Annual report pursuant to Section 13 and 15(d)

STOCKHOLDERS' EQUITY

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STOCKHOLDERS' EQUITY
 12 Months Ended
Sep. 30, 2011
Stockholders Equity Note [Abstract]  
Stockholders' Equity Note Disclosure [Text Block]
4. 
STOCKHOLDERS’ EQUITY
 
Common and Preferred Stock
 
As of September 30, 2011 the Company is authorized to issue 750,000,000 shares of common stock at par value of $0.001 per share.
 
As of September 30, 2011, CNS California is authorized to issue 100,000,000 no par value shares of two classes of stock, 80,000,000 of which was designated as common shares and 20,000,000 of which was designated as preferred shares.
 
As of September 30, 2011, Colorado CNS Response, Inc. is authorized to issue 1,000,000 no par value shares of common stock.
 
As of September 30, 2011, Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of Colorado CNS Response, Inc., is authorized to issue ten thousand (10,000) shares of common stock, no par value per share.
 
On April 25, 2011 we issued 93,679 shares of common stock as payment in lieu of cash for an aggregate amount of $44,000 owed to two vendors who had provided consulting services to the Company.  These shares were issued to these vendors, who were also accredited investors, at $0.47 per share. This was based on the quoted closing price of the Company’s stock on March 11, 2011, which was the date that our Board approved this stock issuance.
 
Stock-Option Plan
 
On August 3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options (ISO) or non-statutory stock options (NSO), stock appreciation rights and stock unit grants to eligible employees, directors and consultants and is administered by the board of directors. A total of 10 million shares of stock were initially reserved for issuance under the 2006 Plan.  
 
The 2006 Plan initially provided that in any calendar year, no eligible employee or director shall be granted an award to purchase more than 3 million shares of stock. The option price for each share of stock subject to an option shall be (i) no less than the fair market value of a share of stock on the date the option is granted, if the option is an ISO, or (ii) no less than 85% of the fair market value of the stock on the date the option is granted, if the option is a NSO; provided, however, if the option is an ISO granted to an eligible employee who is a 10% shareholder, the option price for each share of stock subject to such ISO shall be no less than 110% of the fair market value of a share of stock on the date such ISO is granted. Stock options have a maximum term of ten years from the date of grant, except for ISOs granted to an eligible employee who is a 10% shareholder, in which case the maximum term is five years from the date of grant. ISOs may be granted only to eligible employees.
 
On March 3, 2010, the Board of Directors approved an amendment to the 2006 Plan which increased the number of shares reserved for issuance under the 2006 Plan from 10 million to 20 million shares of stock.  The amendment also increased the limit on shares issued within a calendar year to any eligible employee or director from 3 million to 4 million shares of stock.  The amendment was approved by shareholders at the annual meeting held on April 27, 2010.
 
On March 3, 2010, the Board of Directors also approved the grant of 9,150,000 options to staff members, directors, advisors and consultants, of which 8,650,000 were in fact granted.  For staff members the options will vest equally over a 48 month period while for directors, advisors and consultants the options will vest equally over a 36 month period.  The effective grant date for accredited investors was March 3, 2010 and the exercise price of $0.55 per share was based on the quoted closing share price of the Company’s stock at the time of grant.  For non-accredited investors the grant date will be determined at some time after obtaining a permit from the State of California allowing the granting of options to non-accredited investors.  This permit was granted by the State of California in July 2010.  No options have been granted to non-accredited investors at this time.
 
On July 5, 2010, the Board of Directors also approved an additional grant of 800,000 options to a new member of the executive management team, a new member of the board of directors and a new advisor to the Company.  The respective vesting periods are the same as those for the abovementioned March 3, 2010 grants.  The effective grant date for these accredited investors was July 5, 2010 and the exercise price of $0.40 per share was based on the quoted closing share price of the Company’s stock on July 2, 2010 as markets were closed for the 4th of July holiday weekend. 
 
On March 11, 2011, the Board of Directors also approved an additional grant of 475,000 options to staff members of the Company.  The options will vest equally over a 48 month period.  The effective grant date for these accredited investors was March 11, 2011 and the exercise price of $0.47 per share was based on the quoted closing share price of the Company’s stock on March 11, 2011. 
 
As of September 30, 2011, 2,124,740 options were exercised and there were 15,725,121 options and 183,937 restricted shares outstanding under the amended 2006 Plan leaving 1,966,202 shares available for issuance of future awards.
  
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:
   
2011
    
2010
  
Annual dividend yield
    
-
      
-
  
Expected life (years)
    
                  5
 
    
                  5
 
Risk-free interest rate
    
2.04
%
    
1.81%-3.62
%
Expected volatility
    
281
%
    
215%-536
%
Fair value of options granted
   $
0.47
     $
0.40-$0.54
  
 
Stock-based compensation expense is recognized over the employees’ or service provider’s requisite service period, generally the vesting period of the award. Stock-based compensation expense included in the accompanying statements of operations for the year ended September 30, 2011 and 2010 is as follows:
 
   
For the year ended
September 30,
  
   
2011
    
2010
  
Cost of Neurometric Services revenues
  
$
10,200
    
$
18,000
  
Research
    
199,300
      
280,600
  
Product Development
    
67,700
      
61,000
  
Sales and marketing
    
209,000
      
197,200
  
General and administrative
    
1,119,200
      
745,300
  
Total
  
$
1,605,400
    
$
1,302,100
  
 
             Total unrecognized compensation as of September 30, 2011 amounted to $2,893,900
 
 A summary of stock option activity is as follows:
 
   
Number of
Shares
    
Weighted Average
Exercise Price
  
Outstanding at September 30, 2009
     6,662,014     $ 0.76  
                 
Granted
     9,450,000       0.54  
Exercised
     -       -  
Forfeited
     (441,041 )     0.81  
                 
Outstanding at September 30, 2010
     15,670,973     $ 0.62  
                 
Granted
     475,000       0.47  
Exercised
     -       -  
Forfeited
     (420,852 )     0.47  
                 
Outstanding at September 30, 2011
     15,725,121     $ 0.62  
  
Following is a summary of the status of options outstanding at September 30, 2011:
 
Exercise
Price
    
Number
of Shares
  
Weighted
Average
Contractual
Life
  
Weighted
Average
Exercise
Price
    
Vested at
September
30, 2011
    
Weighted
Average
Remaining
Life
(Years)
    
Aggregate
Intrinsic
Value at
September
30, 2011
  
                                   
$ 0.12       859,270  
10 years
   $ 0.12       859,270       4.9     $ 111,700  
$ 0.132       987,805  
10 years
     0.132       987,805       4.9       116,600  
$ 0.30       135,700  
10 years
     0.30       135,700       5.1       -  
$ 0.59       28,588  
10 years
     0.59       28,588       4.9       -  
$ 0.80       140,000  
10 years
     0.80       137,500       6.2       -  
$ 0.89       968,875  
10 years
     0.89       968,875       6.0       -  
$ 0.96       352,974  
10 years
     0.96       352,974       6.5       -  
$ 1.09       2,513,549  
10 years
     1.09       2,513,549       5.9       -  
$ 1.20       243,253  
5 years
     1.20       243,253       0.9       -  
$ 0.40       856,000  
10 years
     0.40       342,470       8.8       -  
$ 0.47       475,000  
10 years
     0.47       69,286       9.4       -  
$ 0.51       41,187  
10 years
     0.51       41,187       7.0       -  
$ 0.55       8,122,920  
10 years
     0.55       3,530,046       8.4       -  
Total
       15,725,121       $ 0.62       10,210,503       7.3     $ 228,300  
 
We have entered into agreements on June 3, 2011 with the majority of our option holders pursuant to which holders of options to purchase an aggregate of 13,190,658 shares of our common stock, at exercise prices ranging from $0.12 per share to $1.09 per share, have agreed to amend their options to permit exercise only in cash and to limit the period during which the options may be exercised post-termination to 90 days (for employees) and twelve months (for consultants).
 
We have agreed to freeze any further grants or exercises of securities under the 2006 Plan and adopt a new stock incentive plan subject to and in connection with the completion of this proposed offering. The new plan, which we refer to as the 2011 Stock Incentive Plan, would be subject to approval by our stockholders, which we expect to seek at a meeting of stockholders to be called as soon as practicable following completion of the proposed offering.
 
Warrants to Purchase Common Stock
 
The warrant activity for the years ending September 30, 2011 and 2010 respectively are described as follows:
 
Warrants
    
Exercise
Price
  
Issued, Surrendered or Expired in Connection With:
  15,537,485        
Warrants outstanding at October 1 2009
               
  5,893,334     $ 0.30  
Warrants issued in second, third and fourth closing of the 2009 private placement transaction of 11,786,667 shares at $0.30 with 50% warrant coverage as described in Note 3.
               
  1,200,267     $ 0.33  
Warrants issued to lead and secondary placement agents for private placement as described in Note 3.
               
  (3,333,333 )   $ 0.30  
Warrants surrendered in a net issue exercise and 2,456,126 shares were issued in lieu of cash.
               
  500,000     $ 0.30  
Warrants granted to individual staff members of Equity Dynamics, Inc. a Company owned by Mr. Pappajohn, for their efforts in providing consulting services associated with the Company’s financing activities.
               
  852,812     $ 0.30  
Warrants issued to Mr. John Pappajohn, a Director of the Company, pursuant to the October Note and Warrant Purchase agreement described in note 3; whereby two outstanding convertible notes of $250,000 each, issued on June 3 and July 25, 2010 respectively, and 250,000 outstanding warrants issued on July 25, 2010, with an exercise price of $0.50,  were cancelled and exchanged on October 1, 2010 for two October Notes of $250,000 each plus unpaid interest and warrants to purchase 852,812 shares of common stock.
               
  256,125     $ 0.30  
Warrants issued to Deerwood Partners, LLC which is controlled by Dr. George Kallins, a Director of the Company, pursuant to the October Note and Warrant Purchase Agreement described in note 3; whereby two Deerwood Notes of $125,000 each, issued on July 5 and August 20, 2010 respectively, and 75,000 outstanding warrants issued on August 20, 2010, with an exercise price of $0.56 were, cancelled and exchanged on November 3, 2010 for two October Notes of $125,000 each plus unpaid interest and warrants to purchase 256,125 shares of common stock.
               
  256,125     $ 0.30  
Warrants issued to Deerwood Holdings, LLC which is controlled by Dr. George Kallins, a Director of the Company, pursuant to the October Note and Warrant Purchase Agreement described in note 3; whereby the two Deerwood Notes of $125,000 each, issued on July 5 and August 20, 2010 respectively, and 75,000 outstanding warrants issued on August 20, 2010, with an exercise price of $0.56, were cancelled and exchanged on November 3, 2010 for two October notes of $125,000 each plus unpaid interest and warrants to purchase 256,125 shares of common stock.
               
  341,498     $ 0.30  
Warrants issued to SAIL, of which Mr. David Jones, a Director of the Company, is a senior partner of the general partner.  SAIL had undertaken to guarantee the four abovementioned Deerwood notes which were issued on July 5 and August 20, 2010.  For this guarantee SAIL was issued 100,000 warrants on August 20, 2010 with an exercise price of $0.56.  Upon the cancellation and exchange of the Deerwood Notes on November 3, 2010, SAIL undertook to guarantee the four replacement October Notes,  in exchange for the cancellation of the SAIL’s 100,000 outstanding warrants which were replaced with new warrants in the amount of 341,498.
               
  21,504,313          
Warrants outstanding at September 30, 2010
               
  3,333,329     $ 0.30  
These warrants were issued to eight investors who purchased notes for $2,222,220 pursuant to the October Purchase Agreement described in note 3.  These investors included three directors of the Company, Mr. David Jones, Mr. John Pappajohn and Dr. George Kallins, each of whom purchased notes for $250,000 ($750,000 in aggregate) either directly or through an entity that they control.
               
  166,666     $ 0.33  
These warrants were issued to Monarch Capital who acted as placement agents in raising $500,000 from two investors who purchase notes pursuant to the October Purchase agreement described in note 3.
 
  4,166,660     $ 0.30  
These warrants were issued to 12 investors who purchased notes for $2,500,000 pursuant to the January Purchase Agreement described in note 3.  Of the 12 accredited investors during the January 2011 through April 2011 period, eight have previous relationships with the Company as follows:
1) A January Note in the principal amount of $50,000, and a warrant to purchase 83,333 shares were issued to the Company’s Chief Financial Officer, Paul Buck.
2) Three January Notes in aggregate principal amount of $562,500, and  warrants to purchase 937,499 shares were issued to SAIL Venture Partners, LP, of which David Jones, a director of the Company, is a senior partner of the general partner.
3) Three January Notes in aggregate principal amount of $437,500, and warrants to purchase 729,165 shares were issued to SAIL 2010 Co-Investment Partners, L.P., an entity likewise affiliated with Mr. Jones.
4) Two January Notes in aggregate principal amount of $100,000, and a warrant to purchase 166,666 shares were issued to Meyer Proler MD who first invested in 2006 and provides medical consulting services to the Company.
5) A January Note in the principal amount of $400,000 and a warrant to purchase 666,666 shares were issued to Highland Long /Short Healthcare fund which first invested in the company in October.
6) A January Note in the principle amount of $150,000 and a warrant to purchase 250,000 shares were issued to Cummings Bay Capital LP which has the same fund manager as the Highland Long/Short Healthcare Fund which first invested Company in October 2010.
7) A January Note in the principal amount of $200,000 and a warrant to purchase 333,333 shares were issued to Andy Sassine who had first invested in the Company in October 2010.
8) A January Note in the principal amount of $50,000 and a warrant to purchase 83,333 shares were issued to a trust, the trustee of which is the father-in-law of the Company’s Chief Executive Officer, George Carpenter.
 9) Four January Notes in aggregate amount of $550,000 were issued to new accredited investors together with warrants to purchase 916,665 shares.
               
  299,998     $ 0.33  
These warrants were issued Monarch Capital who acted as placement agents in raising $750,000 from three investors who purchase January Notes pursuant to the January Purchase Agreement described in Note 3 and Antaeus Capital, Inc. who acted as placement agent in raising $150,000 from one investor who is purchased January Notes pursuant to the Note and Warrant Purchase agreement described in Note 3.
               
  (42,331 )   $ 0.01  
Warrants expired
               
  (16,932 )   $ 0.01  
Warrants were surrendered in a net issue exercise: 16,170 shares were issued in lieu of cash.
               
  29,411,703          
Warrants outstanding at September 30, 2011
 
At September 30, 2011, there were warrants outstanding to purchase 29,411,703 shares of the Company’s common stock.  The exercise price of the outstanding warrants range from $0.01 to $1.812 with a weighted average exercise price of $0.49.  The warrants expire at various times 2011 through 2018.