 1,143,587 shares of our
common stock at $1.51 per share on or before October 6, 2011.
TRANSACTIONS SURROUNDING THE MERGER
REVERSE MERGER TRANSACTION FEE
Pursuant to the terms of the Merger Agreement, we paid an advisory fee
of $475,000 to Richardson & Patel, LLP, former counsel to Strativation, Inc.
(now CNS Response, Inc.) and our largest shareholder immediately prior to the
Merger, in connection with the Merger upon the first closing of the Private
Placement.
CNS RESPONSE, INC. STOCKHOLDER INDEMNIFICATION
Under the terms of the Merger Agreement and an arrangement with our
majority shareholders immediately prior to the Merger, these stockholders have
agreed to indemnify us against certain third party claims made against us
related to our operation from the time they became stockholders through the
consummation of the Merger.
CONVERSION OF NUPHARM DATABASE, LLC PROMISSORY NOTE
In connection with the consummation of an asset purchase transaction in
January 2000, by and between Mill City/CNS, LLC and NuPharm, Mill City issued to
NuPharm Database, LLC a certain Promissory Note dated January 11, 2000 (the
"Original NuPharm Note") pursuant to which Mill City was obligated to pay
NuPharm an aggregate principal amount of $299,900 together with interest
pursuant to the payment schedule set forth in the Original NuPharm Note. In
January 2000, Mill City contributed substantially all of its assets, including
those securing the Original Note, to CNS California, and CNS California assumed
certain debts and obligations of Mill City, including Mill City's obligations
under the Original NuPharm Note.
In October 2006, CNS California entered into an agreement with NuPharm
to cancel the Original NuPharm Note in consideration for the extension of the
expiration date of a Warrant to purchase CNS California Common Stock held by
NuPharm and a new promissory note in the principal amount of $287,400 (the "New
NuPharm Note"). Upon the closing of the Private Placement and Merger, the
principal and accrued interest through December 31, 2006 on the New NuPharm Note
automatically converted into 244,509 shares of our Common Stock.
Immediately upon extension of the of the NuPharm Warrant, NuPharm
exercised the NuPharm Warrant to purchase 2,800,000 shares of CNS California
common stock for total cash proceeds of $147,700. At the closing of the Merger,
the aforementioned shares converted into an aggregate of 2,800,000 shares of our
common stock. Subsequently, NuPharm distributed its shares of our common stock
to the following stockholders: Stephen C. Suffin, Meyer L. Proler, W. Hamlin
Emory, Masco, a California corporation, Carlton M. Cadwell and John Cadwell.
26
RESULT OF THE MERGER AND PRIVATE PLACEMENT TRANSACTIONS
After the completion of the Private Placement and the Merger, we had an
aggregate of 25,303,462 shares of common stock outstanding, with the former CNS
California shareholders and the investors in the Private Placement owning in the
aggregate 24,351,139 shares of our common stock, which represented approximately
96.2% of our issued and then outstanding shares of common stock. Our
stockholders immediately prior to the Merger and Private Placement owned
approximately 3.4% of our outstanding common stock (or, 868,990 shares of our
common stock) immediately after completion of these transactions.
The issuance of our shares of common stock in the Merger was exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to Section 4(2) thereof and an exemption from registration
contained in Regulation D. The issuance of shares of common stock and the
warrants to the Investors in the Private Placement, and the issuance of the
Placement Agent Warrants were completed pursuant to an exemption from
registration contained in Regulation D. The shares of our common stock and
shares of common stock issuable pursuant to the issued warrants may not be
offered or sold in the United States unless they are registered under the
Securities Act, or an exemption from the registration requirements of the
Securities Act is available.
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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 listed for trading on the OTC Bulletin
Board under the symbol CNSO.OB. The following table sets forth, for the periods
indicated, the high and low bid information for Common Stock as determined from
sporadic quotations on the OTC Bulletin Board. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
HIGH* LOW*
------------ ------------
YEAR ENDED SEPTEMBER 30, 2006
First Quarter........................... $4.50 $1.80
Second Quarter.......................... $4.00 $3.00
Third Quarter........................... $4.00 $3.00
Fourth Quarter.......................... $8.50 $3.50
YEAR ENDED SEPTEMBER 30, 2007
First Quarter........................... $8.50 $0.55
Second Quarter.......................... $4.50 $0.55
Third Quarter........................... $2.50 $1.05
Fourth Quarter.......................... $1.40 $0.70
* Adjusted price reflecting the 1:50 reverse stock split that became effective
January 10, 2007
On February 1, 2008, the closing sales price of our common stock as
reported on the OTC Bulletin Board was $1.05 per share. As of February 1, 2008
there were 370 record holders of our common stock. The number of holders of
record is based on the actual number of holders registered on the books of our
transfer agent and does not reflect holders of shares in "street name" or
persons, partnerships, associations, corporations or other entities identified
in security position listings maintained by depository trust companies.
DIVIDENDS
We have not paid or declared cash distributions or dividends on our
common stock. CNS California has 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.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are a life sciences company focused on the commercialization of a
patented system that guides psychiatrists and other physicians to determine a
proper treatment for patients with behavioral (psychiatric and/or addictive)
disorders.
We have developed an extensive proprietary database (the "CNS
Database") consisting of approximately 13,000 clinical outcomes across 2,000
patients who had psychiatric or addictive problems. For each patient, we have
compiled electrocephalographic ("EEG") scans, symptoms, course of treatment and
outcomes often across multiple treatments from multiple psychiatrists and
physicians. Using this database, our technology compares a patient's EEG scan to
the outcomes in the database and ranks treatment options based on treatment
success of patients having similar neurophysiology.
Trademarked as Referenced-EEGSM ("rEEGSM"), this patented technology
allows CNSR to create and provide simple reports ("rEEG Reports") that
specifically guide physicians to treatment strategies based on the patient's own
physiology. The vast majority of these patients were considered long-term
"treatment-resistant", the most challenging, high-risk and expensive category to
treat.
rEEG identifies relevant neurophysiology that is variant from the norm
and identifies medications that have successfully treated database patients
having similar aberrant physiology. It does this by comparing a patient's
standard digital EEG to a normative database. This identifies the presence of
abnormalities. The rEEG process then identifies a set of patients having similar
abnormalities as recorded in our CNS Database and reports on historical relative
medication success for this stratified group. Upon completion, the physician is
provided the analysis in a report detailing and ranking classes of agents (and
specific agents within the class) by treatment success for patients having
similar abnormal electrophysiology.
29
We believe the key factors that will drive broader adoption of rEEG
will be acceptance by healthcare providers of its clinical benefits,
demonstration of the cost-effectiveness of using our test, reimbursement by
third-party payors, expansion of our sales force and increased marketing
efforts.
Since our inception, we have generated significant net losses. As of
September 30, 2007, we had an accumulated deficit of $11.3 million. We incurred
operating losses of $3.3 million and $1.8 million for the fiscal years ended
September 30, 2007 and 2006, respectively. We expect our net losses to continue
for at least the next several years. We anticipate that a substantial portion of
our capital resources and efforts will be focused on research and development,
scale up of our commercial organization, and other general corporate purposes.
Research and development projects include the completion of clinical trials
which are essential to validate the efficacy of our products and services across
different type of behavioral disorders, the enhancement of the CNS Database and
the identification of new medication that are often combinations of approved
drugs.
FINANCIAL OPERATIONS OVERVIEW
REVENUES
We derive our revenues from the sale of rEEG Reports to physicians and
operate in one industry segment. Physicians are generally billed upon delivery
of an rEEG Report. The list prices of our rEEG Reports to physicians range from
$200 to $800 with $400 being the most frequent charge.
COST OF REVENUES
Cost of revenues represents the cost of direct labor, the amortization
of the purchased database and costs associated with external processing,
analysis and consulting review necessary to render an individualized test
result. Costs associated with performing our tests are expensed as the tests are
performed. We are currently evaluating the feasibility of hiring our own
personnel to perform most of the processing and analysis necessary to render a
report.
RESEARCH AND DEVELOPMENT
Research and development expenses primarily represent costs incurred to
design and conduct clinical studies, improve rEEG processing, add data to our
database, improve analytical techniques and advance application of the
methodology to additional clinical diagnosis. We charge all research and
development expenses to operations as they are incurred.
SALES AND MARKETING
Our selling and marketing expenses consist primarily of personnel costs
and the costs of educating physicians, laboratory personnel and other healthcare
professionals regarding our product.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses consist primarily of personnel
related costs, legal costs, accounting costs and other professional and
administrative costs.
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
30
our estimates on historical experience and on various other factors we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could therefore differ
materially from those estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 3 to our
consolidated financial statements included elsewhere in this prospectus. We
believe the following critical accounting policies reflect our more significant
estimates and assumptions used in the preparation of our consolidated financial
statements.
REVENUE RECOGNITION
We have generated limited revenues since our inception. Revenues for
our product are recognized when an rEEG Report is delivered to a
Client-Physician.
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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
The following table presents consolidated statement of operations data
for each of the periods indicated as a percentage of revenues.
YEAR MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
------------- -------------
Revenues ................................. 100% 100%
Cost of revenues ......................... 70 113
------------- -------------
Gross profit ............................. 30 (13)
Research and development ................. 605 296
Sales and marketing ...................... 52 62
General and administrative expenses ...... 745 643
------------- -------------
Operating loss ........................... (1,372) (1,014)
Other income (expense), net .............. (4) 1,061
------------- -------------
Net income (loss) ........................ (1,376)% 47%
============= =============
31
REVENUES
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, PERCENT
2007 2006 CHANGE
------------- ------------- -------------
Revenues ...................... $ 238,400 $ 175,500 36%
The number of rEEG Reports delivered for the fiscal year increased from
440 in 2006 to 630 in 2007 while the price per report decreased from
approximately $400 in 2006 to $378 in 2007. The increase in the number of
reports is attributable to the purchase of rEEG Reports by 22 doctors in fiscal
2007 as compared to 13 doctors in fiscal 2006. The decrease in the average price
of the reports is attributable to a change in the types of reports (Type 1 vs
Type 2) purchased by physicians. We recently hired a new president whose main
focus is the commercialization of our product, and accordingly, we expect to
begin to scale up our sales and marketing efforts in fiscal 2008. However, we do
not expect to drive broader adoption of reports based on our rEEG technology
until the completion in late 2008 of our multi-site clinical study to validate
the efficacy of our product. Accordingly, we anticipate that revenues will not
increase materially until fiscal 2009.
COST OF REVENUES
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, PERCENT
2007 2006 CHANGE
------------- ------------- -------------
Cost of revenues .............. $ 166,200 $ 197,900 (16%)
Cost of revenues consists of payroll costs, consulting costs, charges
relating to the amortization of the CNS Database and other miscellaneous
charges. For the year ended September 30, 2007, cost of revenues was $166,200
consisting primarily of direct labor costs of $64,600, consulting fees of
$52,800, amortization of the purchased database of $19,900 and stock-based
compensation of $20,100. For the year ended September 30, 2006, cost of revenues
was $197,900 consisting primarily of direct labor costs of $50,200, consulting
fees of $41,500, amortization of the purchased database of $79,800 and
stock-based compensation of $22,000. We expect costs of revenues will increase
as an absolute number as the volume of rEEGs processed increases; however, cost
of revenues will decrease as a percentage of revenues due to operating
efficiencies and as a result of the cost of the purchased database being fully
amortized in the first quarter of our fiscal year ended September 30, 2007.
RESEARCH AND DEVELOPMENT
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, PERCENT
2007 2006 CHANGE
------------- ------------- -------------
Research and development ...... $ 1,442,600 $ 519,800 178%
Research and development expenses consist of clinical studies, costs to
identify indications of approved drugs and drug candidates, projects for
training doctors in the use of rEEG, patents costs, consulting fees, payroll
32
costs (including stock-based compensation), expenses related to database
enhancements, and other miscellaneous costs. Research and development costs
increased for fiscal year ended September 30, 2007 from the fiscal year ended
September 30, 2006 primarily as a result of increases in (i) expenses associated
with clinical studies, (ii) costs incurred to identify indications of approved
drugs and drug candidates, (iii) expenses in relation to projects for training
doctors in the use of rEEG technology, (iv) patent costs and (v) costs relating
to the acquisition of new data for our database. The increase in expenses
relating to clinical studies is attributable to our expansion of a clinical
study with the goal of driving market acceptance of our rEEG technology.
Training costs increased as we undertook projects to train doctors in the use of
rEEG reports. The increase in patent costs is attributable primarily to legal
costs incurred for the expansion and protection of our intellectual property.
The increase in database costs relates to the acquisition of data for
anti-psychotic drugs. We expect research and development expenses to continue to
increase as we, among other things, complete the multi-site study to validate
the efficacy of our product, acquire new data for our database, enhance our
system and hire additional employees.
SALES AND MARKETING
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, PERCENT
2007 2006 CHANGE
------------- ------------- -------------
Sales and marketing ........... $ 123,600 $ 109,600 13%
Sales and marketing expenses were $123,600 for fiscal 2007 as compared
to $109,600 for fiscal 2006. Sales and marketing expenses for fiscal 2007
consisted of primarily of payroll costs of $75,400, production of marketing
materials of $21,000 and consulting expenses of $18,100. Sales and marketing
expenses for fiscal 2006 consisted primarily of payroll costs. The increase in
sales and marketing expenses is attributable to production of collateral
marketing material and the hiring of consultants to commence to expand our sales
and marketing efforts. We expect sales and marketing costs to increase
significantly in fiscal 2008 as we start to expand our sales force.
GENERAL AND ADMINISTRATIVE
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, PERCENT
2007 2006 CHANGE
------------- ------------- -------------
General and administrative .... $ 1,775,600 $ 1,132,400 57%
General and administrative expenses for the fiscal year ended September
30, 2007 primarily related to salaries (including stock-based compensation),
costs associated with being a public company and professional fees. General and
administrative expenses for the fiscal year ended September 30, 2006 primarily
related to salaries (including stock-based compensation), professional fees and
costs incurred in connection with unsuccessful capital raising activities. The
increase in general and administrative expenses for the fiscal year ended
September 30, 2007 is primarily related to (i) a $475,000 advisory fee paid to
Richardson & Patel, LLP in connection with our merger transaction that will not
recur, (ii) increased costs associated with being a public company offset by
(iv) decreased legal costs and travel and entertainment incurred in connection
with unsuccessful capital raising activities and (v) decreased consulting fees
as we outsourced fewer tasks in the period. We expect general and administrative
33
costs to continue to increase as we expand our staff and incur costs associated
with being a public reporting company.
INTEREST EXPENSE
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, PERCENT
2007 2006 CHANGE
------------- ------------- -------------
Interest Expense, net ......... $ 115,600 $ 390,600 (70%)
For the fiscal year ended September 30, 2007, net interest expense was
$115,600 and consisted of $189,800 relating to interest expense from the
ascribed value of a warrant issued to NuPharm Database, LLC, interest expense
from promissory notes and other interest bearing accounts of $16,500 offset by
interest income of $90,700. For the fiscal year ended September 30, 2006
interest expense was $390,600 and consisted of interest expense from promissory
notes and other interest bearing accounts of $391,100 offset by interest income
of $500. Interest expense relating to the warrant will not recur as the entire
balance of unamortized prepaid interest was expensed in connection with our
merger. We expect interest expense relating to convertible debt and other
interest bearing accounts to continue to decrease as substantially all
convertible debt and other interest bearing accounts have either been repaid or
converted into the Company's stock. We expect interest income to increase due to
funds available from the private placement.
GAIN ON DERIVATIVE INSTRUMENTS
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, PERCENT
2007 2006 CHANGE
------------- ------------- -------------
Gain on derivative instruments $ 0 $ 1,178,500 *
* Not meaningful
Gain on derivative instruments was $1,178,500 for the fiscal year ended
September 30, 2006 as compared to zero for the fiscal year ended September 30,
2007. In accordance with generally accepted accounting principles, we treated
the beneficial conversion feature associated with the convertible promissory
notes and all non-employee warrants exercisable during the period the notes were
potentially convertible into an unlimited number of common shares as liabilities
at their fair value. The fair value of the beneficial conversion feature and the
warrants were estimated using the Black-Scholes option pricing model. The fair
value of the beneficial conversion feature and the warrants and options was
recomputed each reporting period with the change in fair value recorded as a
gain or loss on derivative instruments. As of September 30, 2006, we
reclassified the derivative instrument liability into equity as the number of
authorized shares was sufficient to accommodate the conversion of all notes,
related accrued interest and outstanding warrants. Thus, no gain or loss on
derivative instruments were generated or incurred in fiscal year ended September
30, 2007.
34
GAIN ON TROUBLED DEBT RESTRUCTURING
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, PERCENT
2007 2006 CHANGE
------------- ------------- -------------
Gain on troubled-debt
restructuring .............. $ 0 $ 1,079,700 *
* Not meaningful
Gain on troubled debt restructuring was $1,079,700 for the year ended
September 30, 2006 as compared to zero in for the fiscal year ended September
30, 2007. At September 30, 2005, we owed certain employees and consultants
deferred compensation, accrued consulting fees, other compensation-related
liabilities and accrued interest thereon aggregating $2,480,900. Due to
financial difficulties experienced by the company, in August and September 2006,
certain employees and consultants to whom the company owed an aggregate of
$3,199,400 accepted 5,834,117 shares of CNSR's common stock (of which 182,952
were restricted), and warrants and options to purchase an aggregate of 270,638
shares of CNSR's common stock at $0.59 per share in full settlement of our
obligations. On the date of transfer, the amounts due to employees and
consultants exceeded the aggregate fair value of the shares, warrants and
options transferred by $2,467,700. The gain attributable to employees considered
related parties of $1,388,000 has been treated as a capital transaction and
included in additional paid-in capital in the accompanying financial statements.
The remaining gain of $1,079,700 has been included in operations in the
accompanying financial statements.
OTHER INCOME
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, PERCENT
2007 2006 CHANGE
------------- ------------- -------------
Other Income .................. $ 106,900 $ 0 *
* Not meaningful
Other income for the fiscal year ended September 30, 2007 was $196,900
and consisted of gains from settlement of payables. Other income for the fiscal
year ended September 30, 2006 was zero. The increase in other income is
attributable to the settlement of accounts payable at a discount to the recorded
amounts.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have incurred significant losses and, as of
September 30, 2007, we had an accumulated deficit of approximately $11.3
million. We have not yet achieved profitability and anticipate that we will
continue to incur net losses for the foreseeable future. We expect that our
research and development, selling and marketing and general and administrative
expenses will continue to grow and, as a result, we will need to generate
significant product revenues to achieve profitability. We may never achieve
profitability.
SOURCES OF LIQUIDITY
Since our inception substantially all of our operations have been
financed primarily from equity and debt financings. Through September 30, 2007,
we had received proceeds of $8.6 million from the sale of stock, $3,116,000 from
35
the issuance of convertible promissory notes and $220,400 from the issuance of
common stock to employees in connection with expenses paid by such employees on
behalf of the company. As of September 30, 2007, we had cash of $5.8 million and
debt of $659,300.
CASH FLOWS
As of September 30, 2007 we had $5.8 million in cash compared to
$204,900 at September 30, 2006. The increase of $5.6 million was due to cash
received in connection with the sale of common stock of $8.5 million offset by
used cash in operating activities of $3 million.
Net cash used in operating activities was $3 million for the fiscal
year ended September 30, 2007 compared to $597,600 for fiscal year ended
September 30, 2006. The increased in cash used of $2.4 million was primarily
attributable to an increase in research and development expenses, the payment of
the advisory fee of $475,000 to Richardson & Patel, LLP and the repayment of
certain operating liabilities due to availability of cash.
Net cash used in investing activities was $7,200 for the fiscal year
ended September 30, 2007 compared to $175,900 for the fiscal year ended
September 30, 2006. Our investing activities for 2007 consisted of loans made to
employees and deposits. We expect amounts used in investing activities to
increase for the purchase of property and equipment.
Net cash provided by financing activities was $8.6 million for the year
ended September 30, 2007 compared to $500,000 for the fiscal year ended
September 30, 2006. Financing activities in fiscal 2007 consisted of the sale of
stock. Financing activities in fiscal 2006 consisted of the issuance of
convertible promissory notes.
CONTRACTUAL OBLIGATIONS
As of September 30, 2007, we had no significant contractual
obligations.
OPERATING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS
We expect to continue to incur substantial operating losses in the
future and to make capital expenditures to keep pace with the expansion of our
research and development programs and to scale up our commercial operations. We
expect that our existing cash will be used to fund working capital and for
capital expenditures and other general corporate purposes. The amount and timing
of actual expenditures may vary significantly depending upon a number of
factors, such as the progress of our product development, regulatory
requirements, commercialization efforts and the amount of cash used by
operations.
We currently anticipate that our cash and collections from sale of our
services, together with the proceeds of completed financings, will be sufficient
to fund our operations for at least the next 9 months.
Our future funding requirements will depend on many factors, including
the following:
a. the cost of expanding our commercial operations, including our
selling and marketing efforts;
b. the rate of progress and cost of research and development
activities associated with our products;
36
c. the rate of progress and cost of research and development
activities associated with the identification, development and
commercialization of new indications of approved medications
and medication candidates;
d. the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights; and
e. the effect of technological and market developments.
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. The issuance of equity securities may
result in dilution to stockholders. We do not know whether additional funding
will be available on acceptable terms, or at all. If we are not able to secure
additional funding when needed, we may have to delay, reduce the scope of or
eliminate one or more research and development programs or selling and marketing
initiatives. In addition, we may have to work with a partner on one or more of
our technology development programs or market development programs, which may
lower the economic value of those programs to our company.
INCOME TAXES
Since inception, we have incurred operating losses and, accordingly,
have not recorded a provision for federal income taxes for any periods
presented. As of September 30, 2007, we had net operating loss carryforwards for
federal income tax purposes of $8.1 million. If not utilized, the federal net
operating loss carryforwards will expire beginning in 2021. Utilization of net
operating loss and credit carryforwards may be subject to a substantial annual
limitation due to restrictions contained in the Internal Revenue Code that are
applicable if we experience an "ownership change". The annual limitation may
result in the expiration of our net operating loss and tax credit carryforwards
before they can be used.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements or financing activities with
special purpose entities.
37
BUSINESS
WITH RESPECT TO THIS DISCUSSION, THE TERMS "WE" "US" "OUR" "CNS" AND
THE "COMPANY" REFER TO CNS RESPONSE, INC., A DELAWARE CORPORATION AND ITS
WHOLLY-OWNED SUBSIDIARY CNS RESPONSE, INC., A CALIFORNIA CORPORATION ("CNS
CALIFORNIA").
BACKGROUND
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 ("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.
Founded in 2000, and located in Costa Mesa, California, our business is
focused on the commercialization of a patented system that aids physicians in
the identification and determination of appropriate and effective medications
for patients with certain behavioral (mental or addictive) disorders. 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 which are contained in a proprietary outcomes database. This
methodology, called "Referenced-EEG" or "rEEG" represents an innovative approach
to identifying effective medications for patients suffering from debilitating
behavioral disorders. Referenced-EEG and rEEG are registered trademarks of CNS.
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 rEEG
offers an improvement upon traditional methods for determining an effective
course of medication because rEEG is designed to correlate the success of
courses of medication and medication combinations, with the neurophysiological
characteristics of a particular patient.
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. rEEG, in
combination with the information contained in the rEEG database, has the
potential to be able to identify novel uses for, and novel combinations of,
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.
The initial technology, upon which rEEG is based, was originally
developed by an M.D. Pathologist/ Psychiatrist as well as a clinical
Psychiatrist in response to observations within their practice. They partnered
38
and formalized their activities into NuPharm Database, LLC, for the purpose of
facilitating investment in 1999. At the time of its formation, these founding
physicians assigned all of their rights in the technology to NuPharm.
CNS was incorporated in California on January 11, 2000, for the purpose
of acquiring and commercializing the rEEG technology. The patent application for
the primary technology was acquired from Mill City/CNS, LLC, a Minnesota limited
liability Company in January 2000 pursuant to the terms of a Contribution and
Subscription Agreement which provided for the issuance of 1,000,000 shares of
CNS's common stock to Mill City in exchange for all of its assets. Mill City had
previously acquired all of NuPharm's assets pursuant to an Asset Purchase
Agreement.
THE CHALLENGE AND THE OPPORTUNITY
The "CNS" in CNS Response, Inc. refers to the central nervous system,
the largest part of the nervous system and includes the brain and spinal cord -
organs fundamental to behavioral control. Often referred to as mental illness,
behavioral disorders have accounted for 7.4% of the total increase in health
care spending from 1987-2000, and they are second among the 15 conditions that
contributed the most to rising health care spending over this period (behind
only heart disease at 8.1%).(1)
More than one out of five adolescents, adults or senior adults,
representing more than 60 million people collectively, have mental or addictive
illness, an epidemic by any measure.(2) In any given year, only half of this
population receives some care for their problem.(3) The market for
pharmaceuticals to treat central nervous system disorders in the United States
is measured at more than $44 billion ($68 billion worldwide) or 23% of total
annual pharmaceutical sales.(4) Unfortunately, the vast majority of these
expenditures are not based on blood tests, CT scans, or any objective
measurement of the system being treated. Dr. Steven Hyman, Director of the
National Institute of Mental Health from 1996 to 2002 stated:
"IN MOST BRANCHES OF MEDICINE, PHYSICIANS CAN BASE THEIR
DIAGNOSIS ON OBJECTIVE TESTS: A DOCTOR CAN EXAMINE X-RAYS TO
SEE IF A BONE IS BROKEN, FOR EXAMPLE, OR CAN EXTRACT TISSUE
SAMPLES TO SEARCH FOR CANCER CELLS. BUT FOR SOME COMMON AND
SERIOUS PSYCHIATRIC DISORDERS, DIAGNOSES ARE STILL BASED
ENTIRELY ON THE PATIENT'S OWN REPORT OF SYMPTOMS AND THE
DOCTOR'S OBSERVATIONS OF THE PATIENT'S BEHAVIOR." (5)
Collectively, the industry has been waiting to understand the
physiology of behavioral disorders, with the hope of finding an approach that
utilized objective patient data with prescriptive therapy.
Fueling the increase in spending are patients deemed to be
"Treatment-Resistant," typically defined as failing two or more trials of
standard of care therapies of adequate dose and duration. Treatment costs for
such patients are exceedingly high. For example, those in treatment-resistant
depression reach $10,000 annually for patients treated on an outpatient basis
only, and more than $40,000 annually for those treated on an inpatient basis.(6)
Based on conversations with managed behavioral health care organization (MBHO)
- ----------
(1) Moran, Mark, MANY MORE PEOPLE SEEKING MH TREATMENT SINCE 1980S. Psychiatric
News 39-19 at 15 (October 1, 2004).
(2) See SUPRA note 4 at xii.
(3) Id. at viii.
(4) See SUPRA note 2.
(5) Hyman, Steven. E., DIAGNOSING DISORDERS:PSYCHIATRIC ILLNESSES ARE OFTEN HARD
TO RECOGNIZE, BUT GENETIC TESTING AND NEUROIMAGING COULD SOMEDAY BE USED TO
IMPROVE DETECTION, Scientific American, (3): 96-103 (September 2003).
(6) Crown, W.H., Finkelstein, S., Berndt, E.R., Ling, D., Poret, A.W., Rush,
A.J., and Russell, J.M.. THE IMPACT OF TREATMENT-RESISTANT DEPRESSION ON HEALTH
CARE UTILIZATION AND COSTS, 63(11):963-71 (November 2002).
39
executives, the Company estimates that approximately 10% of patients represent
35-40% of MBHOs' patient costs, with the overwhelming majority deemed
treatment-resistant cases. MBHOs manage an estimated 210 million lives in the
U.S. alone, with 115 million covered by four organizations: Magellan, Value
Options, United Behavioral Health and CIGNA Behavioral Health.(7)
Historically, the practice of psychiatric medicine has been operated
subjectively, with treatment decisions involving powerful neuropsychiatric
medications being prescribed with little or no understanding of the underlying
physiology of each patient.(8) Modern medicine has been successful in
establishing etiology and finding effective therapy for only a relatively small
group of mental abnormalities(9) and has, therefore, necessarily had to rely on
symptomatic diagnoses to make course of treatment decisions. The prevalence of
the prescription of multiple courses of ineffective medications for patients
suffering from mental disorders, coupled with the attendant economic
inefficiencies of the practice of Psychiatry in this manner demands a logical
alternative.
Behavioral disorders are common in the United States and
internationally. An estimated 26.2 percent of Americans ages 18 and older --
about one in four adults -- suffer from a diagnosable mental disorder in a given
year.(10) The market for pharmaceuticals to treat central nervous system
disorders is more than $42 billion in the United States and is the largest
market segment of pharmaceutical sales, surpassing pharmaceuticals to treat
cardiac disease, cancer and diabetes.(11) Traditionally, prescription of
medication for the treatment of these disorders has been based on symptoms,
while the underlying physiology and pathology of the disease has rarely been
addressed. This can result in multiple ineffective, costly and often lengthy
courses of treatment before effective medications are identified, if at all.
OUR SOLUTION
rEEG is a historical outcomes-based information treatment tool
personalized to the functional imbalance of a patient's brain. We believe rEEG
to be the first broad-based objective, quantitative, neurophysiologic biomarker
system for facilitating appropriate and effective treatment for patients
suffering from behavioral (mental or addictive) disorders. In the past year,
psychiatrists in twelve states have used this system to guide treatment of their
treatment-resistant patients.
With a rEEG report, a physician (a "Client-Physician") can obtain
neuropsychiatric medication sensitivity and resistance data for individuals that
have brain abnormalities (abnormalities of electrical power distribution in the
brain) similar to that of their patient. The compelling clinical results and
economics demonstrated in multiple studies completed by either CNS or
independent parties provide the basis from which, we believe, rEEG will become a
standard for guidance of psychiatric treatment of treatment-resistant patients.
See Section captioned "OUR BUSINESS - rEEG CLINICAL TRIALS" for a review of
existing clinical data.
Over the course of the last twenty years the Company and its scientific
founders have collected treatment outcomes for patients using various
medications where the patients' brain function was first measured with an EEG.
- ----------
(7) Open Minds Yearbook of Managed Behavioral Health Market Share in the United
States, 1998-1999, at 10-12 (Gettysburg, PA. 1999).
(8) Gardner, R., SOCIOPHYSIOLOGY AS THE BASIC SCIENCE OF PSYCHIATRY, Journal
Theoretical Medicine and Bioethics, 18-4 at 335-356 (December, 1997).
(9) Breggin, P., R., M.D., Toxic Psychiatry: Why Therapy, Empathy and Love Must
Replace the Drugs, Electroshock, and Biochemical Theories of the "New
Psychiatry", at 291 (St. Martin's Press, 1991).
(10) National Institute of Mental Health, The Numbers Count: Mental Disorders In
America (2006),
(http://www.nimh.nih.gov/publicat/numbers.cfm#Intro).
(11) IMS Health (NYSE: RX), IMS Retail Drug Monitor April 2006,
(http://www.imshealth.com/vgn/images/portal/cit_40000873/56/43/78335031IMS%20
Retail%20Drug%20Monitor%20April2006.pdf).
40
CNS has correlated the EEG features with courses of treatment and outcomes
information provided by Client-Physicians. This information has been
subsequently assembled and organized into a proprietary database that we refer
to as the "rEEG Outcomes Database". As of January 15, 2008, the rEEG Outcomes
Database contained outcomes for over 2000 patients and more than 13,000
treatment trials of medications on these patients.
Using the rEEG analysis method and the information contained in the
rEEG Outcomes Database, CNS can provide a report (an "rEEG Report") to a
Client-Physician identifying medication groups (such as antidepressants,
stimulants, anticonvulsants and beta blockers), medication subgroups such as
antidepressant subgroups of SSRI's (selective serotonin reuptake inhibitors, an
example of which is Prozac), TCA's (tricyclic antidepressants, an example of
which is Desipramine), SNRI's (serotonin-norepinephrine reuptake inhibitors, an
example of which is Cymbalta). Further, and most importantly, CNS's statistical
models in combination with the rEEG Outcomes Database indicates which specific
medications within these subgroups (such as Zoloft, Prozac, Elavil, Wellbutrin,
Effexor) are the most effective for patients whose EEGs evidence similar
characteristics to that of the subject patient.
Psychiatric treatment guided by rEEG has been shown, in independent
studies, to be significantly more efficacious than previous treatment practices.
See Section captioned "OUR BUSINESS - rEEG CLINICAL TRIALS." Physicians that
have utilized such reports to inform their treatment strategies identify such
reports as `essential' or `significantly helpful' in approximately 75% of
patients treated based upon the information contained in the rEEG Report. The
vast majority of subject patients for whom we have created rEEG Reports have
been identified by their physicians as "treatment-resistant," generally
understood to be the most challenging, high-risk and expensive category of
patients to treat.(12) Typically, less than 25% of such patients find success in
their next treatment efforts.(13) Management believes that rEEG provides
Client-Physicians with a unique tool that can dramatically improve treatment
outcome based on a patient's own neurophysiology.
rEEG METHOD
CNSR's rEEG method consists of the following four integrated components:
Quantitative Quantitative
Digital EEG + Normative + rEEG Outcomes + EEG/ Medication
Analysis Analysis Correlations
1. Digital Electrocephalogram ("EEG")
The first step in the rEEG process is a standard digital EEG recording.
An EEG is a non-invasive, painless procedure where a cap of twenty
electrodes records the electrical output of the brain while the patient
is awake, but resting with their eyes closed. The recording normally
takes between 20 and 45 minutes. An EEG is a common, standardized
procedure in neurology, often used in diagnosis of epilepsy or other
neurological disorders such as brain tumor, stroke, encephalopathy etc.
2. Quantitative Normative Analysis
- ----------
(12) Dewan, M.J., and Pies, R.W., The Difficult-to-Treat Psychiatric Patient, at
37, American Psychiatric Publishing, Inc. (September 2002).
(13) Rush, A.J., Trivedi, M.H., Wisniewski, S.R., Nierenberg, A.A., Stewart,
J.W., Wadren, D., Niederehe, G., Thase, M.E., Labori, P.W., Lebowitz, B.D.,
McGrath, P.J., Rosenbaum, J.F., Sackheim, H.A., Kupfer, D.J., Luther, J., and
Fava, M., ACUTE AND LONGER-TERM OUTCOMES IN DEPRESSED OUTPATIENTS REQUIRING ONE
OR SEVERAL TREATMENT steps: A STAR*D REPORT. Am. J. Psychiatry; 163: 11,
1905-1917.
41
The electrical output at each of the twenty leads is "Fast Fourier"
transformed (a mathematical technique useful in wave analysis) into a
spectrum of electrical power output at various frequency ranges. One
standard approach transforms these waves into defined frequency ranges,
or bands, labeled Delta, Theta, Alpha and Beta. Output of these four
levels of frequency can be compared among the twenty leads. Standard
comparisons include electrical power of each of these bands on an
absolute and relative power basis (% of the total power output). Also,
comparison of various leads can be made for symmetry and coherence (a
measure of the phase of the energy output). Each of these measurements
(or groups of measurements) in a patient can be compared to values for
asymptomatic people (norms) of the same age and noted when they are
outside of standard normal ranges.
Analysis of the rEEG outcomes database has shown that certain abnormal
indications identifiable in an EEG (individually or in combination) are
indicators of probable response to different medication classes and
individual medications. We refer to these as "biomarkers". We have
identified a significant group of biomarkers that have shown relevance
and we calculate their value for each patient. We then examine the
history of treatment response to specific medications for patients with
similar patterns of abnormality in these biomarkers and compute a
projected sensitivity analysis for the current patient using any of the
specific medications or medication classes where we have sufficient
statistical power.
3. Quantitative rEEG Outcomes Analysis
A core element of rEEG is the rEEG Outcomes Database. This proprietary
database consists primarily of patient digital EEGs, medication
histories and outcomes collected over a 20 year period. An "outcome"
can be defined as a specific measure of change in behavior obtained
while taking specific medications. The rEEG Outcomes Database allows
for statistical correlation of more than 1,100 individual QEEG measures
against medication success, and includes more than 13,000 treatment
episodes with outcomes.
4. EEG / Medication Correlations - Computation of Proprietary
Variables and application of Correlation Engine
Currently, the rEEG Outcomes Database allows the Company to analyze
outcomes related to twenty-seven different medications from the classes
of antidepressants, stimulants, anticonvulsants, beta-blockers and food
supplements. The Company is continually growing the database and adding
additional medications as they become statistically relevant. There are
currently seventy-eight medications marketed in the U.S. for
depression, anxiety disorders, bipolar disorder, schizophrenia,
obsessive-compulsive disorder (OCD), attention-deficit hyperactivity
disorder (ADHD), post-traumatic stress disorder (PTSD), panic disorder,
and insomnia. This does not include sixty-one medications now marketed
in the United States for the treatment of Alzheimer's, Parkinson's
Disease, migraines and Epilepsy.(14)
TREATMENT DECISIONS MADE BY LICENSED PROFESSIONALS
We do not currently operate our own healthcare facilities, employ our
own treating physicians or provide medical advice or treatment to patients. The
Client-Physicians that 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. Physicians who contract
for rEEG Reports are responsible for exercising their independent medical
- ----------
(14) Drug Reference for FDA Approved Psychiatric Drugs,
(http://neurotransmitter.net/drug_reference.html).
42
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, the Client-Physicians are presumed to
administer and provide continuing care treatment.
PROCESS FLOW
The flow chart below details the process of inception to rEEG Report
delivery. Currently, upon receipt of the EEG, a rEEG Report is generally
delivered to the referring physician 3-4 days. We expect that through efficiency
improvements, turnaround will be reduced to next day.
PATIENT/PHYSICIAN CNS RESPONSE NEUROLOGIST
________________________ _______________________
| EEG Recording in Field |_\| Transfer to CNS |
| | /| (Secure) |______________
|________________________| |_______________________| |
| |
___________V___________ _________ V__________
| Artifacting | | Neurologist Review |
| (remove eye blinks, | | (confirming that |
| muscle twitches, etc.)|/__| Patient is suitable |
| |\ | for rEEG) |
|_______________________| |_____________________|
|
___________V___________
| Quantitative |
| Normative |
| Analysis |
|_______________________|
|
___________V___________
| Computation of |
| Proprietary Variables |
|_______________________|
|
___________V___________
| |
| Correlation Engine |
|_______________________|
|
________________________ ___________V___________
| Receive rEEG Report | | rEEG Report |
| (Utilize for |/_| Generation |
| Treatment) |\ | and Review |
|________________________| |_______________________|
The chart above shows that the first step in the process is collection
of a digital EEG from the patient. This may be done at the physician's office or
off-site at a testing center. Some physicians own their own equipment for
testing while others arrange for technicians to visit their offices for patient
appointments. This data is then typically transferred to a secure Health
Insurance Portability and Accountability Act ("HIPPA") compliant FTP (File
Transfer Protocol) Internet site, although it can also be sent via overnight
delivery service. Another early step in the process is artifacting. This is the
process of selecting segments of the QEEG record for analysis that are free of
electrical distortions caused by muscle movement. Also, early in the process is
a conventional review of the EEG by a neurologist or neurophysiologist. This
serves as a quality control step to review the overall quality of the recording
and determine whether it is acceptable for rEEG processing. Also at this time,
the neurologist/neurophysiologist will author a review of the conventional EEG.
This will appear on CNSR's Type I rEEG Report.
OUR TECHNOLOGY AND INTELLECTUAL PROPERTY
rEEG PATENTS
We have two issued U.S. Patents which together provide CNS with the
right to exclude others from using the rEEG technology. In addition, these
patents cover the analytical methodology utilized by CNS with any form of
neurophysiology measurement including SPECT (Single Photon Emission Computed
Tomography), fMRI (Functional Magnetic Resonance Imaging), PET (Positron
43
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.
rEEG TRADEMARKS
We have registered trademarks in the United States for the following
marks: "Referenced-EEG" and "rEEG". We will continue to expand our brand names
and our proprietary trademarks worldwide as our operations expand.
rEEG OUTCOMES DATABASE
The rEEG Outcomes Database consists of approximately 13,000 clinical
outcomes across 2,000 patients who had psychiatric or addictive problems. The
CNS Outcomes 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.
2. The Clinical Outcomes Database
The Clinical Outcomes Database consists of physician provided
assessments of the clinical outcomes of patients and their associated
medications. The clinical outcomes of patients are generally recorded
using an industry-standard outcome rating scale, such as 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. In addition, CNS may utilize specialized scales
applicable to specific disorders, including the Beck Depression
Inventory and Ham-D scales (Hamilton Depression Rating Scale) for
depression and anxiety.
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 Client-Physician has access to his/her own patient
data through the software tool that captures clinical outcome data.
We consider the rEEG Outcomes Database to be a valuable trade secret
and are diligent about protecting such information. The rEEG Outcomes Database
is stored on a secure server and only a limited number of employees have access
to it. Any individual that is provided with access to the database is required
to enter into a strict confidentiality agreement.
OUR CURRENT OPERATIONS -- LABORATORY INFORMATION SERVICES
We provide rEEG analysis in a relationship analogous to the support
other physicians have from a reference laboratory or radiology center.
Physicians send us the QEEG data, and we return an analytical report for a
standard charge. This revenue model requires minimal training or impact on their
44
current operation and is one that physicians readily understand. In some cases,
we also provide the actual patient testing for acquisition of the QEEG data.
Our revenues are currently derived primarily from our Laboratory
Information Services business.
We currently offer rEEG Reports produced by our laboratory based on
QEEG data supplied by the physician or an independent testing service. There are
two primary types of analysis available.
TYPE I ANALYSIS
Type I analysis provides medication sensitivity information based on
statistical probability of improved outcomes against
neurophyisiologically similar patients. It is considered the baseline
measurement where the patient is preferably tested in an unmedicated
state, which means the patient abstains from taking neuropsychiatric
medications that cross the blood-brain barrier and act on the brain for
5 half-lives (can vary from 1 day for Ambien to 5 weeks for Prozac).
TYPE II ANALYSIS
Type II analysis provides medication sensitivity information based on
the changes to the patient's neurophysiology presumed to be from the
intervening treatment. It is, therefore, measured while the patient is
medicated.
Laboratory Information Services are either: 1) billed to the
Client-Physician or 2) billed to the Patient directly. Currently, the vast
majority of the rEEG Reports produced are billed to the Client-Physician. We
bill our Client-Physicians on a monthly basis.
Typically, after a 90 day medication regime guided by the Type I rEEG,
a Type II rEEG will be ordered if the desired outcome has not been achieved.
This follow-up analyzes changes post-medication in the patient's physiology, and
facilitates the preparation of an rEEG Report with data useful for determining
medication dose adjustment, alternative medicine selection or additional
medication augmentation. Because our Type I analysis has shown strong efficacy
in guiding successful medication of subject patient's disorders, we expect that
requests for Type II analysis will remain at their current levels.
OUR CURRENT MARKETS
CURRENT APPLIED DISORDERS
In the last 12 months, physicians in twelve states have used rEEG in
their practice. A series of eight studies involving rEEG have been conducted
over the last several years cumulating 500 patients. See Section captioned
"Clinical Validation." All studies, which involved most major categories of
psychiatric disorders (except for schizophrenia), have shown rEEG to be
demonstrably effective in guiding treatment. To date, these studies have
addressed the efficacy of rEEG with respect to the following behavioral
disorders:
o ATTENTIONAL DISORDERS (INCLUDING ATTENTION DEFICIT DISORDER
("ADD")/ATTENTION DEFICIT HYPERACTIVITY DISORDER ("ADHD"));
o ANXIETY DISORDERS;
o DEPRESSIVE DISORDERS;
o BIPOLAR DISORDERS;
o IMPULSE CONTROL DISORDERS;
45
o POST TRAUMATIC STRESS DISORDER;
o COMPULSIVE AND OBSESSIVE DISORDERS;
o EATING DISORDERS (INCLUDING ANOREXIA NERVOSA AND BULIMIA
NERVOSA); AND
o ADDICTIVE DISORDERS (INCLUDING DRUG AND ALCOHOL ABUSE)
PRIVATE PAYERS
Currently, a large majority of our rEEG Reports are paid for directly
by patients.
Insurance coverage for treatment of behavioral disorders varies
significantly. Many health plans limit coverage for mental health benefits by
imposing co-payments, deductibles or limits on outpatient visits that are more
restrictive than those placed on physical illness. Many times these benefits do
not extend to addiction treatment. Lack of or limitations on insurance coverage
or exhaustion of insurance coverage often result in patients needing to pay
privately for treatment of behavioral disorders.
Another reason patients pay privately is that access to plan
psychiatrists may be limited, requiring patients to seek non-plan psychiatrists
that only accept direct patient payment. Occasionally, a patient receiving care
from a health plan psychiatrist may become disappointed with the amount of time
they are able to spend with that physician. They may prefer to pay privately in
order to obtain more physician time and attention.
Because of the nature of a behavioral disorder, many patients seek out
private pay psychiatrists as a result of a desire for greater anonymity. Some
patients are concerned about filing reimbursement claims with their employer's
health benefit program, especially in cases where they may not want their
employer to know of their affliction (e.g. addiction, Attention Deficit
Disorder, Obsessive-compulsive Disorder, Impulse Control Disorder).
Still other patients are seeking the best quality of care without
concern for reimbursement. Psychiatrists that accept private pay generally are
able to receive a higher hourly rate from private pay patients than most health
plans provide. As a psychiatrist develops a reputation for quality service they
may be able to focus their practice on private pay patients to a greater degree.
It is this reputation for quality service that may attract some of the patients
seeking best quality of care.
For these reasons and more there are a large number of psychiatrists
that accept only patients paying privately for their services. CNS has estimated
that these psychiatrists treat approximately 40% of the treatment resistant
patients, which comprises 2 million people in any given year or a potential
annual market of $1.2 billion with present pricing.
MANAGED BEHAVIORAL HEALTH ORGANIZATIONS/MANAGED CARE PAYERS
Currently, only a small portion of our rEEG Reports are paid for by
insurers or managed healthcare companies.
Many insurance/managed health care companies and many self-insuring
employers providing behavioral health benefits seek to manage these services and
expenditures through separate entities (MBHOs) that focus exclusively on
managing the mental health benefit. MBHOs are separate entities such as Magellan
Health Services or ValueOptions, Inc. or subsidiaries of larger healthcare
management organizations such as United Behavioral Health or CIGNA Behavioral
Health.
MBHOs have developed contracted networks of behavioral health
specialists to service the needs of their insured members. Various policies for
patients and providers help to efficiently deliver the behavioral health
46
benefit. Employers that contract with MBHOs don't necessarily seek the lowest
cost of care. Often, the employer's goals are to minimize absenteeism,
disruption to their processes or time lost as a result of employee disabilities
and prefer to contract with MBHO's that can deliver a better quality of care,
accomplishing these goals. Employers may contract directly with an MBHO or
utilize MBHO's as part of the total health care managed care contract.
Based on our conversations with MBHO managers, we estimate that a small
subset (10%-15%) of those that seek treatment in any year account for a
disproportionately high percentage (30%-45%) of the total medical costs paid out
by MBHOs. These are typically the treatment resistant patients. In addition to
being burdensome on the MBHO's, these patients are also typically more expensive
to their primary health insurer as compared to other patients because of their
higher use of emergency room services, pharmaceuticals (which are often not
managed by the MBHO), and use of medical services associated with physical
ailments.
We estimate over 1 million patients covered by MBHOs in any given year
are candidates for rEEG Report guidance. At present pricing this represents an
annual market opportunity of $600 million.
TOTAL MARKET PERSPECTIVE
A 2004 Harris Interactive Poll stated that "an estimated 59 million
people, or more than one in four U.S. adults, have received some form of mental
health treatment in the past two years. The vast majority of these people -- an
estimated 48 million -- are being treated with prescription medication.
Medications are clearly the dominant form of mental health treatment in America,
the survey found" (as reported in HEALTH DAY NEWS, May 5, 2004). The poll also
estimated another 24 million people needed but were not getting help because
they had given up on treatment or never pursued treatment. We estimate our
market opportunity for our Laboratory Information Services with respect to
central nervous system disorders to be in excess of $1.5 billion.
PRICING
We typically charge $400.00 to physicians for a Type I rEEG Report, our
standard report, which reflects EEG data obtained while a patient is off of
medications. Occasionally, physicians encounter patients that cannot tolerate
the discontinuation of their current medications to have a standard Type I test.
For these patients, we have a special report, Type I(m), which reflects EEG data
obtained while the patient is medicated with a medication that is in the rEEG
Outcomes Database. By estimating the likely EEG effect from the medication, we
can estimate the rEEG parameters of an unmedicated brain and issue a report
based on such estimation. Pricing to the physician for Type I(m) reports are
$800.
Type II testing is for patients that have a baseline Type I test on
record and have been medicated. A Type II rEEG Report compares changes in
neurophysiology from the Type I test data. We currently charge $200.00 for a
Type II rEEG Report.
Because the primary tasks of rEEG analysis are computer automated,
direct costs of processing are relatively low. Currently, CNS contracts with a
neurophysiologist to supply a conventional review of and commentary on a
patient's EEG test. CNS also contracts with outside services to select
artifact-free (an eye-blink and the corresponding electrical signal from same is
an example of an artifact) sections of the recording suitable for rEEG analysis.
These services constitute the majority of the direct costs associated with
processing a rEEG Type I analysis. We plan to bring both of these functions
in-house during 2008, thereby reducing our costs per test, and improving our
margins.
47
CLINICAL VALIDATION
As summarized in a 2005 American Psychiatric Association Poster,
reviewing results of rEEG guided treatment in prospective, retrospective,
comparative studies and independent physician case series, fairly consistent
results were reported. Generally, rEEG guided therapy, when used in conjunction
with other standard clinical information has shown the ability to guide
physicians to successful outcomes in 70% or more of mostly treatment resistant
patients. Various studies in the literature would suggest the current standard
of care for treatment success with treatment resistant patients is less than
half that rate, and in some cases only 10-15%.(15)
COMPLETED INDEPENDENT STUDIES AND TRIALS
- -------------------- ----------------------- -------------------- ----------------------
Veterans Association CIGNA Treatment- Davis-Atlanta
ADD/Depression Study Blind Prospective Major Resistnat Field Trial Case Study
100 Patients Depression Study 56 Patients 15 Patients
13 Patients
- -------------------- ----------------------- -------------------- ----------------------
rEEG-Guided Efficacy rEEG-Guided Efficacy rEEG-Guided Efficacy rEEG-Guided Efficacy
>80% 83% 70% 100%
- -------------------- ----------------------- -------------------- ----------------------
- -------------------- ----------------------- -------------------- ----------------------
Monte Nido Hamilton-Newport Beach Hoffman-Denver L'Abri Dual Diagnosis
Eating Disorder Case Case Series Case Series San Diego Case Series
Series 34 Patients 15 Patients 58 Patients
81 Patients
- -------------------- ----------------------- -------------------- ----------------------
rEEG-Guided Efficacy rEEG-Guided Efficacy rEEG-Guided Efficacy rEEG-Guided Efficacy
83% 78% 73% 93%
- -------------------- ----------------------- -------------------- ----------------------
ADD/DEPRESSION STUDY
-----------------------------------------------------------------------
Prospective study with retrospective analysis.
EFFICACY: >80%
Date: 1995. The initial formalized trial consisted of 100 patients of
which 46 were diagnosed with ADD and 54 with depression. Conventional
thought would have anticipated that the ADD patients would have
responded to the stimulants and the depressed patients would have
responded to the antidepressants. In this study, those that failed to
respond to conventional treatment were treated with non-conventional
medications. rEEG correctly identified which patients would respond to
which medications over 80% of the time. This study was published in
Clinical Electroencephalography.(16)
VETERANS ADMINISTRATION BLINDED PROSPECTIVE MAJOR DEPRESSION STUDY
-----------------------------------------------------------------------
Randomized, Prospective, Double-Blind Study
Date: 1997-1999. A pilot prospective study of severe and long-term
Veterans Administration patients diagnosed with major depressive
disorders was conducted under the direction of Dr Art Kling, former
Vice-Chairman of the Department of Psychiatry at UCLA. The trial
consisted of 13 patients, all diagnosed with depression with average
illness duration of 16 years. As measured by all indices used, all
patients but one in the rEEG guided treatment group showed significant
- ----------
(15) DUNNER, D.L., RUSH, A.J., RUSSELL, J.M., BURKE, M., WOODARD, S., WINGARD,
P., and ALLEN, J., PROSPECTIVE, LONG-TERM, MULTICENTER STUDY OF THE NATURALISTIC
OUTCOMES OF PATIENTS WITH TREATMENT-RESISTANT DEPRESSION. J CLIN PSYCHIATRY.
67(5):688-95 (May 2006).
(16) Suffin, S. C. and Emory, W. H., CLINICAL ELECTROENCEPHALOGRAPHY, 26(2),
1995.
48
improvement (86%). In the control group, where patients were treated
without the benefit of rEEG, only one of the patients significantly
improved based upon physician-guided medication selection (17%), and as
it turned out, this patient received the class of medication that rEEG
predicted would most benefit the patient need even though this
knowledge was not available to the physicians in the control group.
This study has been submitted for publication.
TREATMENT-RESISTANT PATIENT FIELD TRIAL - CIGNA CO-SPONSORSHIP
-----------------------------------------------------------------------
A pilot study conducted between 2000 and 2002 with CIGNA Behavioral
Health and its network of Atlanta psychiatrists included 56
treatment-resistant patients. All patients had previously failed at
least two trials of medication treatments. Utilizing rEEG guidance, 69%
of patients were reportedly responsive to identified treatments.
PHYSICIAN CASE SERIES
-----------------------------------------------------------------------
Six physicians in five different clinical settings covering a wide
variety of diagnoses and ages have now reported on treatment results
aided by the use of rEEG in their clinics. The physicians received no
remuneration of any kind from CNS and, in most cases, paid or had their
patients pay for the test and rEEG analysis. After reporting on their
results, a number of these physicians developed a strong desire to
instruct other physicians in the use of rEEG, and they have now become
regional medical directors with responsibility for training other
physicians. These physicians generally reported patient outcomes on the
seven-point scale, Clinical Global Improvement Index. Most also
reported their subjective assessment of the helpfulness of rEEG in
treatment of each patient on a seven-point scale, Clinical Helpfulness
Index. These patients had a wide variety of disorders but were
generally unresponsive to previous treatment efforts. We are pleased
that virtually all reported case series have shown compelling treatment
results with 70% to 90% of patients achieving MUCH IMPROVED or VERY
MUCH IMPROVED rankings. Equally important, similar levels were reported
in the rEEG Helpfulness Index (SIGNIFICANTLY HELPFUL or ESSENTIAL).
MONTE NIDO RESIDENTIAL TREATMENT CENTER
-----------------------------------------------------------------------
Monte Nido is a small in-patient treatment clinic in Malibu,
California, treating patients suffering from significant eating
disorders, primarily anorexia nervosa or bulimia. Dr. W. Hamlin Emory
is Medical Director of this facility. An initial analysis of treatment
results of 81 patients with pharmacotherapy based on rEEG was compared
to 10 patients treated by physicians without rEEG and 13 patients who
had rEEG testing but decided against medication. 83% of the rEEG guided
patient achieved SIGNIFICANT or MARKED improvement. None of the
patients in the other two groups achieved this level of improvement.
These results were published in a Scientific Poster at the National
Institute of Mental Health annual meeting, New Clinical Drug Evaluation
Unit Symposium of 2004. The Monte Nido Residential Treatment Center is
now seeking long term outcome data through patient surveys. We are
looking forward to learning of these results. The initial study was
described in a report in 2001.
HAMILTON-NEWPORT BEACH CASE SERIES
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Conducted by Dr. Jim Hamilton, a Physician in Newport Beach, CA. In
this study, 34 treatment-resistant patients medicated based on
information provided in rEEG Reports were followed and rated. 19 of the
34 patients had addictive disorders. Only 28 of the 34 cases were
analyzed due to the fact that the balance were not available for
follow-up. Of the 28 analyzed, in 22 of these 28 cases rEEG was judged
49
to be essential or very helpful in their treatment. In 14 out of these
28 cases, where the rEEG was judged essential, Dr. Hamilton reported
that rEEG had directed him "to combinations of medicines that one would
never find, or would take years to find after nothing else had worked."
In the 19 addiction cases, 4 were lost to follow-up, but in the 15 that
were followed, rEEG was judged essential or very helpful in 14 (79%) of
the cases.
HOFFMAN-DENVER CASE SERIES
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Conducted by Daniel Hoffman, M.D., now the Company's Chief Medical
Officer, with a practice in Denver, CO. This study was conducted prior
to Dr. Hoffman's affiliation with the Company. In this study, rEEG
Reports were provided for 74 treatment-resistant patients who were then
followed, and were rated on both the CGI scale and the "Helpfulness"
Index. In 56 (74%) of these cases, rEEG was judged to be essential or
very helpful in their treatment. A like percentage reported a much
improved or very much improved on the Clinical Global Improvement
index.
DAVIS-ATLANTA CASE SERIES
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Conducted by T. Albert Davis, M.D., Medical Director at the Florence
McDonnell Center in Atlanta. This was Dr. Davis's initial study of 15
patients that he treated with the aid of rEEG Reports. All 15 patients
were reported as having successful outcomes with 7 rated as Very Much
Improved and 8 rated Much Improved on the CGI scale. In Helpfulness,
rEEG was rated essential for 9 of these patients and moderately helpful
for six of these patients.
RANCHO L'ABRI DUAL DIAGNOSIS
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In this study, 58 "dual diagnosis" (addiction and co-morbid mental
illness) patients were treated at Rancho L'Abri, San Diego, one of the
most respected in-patient treatment facilities in Southern California.
The physicians of Rancho L'Abri described their experience with rEEG in
a scientific poster at the 2005 American Psychiatry Association annual
meeting. The poster described both CGI rating of Very Much Improved or
Much Improved and Helpfulness rating of Essential or Very Helpful in
over 90% of the patients for whom it was used.
OUR BUSINESS PLAN - LABORATORY INFORMATION SERVICES
OUR STRATEGY
Our strategy is to provide rEEG analysis in a relationship with a
physician that is analogous to that of a reference laboratory. In each
geographic market, we plan to support this service with a full-time market
manager, identified EEG testing sites and a part-time Regional Medical Director.
The Regional Medical Director will provide local medical leadership and
training, local market communications, a site for physicians to refer
particularly challenging cases and support of family physicians needing
specialty consults.
In the next year, we plan to execute initiatives designed to allow for
dramatic introduction of rEEG to both treating physicians and their patients in
calendar year 2008. We envision this introduction will have elements of pushing
demand for rEEG via physician education and pulling demand for rEEG through
consumer education. The physician introduction will be accomplished through
development of an in-house direct sales force along with professional journal
and trade show introduction. The consumer introduction will utilize the major
broadcast, print and electronic news media.
50
Certain initiatives which are being considered for 2008 include:
1. EXPAND OUR GROUP OF CLIENT-PHYSICIANS TO INCLUDE MOST MAJOR US
CITIES. This key infrastructure development is one element
necessary for rapid penetration. rEEG Reports often stimulate
the identification of treatment strategies that most
physicians would not typically consider. Physicians often are
inexperienced in these treatment strategies, and they also may
be unfamiliar with combinations of medicines that may be
suggested by our rEEG Reports. It is valuable for physicians
who are not familiar with our rEEG Reports to have an
experienced colleague guide them through initial treatments
that are facilitated by the use of our rEEG Reports. For
physicians that are unfamiliar with our rEEG Reports, their
success is dependent on their ability to understand our rEEG
Reports and integrate them as another tool of insight to be
used in conjunction with their existing training.
2. CONDUCT THREE PILOT PROGRAMS WITH MANAGED CARE PAYERS. We
believe that adoption of rEEG for reimbursement is best
accomplished through demonstration of its clinical and
economic impact with patients in a health plan. In at least
one of these pilot programs, CNS will seek to pay for
independent economic and outcome analysis that CNS will have
the right to publish.
3. COMPLETE CURRENT MULTI-SITE AND CONDUCT ADDITIONAL ACADEMIC
TRIALS. CNS is conducting a nine site, 120 patient, academic
controlled, blinded, and randomized study of patients
suffering from treatment resistant depression. The study will
be conducted at Stanford, Cambridge Hospital-Harvard,
University of California - Irvine, University of California -
San Diego and University of Texas - San Antonio. This study
has been designed with significant care by many academicians
including members of our advisory board. Because of the
involvement of respected academic centers, we believe that the
results of the study will be published, and widely
disseminated.
4. IMPROVE SYSTEM TURN-AROUND TO NEXT DAY AND ADD CAPACITY TO
COVER PROJECTED VOLUME. We plan to increase the usefulness of
our service by returning reports to physicians one day after
patient data is submitted to us. To accomplish this task, we
will need to improve the coordination of functions related to
rEEG analysis that we currently outsource. Our longer term
goal is to advance rEEG turn-around time to be
"while-you-wait."
5. ENHANCE REPORTS TO PROVIDE QUANTITATIVE BIOMARKER DATA AND
DEVELOP PHYSICIAN TRAINING AND CERTIFICATION PROCESS. We plan
to advance our training programs this year with the aid of a
training CD-ROM which is currently in development. In
addition, our next generation rEEG report is anticipated to
provide technical data on the set of rEEG biomarkers in a
manner that will allow trained physicians to better consider
treatment options and integrate their knowledge of clinical
assessment and historical treatment experience with the rEEG
biomarker data. Our training program will aid physicians' use
and understanding of our rEEG Reports. The training process
will have the added advantage of communicating to patients and
their families that a participating physician has completed
rEEG training, and is competent in the use of rEEG Reports to
guide treatment.
6. EXPAND REPORTED MEDICATIONS TO INCLUDE ANTIPSYCHOTICS.
Antipsychotics are the only significant class of psychotropic
medications for which rEEG does not currently offer treatment
guidance. Psychosis is one of the most severe mental illness
and is also one of the most difficult to treat. We are
currently conducting studies to determine if our rEEG Reports
are useful in guiding the treatment of psychosis, especially
schizophrenia. We have an initiative to accomplish this
objective with a group in China.
51
7. ADD KEY LEADERSHIP IN MEDICINE AND MARKETING. We plan to continue
to hire, train, retain and motivate additional skilled personnel,
particularly managers with experience in growing healthcare
companies, sales representatives who are responsible for customer
education and training and customer support, as well as personnel
with experience in clinical testing and matters relating to
obtaining regulatory approvals.
MARKET INTRODUCTION
After accomplishing our immediate goals of building the regional
medical leadership and reaching agreement for pilot trials with MBHOs,
aggressive national introduction will occur with establishment of that regional
leadership, establishment of an introductory sales force, and prepublication
release of our treatment-resistant depression or other key study data.
PUSH: By accessing thought leaders in psychiatry at the national and
community level, publicizing the clinical benefits in professional and consumer
media, and relying on our own dedicated sales force to educate psychiatrists we
believe that the compelling benefits and economic efficiency of rEEG guidance
will provide large scale physician trial.
Our main promotional strategy with physicians will continue to be "try
it, you'll like it - no charge". Because of the low variable cost of producing
rEEG Reports, we can offer free trials to physicians to encourage them to begin
to experience the benefits of rEEG. Our current program offers Physicians five
(5) free Type I reports with their only commitment being the completion of a
consultative review with one of our regional medical directors for each report.
We encourage physicians to select their most hard to treat patients for these
free trials. It is our expectation that no matter how well conducted our
academic trials, physicians need to experience rEEG for themselves. One
physician has written a letter to CNSR stating, "I DON'T KNOW THAT I COULD GO
BACK TO PRACTICING BLINDED PSYCHIATRY. UNTIL YOU EXPERIENCE HOW DIFFERENT IT
FEELS TO PRACTICE THIS WAY, I COULD SEE SKEPTICISM FROM OTHERS." We believe
physician trial is the key to adoption of rEEG.
PULL: We intend to utilize major print, broadcast and electronic news
media to explain the benefits of rEEG directly to patients. We believe that
these media are the most effective and cost-efficient means to pull-in consumer
demand for rEEG and that we have an unusual opportunity to develop a large reach
at an early stage that can stimulate dynamic demand.
This demand will also encourage physicians to seek early understanding
of rEEG and our goal of trial. Assisting patients to find early adopting
physicians by providing identification of trained physicians on our web site
will likely provide another win- win for patients, physicians and CNS.
NEW MARKETS
ADDITIONAL APPLICABLE DISORDERS
While physicians have historically classified central nervous system
disorders as psychiatric or neurological, the diseases themselves could be
characterized as disorders of the same organ system, primarily the brain. The
utility of using of neurophysiological data to guide treatment of the brain in
connection with psychiatric disorders may well extend to neurological disorders.
For example, we currently have significant information in our rEEG
Outcomes Database with respect to the effectiveness of anticonvulsants for
patients with certain biomarkers. We intend to explore the utility of our
biomarkers for guiding use of medications, including anticonvulsants, for their
52
primary indication of seizure disorders, as well as their utility in pain
management for which they are also often prescribed.
ADDITIONAL APPLICATIONS BEYOND TREATMENT-RESISTANCE
Due to the success of rEEG with treatment-resistant patients, we
believe that rEEG has the potential to become a useful tool for psychiatrists in
treating patients that do not qualify as treatment resistant. For example, it is
generally acknowledged that children have a wide range of reactions to
anti-depressants and, in fact, anti-depressants in many cases actually harm
instead of help them. The ability to avoid prescribing anti-depressants for
children that may have a physiological predisposition to react negatively would
reduce suffering for both the children, and their families, and facilitate the
identification of a successful strategy earlier in the process. In addition,
adolescents, who are typically intolerant of the long process of medication,
would be especially good candidates for rEEG guided therapy.
CENTERS OF EXCELLENCE
It is our intention to work with our Client-Physicians, and our medical
advisors to support, possibly with financial resources, the establishment of
practices and/or clinics that specialize in the use of rEEG guided therapy. We
believe that a network of such practices, which we call "Centers of Excellence,"
will provide opportunities for physician training and additional clinical trials
and demonstrations of the value of rEEG technology. It is our goal to make these
Centers of Excellence a destination for treatment-resistant patients and a
resource for care managers of the MBHOs, and, in time, a network of such Centers
may be in a position to contract for a disease management program with the
managed care industry.
GOVERNMENT
The market for our Laboratory Information Services potentially includes
state hospitals, wards of the state in specialty care homes for persistently and
seriously ill and jails. 2,186,230 prisoners were held in Federal or State
prisons or in local jails as of mid 2005.(17) Rates of severe mental illness in
this population are reportedly as high as 24%.(18) We are not currently pursuing
this market, in part because there is a substantial incidence of Schizophrenia
in this population and we do not yet have sufficient data to provide treatment
guidance for Schizophrenic patients.
We believe the incarcerated population returning to society may be a
particularly good market for rEEG. We have not yet explored the opportunity to
address this population but are interested in studying whether rEEG guided
treatment might add enough improvement in efficiency and effectiveness to alter
the recidivism rate.
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(17) U.S. Dept. of Justice- Bureau of Justice Statistics,
(http://www.ojp.usdoj.gov/bjs/prisons.htm).
(18) Daly, R., PRISON MENTAL HEALTH CRISIS CONTINUES TO GROW, Psychiatry News,
40-20 at 1 (October 20, 2006).
53
RESEARCH AND DEVELOPMENT
We will continue to enhance, refine and improve the accuracy of our CNS
Database and rEEG through expansion of the number of medications covered by our
rEEG Reports, expansion of our biomarkers, refinement of our biomarker system,
and by reducing the time to turnaround a report to the physician.
OUR BUSINESS PLAN - PHARMACEUTICAL DEVELOPMENT AND ADVANCEMENT
Although we intend to emphasize our Laboratory Information Services
during the next twelve (12) months, we plan to increase our involvement with the
pharmaceutical industry in the future.
OUR STRATEGY
Our strategy in the next year is the initiation of marketing of rEEG to
selected potential pharmaceutical development partners. Evaluation of such
opportunities by potential partners is complicated by many issues including
state of intellectual property, regulatory approval for marketing and the
trial(s) necessary, medication delivery and packaging requirements of the
medications, therapeutic synergy of the combination, market needs in selected
indications and related competitive advantage, estimated market size, production
costs, current physician familiarity with the individual agents and other
considerations.
A secondary goal is to explore the business opportunity in aiding in
resuscitating opportunities for psychiatric medications that are no longer being
pursued by their developers despite the fact that such medications demonstrated
significant efficacy for subgroups of patients in clinical trials. We believe
that, by using our system of rEEG biomarkers, we can aid in identifying patient
populations that are more likely to respond to a particular medication based on
their common physiological characteristics. We are interested in exploring
cooperative relationships, which utilize our technology and rEEG Outcomes
Database to aid in the development and clinical trials of efficacious
medications that previously had failed to adequately demonstrate that efficacy
in late stage trials.
We intend to leverage our capabilities and technology to develop a
pharmaceutical business from four sources:
COMBINATION OF OFF-PATENT AGENTS FORMULATED INTO SINGLE PILL FIXED-DOSE
COMBINATIONS.
Our data has demonstrated that some patient electrophysiological
abnormalities are more frequently observed than others. Most of the frequent
abnormalities take more than one agent to bring the patient to an
electrophysiological normal state. This is not surprising, as the individual
agents were never developed from an electrophysiological normalizing
perspective. We have identified a number of high frequency abnormalities that
appear to be most effectively addressed by a combination of medications. We have
filed patent applications on two categories of combinations and expect to file
more. Our current focus is for opportunities in bulimia, treatment-resistant
depression and addiction.
PARTNERING WITH PHARMACEUTICAL DEVELOPERS TO "RESCUE" NEW AGENTS IN
DEVELOPMENT.
New Chemical Entities (NCEs) that have been shown to be safe, but not
efficacious in late stage clinical trials present opportunities to partner or
acquire and re-license. Specifically, our interest is focused on a group of
agents that can generally be described as having (a) completed pre-clinical
formulation, toxicology, pilot production development, and all required animal
studies, (b) completed Phase I human safety studies, (c) completed Phase II
human dosing studies and possibly conducted initial Phase III pivotal efficacy
54
studies. These agents will have shown themselves to be generally safe without
debilitating adverse affects but have been discontinued in development due to
their failure to show compelling efficacy in either Phase II or Phase III
studies.
We estimate that there are approximately 200 central nervous system
compounds which are sitting idle at large pharmaceutical companies after failing
Phase II or Phase III trial.(19) We have completed a review of 53 such agents
that fit the described criteria and initially has focused on eight which are
thought to be worthy of consideration for licensing. Five other agents have been
identified as to be worth in-licensing pursuit for United States development.
These are agents that have been approved in overseas markets but not in the
United States. While they may not have been adequately differentiated, or the
regulatory expense may not have seemed justifiable for the potential market
opportunity, we believe that these agents belong to classes that have been
generally under utilized for additional significant indications. We believe that
for some medications, our rEEG biomarker system will be able to identify
patients with a high likelihood of responding well to these medications based on
the presence of rEEG-defined biomarkers.
We believe our rEEG biomarker system can be used to effect:
o Reduction of placebo responders in a clinical trial by
focusing on treatment resistant patients or eliminating
patients demonstrating normal neurophysiologic function and
balance;
o An increase in treatment group responders by selecting
patients for trial inclusion based on the presence of specific
rEEG defined neurophysiology.
AMELIORATING THE CNS SIDE EFFECTS OF MEDICATIONS USED FOR OTHER MEDICAL
PURPOSES.
"Cancer fog" is a colloquial term used to describe the response of a
patient or care-givers response to the stresses and perhaps the medications
associated with cancer therapeutics. For patients, these effects appear to be
particularly specific to certain chemotherapeutic agents.
To the extent these agents cause a specific common alteration in
neurophysiological function, rEEG should be able to note and identify this. This
should allow the creation of a counteracting medication antidote for people
suffering from a neuropsychiatric condition following primary therapy.
COMPARABLE COMPANIES, COMPETITION AND INDUSTRY DEVELOPMENTS
INDUSTRY DEVELOPMENTS
We are not aware of any reference laboratories that service Psychiatry
with tools or information to direct therapy, although the following firms are
using neurophysiological data in an attempt to diagnose certain disorders and,
in some cases, monitor or confirm therapy:
o LEXICOR INC. (www.lexicor.com) uses EEG to diagnose ADHD
o NEURONETIX (www.neuronetix.com) uses tools to diagnose Autism,
Dyslexia and Alzheimer's
o AMEN CLINIC - uses SPECT for diagnosis and monitoring of
therapy
- ----------
(19) Jarvis, L. M. TEACHING AN OLD DRUG NEW TRICKS: GENE LOGIC IS CONVINCING BIG
PHARMA TO TAKE ANOTHER LOOK AT ABANDONED DRUGS. Chemical and Engineering News,
84-7 at 52,54-55(February 13, 2006).
55
o NEUROGNOSTICS - uses FMRI for confirmation of therapeutic
efficacy
We are not aware of any companies using neurophysiological data to
guide therapy in conjunction with a neurophysiology outcomes database.
COMPARABLE COMPANIES
Although there are no companies offering a service similar to that
offered by CNS, the following companies might be noted as comparable through
some commonalities:
o ASPECT MEDICAL SYSTEMS, INC. (Nasdaq: ASPM), an EEG anesthesia
monitoring company, is developing a specific EEG measurement
system that indicates a patient's likely response to some
antidepressant medications. Boston Scientific invested $25
million in a joint venture to accelerate this effort. Patients
must be measured prior to and after taking medication.
Publicly available knowledge suggests that the technology may
validate a patient's treatment but does not guide specific
treatment. Initial trials have shown efficacy in correlating a
patient's ultimate response to antidepressants. The revenue
model appears to involve sale of equipment and a per-patient
charge. The company is now conducting trials.
o HYTHIAM, INC. (Nasdaq: HYTM). Though perhaps more of an
analogous company than a competitor, Hythiam is a public
company introducing a proprietary addiction detoxification
procedure that purports to address physiologic needs of
addicts and impact on-going recovery. The company charges a
$15,000 fee for stimulant abusers and $12,000 for alcohol
abusers. Since CNSR does not provide guidance regarding
detoxification of addictions (only their post-detoxification
treatment), Hythiam is not a direct competitor.
o BRAIN RESOURCE COMPANY (www.brainresource.com), a development
stage Australian public company developing EEG and other
physiology data on patients with behavioral illness through a
network of physician data relationships. Their revenue model
includes physician services and sale of systems and services
to pharmaceutical development companies in the CNSR field.
o GENOMIC HEALTH, INC. (NasdaqGM: GHDX) This public company
provides analogous services to those of CNS for patients
suffering from cancer.
EMERGING TECHNOLOGIES
The entire field of neuropsychiatry is undergoing dramatic changes as a
result of the introduction of new technologies. Many of these changes are driven
by medical device companies including:
o CYBERONICS, INC. (Nasdaq: CYBX). Cyberonics has developed an
implantable Vagus Nerve Stimulation device approved for
treatment-resistant depression. This device has received
pre-marketing approval from the Food and Drug Agency for
patients and is believed to be under reimbursement review by
insurance payers.
o MEDTRONIC, INC. (NYSE: MDT). Medtronic has an implantable deep
brain stimulation device (DBS) in development which is similar
to their device approved for Parkinson's treatment.
o NEURONETICS (www.neuronetics.com). Neuronetics has developed a
trans-cranial magnetic stimulation (rTMS) device which is
designed to be applied externally in a series of treatments
over several weeks. The company is expected to file FDA
registration soon.
56
We view these developing treatment options as expensive augmentations
to existing therapies for treatment-resistant patients. From this perspective,
these devices can be considered as competitive therapeutic treatment options to
medications. To the best of our knowledge, rEEG-guided therapy provides a higher
probability of treatment success at a significantly lower cost than device-based
solutions, which gives us a competitive advantage in the marketplace.
GOVERNMENT REGULATION
Currently, we do not believe that sales of our Laboratory Information
Services, including our rEEG Reports, are subject to regulatory approval.
However, federal and state laws and regulations relating to the sale of our
Laboratory 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 Laboratory Information Services.
In the future, we intend to 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.
57
DESCRIPTION OF PROPERTY
We currently lease our office space under a lease agreement which
expires in November of 2008. The facility is approximately 1900 sq. ft, and is
located in Costa Mesa, California. It is from this facility that we conduct all
of our executive and administrative functions. We believe our space is adequate
for our current needs and that suitable additional or substitute space will be
available to accommodate the foreseeable expansion of our operations.
EMPLOYEES
As of February 1, 2008, we had 15 full-time employees. Since inception,
we have never had a work stoppage, and our employees are not represented by a
labor union. We consider our relationships with our employees to be positive.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal 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, that would have a
material adverse effect on our results of operations or financial position.
58
MANAGEMENT
The following table sets forth the name, age and position of each of
our executive officers and directors as of February 1, 2008.
NAME AGE POSITION
Leonard J. Brandt 51 Chairman of the Board, Chief Executive Officer
and Secretary
Horace Hertz 58 Chief Financial Officer
George Carpenter 49 President
Dr. Daniel Hoffman 59 Chief Medical Officer
David B. Jones 64 Director
Jerome Vaccaro, M.D. 52 Director
Dr. Henry T. Harbin 60 Director
LEONARD J. BRANDT, DIRECTOR, CHIEF EXECUTIVE OFFICER, SECRETARY & FOUNDER
Leonard Brandt became our Chairman of the Board, Chief Executive
Officer and Secretary upon completion of our merger with CNS California on March
7, 2007. Mr. Brandt is a founder of CNS California, and has served as its
President and Chief Executive Officer, and as a member of its Board of Directors
since its inception in 2000. Mr. Brandt started his career with Norwest Venture
Capital in 1980. In 1983 he became Vice President of Norwest Growth Fund and
General Partner of Norwest Venture Partners, where he served until 1990. In this
capacity he was primarily responsible for the firm's investments in the
healthcare industry, including several involving the behavioral health industry.
In 1995 Mr. Brandt founded Time Segment Publishing, Inc and was its President
until 1999. In 1999, Mr. Brandt co-founded Embro Vascular, LLC, a provider of
technology for least-invasive harvesting of the saphenous vein for heart-bypass
surgery. He also individually provided consulting to early stage ventures from
1993 until he co-founded Mill City Venture Consulting in 1998. Mill City Venture
Consulting was initially an advisor to NuPharm, Inc., the predecessor of CNS
California. Mr. Brandt has been a United States member of the government of New
Zealand Trade and Enterprise Advisory Board since 2005. Len holds a Bachelor of
Science degree from the College of Commerce at University of Illinois and a
Masters of Business Administration from Harvard University.
HORACE HERTZ, CHIEF FINANCIAL OFFICER
Horace Hertz became our Chief Financial Officer upon completion of our
merger with CNS California on March 7, 2007. Mr. Hertz has served as Chief
Financial Officer of CNS California since October 15, 2006. From August 2003 to
September 2006, Mr. Hertz served as the Chief Operating Officer and Chief
Financial Officer of Bankers Integration Group, a financial information company.
From April 2002 to August 2003, Mr. Hertz served as Chief Financial Officer of
Infacare Pharmaceutical Corporation, a medication development company. From
April 2, 2001 to April 2002, Mr. Hertz served as Interim Chief Executive Officer
of Maxoptix, Inc., a hardware company undergoing a restructuring. Prior to that
Mr. Hertz served as a Chief Financial Officer for a NASDAQ-listed public
company, Aspeon, Inc, a manufacturer of hardware, for 3 years. Mr. Hertz, a
Certified Public Accountant, was a partner of Deloitte & Touche, LLP from 1974
to 1991 and has a Masters Degree in Mathematics from the University of
California at Irvine.
59
GEORGE CARPENTER, PRESIDENT
George Carpenter has served as our President since October 1, 2007.
Prior to joining us, 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. Core was
acquired in 2001 by Assurant, Inc. 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.
DR. DANIEL HOFFMAN, CHIEF MEDICAL OFFICER
Dr. Hoffman is a Neuropsychiatrist with over 25 years experience
treating general psychiatric conditions such as depression, bipolar disorder and
anxiety. He provides the newest advances in diagnosing and treating attentional
and learning problems in children and adults. Dr. Hoffman has authored over 40
professional articles, textbook chapters, poster presentations and letters to
the editors on various aspects of neuropsychiatry, Quantitative EEG, LORETA,
Referenced EEG, advances in medication management, national position papers and
standards, Mild Traumatic Brain Injury, neurocognitive effects of Silicone
Toxicity, sexual dysfunction and other various topics. Dr. Hoffman has given
over 58 major presentations and seminars, including Grand Rounds at Universities
and Hospitals, workshops and presentations at national society meeting (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. Dr
Hoffman has a Bachelor of Science in Psychology from the University of Michigan,
an MD from Wayne State University School of Medicine and conducted his Residency
in Psychiatry at the University of Colorado Health Sciences Center. During the
past five years, Dr. Hoffman has served as the President and CEO of
Neuro-Therapy Clinic, P.C., a company that is focused on discovering ways to
integrate technology into the creation of better business practices.
DAVID B. JONES, DIRECTOR
David B. Jones has been a director of CNS California since July 2006,
and became a director of the company upon completion of our merger with CNS
California on March 7, 2007. Mr. Jones currently serves as a partner of Sail
Venture Partners, L.P., a position which he has held since 2003. Mr. Jones also
currently serves as a director of Earthanol, Inc. From 1998 to 2004, Mr. Jones
served as Chairman and Chief Executive Officer of Dartron, Inc., a computer
accessories manufacturer. From 1985 to 1997, Mr. Jones was a general partner of
InterVen Partners, a venture capital firm with offices in Southern California
and Portland, Oregon. From 1979 to 1985, Mr. Jones was President and Chief
Executive Officer of First Interstate Capital, Inc., the venture capital
affiliate of First Interstate Bancorp. Mr. Jones is a graduate of Dartmouth
College and holds Masters of Business Administration and law degrees from the
University of Southern California.
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 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. Prior to his appointment as president of APS, Mr. Vaccaro served as
60
Senior Vice President with United Health Group's Specialized Care Services. He
has served in a number of health care executive roles, most recently as Chief
Executive Officer of United Behavioral Health, and before that as President and
Chief Executive Officer of PacifiCare Behavioral Health ("PBH"). 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.
HENRY T. HARBIN, M.D., DIRECTOR
Henry Harbin, M.D. joined our Board of Directors on October 17, 2007.
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 3 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. Since 2004, Dr. Harbin has been providing health care
consulting services to a number of private and public organizations.
Except for Mr. Harbin, who was the Chief Executive Officer of Magellan
Health Services within two years prior to Magellan Health Services' bankruptcy
filing, in the past five years, none of our officers or directors has had any
bankruptcy petition filed by or against any business of which such officer or
director was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time. None of our officers and
directors have been convicted in a criminal proceeding or are subject to a
pending criminal proceeding, excluding traffic violations or similar
misdemeanors, nor have they been subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending, or
otherwise limiting his involvement in any type of business, securities or
banking activities. In addition, none of our officers and directors have been
found by a court of competent jurisdiction (in a civil action), the Commission,
or the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated. There are no family relationships among our executive
officers and directors.
BOARD COMPOSITION AND COMMITTEES
Our board of directors currently consists of four members: Leonard
Brandt, David Jones, Jerome Vaccaro, and Henry Harbin. Except for Mr. Harbin,
who was appointed by our Board of Directors to fill a vacancy created by an
expansion in the size of our Board of Directors, each director was elected
either at a meeting of shareholders or by written consent of the shareholders.
Each of our directors will serve until our next annual meeting or until his or
her successor is duly elected and qualified. We do not have a separately
designated audit, compensation or nominating committee of our board of directors
61
and the functions customarily delegated to these committees are performed by our
full board of directors. We are not a "listed company" under SEC rules and are
therefore not required to have separate committees comprised of independent
directors. We have, however, determined that David Jones, Jerome Vaccaro and
Henry Harbin are "independent" as that term is defined in Section 4200 of the
Marketplace Rules as required by the NASDAQ Stock Market. We have also
determined that David Jones qualifies as an "audit committee financial expert"
within the meaning of the rules and regulations of the SEC and that each of our
other board members are able to read and understand fundamental financial
statements and have substantial business experience that results in that
member's financial sophistication. Accordingly, our board of directors believes
that each of its members has sufficient knowledge and experience necessary to
fulfill the duties and obligations that an audit committee would have.
We intend to establish an audit, compensation and nominating committee
of our board of directors later this year as we recently expanded our board to
include three directors who are independent directors under the applicable rules
of the SEC and NASDAQ.
KEY EMPLOYEE
BRIAN MACDONALD, a co-founder of the company, has served as our Director of
Engineering since 2000. Prior to receiving his Master of Business Administration
from the Wharton School of Business, University of Pennsylvania, in 1990, Brian
was trained in operations and chemical engineering. He consulted for Deloitte &
Touche Management Consulting from July 1990 to April 1995, KPMG Strategic
Services from April 1995 through April 1996, and in private practice from April
1996 until January 1999. Mr. MacDonald's focus throughout this time was in the
area of operations and information systems. Brian is co-founder of Mill City
Venture Development, an entity founded in January 1999 that consulted for the
predecessor company to CNS. In addition to his Masters of Business
Administration, Mr. MacDonald holds a Bachelor of Science degree from the
University of Alabama.
SCIENTIFIC AND MEDIA ADVISORS
CNS's Scientific Advisors and Media Advisors are experts in their field. During
their tenure, CNS Board of Directors and management team utilize their
specialized expertise on an as-needed basis.
STEPHEN C. SUFFIN, MD, Advisor, is certified in anatomic and clinical pathology
and has published more than 50 scientific papers. Dr. Suffin is a former
Investigator at the Laboratory of Infectious Diseases at the National Institute
of Allergy and Infectious Diseases and consultant to the Armed Forces Institute
of Pathology before returning to the West Coast to become Medical Director at
Upjohn's Laboratory Procedures. Dr. Suffin has served as a medical director for
SmithKline Beecham and Quest Diagnostics for over 20 years. Additionally, Dr.
Suffin is a board certified psychiatrist who has served as the medical director
of two psychiatric hospitals and as the Chief Medical Officer of CNS California
from its founding in 2000 until 2002.
MAURIZIO FAVA, MD, Advisor, is currently Associate Chief of Psychiatry for
Clinical Research and Director of the Depression Clinical and Research Program
at the Massachusetts General Hospital and Professor of Psychiatry at Harvard
Medical School. Dr. Fava has authored or co-authored more than 200 original
articles, edited four books, published more than 50 chapters, 200 abstracts and
given more than 200 presentations at national or international meetings. He has
received several awards during his career and is on the editorial board of four
international medical journals. Dr. Fava's prominence in the field is reflected
by his role as the co-principal investigator of STAR*D, the largest study ever
conducted in the area of depression.
62
ALAN SCHATZBERG, MD, Advisor, is the Kenneth T. Norris, Jr., Professor and
Chairman of the Department of Psychiatry and Behavioral Sciences at Stanford
University. He has authored over 500 publications and abstracts, including the
MANUAL OF CLINICAL PSYCHOPHARMACOLOGY, (fifth edition published in 2005),
co-edited the TEXTBOOK OF PSYCHOPHARMACOLOGY (third edition 2003) and is
Co-Editor-in-Chief of the JOURNAL OF PSYCHIATRIC RESEARCH. He has received
numerous awards during his career, including most recently the Distinguished
Service in Psychiatry Award from the American College of Psychiatrists and is on
the editorial board of several international medical journals. In 2003, Dr.
Schatzberg was elected into the Institute of Medicine of the National Academy of
Sciences.
MAX A. SCHNEIDER, MD, Medical Advisor to CNS, Director of Education, Positive
Action Center at Chapman Medical Center, Orange, California, is a Fellow and
Past President of the American Society of Addiction Medicine (ASAM), a Past
Chair of the Board of Directors of the National Council on Alcoholism and Drug
Dependence (NCADD), a former consultant to the Drug and Alcohol Advisory
Committee of the U.S. Food and Drug Administration and a Certified Medical
Review Officer. He currently serves as a Clinical Professor at the University of
California at Irvine where he teaches in their Addiction Medicine program which
he founded in 1969. Dr. Schneider has produced ten films and five booklets on
addiction. In 1956 he was a member of the research team that developed "mouth to
mouth" resuscitation that revolutionized the technique of artificial
resuscitation.
GREGORY VISTICA, Advisor to CNS, is the president of Washington Media Group,
Inc., a communications firm that specializes in crisis management. He is also a
principal with SAIL Venture Partners, an energy/cleantech venture firm. He is an
author and former award-winning investigative journalist who has worked as a
correspondent for NEWSWEEK, a contributing writer for THE NEW YORK TIMES
MAGAZINE, a staff writer for THE WASHINGTON POST, a producer for 60 MINUTES II,
and a military affairs writer for THE SAN DIEGO UNION-TRIBUNE. He has been
nominated for an EMMY by CBS News and was a finalist for a PULITZER PRIZE
nominated by the New York Times. He won a PEABODY AWARD and THE GEORGE POLK
AWARD for his investigative reporting of the "Tailhook Scandal."
63
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides disclosure concerning all compensation
paid for services to us in all capacities for our fiscal year ended September
30, 2007 (i) as to each person serving as our Chief Executive Officer during our
fiscal year ended September 30, 2007, (ii) as to our most highly compensated
executive officer other than our Chief Executive Officer who was serving as an
executive officer at the end of our fiscal year ended September 30, 2007, whose
compensation exceeded $100,000 and (iii) as to each other individual, who was
not an executive officer as of our fiscal year ended September 30, 2007, whose
compensation exceeded $100,000. The people listed in the table below are
referred to as our "named executive officers".
Fiscal Year All Other
Name and Ended Option Compensation
Principal Position September 30, Salary($) Bonus($) Awards($) ($)(7) Total($)
- --------------------- ------------- --------- -------- ----------- ------------ ---------
Leonard Brandt (Chief 2007 175,000 0 1,025,600(3) 18,000 1,218,600
Executive Officer,
Director)(1) ....... 2006 175,000 10,000 196,500(4) 59,700 441,200
Silas Phillips (2)
(former Chief 2007 0 0 0 0 0
Executive Officer) ..
2006 0 0 0 0 0
Horace Hertz (Chief 2007 143,750 0 515,400(5) 0 659,150
Financial Officer) ..
Brian McDonald ...... 2007 120,000 0 257,700(6) 0 377,700
(1) For the fiscal years ended 2005 and 2006, Mr. Brandt agreed to forgo
payment of his salary and allow CNS California to accrue such
compensation. In August 2006, Mr. Brandt agreed to settle his claims
for compensation through September 30, 2006 in the aggregate amount of
$1,106,900 in exchange for the issuance of 298,437 shares of CNS
California common stock, which were exchanged for 298,437 shares of our
common stock upon the closing of the Merger on March 7, 2007.
(2) Silas Phillips was appointed the CEO, President, CFO, Secretary and
sole Director of the company on July 18, 2006. Mr. Phillips resigned
from all of his positions with the company upon the closing of the
merger with CNS California on March 7, 2007. Mr. Phillips did not
receive any compensation for serving as an officer and director of the
company.
(3) The fair value of options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: grant date fair value of $1.09; dividend yield of 0; risk
free interest rate of 4.72%; expected volatility of 91% and an expected
life of 5 years.
(4) Represents options to purchase 2,124,740 shares of our common stock for
which the CNS California common stock underlying the originally issued
options were exchanged upon the closing of the Merger. The options are
fully vested and exercisable at $0.132 per share. The fair value of
options was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:
grant date fair value of $0.132; dividend yield of 0; risk free
interest rate of 5.5%; expected volatility of 100% and an expected life
of 5 years.
64
(5) The fair value of options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: grant date fair value of $1.09; dividend yield of 0; risk
free interest rate of 4.72%; expected volatility of 91% and an expected
life of 5 years.
(6) The fair value of options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: grant date fair value of $1.09; dividend yield of 0; risk
free interest rate of 4.72%; expected volatility of 91% and an expected
life of 5 years.
(7) Relates to insurance premiums paid on behalf of Mr. Brandt by the
company.
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE
We compensate our executive officers through a combination of a base
salary, a cash bonus, and options to purchase shares of our common stock. We did
not pay any bonuses to our executive officers during our fiscal year ended 2007
as we desired to retain our cash to fund our growth. The bonuses paid to our
executive officers in fiscal year ended 2006 were determined by our Board of
Directors, and were based on the performance of the executive officer and the
company. We do not have a formal plan for determining the compensation of our
executive officers. All agreements with our named executive officers that
provide for payments 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
are set forth below under the heading "Employment Agreements."
EMPLOYMENT AGREEMENTS
GEORGE CARPENTER
On October 1, 2007, after our 2007 fiscal year end, we entered into an
Employment Agreement (the "Employment Agreement") with George Carpenter pursuant
to which Mr. Carpenter serves 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. In addition, pursuant to the terms
of the Employment Agreement, on October 1, 2007, Mr. Carpenter was granted an
option to purchase 968,875 shares of our common stock at an exercise price of
$0.89 per share pursuant to our 2006 Stock Incentive Plan, which vests as
follows: 121,109 shares vested on the grant date and the remaining 847,766
shares will vest in equal monthly installments of approximately 20,185 shares
over forty-two months beginning seven months after the commencement of Mr.
Carpenter's employment with us, subject to Mr. Carpenter's continued employment
with us. In the event of a change of control transaction, Mr. Carpenter's
options are subject to partial acceleration. 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, Mr. Carpenter shall be eligible
to receive as severance his salary and benefits for a period equal to six months
payable in one lump sum upon termination. If Mr. Carpenter is terminated by us
for cause, or if Mr. Carpenter voluntarily terminates his employment, he will
not be entitled to any severance.
65
DR. DANIEL HOFFMAN
On January 11, 2008, we entered into an Employment Agreement (the
"Employment Agreement") with Daniel Hoffman pursuant to which Dr. Hoffman will
serve as our Chief Medical Officer commencing 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, Dr. Hoffman will be eligible to receive as severance his
salary and benefits for a period equal to six months payable in one lump sum
upon termination. If Dr. Hoffman is terminated by us for cause, or if Dr.
Hoffman voluntarily terminates his employment, he will not be entitled to any
severance. Dr. Hoffman will be entitled to four weeks vacation per annum, health
and dental insurance coverage for himself and his dependents, and other fringe
benefits that we may offer our employees from time to time.
Prior to Dr. Hoffman's appointment to the position of Chief Medical
Officer, Dr. Hoffman was granted options to purchase an aggregate of 814,062
shares of our common stock at an exercise price of $1.09 on August 7, 2007, as
compensation for his services to us as a consultant. In accordance with the
terms of the Employment Agreement, the terms of Dr. Hoffman's option grant will
be amended to provide that in the event of a change of control transaction, Dr.
Hoffman's options will partially accelerate.
The Company has no other employment agreements with its executive
officers.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2007
The following table presents information regarding outstanding options
held by our named executive officers as of the end of our fiscal year ended
September 30, 2007. None of the named executive officers exercised options
during the fiscal year ended September 30, 2007.
Number of Securities Underlying
Unexercised Options (#)
-------------------------------
Option Option
Exercise Expiration
Name Exercisable Unexercisable Price ($) Date
- ------------ -------------- -------------- -------------- ---------------
Leonard 2,124,740 0 0.132 August 11, 2011
Brandt(1) 83,403 250,208 1.20 August 8, 2012
323,627 645,262 1.09 August 8, 2017
- ------------ -------------- -------------- -------------- ---------------
Horace Hertz 0 651,249 1.09 August 8, 2017
(2)
- ------------ -------------- -------------- -------------- ---------------
Brian 714,076 0 0.132 August 11, 2011
MacDonald(3) 101,758 223,867 1.09 August 8, 2017
- ------------ -------------- -------------- -------------- ---------------
(1) On August 8, 2007, Mr. Brandt was granted options to purchase 1,302,500
shares of our common stock. The options are exercisable at $1.20 per
share as to 333,611 shares and $1.09 per share as to 968,889 shares.
The options to purchase 333,611 shares vest as follows: options to
purchase 83,403 shares vested on August 8, 2007, the date of grant;
options to purchase 243,250 shares vest in equal monthly amounts of
6,950 shares over 35 months commencing on January 31, 2008; the
remaining options to purchase 6,958 shares vest on December 31, 2010.
The options to purchase 968,889 shares vest as follows: options to
purchase 269,357 shares vested on August 8, 2007, the date of grant;
options to purchase 135,675 shares vest in equal monthly amounts of
27,135 shares over 5 months beginning on August 31 2007; options to
purchase 543,276 shares vest in equal monthly of 20,138 shares over 27
months
66
beginning on January 31, 2008; the remaining options to purchase 20,131
shares vest on April 30, 2010.
(2) On August 8, 2007, Mr. Hertz was granted options to purchase 651,249
shares of our common stock. The options are exercisable at $1.09 per
share and vest as follows: options to purchase 162,812 vested on
October 15, 2007; options to purchase 474,880 shares vest in equal
monthly amounts of 13,568 over 35 months beginning November 30, 2007;
the remaining options to purchase 13,557 vest on October 15, 2010.
(3) On August 8, 2007, Mr. MacDonald was granted options to purchase
325,625 shares of our common stock. The options are exercisable at
$1.09 per share and vest as follows: options to purchase 101,758 shares
vested prior to September 30, 2007; options to purchase 223,867 shares
vest in equal monthly installments of 6,784 shares over 32 months
commencing on October 1, 2007; the remaining options to purchase 6,779
shares vest on June 30, 2010.
DIRECTOR COMPENSATION
During our fiscal year ended September 30, 2007, our non-employee
directors did not receive compensation for their services on our board. We do
not pay management directors for board service in addition to their regular
employee compensation. Going forward, we intend to compensate our non-employee
directors with a combination of cash payments and option grants. In addition,
even though we did not reimburse directors for travel expenses associated with
attendance at Board meetings during our fiscal year ended September 30, 2007 (as
no such expenses were incurred), it is our policy to reimburse directors for
such travel expenses.
After our fiscal year end, on December 19, 2007, we granted Mr. Harbin
options to purchase 20,000 shares of our common stock at an exercise price of
$0.80 per share under our 2006 Stock Incentive Plan. The options expire on
December 19, 2017. The options vest in equal installments of 5,000 shares on
each of June 19, 2008, December 19, 2008, June 19, 2009, and December 19, 2009.
The fair value of options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: grant date fair value of $0.80; dividend yield of 0; risk free
interest rate of 4.0%; expected volatility of 113% and an expected life of 10
years.
2004 STOCK INCENTIVE PLAN
On September 27, 2004, we adopted our 2004 Stock Option Plan pursuant
to which there were 15,000,000 shares of common stock reserved for issuance and
under which we may issue incentive stock options, nonqualified stock options,
stock awards and stock bonuses to officers, directors and employees. The option
price for each share of stock subject to an option was to 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 was an ISO granted to an eligible employee who is a 10%
shareholder, the option price for each share of stock subject to such ISO was to
be no less than 110% of the fair market value of a share of stock on the date
such ISO is granted. Stock options were to 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 was to be five years from the date
of grant. ISOs could be granted only to eligible employees. At September 30,
2007, there were no options outstanding under this plan, and we intend to
terminate this plan in the near future.
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
67
at the same price and terms. 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 to eligible employees, directors and consultants
and is administered by the board of directors. A total of 10 million shares of
stock are reserved for issuance under the 2006 Plan. As of September 30, 2007,
there were 7,436,703 options and 183,937 restricted shares outstanding under the
2006 Plan and 2,379,360 shares available for issuance of awards. The 2006 Plan
provides that in any calendar year, no eligible employee or director shall be
granted an award to purchase more than 3 million shares of stock. The option
price for each share of stock subject to an option shall be (i) no less than the
fair market value of a share of stock on the date the option is granted, if the
option is an ISO, or (ii) no less than 85% of the fair market value of the stock
on the date the option is granted, if the option is a NSO; provided, however, if
the option is an ISO granted to an eligible employee who is a 10% shareholder,
the option price for each share of stock subject to such ISO shall be no less
than 110% of the fair market value of a share of stock on the date such ISO is
granted. Stock options have a maximum term of ten years from the date of grant,
except for ISOs granted to an eligible employee who is a 10% shareholder, in
which case the maximum term is five years from the date of grant. ISOs may be
granted only to eligible employees.
CHANGES IN CONTROL
We do not have any arrangements which may at a subsequent date result
in a change in control.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
The Delaware General Corporation Law and certain provisions of our
certificate of incorporation an 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 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 were not 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, 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 for negligence or misconduct.
Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future or pursuant to a vote of stockholders or
directors. The provision cited above also grants 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
68
present, 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.
69
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 9,978,676 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 February 1, 2008, 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:
o each of the executive officers;
o each of our directors;
o all of our directors and executive officers as a group;
o each stockholder known by us to be the beneficial owner of
more than 5% of our common stock; and
o each of the selling stockholders.
Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Unless otherwise indicated below, to our knowledge, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of our common stock subject to options and warrants
from the company that are currently exercisable or exercisable within February
1, 2008 are deemed to be outstanding and to be beneficially owned by the person
holding the options for the purpose of computing the percentage ownership of
that person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
The information presented in this table is based on 25,299,547 shares
of our common stock outstanding on February 1, 2008. 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., 2755 Bristol St., Suite 285
Costa Mesa, CA 92626.
NUMBER OF SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
--------------------------------- ---------------------------------
PERCENTAGE OF NUMBER OF PERCENTAGE OF
SHARES SHARES SHARES
NAME OF BENEFICIAL OWNER NUMBER OUTSTANDING BEING OFFERED NUMBER OUTSTANDING
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
EXECUTIVE OFFICERS AND DIRECTORS:
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Leonard Brandt(1) ............... 9,078,888 31.1% 0 9,078,888 31.1%
Director, Chief Executive
Officer and Secretary
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
David B. Jones(2) ............... 4,338,521 16.4% 484,250 3,854,271 16.4%
Director
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
70
NUMBER OF SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
--------------------------------- ---------------------------------
PERCENTAGE OF NUMBER OF PERCENTAGE OF
SHARES SHARES SHARES
NAME OF BENEFICIAL OWNER NUMBER OUTSTANDING BEING OFFERED NUMBER OUTSTANDING
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Dr. Jerome Vaccaro (3) .......... 15,000 * 0 15,000 *
Director
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Dr. Henry Harbin (4) ............ 18,000 * 0 18,000 *
Director
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Horace Hertz (5) ................ 217,084 * 0 217,084 *
Chief Financial Officer
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
George Carpenter (6) ............ 121,109 * 0 121,109 *
President
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Dr. Daniel Hoffman (7) .......... 229,558 * 54,168 175,390 *
Chief Medical Officer
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Directors and officers as a group 14,018,160 45.3% 538,418 13,479,742 43.9%
(4 persons)(8)
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
5% STOCKHOLDERS:
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Stephen C. Suffin (9) ........... 1,260,316 5.0% 0 1,260,316 5.0%
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Sail Venture Partners LP (2) .... 4,338,521 16.4% 484,250 3,854,271 16.4%
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Brian MacDonald (10) ............ 2,092,128 8.0% 0 2,092,128 8.0%
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
W. Hamlin Emory (11) ............ 1,312,866 5.1% 0 1,312,866 5.1%
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Heartland Value Fund (12) ....... 2,340,000 9.1% 2,340,000 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
EAC Investment Limited
Partnership (13) ............. 1,766,279 6.8% 0 1,766,279 6.8%
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
LMA SPC for and on behalf of Map 1,625,000 6.3% 1,625,000 -- --
2 Segregated Portfolio;
Partner Healthcare Offshore Fund,
Ltd.;
Partner Healthcare Fund, L.P.(14)
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
OTHER SELLING STOCKHOLDERS:
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Mark Abdou (15) ................. 15,609 * 15,609 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Addison Adams (16) .............. 15,610 * 15,610 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Corporate Capital Partners (17) . 17,839 * 17,839 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Kevin Friedmann (18) ............ 13,380 * 13,380 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Victor Fu (19) .................. 13,379 * 13,379 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Ryan Hong (20) .................. 22,299 * 22,299 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Lisa Klein (21) ................. 13,380 * 13,380 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Kevin Leung (22) ................ 17,839 * 17,839 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Albert Liou (23) ................ 22,300 * 22,300 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
A&E Capital Partners, LLC (24) .. 22,299 * 22,299 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Nimish Patel (25) ............... 66,899 * 66,899 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Luan Phan (26) .................. 22,299 * 22,299 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Silas Phillips (27) ............. 22,300 * 22,300 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Erick E. Richardson (28) ........ 66,898 * 66,898 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Troy Rillo (29) ................. 22,300 * 22,300 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
John Tishbi (30) ................ 4,460 * 4,460 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
71
NUMBER OF SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
--------------------------------- ---------------------------------
PERCENTAGE OF NUMBER OF PERCENTAGE OF
SHARES SHARES SHARES
NAME OF BENEFICIAL OWNER NUMBER OUTSTANDING BEING OFFERED NUMBER OUTSTANDING
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
David J. Zwiebel (31) ........... 54,169 * 54,169 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Craig B. Swanson (32) ........... 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Jaeger Family LLC (33) .......... 16,249 * 16,249 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Henry Harbin, M.D. (34) ......... 10,835 * 10,835 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Edward M. Giles (35) ............ 110,500 * 110,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
David J. Galey (36) ............. 10,970 * 10,970 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Bill and Kim Woodworth (37) ..... 58,500 * 58,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Edmund H. Melhado (38) .......... 36,563 * 36,563 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Bradley N. Rotter Self Employed
Pension Plan & trust (39) .... 146,250 * 146,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Bradley Rotter (40) ............. 433,335 1.7% 433,335 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Paul E. von Kuster (41) ......... 109,688 * 109,688 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Paul E. von Kuster, Trustee,
Credit trust under will of
Thomas W. von Kuster (42) .... 55,575 * 55,575 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Joseph E. Stocke (43) ........... 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Martha S. McCormick (44) ........ 13,000 * 13,000 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
D. Dean McCormick III (45) ...... 13,299 * 13,299 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
David R. Holbrooke (46) ......... 58,500 * 58,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Max A Schneider, M.D. Trust (47) 14,625 * 14,625 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Frederick E. Kahn, MD (48) ...... 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Dr. Jim Greenblatt (49) ......... 129,028 * 58,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Lawrence M. Baill (50) .......... 32,886 * 14,625 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Lionsgate Capital (51) .......... 219,375 * 219,375 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Jospeh A. Bailey (52) ........... 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Dr. Samuel Klagsbrun (53) ....... 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Daniel E. Greenblatt (54) ....... 58,500 * 58,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Fred Ehrman (55) ................ 325,000 1.3% 325,000 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
William C. Brown (56) ........... 36,563 * 36,563 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Michael T. Cullen, M.D. (57) .... 48,182 * 26,000 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Crown Jewel Ventures, LLC (58) .. 131,807 * 30,713 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Thomas W. von Kuster Jr. (59) ... 16,625 * 14,625 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
George Karfunkel (60) ........... 130,000 * 130,000 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Westfield Microcap Fund L.P. (61) 216,668 * 216,668 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Itasca Capital Partners, LLC (62) 58,500 * 58,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
P. Kent Pachl (63) .............. 5,418 * 5,418 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Kerry Judd and Susan Stillman
(64) ........................ 10,970 * 10,970 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Mr. & Mrs. Shannon Sullivan (65) 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
H. R. Swanson Revocable Trust
(66) ........................ 58,500 * 58,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Robert James Blinken Jr. (67) ... 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Van Zandt Hawn (68) ............. 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Thomas E. Brust and Susan Brust
(69) ........................ 58,500 * 58,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Brean Murray Carret & Co. (70) .. 1,270,323 4.9% 1,244,978 25,345 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Pradeep Sinha (71) .............. 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Rotter Family Trust (72) ........ 130,000 * 130,000 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Hal F. Lewis (73) ............... 32,500 * 32,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
G&A Consulting Retirement Trust
(74) ........................ 58,500 * 58,500 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Arthur J. Bauernfeind RLT dated
6/25/04 (75) ................ 260,000 1.0% 260,000 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
72
NUMBER OF SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
--------------------------------- ---------------------------------
PERCENTAGE OF NUMBER OF PERCENTAGE OF
SHARES SHARES SHARES
NAME OF BENEFICIAL OWNER NUMBER OUTSTANDING BEING OFFERED NUMBER OUTSTANDING
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Frederick Winston Trustee,
Frederick Winston Revocable
Trust u/a dated 11/02/01 (76) 29,250 * 29,250 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Pacific Ridge Capital, LLC (77) . 40,954 * 40,954 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
SLWK Venture Fund, LLP (78) ..... 62,166 * 62,166 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Medlen & Carroll, LLP (79) ...... 119,834 * 16,035 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Hooper, Lundy & Bookman, Inc.
(80) ......................... 27,085 * 27,085 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Scott Alderton (81) ............. 50,894 * 29,726 21,168 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Murray Markiles (82) ............ 50,894 * 29,726 21,168 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
V. Joseph Stubbs (83) ........... 50,894 * 29,726 21,168 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Jonathan Hodes (84) ............. 25,535 * 17,308 8,227 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
John McIlvery (85) .............. 25,804 * 17,308 8,496 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Greg Akselrud (86) .............. 21,272 * 15,411 5,861 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Scott Galer (87) ................ 17,877 * 11,759 6,118 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Kevin DeBre (88) ................ 22,558 * 15,756 6,802 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Ryan Azlein (89) ................ 9,430 * 9,430 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
AJ Investors # 1 (90) ........... 216,668 * 216,668 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Westminster Securities (91) ..... 2,633 * 2,633 -- --
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
John Pagnucco (92) .............. 485,807 1.9% 64,125 421,682 1.7%
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
Doug Metz (93) .................. 25,101 * 7,359 17,742 *
- --------------------------------- --------------- --------------- --------------- --------------- ---------------
* Less than 1%
(1) Consists of (a) 5,138,991 shares of common stock (including 540,000
shares owned by Mr. Brandt's children), and 3,939,897 shares of common
stock issuable upon the exercise of vested and exercisable options and
warrants held by Mr. Brandt.
(2) Consists of (a) 3,109,406 shares of Common Stock and (b) 1,229,115
shares of Common Stock issuable upon the exercise of vested and
exercisable warrants held by Sail Venture Partners, LP. Of these
holdings, 372,500 shares of common stock and 111,750 shares of common
stock reserved for issuance upon exercise of certain warrants to
purchase common stock are being registered for resale. Sail Venture
Partners, LLC is the general partner of Sail Venture Partners, L.P..
The unanimous vote of the managing members of Sail Venture Partners,
LLC (who are Walter Schindler, Alan Sellers, Thomas Cain, and David B.
Jones), is required to voting and make investment decisions over the
shares held by this selling stockholder. The address of Sail Venture
Partners, L.P. is 600 Anton Blvd., Suite 1750, Costa Mesa, CA 92626.
(3) Consists of options to acquire 15,000 shares of common stock issuable
upon the exercise of vested and exercisable options.
(4) Consists of options to acquire 18,000 shares of common stock issuable
upon the exercise of vested and exercisable options.
(5) Consists of options to acquire 217,084 shares of common stock issuable
upon the exercise of vested and exercisable options.
(6) Consists of options to acquire 121,109 shares of common stock issuable
upon the exercise of vested and exercisable options.
(7) Consists of 98,044 shares of common stock and options to acquire
131,514 shares of common stock issuable upon the exercise of vested
options and warrants.
(8) Consists of 8,346,441 shares of common stock and 5,671,719 shares of
common stock issuable upon the exercise of vested and exercisable
options and warrants.
73
(9) Consists of 965,422 shares of common stock and 294,894 shares of common
stock issuable upon the exercise of vested and exercisable options and
warrants held by Mr. Suffin.
(10) Consists of 1,242,375 shares of common stock and 849,753 shares of
common stock issuable upon the exercise of vested and exercisable
options to purchase common stock. The address of Brian MacDonald is
4007 Beard Ave. South, Minneapolis, MN 55410.
(11) Consists of 1,015,334 shares of common stock and 297,532 shares of
common stock issuable upon the exercise of vested and exercisable
options to purchase common stock. The address of Mr. Emory is 9663
Santa Monica Blvd., Suite 221, Beverly Hills, CA 90210.
(12) Consists of 1,800,000 shares of common stock and 540,000 shares
reserved for issuance upon exercise of warrants to purchase common
stock. Heartland Group Value Fund is affiliated with Hartland Investor
Services, LLC, a registered broker/dealer and member of NASD. Heartland
Group Value Fund 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.
Mr.Paul T. Beste, Vice President & Secretary of Heartland Group Inc.,
exercises voting and investment authority over the shares held by this
selling stockholder. The address of the selling stockholder is c/o
Brown Brothers Harriman, 140 Broadway St., New York, NY 10005.
(13) Consists of 1,249,846 shares of common stock and 516,433 shares of
common stock issuable upon the exercise of warrants to purchase common
stock. Anthony Morgentheau exercises voting and investment authority
over the shares held by this selling stockholder. The address of the
selling stockholder is 380 Leucadendra Drive, Cora Gables, FL 33156.
(14) Consists of 224,110 shares of common stock and 67,233 shares reserved
for issuance upon exercise of warrants to purchase common stock held by
LMA SPC for and on behalf of Map 2 Segregated Portfolio; 651,090 shares
of common stock and 195,327 shares reserved for issuance upon exercise
of certain warrants to purchase common stock 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 held by Partner Healthcare Offshore Fund, Ltd. Eric Moore, as the
Chief Financial Officer of Partner Healthcare Offshore Fund, Ltd.,
exercises voting and investment authority over the shares held by
Partner Healthcare Offshore Fund, Ltd. Eric Moore, as the Chief
Financial Officer of Partner Healthcare Fund, L.P., exercises voting
and investment authority over the shares held by Partner Healthcare
Fund, L.P.. Robert P. Swan, as Director, exercises voting and
investment authority over the shares held by LMA SPC for and on behalf
of Map 2 Segregated Portfolio. The address of each of the selling
stockholders is One Market Plaza, Steuart Tower, 22nd Floor, San
Francisco, CA 94105.
(15) Consists of 15,609 shares of common stock.
(16) Consists of 15,610 shares of common stock.
(17) Consists of 17,839 shares of common stock.
(18) Consists of 13,380 shares of common stock.
(19) Consists of 13,379 shares of common stock.
(20) Consists of 22,299 shares of common stock.
(21) Consists of 13,380 shares of common stock.
(22) Consists of 17,839 shares of common stock.
(23) Consists of 22,300 shares of common stock.
(24) Consists of 22,299 shares of common stock. Edgar Park, as member,
exercises voting and investment authority over the shares held by this
selling stockholder.
(25) Consists of 66,899 shares of common stock.
(26) Consists of 22,299 shares of common stock.
(27) Consists of 22,300 shares of common stock.
(28) Consists of 66,898 shares of common stock.
(29) Consists of 22,300 shares of common stock.
(30) Consists of 4,460 shares of common stock.
74
(31) Consists of 41,668 shares of common stock and 12,501 shares reserved
for issuance upon exercise of warrants to purchase common stock.
(32) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(33) Consists of 12,499 shares of common stock and 3,750 shares reserved for
issuance upon exercise of warrants to purchase common stock. Eric
Jaeger, President and General Manager of Jaeger Family LLC exercises
voting and investment authority over the shares held by this selling
stockholder.
(34) Consists of 8,334 shares of common stock and 2,501 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(35) Consists of 85,000 shares of common stock and 25,500 shares reserved
for issuance upon exercise of warrants to purchase common stock.
(36) Consists of 8,438 shares of common stock and 2532 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(37) Consists of 45,000 shares of common stock and 13,500 shares reserved
for issuance upon exercise of warrants to purchase common stock.
Kimberly Craig-Woodworth and William N. Woodworth are affiliated with
Brean Murray, Carret & Co. a registered broker/dealer and member of
NASD. 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.
(38) Consists of 28,125 shares of common stock and 8,438 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(39) Consists of 112,500 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.
(40) Consists of 333,334 shares of common stock and 100,000 shares reserved
for issuance upon exercise of warrants to purchase common stock.
(41) Consists of 84,375 shares of common stock and 25,313 shares reserved
for issuance upon exercise of warrants to purchase common stock.
(42) Consists of 42,750 shares of common stock and 12,825 shares reserved
for issuance upon exercise of warrants to purchase common stock. 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.
(43) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(44) Consists of 10,000 shares of common stock and 3,000 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(45) Consists of 10,230 shares of common stock and 3,069 shares reserved for
issuance upon exercise of warrants to purchase common stock. D. Dean
McCormick is affiliated with a registered broker/dealer and member of
NASD. 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.
(46) Consists of 45,000 shares of common stock and 13,500 shares reserved
for issuance upon exercise of warrants to purchase common stock.
(47) Consists of 11,250 shares of common stock and 3,375 shares reserved for
issuance upon exercise of warrants to purchase common stock. Max
Schneider, Trustee of the Max A Schneider, M.D. Trust, exercises voting
and investment authority over the shares held by this selling
stockholder.
(48) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(49) Consists of 115,528 shares of common stock and 13,500 shares reserved
for issuance upon exercise of warrants to purchase common stock. 45,000
shares of common stock and 13,500 shares reserved for issuance upon
exercise of warrants to purchase common stock are being registered for
re-sale by the selling
75
shareholder on this prospectus. 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.
(50) Consists of 29,511 shares of common stock 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 are being registered for
re-sale by the selling shareholder on this prospectus.
(51) Consists of 168, 750 shares of common stock and 50,625 shares reserved
for issuance upon exercise of warrants to purchase common stock.
Kenneth Rickel, as President of Liongate Capital, exercises voting and
investment authority over the shares held by this selling stockholder.
(52) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock. Mr. Bailey
is affiliated with Brean Murray, Carret & Co., LLC, a registered
broker/dealer and member of NASD, 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.
(53) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(54) Consists of 45,000 shares of common stock and 13,500 shares reserved
for issuance upon exercise of warrants to purchase common stock.
(55) Consists of 250,000 shares of common stock and 75,000 shares reserved
for issuance upon exercise of warrants to purchase common stock. Mr.
Ehrman is affiliated with Brean Murray, Carret & Co. a registered
broker/dealer and member of NASD. 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.
(56) Consists of 28,125 shares of common stock and 8,438 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(57) Consists of 42,182 shares of common stock and 6,000 shares reserved for
issuance upon exercise of warrants to purchase common stock. 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.
(58) Consists of 124,719 shares of common stock and 7,088 shares reserved
for issuance upon exercise of warrants to purchase common stock. Sharon
Keene exercises voting and investment authority over the shares held by
this selling stockholder. 23,625 shares of common stock and 7,088
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.
(59) Consists of 13,250 shares of common stock 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 of common stock issuable upon
exercise of warrants are being registered for resale on this
prospectus.
(60) Consists of 100,000 shares of common stock and 30,000 shares reserved
for issuance upon exercise of warrants to purchase common stock.
(61) Consists of 166,667 shares of common stock and 50,001 shares reserved
for issuance upon exercise of warrants to purchase common stock.
William A. Muggia, the general partner of Westfield Microcap Fund L.P.,
exercises voting and investment authority over the shares held by this
selling stockholder.
(62) Consists of 45,000 shares of common stock and 13,500 shares reserved
for issuance upon exercise of warrants to purchase common stock.
Michael S. Wallace, the Managing Member of Itasca Capital Partners,
LLC, exercises voting and investment authority over the shares held by
this selling stockholder.
(63) Consists of 4,167 shares of common stock and 1,251 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(64) Consists of 8,438 shares of common stock and 2,532 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(65) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.
76
(66) Consists of 45,000 shares of common stock and 13,500 shares reserved
for issuance upon exercise of warrants to purchase common stock. H. R.
Swanson, Trustee of the H. R. Swanson Rev. Trust, exercises voting and
investment authority over the shares held by this selling stockholder.
(67) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(68) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(69) Consists of 45,000 shares of common stock and 13,500 shares reserved
for issuance upon exercise of warrants to purchase common stock.
(70) Consists of 633,138 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 NASD 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. 625,218 shares of common stock and 619,760
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.
(71) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(72) Consists of 100,000 shares of common stock and 30,000 shares reserved
for issuance upon exercise of warrants to purchase common stock. John
Rotter, Trustee of the Rotter Family Trust, exercises voting and
investment authority over the shares held by this selling stockholder.
(73) Consists of 25,000 shares of common stock and 7,500 shares reserved for
issuance upon exercise of warrants to purchase common stock. Mr. Lewis
is affiliated with a registered broker/dealer and member of NASD. 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.
(74) Consists of 45,000 shares of common stock and 13,500 shares reserved
for issuance upon exercise of warrants to purchase common stock. Gary
Gossard, as Trustee of the G&A Consulting Retirement Trust, exercises
voting and investment authority over the shares held by this selling
stockholder.
(75) Consists of 200,000 shares of common stock and 60,000 shares reserved
for issuance upon exercise of warrants to purchase common stock. Arthur
J. Bauernfeind, as Trustee of the Arthur J. Bauernfeind RLT dated
6/25/04, exercises voting and investment authority over the shares held
by this selling stockholder.
(76) Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock. Frederick
Winston, as Trustee of the Frederick Winston Revocable Trust u/a dated
11/2/01, exercises voting and investment authority over the shares held
by this selling stockholder.
(77) Consists of 8,334 shares of common stock and 32,620 shares reserved for
issuance upon exercise of warrants to purchase common stock. Mark
Mansfield of Pacific Ridge Capital, LLC, exercises voting and
investment authority over the shares held by this selling stockholder.
(78) Consists of 47,820 shares of common stock and 14,346 shares reserved
for issuance upon exercise of warrants to purchase common stock. Steve
Lundberg of SLWK Venutre Fund, LLP, exercises voting and investment
authority over the shares held by this selling stockholder.
(79) Consists of 116,133 shares of common stock and 3,701 shares reserved
for issuance upon exercise of warrants to purchase common stock. Peter
Carroll of Medlen & Carroll, LLP, exercises voting and investment
authority over the shares held by this selling stockholder. 12,334
shares of common stock and 3,701 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.
(80) Consists of 20,834 shares of common stock and 6,251 shares reserved for
issuance upon exercise of warrants to purchase common stock. Stephen K.
Phillips of Hooper, Lundy & Bookman, Inc. exercises voting and
investment authority over the shares held by this selling stockholder.
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(81) Consists of 36,096 shares of common stock and 14,798 shares reserved
for issuance upon exercise of warrants to purchase common stock. 22,866
shares of common stock and 6,860 shares of common stock reserved for
issuance upon exercise of warrants to purchase common stock are being
registed for re-sale on this prospectus by the selling shareholder.
(82) Consists of 36,096 shares of common stock and 14,798 shares reserved
for issuance upon exercise of warrants to purchase common stock. 22,866
shares of common stock and 6,860 shares of common stock reserved for
issuance upon exercise of warrants to purchase common stock are being
registed for re-sale on this prospectus by the selling shareholder.
(83) Consists of 36,096 shares of common stock and 14,798 shares reserved
for issuance upon exercise of warrants to purchase common stock. 22,866
shares of common stock and 6,860 shares of common stock reserved for
issuance upon exercise of warrants to purchase common stock are being
registed for re-sale on this prospectus by the selling shareholder.
(84) Consists of 18,456 shares of common stock and 7,079 shares reserved for
issuance upon exercise of warrants to purchase common stock. 13,314
shares of common stock and 3,994 shares of common stock reserved for
issuance upon exercise of warrants to purchase common stock are being
registed for re-sale on this prospectus by the selling shareholder.
(85) Consists of 18,624 shares of common stock and 7,180 shares reserved for
issuance upon exercise of warrants to purchase common stock. 13,314
shares of common stock and 3,994 shares of common stock reserved for
issuance upon exercise of warrants to purchase common stock are being
registed for re-sale on this prospectus by the selling shareholder.
(86) Consists of 15,518 shares of common stock and 5,754 shares reserved for
issuance upon exercise of warrants to purchase common stock. 11,855
shares of common stock and 3,556 shares of common stock reserved for
issuance upon exercise of warrants to purchase common stock are being
registed for re-sale on this prospectus by the selling shareholder.
(87) Consists of 12,869 shares of common stock and 5,008 shares reserved for
issuance upon exercise of warrants to purchase common stock. 9,045
shares of common stock and 2,714 shares of common stock reserved for
issuance upon exercise of warrants to purchase common stock are being
registed for re-sale on this prospectus by the selling shareholder.
(88) Consists of 16,371 shares of common stock and 6,187 shares reserved for
issuance upon exercise of warrants to purchase common stock. 12,120
shares of common stock and 3,636 shares of common stock reserved for
issuance upon exercise of warrants to purchase common stock are being
registed for re-sale on this prospectus by the selling shareholder.
(89) Consists of 7,254 shares of common stock and 2,176 shares reserved for
issuance upon exercise of warrants to purchase common stock.
(90) Consists of 166,667 shares of common stock and 50,001 shares reserved
for issuance upon exercise of warrants to purchase common stock. Adam
Katz, as Partner of AJ Investors #1, exercises voting and investment
authority over the shares held by this selling stockholder.
(91) Consists of 2,633 shares reserved for issuance upon exercise of
warrants to purchase common stock.
(92) Consists of 225,856 shares of common stock and 259,951 shares reserved
for issuance upon exercise of warrants to purchase common stock. Of
these holdings, 64,125 shares of common stock reserved for issuance
upon exercise of common stock are being registered for resale sale on
this prospectus by the selling shareholder.
(93) Consists of 9,566 shares of common stock and 15,535 shares reserved for
issuance upon exercise of warrants to purchase common stock. Of these
holdings, 7,539 shares of common stock reserved for issuance upon
exercise of common stock are being registered for resale on this
prospectus by the selling shareholder.
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RELATED PARTY TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CNS CALIFORNIA
Except as follows, since September 30, 2005, there has not been, nor is
there currently proposed, any transaction or series of similar transactions to
which CNS California is or will be a party:
o 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
three completed fiscal years; and
o in which any director, executive officer, other stockholders
of more than 5% of our common stock or any member of their
immediate family had or will have a direct or indirect
material interest.
From August 2000 through February 2003, Leonard J. Brandt, together
with Meyerlen, LLC, a company in which Mr. Brandt owned a controlling interest,
loaned CNS California a total of approximately $718,900 and purchased warrants
to purchase approximately 945,750 shares of CNS California common stock,
pursuant to the terms of certain Note and Warrant Purchase Agreements. In
October 2006, Mr. Brandt agreed to cancel the promissory notes and convert the
loans, including all outstanding principal and accrued interest thereon, into
1,218,741 shares of CNS California's Series A-1 Preferred Stock and 255,306
shares of CNS California's Series A-2 Preferred Stock. At the closing of the
Merger, the 1,218,741 shares of CNS California's Series A-1 Preferred Stock and
255,306 shares of CNS California's Series A-2 Preferred Stock converted into an
aggregate of 1,474,047 shares of our Common Stock. Subsequent to the closing of
the Merger, Meyerlen, LLC was dissolved, and ownership of all of the shares of
our Common Stock formerly held by Meyerlen, LLC were distributed to Mr. Brandt.
In connection with the consummation of an asset purchase transaction in
January 2000, by and between Mill City/CNS, LLC and NuPharm, Mill City issued to
NuPharm Database, LLC a certain Promissory Note dated January 11, 2000 (the
"Original NuPharm Note") pursuant to which Mill City was obligated to pay
NuPharm an aggregate principal amount of $299,923.00 together with interest
pursuant to the payment schedule set forth in the Original NuPharm Note. In
January 2000, Mill City contributed substantially all of its assets, including
those securing the Original Note, to CNS California, and CNS California assumed
certain debts and obligations of Mill City, including Mill City's obligations
under the Original NuPharm Note. In October 2006, CNS California entered into an
agreement with NuPharm to cancel the Original NuPharm Note in consideration for
the extension of the expiration date of a Warrant to purchase CNS California
Common Stock held by NuPharm and a new promissory note in the principal amount
of $287,423 (the "New NuPharm Note"). Upon the closing of the Private Placement,
the principal and accrued interest through December 31, 2006 on the New NuPharm
Note automatically converted into 244,509 shares of our Common Stock.
In May 2005, April 2006 and July 2006, Odyssey Venture Partners II,
L.P. (now called Sail Venture Partners LP) of which David Jones is a partner,
loaned CNS California an aggregate of approximately $999,400 and purchased
warrants to purchase approximately 523,305 shares of CNS California common
stock, pursuant to the terms of certain Note and Warrant Purchase Agreements. In
October 2006 Odyssey Venture Partners II, L.P. agreed to cancel the promissory
notes and convert the loans, including all outstanding principal and accrued
interest thereon, into 1,693,899 shares of CNS California's Series A-1 Preferred
Stock and 52,907 shares of CNS California's Series A-2 Preferred Stock. At the
closing of the Merger, the 1,693,899 shares of CNS California's Series A-1
Preferred
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Stock and 255,306 shares of CNS California's Series A-2 Preferred Stock
converted into an aggregate of 1,949,205 shares of our Common Stock.
On August 11, 2006, Mr. Brandt was granted an option to purchase
2,124,740 shares of CNS California's common stock for an exercise price of
$0.132 per share pursuant to CNS California's 2006 Stock Incentive Plan. At the
closing of the Merger, the option to purchase 2,124,740 shares of CNS
California's common stock was converted into the right to purchase an aggregate
of 2,124,740 shares of our Common Stock at an exercise price of $0.132 per
share.
In September 2006, CNS California entered into multiple settlement
agreements with its employees and consultants with respect to compensation
accrued for services provided to CNS California. Pursuant to CNS California's
settlement agreement with Mr. Brandt, CNS California issued to Mr. Brandt
1,519,366 shares of its common stock in settlement of accrued compensation due
in the amount of $1,258,705. In connection with this settlement, CNS California
loaned Mr. Brandt approximately $91,700 to pay the withholding tax on the value
of such shares, which loan was evidenced by a promissory note. Immediately
following the closing of the Merger, the loan to Mr. Brandt was repaid by Mr.
Brandt returning to us 78,219 shares of our common stock having a value equal to
the loan amount plus accrued interest thereon. Under a separate Settlement
Agreement, Mr. Brandt was issued 1,827,827 shares of CNS California's common
stock in settlement of amounts owed for reimbursement for business expenses paid
by Mr. Brandt through July 2006. At the closing of the Merger, the 1,519,366
shares of CNS California's common stock issued pursuant to the first of the
aforementioned settlement agreements, and the 1,827,827 shares of CNS
California's common stock issued pursuant to the second of the aforementioned
settlement agreements converted into an aggregate of 3,347,193 shares of our
Common Stock.
In October 2006, Odyssey Venture Partner II, L.P. (now called Sail
Venture Partners LP) invested $800,000 in CNS California's mezzanine financing
and received 792,080 shares of CNS California's Series B Preferred Stock and
warrants to purchase 475,248 shares of CNS California's common stock. David B.
Jones is one of the two board members that were designated by the holders of CNS
California's Series B Preferred Stock pursuant to a Voting Agreement entered
into in connection with the mezzanine financing and note conversion transaction.
At the closing of the Merger, David B. Jones was appointed as a director of the
company.
CNS RESPONSE, INC. (A DELAWARE CORPORATION)
Other than the transactions described below, since September 30, 2005,
there has not been, nor is there currently proposed, any transaction or series
of similar transactions to which we were or will be a party:
o 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
three completed fiscal years; and
o in which any director, executive officer, shareholder who
beneficially owns 5% or more of our common stock or any member
of their immediate family had or will have a direct or
indirect material interest.
NEOTACTIX, INC. CONSULTING AGREEMENT
Prior to the Merger, on June 22, 2004, the Company and NeoTactix (NTX)
entered into a Business Consulting Agreement ("NeoTactix Agreement") pursuant to
which NeoTactix agreed to provide certain business consulting services, in
exchange for 4,500,000 shares of the Company's common stock (on a pre-reverse
stock split basis). On August 24, 2004, our board elected both managing partners
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of NTX, Scott Absher and George LeFevre, to our board of directors, and also
elected Mr. Absher as CEO and Mr. LeFevre as CFO and Secretary. The Company and
NTX agreed that the compensation shares issued by the Company to affiliates of
NTX would be cancelled and returned to the Company if, prior to October 31,
2005, the Company had not achieved certain benchmarks pursuant to the NeoTactix
Agreement. On October 5, 2005, the NeoTactix Agreement was extended to October
31, 2006. On May 31, 2006, the Board of the Company approved the waiver of the
forfeiture clause contained in the NeoTactix Agreement and it was deemed fully
performed, and then terminated.
STOCK PURCHASE AGREEMENT
Prior to the Merger, on July 18, 2006, the Company entered into a Stock
Purchase Agreement with seventeen accredited investors pursuant to which the
Company agreed to issue 3,800,000 shares of the Company's common stock (76,000
shares of our common stock after taking into account our 1-for-50 reverse stock
split which became effective on January 10, 2007) to the purchasers. The Company
received an aggregate of $237,669 as consideration for the share issuance. In
addition, these investors acquired shares in private transactions with certain
of our stockholders, and acquired a majority stake in our issued and outstanding
shares. In connection with these transactions, effective July 18, 2006, Mr.
Scott Absher and Mr. George LeFevre resigned as officers and members of the
board of directors, and Mr. Silas Philips was appointed our Chief Executive
Officer, Chief Financial Officer, Secretary, and sole director. Mr. Phillips was
an investor in this private placement.
DEBT CANCELLATION AGREEMENTS
Prior to the Merger, on July 28, 2006, Scott Absher, our former CEO,
was paid a sum of $33,943 in full satisfaction of outstanding debt payable to
him by the Company pursuant to a Debt Cancellation Agreement. The remaining
balance of $47,612 including accrued interest was forgiven. Our former CFO,
George LeFevre, also agreed to forgive all of his outstanding debt, including
accrued interest, of $12,353 payable to the Company pursuant to a separate Debt
Cancellation Agreement.
NOTES PAYABLE
Prior to the Merger, on July 28, 2006, the principal balance of the
notes payable to related parties of $28,800 were satisfied. All related interest
was forgiven by related parties.
PRIVATE PLACEMENT
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.
TRANSACTIONS WITH HENRY HARBIN
Prior to his appointment as a Director, Dr. Harbin has been party to
several transactions with us. On March 7, 2007, Dr. Harbin participated in the
first closing of our private placement transaction (the "Private Placement"),
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
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common stock and a warrant to purchase 2,501 shares of our common stock as a
result of his investment in the company.
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 vest in equal installments of
2,000 shares on each monthly anniversary of the grant date for a period of nine
months.
TRANSACTIONS WITH DR. HOFFMAN
In connection with his appointment as Chief Medical Officer of the
company, we entered into a Stock Purchase Agreement with Neuro-Therapy Clinic,
P.C. ("Neuro"), a Colorado professional medical corporation wholly owned by Dr.
Hoffman, and Dr. Hoffman. Pursuant to the agreement, Dr. Hoffman sold all of the
shares of Neuro to us for a purchase price of $300,000 to be paid in cash. We
expect the acquisition of Neuro will help us further define the opportunity to
use technology in general, and our core technology referred to as "rEEG" in
particular, to improve our business performance.
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.
In addition, Dr. Hoffman has acted as a consultant to the corporation
on various matters since 2003. Prior to August of 2006, Dr. Hoffman was
compensated for his services through the issuance of options to purchase an
aggregate of 119,013 shares of our common stock at $0.12 per share, and through
the issuance of 56,377 shares of our common stock. Subsequent to August of 2006,
Mr. Hoffman has received cash payments in consideration for his services to us,
as well as an option to purchase 814,062 shares of our common stock at an
exercise price of $1.09 which was granted on August 7, 2007.
TRANSACTIONS WITH PROMOTERS AND CONTROL PERSONS
Prior to the Merger, which closed on March 7, 2007, Strativation, Inc.
(now called CNS Response, Inc.) existed as a "shell company" with nominal assets
whose sole busines was to identify, evalutate and investigate various companies
to acquire or with which to merge.
SHARES FOR DEBT AGREEMENT
Prior to the Merger, 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.
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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 Corporation signatory thereto ("Majority
Stockholders") in connection with the shares of the company acquired pursuant to
the Shares For Debt Agreement and certain other previously disclosed or
privately negotiated 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. On March 7,
2007, the merger with CNS California closed, CNS California became our
wholly-owned subsidiary, and we changed our name from Strativation, Inc. to CNS
Response, Inc.
At the Effective Time of the Merger (as defined in the Merger
Agreement, as amended on February 23, 2007), MergerCo was merged with and into
CNS California, the separate existence of MergerCo ceased, and CNS California
continued as the surviving corporation at the subsidiary level. We issued an
aggregate of 17,744,625 shares of our common stock to the stockholders of CNS
California in exchange for 100% ownership of CNS California. Additionally, we
assumed an aggregate of 8,407,517 options to purchase shares of common stock and
warrants to purchase shares of common stock on the same terms and conditions as
previously issued by CNS California. Pursuant to the merger agreement, our
former sole director and executive officer, Silas Phillips, resigned as a
director and executive officer of our company effective as of the closing of the
Merger, and the directors and officers of CNS California were appointed to serve
as directors and officer of our company. Except for the Merger Agreement, as
amended, and the transactions contemplated by that agreement, neither CNS
California, nor the directors and officers of CNS California serving prior to
the consummation of the Merger, nor any of their associates, had any material
relationship with us, or any of our directors and officers, or any of our
associates prior to the merger. Following the Merger, the business conducted by
the company is the business conducted by CNS California.
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.
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 February 1, 2008, we had 25,299,547 shares of Common Stock issued
and outstanding. In addition, we have reserved 8,545,578 shares of Common Stock
for issuance in respect of options to
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purchase common stock and 6,899,353 shares of Common Stock were reserved for
issuance pursuant to issued and outstanding warrants to purchase our Common
Stock.
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 February 1, 2008, the following warrants were outstanding:
o warrants that will expire at various times through 2012 to
purchase an aggregate of 1,688,132 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;
o 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;
o 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;
o 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;
o 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;
o warrants that will expire in 2012 to purchase 1,951,444 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;
o warrants that will expire in 2012 to purchase 520,381 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;
o 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
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with the private placement which was completed concurrently
with the Merger on March 7, 2007.
OPTIONS
At February 1, 2008, options to purchase 8,545,578 shares of our common
stock were outstanding. Of these options, 4,136,103 were granted to former
holders of options of CNS California, were assumed by us, and converted into
options to purchase shares of our common stock. The options granted to former
holders of options of CNS California are exercisable at a weighted average
exercise price of approximately $0.14 per share, and will expire at various
times on the tenth anniversary of the date on which they were granted.
ANTI-TAKEOVER PROVISIONS
Delaware has enacted the following legislation that may deter or
frustrate takeovers of Delaware corporations, such as CNS Response:
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. Section 203
provides, with some exceptions, that a Delaware corporation may not engage in
any of a broad range of business combinations with a person or affiliate, or
associate of the person, who is an "interested stockholder" for a period of
three years from the date that the person became an interested stockholder
unless: (i) the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the board of directors
of the corporation before the person becomes an interested stockholder; (ii) the
interested stockholder acquires 85% or more of the outstanding voting stock of
the corporation in the same transaction that makes it an interested stockholder,
excluding shares owned by persons who are both officers and directors of the
corporation, and shares held by some employee stock ownership plans; or (iii) on
or after the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least 66 2/3% of the corporation's outstanding voting stock at an
annual or special meeting, excluding shares owned by the interested stockholder.
An "interested stockholder" is defined as any person that is (a) the owner of
15% or more of the outstanding voting stock of the corporation or (b) an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether the person is an interested stockholder.
AUTHORIZED BUT UNISSUED STOCK. The authorized but unissued shares of
our common stock are available for future issuance without shareholder approval.
These additional shares may be used for a variety of corporate purposes,
including future public offering to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued shares of common stock may enable our Board to issue shares of stock to
persons friendly to existing management, which may deter or frustrate a takeover
of the company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company. The address of American Stock Transfer & Trust Company
is 59 Maiden Lane, New York, New York, and the phone number is (718) 921-8201.
LISTING
Our common stock is currently quoted on the Over-The-Counter Bulletin
Board under the trading symbol "CNSO.OB".
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MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Our common stock is currently listed for trading on the
Over-the-Counter Bulletin Board under the symbol CNSO.OB.
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.
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PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
security holders. Sales of shares may be made by selling security holders,
including their respective donees, transferees, pledgees or other
successors-in-interest directly to purchasers or to or through underwriters,
broker-dealers or through agents. Sales may be made from time to time on the
Over-the-Counter Bulletin Board or any exchange upon which our shares may trade
in the future, in the over-the-counter market or otherwise, at market prices
prevailing at the time of sale, at prices related to market prices, or at
negotiated or fixed prices. The shares may be sold by one or more of, or a
combination of, the following:
o a block trade in which the broker-dealer so engaged will
attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction (including crosses in which the same broker acts
as agent for both sides of the transaction);
o purchases by a broker-dealer as principal and resale by such
broker-dealer, including resales for its account, pursuant to
this prospectus;
o ordinary brokerage transactions and transactions in which the
broker solicits purchases;
o through options, swaps or derivatives;
o in privately negotiated transactions;
o in making short sales or in transactions to cover short sales;
o put or call option transactions relating to the shares; and
o any other method permitted under applicable law.
The selling security holders may effect these transactions by selling
shares directly to purchasers or to or through broker-dealers, which may act as
agents or principals. These broker-dealers may receive compensation in the form
of discounts, concessions or commissions from the selling security holders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). The
selling security holders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities.
The selling security holders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with those
transactions, the broker-dealers or other financial institutions may engage in
short sales of the shares or of securities convertible into or exchangeable for
the shares in the course of hedging positions they assume with the selling
security holders. The selling security holders may also enter into options or
other transactions with broker-dealers or other financial institutions which
require the delivery of shares offered by this prospectus to those
broker-dealers or other financial institutions. The broker-dealer or other
financial institution may then resell the shares pursuant to this prospectus (as
amended or supplemented, if required by applicable law, to reflect those
transactions).
The selling security holders and any broker-dealers that act in
connection with the sale of shares may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act of 1933, and any commissions
received by broker-dealers or any profit on the resale of the shares sold by
them while acting as principals may be deemed to be underwriting discounts or
commissions under the
87
Securities Act. The selling security holders may agree to indemnify any agent,
dealer or broker-dealer that participates in transactions involving sales of the
shares against liabilities, including liabilities arising under the Securities
Act. We have agreed to indemnify certain selling security holders and certain
selling security holders have agreed, severally and not jointly, to indemnify us
against some liabilities in connection with the offering of the shares,
including liabilities arising under the Securities Act.
The selling security holders will be subject to the prospectus delivery
requirements of the Securities Act. We have informed the selling security
holders that the anti-manipulative provisions of Regulation M promulgated under
the Securities Exchange Act of 1934 may apply to their sales in the market.
Selling security holders also may resell all or a portion of the shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of Rule 144.
Upon being notified by a selling security holder that a material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, we will file a supplement to
this prospectus, if required pursuant to Rule 424(b) under the Securities Act,
disclosing:
o the name of each such selling security holder and of the
participating broker-dealer(s);
o the number of shares involved;
o the initial price at which the shares were sold;
o the commissions paid or discounts or concessions allowed to
the broker-dealer(s), where applicable;
o that such broker-dealer(s) did not conduct any investigation
to verify the information set out or incorporated by reference
in this prospectus; and
o other facts material to the transactions.
In addition, if required under applicable law or the rules or
regulations of the Commission, we will file a supplement to this prospectus when
a selling security holder notifies us that a donee or pledgee intends to sell
more than 500 shares of common stock.
We are paying all expenses and fees in connection with the registration
of the shares. The selling security holders will bear all brokerage or
underwriting discounts or commissions paid to broker-dealers in connection with
the sale of the shares.
88
LEGAL MATTERS
Stubbs Alderton & Markiles, LLP ("SAM LLP"), has provided legal
services to us in connection with its preparation of the registration statement
covering the securities offered by this prospectus. In addition, SAM LLP has
rendered a legal opinion, attached hereto as Exhibit 5.1, as to the validity of
the shares of the our 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 40,650 shares of our common stock at an exercise price of
$1.81 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 SB-2 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 facilities of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the SEC at prescribed rates. Information on the
public reference facilities may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a web site that contains reports,
proxy and information statements and other information that is filed through the
SEC's EDGAR System. The web site can be accessed at http://www.sec.gov.
89
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm................ F-2
Consolidated Balance Sheet as of September 30, 2007.................... F-3
Consolidated Statements of Operations for the Years Ended
September 30, 2007 and 2006............................................ F-4
Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the Years Ended September 30, 2007 and 2006.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2007 and 2006............................................ F-6
Notes to Consolidated Financial Statements for the Years Ended
September 30, 2007 and 2006............................................ F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
CNS Response, Inc.
We have audited the accompanying consolidated balance sheet of CNS Response,
Inc. (the "Company") and its subsidiary as of September 30, 2007, and the
related consolidated statements of operations and comprehensive loss, changes in
stockholders' equity and cash flows for each of the years in the two-year period
ended September 30, 2007. These financial statements are the responsibility of
the Company's management. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 CNS Response, Inc.
at September 30, 2007, and the results of its operations and it cash flows for
each of the years in the two-year period ended September 30, 2007 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
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 financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Cacciamatta Accountancy Corporation
- ---------------------------------------
Irvine, California
December 7, 2007
F-2
CNS RESPONSE, INC.
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2007
ASSETS
CURRENT ASSETS:
Cash ...................................................... $ 5,790,100
Accounts receivable (net of allowance for doubtful
accounts of $17,200) ................................... 59,200
Prepaids and other ........................................ 159,000
------------
Total current assets .................................... 6,008,300
OTHER ASSETS ................................................. 4,100
------------
TOTAL ASSETS ................................................. $ 6,012,400
============
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable (including $5,000 to related party) ...... $ 219,400
Accrued liabilities ....................................... 207,500
Deferred compensation (including $56,700
to related party) ....................................... 73,400
Accrued consulting fees ................................... 73,200
Accrued interest .......................................... 35,800
Convertible promissory notes .............................. 50,000
------------
Total current liabilities ............................... 659,300
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; authorized
750,000,000 shares; 25,299,547 outstanding .............. 25,300
Additional paid-in capital ................................ 16,630,000
Accumulated deficit ....................................... (11,302,200)
------------
Total stockholders' equity .............................. 5,353,100
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
------------
EQUITY .................................................... $ 6,012,400
============
See accompanying Notes to Consolidated Financial Statements
F-3
CNS RESPONSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 2007 AND 2006
YEARS ENDED
SEPTEMBER 30,
----------------------------
2007 2006
------------ ------------
REVENUES ................................................ $ 238,400 $ 175,500
------------ ------------
OPERATING EXPENSES:
Cost of revenues (including amortization expense of
$19,900 and $79,800 for the years ended September 30,
2007 and 2006, respectively) ........................ 166,200 197,900
Research and development ............................. 1,442,600 519,800
Sales and marketing .................................. 123,600 109,600
General and administrative ........................... 1,775,600 1,132,400
------------ ------------
Total operating expenses ........................... 3,508,000 1,959,700
------------ ------------
OPERATING LOSS .......................................... (3,269,600) (1,784,200)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net ................................ (115,600) (390,600)
Gain on derivative instruments ....................... -- 1,178,500
Gain on troubled debt restructuring .................. -- 1,079,700
Other ................................................ 106,900
------------ ------------
Total other income (expense) ......................... (8,700) 1,867,600
------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES ......... (3,278,300) 83,400
PROVISION FOR INCOME TAXES .............................. 800 800
------------ ------------
NET INCOME (LOSS) ....................................... $ (3,279,100) $ 82,600
============ ============
------------ ------------
BASIC NET INCOME (LOSS) PER SHARE ....................... $ (0.17) $ 0.03
============ ============
------------ ------------
DILUTED NET INCOME (LOSS) PER SHARE ..................... $ (0.17) $ 0.00
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
------------ ------------
Basic ................................................ 18,778,077 2,836,216
============ ============
Diluted .............................................. 18,778,077 33,369,915
============ ============
See accompanying Notes to Consolidated Financial Statements
F-4
CNS RESPONSE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
Additional
Common Stock Paid-in
Shares Amount Capital
------------ ------------ ------------
Balance at October 1, 2005 .................................... 2,068,990 $ 2,100 $ 26,100
Reclassification of derivative instrument ..................... -- -- 343,100
Issuance of stock for settlement of debt ...................... 5,834,117 5,800 695,000
Troubled debt restructuring with related parties .............. -- -- 1,388,000
Stock-based compensation ...................................... -- -- 369,900
Net income for the year ended September 30, 2006 .............. -- -- --
------------ ------------ ------------
Balance at September 30, 2006 ................................. 7,903,107 7,900 2,822,100
Forgiveness of accrued interest from NuPharm and issuance and
exercise of warrants by NuPharm ........................... 2,800,000 2,800 334,800
Conversion of convertible promissory notes and
accrued interest ......................................... 5,993,515 6,000 4,061,100
Issuance of stock in connection with mezzanine
financing, net of offering costs of $47,600 .............. 1,905,978 1,900 1,875,500
Issuance of stock for settlement of debt ...................... 11,015 -- 1,300
Issuance of options in settlement of accrued consulting fees .. -- -- 27,000
Issuance of stock in connection with private
placement, net of offering costs of $1,057,300 .......... 6,504,758 6,500 6,741,900
Issuance of stock as payment of placement agent fee ........... 83,333 100 (100)
Issuance of stock to repay note to NuPharm and
related accrued interest ................................. 244,509 200 293,200
Collection of loans receivable through the receipt of stock ... (146,668) (100) (175,900)
Stock- based compensation ..................................... -- -- 649,100
Derivative instrument liability ............................... -- -- (2,273,700)
Reclassify fair value of derivative instrument liability ...... -- -- 2,273,700
Net loss for the year ended September 30, 2007 ................ -- -- --
------------ ------------ ------------
Balance at September 30, 2007 ................................. 25,299,547 $ 25,300 $ 16,630,000
============ ============ ============
Accumulated
Deficit Total
------------ ------------
Balance at October 1, 2005 .................................... $ (8,105,700) $ (8,077,500)
Reclassification of derivative instrument ..................... -- 343,100
Issuance of stock for settlement of debt ...................... -- 700,800
Troubled debt restructuring with related parties .............. -- 1,388,000
Stock-based compensation ...................................... -- 369,900
Net income for the year ended September 30, 2006 .............. 82,600 82,600
------------ ------------
Balance at September 30, 2006 ................................. (8,023,100) (5,193,100)
Forgiveness of accrued interest from NuPharm and issuance and
exercise of warrants by NuPharm ........................... -- 337,600
Conversion of convertible promissory notes and
accrued interest ......................................... -- 4,067,100
Issuance of stock in connection with mezzanine
financing, net of offering costs of $47,600 .............. -- 1,877,400
Issuance of stock for settlement of debt ...................... -- 1,300
Issuance of options in settlement of accrued consulting fees .. -- 27,000
Issuance of stock in connection with private
placement, net of offering costs of $1,057,300 .......... -- 6,748,400
Issuance of stock as payment of placement agent fee ........... -- --
Issuance of stock to repay note to NuPharm and
related accrued interest ................................. -- 293,400
Collection of loans receivable through the receipt of stock ... -- (176,000)
Stock- based compensation ..................................... -- 649,100
Derivative instrument liability ............................... -- (2,273,700)
Reclassify fair value of derivative instrument liability ...... -- 2,273,700
Net loss for the year ended September 30, 2007 ................ (3,279,100) (3,279,100)
------------ ------------
Balance at September 30, 2007 ................................. $(11,302,200) $ 5,353,100
============ ============
See accompanying Notes to Consolidated Financial Statements
F-5
CNS RESPONSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED
SEPTEMBER 30, 2007 AND 2006
YEAR ENDED SEPTEMBER 30,
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................. $(3,279,100) $ 82,600
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of intangibles .................................. 19,900 79,800
Allowance for doubtful accounts .............................. -- 4,800
Gain on derivative instruments ............................... -- (1,178,500)
Gain on troubled debt restructuring .......................... -- (1,079,700)
Other ........................................................ (106,900) --
Stock based compensation ..................................... 649,100 369,900
Non-cash interest expense .................................... 189,800 --
Changes in operating assets and liabilities:
Accounts receivable ........................................ (32,900) (1,700)
Prepaids and other ......................................... (87,900) (67,000)
Accounts payable ........................................... (271,200) 202,700
Accrued liabilities ........................................ (59,400) 5,900
Deferred compensation ...................................... 2,100 298,800
Accrued consulting ......................................... 7,400 301,300
Accrued interest ........................................... 10,200 383,500
----------- -----------
Net cash used in operating activities ...................... (2,958,900) (597,600)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in deposits ........................................... (3,000) --
Loans to employees ............................................. (4,200) (175,900)
----------- -----------
Net cash used in investing activities ...................... (7,200) (175,900)
----------- -----------
F-6
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt .............................................. (5,000) --
Proceeds from issuance of convertible promissory notes, net of
offering costs ............................................... -- 500,000
Proceeds from the sale of preferred stock, net of offering costs 1,779,900 --
Proceeds from the sale of common stock, net of offering costs .. 6,748,400 --
Proceeds from exercise of warrants ............................. 28,000 --
----------- -----------
Net cash provided by financing activities .................. 8,551,300 500,000
----------- -----------
NET INCREASE (DECREASE) IN CASH ................................... 5,585,200 (273,500)
CASH- BEGINNING OF YEAR ........................................... 204,900 478,400
----------- -----------
CASH- END OF YEAR ................................................. $ 5,790,100 $ 204,900
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ..................................................... $ 2,300 --
=========== ===========
Income taxes ................................................. $ 800 $ 800
=========== ===========
Common stock issued for settlement of troubled debt ............ -- $ 700,800
=========== ===========
Conversion of preferred stock into common stock ................ 5,958,200 --
=========== ===========
Conversion of promissory notes and related accrued interest into
preferred stock .............................................. 4,067,100 --
=========== ===========
Common stock received as collection of loans receivable ........ 176,000 --
=========== ===========
Derivative instrument liability ................................ 2,273,700 --
=========== ===========
See accompanying Notes to Consolidated Financial Statements
F-7
CNS RESPONSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER 30, 2007 AND 2006
1. NATURE OF OPERATIONS
ORGANIZATION AND NATURE OF OPERATIONS
CNS Response, Inc. (the "Company") was incorporated in Delaware on July
10, 1984. The Company utilizes a patented system that guides psychiatrists and
other physicians to determine a proper treatment for patients with mental,
behavioral and/or addictive disorders. The Company also intends to identify,
develop and commercialize new indications of approved drugs and drug candidates
for this patient population.
GOING CONCERN UNCERTAINTY
The Company has a limited operating history and its operations are
subject to certain risks and uncertainties frequently encountered by rapidly
evolving markets. These risks include the failure to develop or supply
technology or services, the ability to obtain adequate financing, competition
within the industry and technology trends.
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
ability to expand and retain its customer base, its ability to execute its
current business plan and other factors. 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. REVERSE MERGER AND FINANCING
COMPLETION OF MERGER
On January 16, 2007, CNS Response, Inc. (formerly Strativation, Inc), a
Delaware corporation (the "Company"), along with CNS Merger Corporation, a
California corporation and the Company's wholly-owned subsidiary ("Merger Sub")
entered into an Agreement and Plan of Merger (the "Merger Agreement") with CNS
Response, Inc, a privately held California corporation ("CNS California"),
pursuant to which CNS California would be acquired by the Company in a merger
transaction wherein Merger Sub would merge with and into CNS California, with
CNS California being the surviving corporation (the "Merger"). On March 7, 2007,
the Merger closed and CNS California became a wholly-owned subsidiary of the
Company. At the closing, the Company changed its name to CNS Response, Inc.
From a historical perspective, CNS California was deemed to have been
the acquirer in the reverse merger and CNS California is deemed the survivor of
the reorganization. As a result, the consolidated financial statements of the
Company presented reflect the historical results of CNS California prior to the
Merger, and of the combined entities following the merger, and do not include
the historical financial results of the entity formerly known as Strativation,
Inc. Common stock has been retroactively restated to reflect the number of
shares received by CNS California equity holders in the Merger after giving
effect to the difference in par value, with the offset to additional paid-in
capital. The equity of the Company survives the reorganization. Upon the closing
of the reorganization, the Company changed its fiscal year to September 30. All
costs associated with the Merger were expensed as incurred.
F-8
PRINCIPAL TERMS OF THE MERGER
On March 7, 2007, Merger Sub was merged with and into CNS California,
the separate existence of Merger Sub ceased, and CNS California continued as the
surviving corporation at the subsidiary level. Pursuant to the Merger, the
issued and outstanding shares of common stock of CNS California were converted
into an aggregate of 9,845,132 shares of Company Common Stock, and the issued
and outstanding shares of Series A and B preferred stock of CNS California were
converted into 5,993,515 and 1,905,978 shares of Company Common Stock,
respectively. In addition warrants and options to purchase shares of common
stock of CNS California were converted into warrants and options to purchase
4,271,414 and 4,136,103 shares of Company Common Stock, respectively. Following
the Merger, the business conducted by the Company is the business conducted by
CNS California.
Pursuant to the terms of the Merger Agreement, CNS Response, Inc.
(formerly Strativation, Inc.) paid an advisory fee of $475,000 to Richardson &
Patel, LLP, the Company's former legal counsel and a principal shareholder,
immediately upon the closing of the Merger. The fee has been expensed as a cost
of the merger.
Immediately after the closing of the Merger, and without taking into
consideration the Private Placement Offering, the issuance of shares of common
stock to repay the note to NuPharm Database, LLC and the tendering to the
Company of shares of common stock by an officer and certain employees to repay
their loans to CNS California described below, the Company had outstanding
18,696,948 shares of common stock, options to purchase 4,136,103 shares of
common stock and warrants to purchase 4,271,414 shares of common stock.
ACCOUNTING TREATMENT OF THE MERGER AND FINANCIAL STATEMENT PRESENTATION
The Company accounted for the Merger as a reverse merger under
generally accepted accounting principles, and accordingly, the consolidated
financial statements of the Company for the periods before March 7, 2007,
reflect only the operations of CNS California. No goodwill or other intangible
asset was recorded as a result of the Merger. Immediately prior to the reverse
merger on March 7, 2007, the Company had no material operations, assets, or
liabilities. Therefore, pro forma financial statements are not presented.
THE PRIVATE PLACEMENT
Immediately following the closing of the Merger, the Company received
gross proceeds of approximately $7.0 million from the first closing of a private
placement transaction (the "Private Placement") with institutional investors and
other high net worth individuals ("Investors"). On May 15, 2007, the Company
received additional gross proceeds of $797,300 from the second closing of the
Private Placement. Pursuant to Subscription Agreements entered into with these
Investors, the Company sold 6,504,758 Investment Units, at $1.20 per Investment
Unit. Each Investment Unit consists of one share of Company common stock, and a
five year non-callable warrant to purchase three-tenths of one share of the
Company common stock at an exercise price of $1.80 per share. The value of the
warrants was determined to be $1,674,600 using the Black-Scholes option pricing
model with the following assumptions: a volatility rate of 100%, risk free
interest rate of 5%, an expected life of five years and zero dividends. The
value of the warrants was recorded as a liability in accordance with SFAS No.
133 and EITF 00-19. As of June 22, 2007, the common shares underlying the
warrants were registered satisfying the warrant liability. As of such date, the
value of the warrants had not changed and thus the recorded amount was
reclassified to Stockholders' Equity.
As partial consideration for services rendered further to the Private
Placement, the Company's placement agent was issued 83,333 shares of common
stock, warrants to purchase 520,380 shares of Company common stock at an
exercise price of $1.44 per share and warrants to purchase 156,114 shares of
Company's common stock at exercise price of $1.80 per share . The value of the
F-9
warrants was determined to be $599,100 using the Black-Scholes option pricing
model with the following assumptions: a volatility rate of 100%, risk free
interest rate of 5%, an expected life of five years and zero dividends. The
value of the warrants was recorded as a liability in accordance with SFAS No.
133 and EITF 00-19. As of June 22, 2007, the common shares underlying the
warrants were registered satisfying the warrant liability. As of such date, the
value of the warrants had not changed and thus the recorded amount was
reclassified to Stockholders' Equity.
See Notes 4, 6, 7 and 8 for description of other transactions completed
concurrently with the completion of the private placement.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of CNS
Response, Inc., an inactive parent company, and its wholly owned subsidiary CNS
California. All significant intercompany transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expense, and related disclosure of contingent
assets and liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to revenue recognition, doubtful accounts,
intangible assets, income taxes, valuation of equity instruments, contingencies
and litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates.
CASH
The Company deposits its cash with major financial institutions and may
at times exceed federally insured limits. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's short-term financial instruments, including cash,
accounts receivable and accounts payable are carried at cost. The cost of the
short-term financial instruments approximates fair value due to their relatively
short maturities. The carrying value of long-term financial instruments,
including notes payable, approximates fair value as the interest rates
approximate current market rates of similar debt obligations.
ACCOUNTS RECEIVABLE
The Company estimates the collectibility 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.
INTANGIBLE ASSETS
Intangible assets consisted of a purchased database recorded at cost
and were amortized over an estimated useful life of seven years.
F-10
LONG-LIVED ASSETS
As required by Statement of Financial Accounting Standards ("SFAS") No.
144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, 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 was recorded for the years ended September 30, 2007
and 2006.
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 SFAS No. 123R, SHARE-BASED PAYMENT (revised
2004) and related interpretations which establish the accounting for equity
instruments exchanged for employee services. Under SFAS No. 123R, 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
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under the provisions of SFAS 109, 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)
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, 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, 2007 and 2006.
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-11
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 one measurement of profitability and does not disaggregate its business for
internal reporting and therefore operates in a single business segment.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to
current year presentation. These reclassifications had no effect on previously
reported operating loss or net income.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140."
SFAS No. 155 eliminates the exemption from applying SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," to interests in securitized
financial assets so that similar instruments are accounted for similarly
regardless of the form of the instruments. SFAS No. 155 also allows issuers of
financial statements to elect fair value measurement at acquisition, at
issuance, or when a previously recognized financial instrument is subject to a
remeasurement (new basis) event, on an instrument-by-instrument basis, in cases
in which a derivative would otherwise have to be bifurcated. SFAS No. 155 is
effective for all financial instruments acquired or issued after the first
fiscal year beginning after September 15, 2006. The adoption of SFAS No. 155 did
not have a material impact on our consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets--an amendment of FASB Statement No. 140." SFAS No. 156
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. It also
permits, but does not require, the subsequent measurement of servicing assets
and servicing liabilities at fair value. An entity that uses derivative
instruments to mitigate the risks inherent in servicing assets and servicing
liabilities is required to account for those derivative instruments at fair
value. Under SFAS No. 156, an entity can elect subsequent fair value measurement
of its servicing assets and servicing liabilities by class, thus simplifying its
accounting and providing for income statement recognition of the potential
offsetting changes in fair value of the servicing assets, servicing liabilities,
and related derivative instruments. An entity that elects to subsequently
measure servicing assets and servicing liabilities at fair value is expected to
recognize declines in fair value of the servicing assets and servicing
liabilities more consistently than by reporting other-than-temporary
impairments. SFAS No. 156 is effective for fiscal years beginning after
September 15, 2006. The adoption of SFAS No. 156 did not have a material impact
on our consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, or FIN 48,
"Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement
No. 109, Accounting for Income Taxes," which clarifies the accounting for
uncertainty in income taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The Interpretation
requires that the Company recognize in the financial statements, the impact of a
tax position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure. The provisions of FIN 48 are effective beginning
in the fiscal year ending September 30, 2008 with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings. We do not expect the adoption of FIN 48 to have a material impact on
our consolidated financial statements.
F-12
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 provides
guidance on how the effects of the carryover or reversal of prior year financial
statement misstatements should be considered in quantifying a current year
misstatement. Prior practice allowed the evaluation of materiality on the basis
of the error quantified as the amount by which the current year income statement
was misstated (rollover method) or the cumulative error quantified as the
cumulative amount by which the current year balance sheet was misstated (iron
curtain method). The guidance provided in SAB 108 requires both methods to be
used in evaluating materiality. Immaterial prior year errors may be corrected
with the first filing of prior year financial statements after adoption. The
cumulative effect of the correction would be reflected in the opening balance
sheet with appropriate disclosure of the nature and amount of each individual
error corrected in the cumulative adjustment, as well as a disclosure of the
cause of the error and that the error had been deemed to be immaterial in the
past. The adoption of SAB 108 did not have a material impact on our consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements," or SFAS No. 157. This Statement
defines fair value as used in numerous accounting pronouncements, establishes a
framework for measuring fair value in generally accepted accounting principles,
or GAAP, and expands disclosure related to the use of fair value measures in
financial statements. SFAS No. 157 does not expand the use of fair value
measures in financial statements, but standardizes its definition and guidance
in GAAP. The Standard emphasizes that fair value is a market-based measurement
and not an entity-specific measurement based on an exchange transaction in which
the entity sells an asset or transfers a liability (exit price). SFAS No. 157
establishes a fair value hierarchy from observable market data as the highest
level to fair value based on an entity's own fair value assumptions as the
lowest level. The Statement is to be effective for our financial statements
issued in 2008; however, earlier application is encouraged. We believe that SFAS
No. 157 will not have a material impact on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB
Statements No. 87, 88, 106, and 132(R)," which requires the recognition of the
over-funded or under-funded status of a defined benefit postretirement plan in a
company's balance sheet. This portion of the new guidance is effective on
December 31, 2006. Additionally, the pronouncement eliminates the option for
companies to use a measurement date prior to their fiscal year-end effective
December 31, 2008. SFAS No. 158 provides two approaches to transition to a
fiscal year-end measurement date, both of which are to be applied prospectively.
Under the first approach, plan assets are measured on September 30, 2007 and
then remeasured on January 1, 2008. Under the alternative approach, a 15-month
measurement will be determined on September 30, 2007 that will cover the period
until the fiscal year-end measurement is required on December 31, 2008. We do
not have any defined benefit pension or postretirement plans that are subject to
SFAS No. 158. As such, we do not expect the pronouncement to have a material
impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115," which permits companies to measure many financial
instruments and certain other assets and liabilities at fair value on an
instrument-by-instrument basis (the fair value option). Adoption of the standard
is optional and may be adopted beginning in the first quarter of 2007. We are
currently evaluating the possible impact of adopting SFAS No. 159 on our
consolidated financial statements.
In May 2007, Emerging Issues Task Force Issue No.07-4, "Application of
the Two-Class Method under FASB Statement No. 128, EARNINGS PER SHARE, to Master
Limited Partnerships" or EITF 07-4, was issued. The provisions of this standard
are effective for interim and annual reporting periods beginning after December
15, 2007. We do not expect the adoption of EITF 07-4 to have a material impact
on our consolidated financial statements.
F-13
4. LOANS TO RELATED PARTIES
From September 2006 through February 2007, CNS California loaned
certain officer, employees and a consultant $171,800 under notes bearing
interest at 5.26% per annum, compounded annually, and requiring payment on or
after the earlier of (i) the date that is two years following the date of the
note, and (ii) a demand by CNS California following the date on which CNS
California has received an aggregate of $5,000,000 from the sale(s) of its
capital stock provided the assigned value (as defined) of the stock at the time
of the demand is more than $1. The notes provided that repayment of the notes
could be made in one of the following ways, or in combination of both:
(a) in cash, or
(b) by tendering Common Stock of CNS California owned by
the borrower, with an aggregate Assigned Value (as
defined) equal to the principal and accrued interest
on the notes.
Pursuant to the abovementioned terms and the terms of the merger
described in Note 2 above, the Company demanded payment of all such notes upon
the completion of the merger and private placement in which the Company raised
approximately $7,805,000. The officer who owed the Company $93,900, including
interest, repaid the loan by tendering 78,219 shares of the Company's Common
Stock to the Company. Certain other employees and consultant repaid their loans
by tendering an aggregate of 68,449 shares of the Company's common stock to the
Company. None of the aforementioned notes remained outstanding as of September
30, 2007.
5. TROUBLED DEBT RESTRUCTURING--DEFERRED COMPENSATION AND ACCRUED
CONSULTING FEES
At September 30, 2005, CNS California owed certain employees and
consultants deferred compensation, accrued consulting fees, other
compensation-related liabilities and accrued interest thereon aggregating
$2,480,900. Due to financial difficulties experienced by CNS California, in
August and September 2006, certain employees and consultants to whom CNS
California owed an aggregate of $3,199,400 forgave approximately 80% of the debt
and accepted 5,834,117 shares of the Company's common stock (of which 182,952
were restricted), and warrants and options to purchase an aggregate of 270,638
shares of CNS California's common stock at an exercise price of $0.59 per share
in full settlement of CNS California's remaining obligations. On the date of
transfer, the amounts due to employees and consultants exceeded the aggregate
estimated fair value (based on an estimate of $0.12 per share) of the shares,
warrants and options transferred by $2,467,700. The gain attributable to
employees considered related parties of $1,388,000 has been treated as a capital
transaction and included in additional paid-in capital in the accompanying
consolidated financial statements. The remaining gain of $1,079,700 has been
recorded as a gain on troubled debt restructuring in the accompanying
consolidated financial statements.
6. CONVERTIBLE PROMISSORY NOTES
CNS California has issued convertible promissory notes with detachable
warrants from time to time to fund its operations. The notes bear interest at 8%
per year, compounded annually, and are payable on demand. The terms of the notes
provide for the (i) conversion of principal and accrued interest into the same
type of securities issued by CNS California upon a qualified institutional
financing, the amount of which financing varies between notes and ranges from $1
to $4 million, and (ii) conversion price to be equal to the same price as the
shares sold in the financing. The notes provide for an aggregate of $2,196,000
in principal to convert automatically and $920,700 to convert at the note
holders' options based upon certain financing requirements (as defined).
F-14
Due to the variable conversion price, the notes were potentially
convertible into an unlimited number of common shares. Accordingly, CNS
California has accounted for the notes under SFAS 133 and EITF 00-19 which
require the beneficial conversion feature to be treated as an embedded
derivative, recording a liability equal to the estimated fair value of the
conversion option. In addition, all non-employee warrants that are exercisable
during the period the notes were potentially convertible into an unlimited
number of common shares are required to be recorded as liabilities at their fair
value. The fair value of the beneficial conversion feature and the warrants were
estimated using the Black-Scholes option pricing model. The fair value of the
beneficial conversion feature and the warrants and options was recomputed each
reporting period with the change in fair value recorded as a gain or loss on
derivative instruments.
In August 2006, CNS California amended its Articles of Incorporation
whereby the number of authorized shares was increased to 100,000,000, of which
80,000,000 were designated as common shares and 20,000,000 were designated as
preferred shares.
Since at September 30, 2006, the number of authorized shares was
sufficient to accommodate the conversion of all notes, related accrued interest
and outstanding warrants, CNS California has reclassified the derivative
instrument liability with an estimated fair value of $343,100 to equity in the
accompanying consolidated financial statements.
In October 2006, CNS California and the note holders of certain of the
convertible promissory notes converted promissory notes with an aggregate
outstanding balance of $3,061,700 and related accrued and unpaid interest of
$1,005,400 at September 30, 2006 into 5,993,515 shares of CNS California's
Series A Preferred Stock. In addition, the exercise price of warrants to
purchase 1,062,116 shares of the Company's common stock was changed to $0.59 per
share. The preferred shares were converted into 5,993,515 shares of the
Company's common stock upon the completion of the merger described in Note 2.
7. NOTE PAYABLE TO NUPHARM DATABASE, LLC
In connection with the January 2000 Asset Purchase Agreement between
CNS California and NuPharm Database, LLC (NuPharm) providing for the purchase of
a database and the assumption of certain NuPharm liabilities, CNS California
issued a subordinated note payable to NuPharm in the amount of $299,900 bearing
interest at 8% per year and due on March 15, 2004 and a warrant to purchase
2,800,000 shares of CNS California's common stock at $0.01 per share. The
warrant was not exercised before expiring in 2005.
In October 2006, CNS California and NuPharm agreed to exchange the note
and the related accrued interest for a 5% note in the principal amount of
$287,400, representing the outstanding principal at September 30, 2006, and
warrants to purchase 2,800,000 shares of the CNS California's common stock at
$0.01 per share. The note was due and payable on demand five years from the date
of issuance, could be prepaid by the Company at any time without penalties and
was convertible into shares of common stock of CNS California upon the
completion of a financing (as defined) at a price per share of the common stock
issued in such financing. The warrant was exercised in October 2006. CNS
California valued the warrant at $309,500 using the Black-Scholes model and
recorded the excess of the value of the warrant over the forgiven accrued
interest of $119,800 as a prepaid asset. The excess was being amortized as
interest expense over a period of one year, the expected term of the note when
it was issued.
Pursuant to the abovementioned terms, the note payable to NuPharm and
accrued interest thereon were converted into 244,509 shares of the Company's
Common Stock upon the completion of the merger and private placement described
in Note 2 above. Upon conversion, the entire balance of the unamortized prepaid
interest was charged to interest expense.
F-15
8. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
The Company is authorized to issue 750,000,000 shares of common stock.
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 described in Note 5 above, during August and September 2006, CNS
California issued 5,834,117 shares of its common stock with a fair value of
$700,800 in connection with the restructuring of certain debt. These common
shares were converted into 5,834,117 shares of the Company's common stock upon
the completion of the merger described in Note 2 above.
As described in Note 7 above, in October 2006, NuPharm exercised the
warrant to purchase 2,800,000 shares of CNS California's common stock at a price
of $0.01 per share. These common shares were converted into 2,800,000 shares of
the Company's common stock upon the completion of the merger described in Note 2
above.
As described in Note 6 above, in October 2006, CNS California and the
note holders of certain of the convertible promissory notes converted promissory
notes with an aggregate outstanding balance of $3,061,700 and related accrued
and unpaid interest of $1,005,400 at September 30, 2006 into 5,993,515 shares of
the CNS California's Series A Preferred Stock. These preferred shares were
converted into 5,993,515 shares of the Company's common stock upon the
completion of the merger described in Note 2 above.
In October, 2006, CNS California sold 1,905,978 Units in a private
financing resulting in net proceeds of $1,877,400. Each Unit consists of one
share of Series B Preferred Stock and 5-year warrants to purchase .6 shares of
the CNS California's common stock at $1.51 per share. Holders of the Series B
Preferred Stock were entitled to receive non-cumulative dividends at an annual
rate of 4% when, as and if declared by the Board. Each share of the Series B
Preferred Stock initially converts into one share of the Company's Common Stock
at any time at the option of the holder. However, each share of Series B
Preferred Stock will automatically convert into Common Stock at the then
applicable conversion rate in the event of (i) the sale of $5,000,000 or more of
Common Stock or units consisting of Common Stock and warrants in one or more
related transactions; (ii) the closing of an underwritten public offering with a
price equal or greater than $1.21 per share and net proceeds to CNS California
of not less than $5,000,000, or (iii) upon the written consent of the holders of
the majority of the Series A Preferred (see Note 6) in the case of conversion of
the Series A Preferred or the Series B Preferred in the case of conversion of
the Series B Preferred. All shares of preferred stock were converted into
1,905,978 shares of common stock concurrently with the completion of the Merger.
As described in Note 2 above, in March and May 2007, the Company sold
6,504,758 Investment Units, at $1.20 per Investment Unit. Each Investment Unit
consists of one share of Company common stock, and a five year non-callable
warrant to purchase three-tenths of one share of the Company common stock at an
exercise price of $1.80 per share.
As described in Note 2 above, as partial consideration for services
rendered further to the private placement, the Company's placement agent was
issued 83,333 shares of the Company's common stock.
As described in Note 7 above, the note payable to NuPharm and accrued
interest thereon were converted into 244,509 shares of the Company's Common
Stock upon the completion of the merger and private placement described in Note
2 above.
As described in Note 4 above, an officer and certain employees and
consultants repaid their loans to the Company by tendering 146,668 shares of the
Company's common stock.
F-16
STOCK-OPTION PLAN
On September 27, 2004, the Company adopted the 2004 Stock Option Plan
pursuant to which there were 15,000,000 shares of common stock reserved for
issuance and under which the Company may issue incentive stock options,
nonqualified stock options, stock awards and stock bonuses to officers,
directors and employees. The option price for each share of stock subject to an
option was to 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 was an ISO granted to an
eligible employee who is a 10% shareholder, the option price for each share of
stock subject to such ISO was to be no less than 110% of the fair market value
of a share of stock on the date such ISO is granted. Stock options were to 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
was to be five years from the date of grant. ISOs could be granted only to
eligible employees. At September 30, 2007, there were no options outstanding
under this plan.
In connection with the Merger described in Note 2, the Company assumed
the CNS California stock option plan described below and all of the options
granted thereunder at the same price and terms.
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 nonstatutory stock options (NSO)), stock
appreciation rights and stock unit grants to eligible employees, directors and
consultants and is administered by the board of directors. A total of 10 million
shares of stock are reserved for issuance under the 2006 Plan. As of September
30, 2007, there were 7,436,703 options and 183,937 restricted shares outstanding
under the 2006 Plan and 2,379,360 shares available for issuance of awards.
The 2006 Plan provides that in any calendar year, no eligible employee
or director shall be granted an award to purchase more than 3 million shares of
stock. The option price for each share of stock subject to an option shall be
(i) no less than the fair market value of a share of stock on the date the
option is granted, if the option is an ISO, or (ii) no less than 85% of the fair
market value of the stock on the date the option is granted, if the option is a
NSO ; provided, however, if the option is an ISO granted to an eligible employee
who is a 10% shareholder, the option price for each share of stock subject to
such ISO shall be no less than 110% of the fair market value of a share of stock
on the date such ISO is granted. Stock options have a maximum term of ten years
from the date of grant, except for ISOs granted to an eligible employee who is a
10% shareholder, in which case the maximum term is five years from the date of
grant. ISOs may be granted only to eligible employees.
The Company has adopted SFAS No. 123R (revised 2004), "Share-Based
Payment", and related interpretations. Under SFAS No. 123R, 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 Options
Options granted in granted in
granted in November August
fiscal 2006 2006 2007
Dividend yield ...... 0% 0% 0%
Risk-free interest rate ...... 5.46% 5.00% 4.72%
Expected volatility ...... 100% 100% 91%
Expected life ...... 5 years 10 years 5 years
F-17
The expense is recognized over the employees' requisite service period,
generally the vesting period of the award. Stock-based compensation expense
included in the accompanying statements of operations for the years ended
September 30, 2007 and 2006 is as follows:
For the fiscal year
ended September 30,
2007 2006
-------- --------
Operations ................... $ 20,100 $ 22,000
Research and development ................... 212,000 141,000
Sales and marketing ................... -- 8,300
General and administrative ................... 417,000 198,600
-------- --------
Total ................... $649,100 $369,900
======== ========
Total unrecognized compensation as of September 30, 2007 amounted to
$1,980,300.
A summary of stock option activity is as follows:
Weighted
Average
Number of Exercise
Shares Price
--------- ---------
Outstanding at October 1, 2005
Granted ............................................. 4,000,403 $ 0.13
Exercised ........................................... -- --
Forfeited ........................................... -- --
Outstanding at September 30, 2006 ........................ 4,000,403 $ 0.13
Granted ............................................. 3,436,300 $ 1.07
Exercised ........................................... -- --
Forfeited ........................................... -- --
Outstanding at September 30,2007 ......................... 7,436,703 $ 0.57
Weighted average fair value of options granted during:
Year ended September 30, 2006 ....................... $ 0.09
Year ended September 30, 2007 ....................... $ 0.77
Following is a summary of the status of options outstanding at
September 30, 2007:
Weighted Average
Contractual Weighted Average
Exercise Price Number of Shares Life Exercise Price
- -------------- ---------------- ---------------- ----------------
$0.12 859,270 10 years $0.12
$0.132 3,112,545 7 years $0.132
$0.30 135,700 10 years $0.30
$0.59 28,588 10 years $0.59
$1.09 2,966,989 10 years $1.09
$1.20 333,611 5 years $1.20
----------------- ----------------
7,436,703 $0.57
================= ================
F-18
Following is a summary of the status of options exercisable at
September 30, 2007:
Weighted Average
Contractual Weighted Average
Exercise Price Number of Shares Life Exercise Price
- -------------- ---------------- ---------------- ----------------
$0.12 849,270 9 years $0.12
$0.132 3,112,545 6 years $0.132
$0.30 73,825 9 years $0.30
$0.59 28,588 9 years $0.59
$1.09 560,583 10 years $1.09
$1.20 83,403 5 years $1.20
---------------- ----------------
4,708,214 $0.27
================ ================
WARRANTS TO PURCHASE COMMON STOCK
At September 30, 2006, there were warrants outstanding to purchase
3,115,154 shares of the Company's common stock at exercise prices ranging from
$0.01 to $0.59 with a weighted average exercise price of $0.28. The warrants
expire at various times through 2016 and are still outstanding as of September
30, 2007.
As described in Note 6, these warrants were initially recorded as a
liability at their fair value. Fair value was computed using the Black-Scholes
pricing model at each reporting period with the change in fair value recorded as
a gain or loss on derivative instruments. For the year ended September 30, 2006,
the Company recorded a gain on derivative instruments amounting to $1,178,500.
As of September 30, 2006, the warrants were reclassified to equity since the
number of authorized shares was increased to accommodate the exercise of all
warrants and settlement of warrants was within the control of the Company.
During the year ended September 30, 2007, the following additional
3,784,199 warrants were granted and are outstanding as of such date:
Warrants to Purchase Exercise Price Issued in Connection With:
1,143,587 shares $1.51 Private placement described in Note
2
7,921 shares $1.01 To placement agent for private
placement described in Note 2
4,752 shares $1.812 To placement agent for private
placement described in Note 2
1,951,445 shares $1.80 Private placement completed
immediately after the merger and
described in Note 2
520,380 shares $1.44 To placement agent for private
placement completed immediately
after the merger and described in
Note 2
156,114 shares $1.80 To placement agent for private
placement completed immediately
after the merger and described in
Note 2
As described in Note 2, the warrants to purchase 2,107,559 shares of
common stock at $1.80 per share and the warrants to purchase 520,380 shares at
$1.44 per share were initially recorded as a liability at their fair value. Fair
value was computed using the Black-Scholes pricing model. As of June 22, 2007,
the common shares underlying the warrants were registered satisfying the warrant
liability. As of such date, the value of the warrants had not changed and thus
the recorded amount was reclassified to Stockholders' Equity.
F-19
9. INCOME TAXES
The Company accounts for income taxes under the liability method.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. We provide a valuation allowance to reduce our deferred
tax assets to their estimated realizable value.
Reconciliations of the provision (benefit) for income taxes to the
amount compiled by applying the statutory federal income tax rate to profit
(loss) before income taxes is as follows for each of the years ended September
30:
2007 2006
---- ----
Federal income tax (benefit) at statutory rates .............. (34)% 34%
Non-recognizable (gains) losses from derivative instruments .. 0% (483)%
Gain from troubled debt restructured with related parties .... 0% 566%
Stock-based compensation ..................................... 17% 447%
Non deductible interest expense .............................. 6% --
Change in valuation allowance ................................ 11% (564)%
State income taxes ........................................... 0% 1%
Income tax provision ......................................... 0% 1%
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to significant portions
of deferred taxes relate to the following at September 30, 2007 and 2006:
2007 2006
----------- -----------
Deferred income tax assets:
Net operating loss carryforward .......................... $ 3,257,800 $ 1,851,000
Deferred interest, consulting and compensation liabilities 14,300 462,500
Amortization ............................................. 223,300 215,400
----------- -----------
3,495,400 2,528,900
Deferred income tax liabilities--other ....................... (12,100) (34,600)
----------- -----------
Deferred income tax asset--net before valuation allowance .... 3,483,300 2,494,300
Valuation allowance .......................................... (3,483,300) (2,494,300)
----------- -----------
Deferred income tax asset--net ............................... $ -- $ --
=========== ===========
Current and non-current deferred taxes have been recorded on a net
basis in the accompanying balance sheet. As of September 30, 2007 we have net
operating loss carryforwards of approximately $8.1 million. The net operating
loss carryforwards expire by 2027. 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.
F-20
10. EARNINGS PER SHARE
In accordance with 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 year ended September 30, 2007, the Company has
excluded all common equivalent shares from the calculation of diluted net loss
per share as such securities are anti-dilutive. The number of dilutive common
equivalent shares for the year ended September 30, 2006 has been determined in
accordance with the treasury-stock method.
A summary of the net income (loss) and shares used to compute net
income (loss) per share for the years ended September 30, 2007 and 2006 is as
follows:
2007 2006
------------ ------------
Net income (loss) for computation of basic net
income (loss) per share ...................... $ (3,279,100) $ 82,600
Add interest expense relating to convertible debt -- 297,800
------------ ------------
Net income (loss) for computation of dilutive
net income (loss) per share .................. $ (3,279,100) $ 380,400
============ ============
Basic net income (loss) per share ............... $ (0.17) $ 0.03
============ ============
Diluted net income (loss) per share ............. $ (0.17) $ 0.00
============ ============
Basic weighted average shares outstanding ....... 18,778,077 2,836,216
Dilutive common equivalent shares ............... -- 30,533,699
------------ ------------
Diluted weighted average common shares .......... 18,778,077 33,369,915
============ ============
Anti-dilutive common equivalent shares not
included in the computation of dilutive
loss per share:
Convertible debt ........................ 6,283,989 323,086,919
Warrants ................................ 5,372,566 2,496,063
Options ................................. 4,598,260 --
Preferred Stock ......................... 767,324 --
11. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
From time to time the Company is subject to legal proceedings and
claims, which arise in the ordinary course of its business. The Company believes
that although there can be no assurances as to the disposition of the
proceedings, based upon information available to the Company at this time, the
expected outcome of these matters would not have a material impact on the
Company's results of operations or financial condition.
RENT EXPENSE
The Company leases its headquarters under an operating lease expiring
in November 2007 and requiring monthly rentals of $3,500. Total rental expense
for the years ended September 30, 2007 and 2006 was $39,100 and $8,300,
respectively.
F-21
In November 2007, the Company entered into a new one-year lease for its
headquarters at the same location expiring in November 2008 and requiring
monthly rentals of $3,600.
12. SIGNIFICANT CUSTOMERS
For the year ended September 30, 2007, four customers accounted for 58%
of the Company's revenue and 48% of accounts receivable at September 30, 2007.
For the year ended September 30, 2006, five customers accounted for 75%
of the Company's revenue and 29% of accounts receivable at September 30, 2006.
13. RELATED PARTY TRANSACTIONS
Convertible promissory notes and accrued interest to related parties
amounted to $1,768,300 and $414,300, respectively, at September 30, 2006 and
were repaid in October 2006 as described in Note 6 above. Interest expense to
related parties amounted to $112,900 for the year ended September 30, 2006.
Consulting expenses to a director amounted to $10,000 for the year
ended September 30, 2006.
As described in Note 4, in August 2006 CNS California and two of its
employees, who were significant shareholders, entered into an agreement whereby
the two employees received 4,362,652 shares of the Company's common stock,
warrants to purchase 242,050 shares of the Company's common stock at $0.59 per
share and options to purchase 28,588 shares of the Company's common stock at
$0.59 per share in full settlement of debt aggregating $1,943,100. On the date
of transfer, the amounts due to these employees exceeded the aggregate fair
value (based on an estimate of $0.12 per share) of the shares, warrants and
options transferred by $1,388,000. The gain has been treated as a capital
transaction and included in additional paid-in capital in the accompanying
consolidated financial statements.
14. SUBSEQUENT EVENTS
On October 1, 2007, the Company entered into an employment agreement
with George Carpenter pursuant to which Mr. Carpenter will serve as our
President commencing on October 1, 2007. 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 the Board of Directors of our Company. In addition, 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 the Company's 2006 Stock Incentive Plan,
which will vest as follows: 121,109 shares will vest on the grant date and the
remaining 847,766 shares will vest in equal monthly installments of
approximately 20,185 shares over forty-two months beginning seven months after
the commencement of Mr. Carpenter's employment.
On October 24, 2007, the Company signed a letter of intent to acquire
the NeuroTherapy Clinic (NTC), a psychiatric clinic in Denver, Colorado. NTC is
a center for highly-advanced testing and treatment of neuropsychiatric problems,
including learning, attentional and behavior challenges, mild head injuries, as
well as depression, anxiety, bipolar and all other common psychiatric disorders.
F-22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers.
The Delaware General Corporation Law and certain provisions of our
certificate of incorporation an 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 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 were not 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, 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 for negligence or misconduct.
Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future or pursuant to a vote of stockholders or
directors. The provision cited above also grants 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. We do not currently have any
indemnification agreements with any of our directors or executive officers.
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, 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.
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
II-1
ITEM 25. 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 ............ $ 506
Legal fees and expenses .......................................... $60,000
Accounting fees and expenses ..................................... $10,000
Miscellaneous expenses ........................................... $ 5,000
-------
Total ....................................................... $75,506
ITEM 26. Recent Sales of Unregistered Securities.
Recent Sales Of Unregistered Securities By CNS Delaware
Reference is made to the Stock Purchase Agreement entered into on July
18, 2006, and the Shares for Debt Agreement entered into on January 11, 2007
described above in the section entitled Certain Relationships and Related
Transaction, which is hereby incorporated by reference.
Merger with CNS California
On January 16, 2007, we entered into an Agreement and Plan of Merger
with CNS Response, Inc., a California corporation (or CNS California), and CNS
Merger Corporation, a California corporation and our wholly-owned subsidiary
that was formed to facilitate the acquisition of CNS California. On March 7,
2007, the merger with CNS California closed, CNS California became our
wholly-owned subsidiary, and we changed our name from strativation, Inc. to CNS
Response, Inc. At the Effective Time of the Merger (as defined in the Merger
Agreement, as amended on February 23, 2007), MergerCo was merged with and into
CNS California, the separate existence of MergerCo ceased, and CNS California
continued as the surviving corporation at the subsidiary level. We issued an
aggregate of 17,744,625 shares of our common stock to the stockholders of CNS
California in exchange for 100% ownership of CNS California. Additionally, we
assumed an aggregate of 8,407,517 options to purchase shares of common stock and
warrants to purchase shares of common stock on the same terms and conditions as
previously issued by CNS California.
Securities Issued in Private Placement
On March 7, 2007, simultaneous with the closing of the Merger, we
received gross proceeds of approximately $7,008,450 in the first closing of a
private placement transaction (the "Private Placement") with institutional
investors and other high net worth individuals ("Investors"). Pursuant to
Subscription Agreements entered into with these Investors, we sold 5,840,368
Investment Units, at $1.20 per Investment Unit. Each "Investment Unit" consists
of one share of our common stock, and a five year non-callable warrant to
purchase three-tenths of one share of our common Stock, at an exercise price of
$1.80 per share (the "Investor Warrant"). On May 16, 2007, we completed a second
closing of the Private Placement for an additional 664,390 Investment Units. The
additional gross proceeds to us amounted to $797,300.
Brean Murray Carret & Co. ("Brean Murray") acted as placement agent and
corporate finance advisor in connection with the Private Placement. For their
services as placement agent and financial advisor, pursuant to the terms of an
Engagement Agreement between CNS California and Brean Murray,
II-2
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 has 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.
Stock Options
On August 8, 2007, Mr. Brandt, our CEO, Mr. Hertz, our CFO, and Dr.
Hoffman, our Chief Medical Officer, were granted options to purchase an
aggregate of 2,434,200 shares of our stock for an exercise price of $1.09 per
share pursuant to CNS California's 2006 Stock Incentive Plan, which we assumed
in connection with the closing of the merger transaction with CNS California on
March 7, 2007. On August 8, 2007, Mr. Brandt was also granted an option to
purchase 333,611 shares of our common stock at an exercise price of $1.20 per
share.
On October 1, 2007, Mr. Carpenter, our President, was granted options
to purchase 968,875 shares of our common stock at an exercise price of $0.89
pursuant to CNS California's 2006 Stock Incentive Plan and on December 19, 2007,
Dr. Harbin, a director of the company, and Mr. Webster, an employee of the
company, were granted options to purchase an aggregate of 140,000 shares of our
common stock at an exercise price of $0.80 per share.
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..
Recent Sales Of Unregistered Securities By CNS California
Preferred Stock Transactions
Note Conversion Transaction
In October 2006, CNS California and the holders of certain promissory
notes agreed to convert such notes with an aggregate outstanding balance of
$3,061,700 and related accrued and unpaid interest of $1,005,300 at September
30, 2006, into 5,189,294 shares of CNS California's Series A-1 Preferred Stock,
and 804,221 shares of CNS California's Series A-2 Preferred Stock. At the
closing of the Merger, the aforementioned shares converted into an aggregate of
5,993,515 shares of our common stock.
II-3
Mezzanine Financing
In October 2006, CNS California sold 1,905,978 units (each, a
"Mezzanine Unit") in a private financing resulting in net proceeds of
$1,925,000. Each Mezzanine Unit consisted of one share of CNS California's
Series B Preferred Stock and a 5-year warrant to purchase 0.6 shares of CNS
California's common stock at $1.51 per share. At the closing of the Merger, the
aforementioned shares and warrants were converted into 1,905,978 shares of our
common stock and a warrant to purchase an aggregate of 1,138,835 shares of our
common stock at $1.51 per share on or before October 6, 2011.
Common Stock Transactions
Settlement Agreement Financing
In August and September 2006, certain employees and consultants to whom
CNS California owed an aggregate of $3,199,400 forgave approximately 80% of the
debt and accepted 5,834,117 shares of CNS California's common stock, and
warrants and options to purchase an aggregate of 270,638 shares of CNS
California's common stock at $0.59 per share in full settlement of CNS
California's remaining obligations. At the closing of the Merger, the
aforementioned shares and warrants were converted into 5,834,117 shares of our
common stock and warrants and options to purchase an aggregate of 270,638 shares
of our common stock at $0.59 per share.
Conversion Of Nupharm Database, LLC Promissory Note
In connection with the consummation of an asset purchase transaction in
January 2000, by and between Mill City/CNS, LLC and NuPharm, Mill City issued to
NuPharm Database, LLC a certain Promissory Note dated January 11, 2000 (the
"Original NuPharm Note") pursuant to which Mill City was obligated to pay
NuPharm an aggregate principal amount of $299,923.00 together with interest
pursuant to the payment schedule set forth in the Original NuPharm Note. In
January 2000, Mill City contributed substantially all of its assets, including
those securing the Original Note, to CNS California, and CNS California assumed
certain debts and obligations of Mill City, including Mill City's obligations
under the Original NuPharm Note.
In October 2006, CNS California entered into an agreement with NuPharm
to cancel the Original NuPharm Note in consideration for the extension of the
expiration date of a Warrant to purchase CNS California Common Stock held by
NuPharm and a new promissory note in the principal amount of $287,423 (the "New
NuPharm Note"). Upon the closing of the Private Placement and Merger, the
principal and accrued interest through December 31, 2006 on the New NuPharm Note
automatically converted into 244,509 shares of our Common Stock.
Immediately upon extension of the of the NuPharm Warrant, NuPharm
exercised the NuPharm Warrant to purchase 2,800,000 shares of CNS California
common stock for total proceeds of $147,700. At the closing of the Merger, the
aforementioned shares converted into an aggregate of 2,800,000 shares of our
common stock. Please also see the disclosure set forth above in relation to the
shares of common stock that were issued in the Merger and Private Placement.
Stock Options
Option Grant To Leonard Brandt
On August 11, 2006, Mr. Brandt was granted an option to purchase
2,124,740 shares of CNS California's common stock for an exercise price of
$0.132 per share pursuant to CNS California's 2006 Stock Incentive Plan. At the
closing of the Merger, the option to purchase 2,124,740 shares of CNS
California's common stock was converted into the right to purchase an aggregate
of 2,142,740 shares of our Common Stock at an exercise price of $0.132 per
share.
II-4
In connection with the above stock issuances and option grants, CNS
California 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 the
Company's existing stockholders, one of the company's creditors, one of the
company's current or former officers or directors, one of the company's service
providers, or an accredited investor with whom the company or one of its
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.
II-5
ITEM 27. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -----------------------------------------------------------------------
2.1 Agreement and Plan of Merger between Strativation, Inc., CNS Merger
Corporation and CNS Response, Inc. dated as of January 16, 2007.
Incorporated by reference to Exhibit No. 10.1 to the Registrant's
Current Report on Form 8-K (File No. 000-26285) filed with the
Commission on January 22, 2007.
2.2 Amendment No. 1 to Agreement and Plan of Merger by and among
Strativation, Inc., CNS Merger Corporation, and CNS Response, Inc.
dated as of February 28, 2007. Incorporated by reference to Exhibit No.
10.1 to the Registrant's Current Report on Form 8-K (File No.
000-26285) filed with the Commission on March 1, 2007.
3.1.1 Certificate of Incorporation, dated March 17, 1987. Incorporated by
reference to Exhibit No. 3(i) to the Registrant's Form 10-SB (File No.
000-26285) filed with the Commission on June 7, 1999.
3.1.2 Certificate of Amendment of Certificate of Incorporation, dated June 1,
2004. Incorporated by reference to Exhibit 16 to the Registrant's
Current Report on Form 8-K (File No. 000-26285) filed with the
Commission on June 8, 2004.
3.1.3 Certificate of Amendment of Certificate of Incorporation, dated August
2, 2004. Incorporated by reference to Exhibit 16 to the Registrant's
Current Report on Form 8-K (File No. 000-26285) filed with the
Commission on August 5, 2004.
3.1.4 Certificate of 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 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.
4.1 2006 CNS Response, Inc. Option Plan. Incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 10-QSB (File No.
000-26285) filed with the Commission on May 15, 2007. *
4.2 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.
5.1 Opinion of Stubbs Alderton & Markiles LLP. Incorporated by reference to
our Registration Statement on Form SB-2 (File. No. 333-143139) filed on
May 22, 2007.
10.1 Stock Purchase Agreement by and among the Registrant and George
LeFevre, Scott Absher, and the purchasers signatory thereto dated July
18, 2006. Incorporated by reference from the Registrant's Current
Report on Form 8-K (File No. 000-26285) filed with the Commission on
July 24, 2006.
II-6
10.2 Amended and Restated Shares for Debt Agreement, dated January 16, 2007
by and between the Registrant and Richardson & Patel LLP 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 16, 2007.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.*
10.9 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.*
21.1 Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21
to the Registrant's Current Report on Form 8-K (File No. 000-26285)
filed with the Commission on March 13, 2007.
23.1 Consent of Stubbs, Alderton & Markiles LLP (included in Exhibit 5.1)
23.2 Consent of Cacciamatta Accountancy Corporation
* Indicates a management contract or compensatory plan.
II-7
(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 28. Undertakings.
(a) Rule 415 Offering. The undersigned registrant hereby
undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together, represent a
fundamental change in the information in the registration
statement; and notwithstanding the forgoing, 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 prospects filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in the volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time
as the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(e) Request for Acceleration of Effective Date. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
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 small business issuer 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 Securities Act and will be governed by
the final adjudication of such issue.
(g) Reliance on 430C. For the purpose of determining liability
under the Securities Act 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
II-8
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-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Irvine,
California, on February 4, 2008.
CNS RESPONSE, INC.
(Registrant)
By: /s/ Leonard J. Brandt
-------------------------------------
Leonard J. Brandt
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/ Leonard J. Brandt Chief Executive Officer February 4, 2008
- -------------------------- and Secretary, and
Leonard J. Brandt Chairman of the Board
(Principal Executive Officer)
/s/ Horace Hertz Chief Financial Officer February 4, 2008
- -------------------------- (Principal Financial and
Horace Hertz Accounting Officer)
/s/ George Carpenter President February 4, 2008
- --------------------------
George Carpenter
/s/ Daniel Hoffman Chief Medical Officer February 4, 2008
- --------------------------
Daniel Hoffman
/s/ David B. Jones Director February 4, 2008
- --------------------------
David B. Jones
/s/ Jerome Vaccaro, M.D. Director February 4, 2008
- --------------------------
Jerome Vaccaro, M.D.
/s/ Henry T. Harbin, M.D. Director February 4, 2008
- --------------------------
Henry T. Harbin, M.D.
II-10
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 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 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.
4.1 2006 CNS Response, Inc. Option Plan. Incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 10-QSB (File No.
000-26285) filed with the Commission on May 15, 2007. *
4.2 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.
5.1 Opinion of Stubbs Alderton & Markiles LLP. Incorporated by reference to
our Registration Statement on Form SB-2 (File. No. 333-143139) filed on
May 22, 2007.
10.1 Stock Purchase Agreement by and among the Registrant and George
LeFevre, Scott Absher, and the purchasers signatory thereto dated July
18, 2006. Incorporated by reference from the Registrant's Current
Report on Form 8-K (File No. 000-26285) filed with the Commission on
July 24, 2006.
EX-1
10.2 Amended and Restated Shares for Debt Agreement, dated January 16, 2007
by and between the Registrant and Richardson & Patel LLP 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 16, 2007.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.*
10.9 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.*
21.1 Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21
to the Registrant's Current Report on Form 8-K (File No. 000-26285)
filed with the Commission on March 13, 2007.
23.1 Consent of Stubbs, Alderton & Markiles LLP (included in Exhibit 5.1)
23.2 Consent of Cacciamatta Accountancy Corporation
* Indicates a management contract or compensatory plan.
EX-2