Quarterly report pursuant to Section 13 or 15(d)

STOCKHOLDERS' EQUITY

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STOCKHOLDERS' EQUITY
 3 Months Ended
Dec. 31, 2011
Stockholders Equity Note [Abstract]  
Stockholders' Equity Note Disclosure [Text Block]
4. STOCKHOLDERS’ EQUITY

 

Common and Preferred Stock

 

As of December 31, 2011 the Company is authorized to issue 750,000,000 shares of common stock at par value of $0.001 per share and the number of shares issued and outstanding was 56,218,431.

 

As of December 31, 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 December 31, 2011, Colorado CNS Response, Inc. is authorized to issue 1,000,000 no par value shares of common stock.

 

As of December 31, 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 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 December 31, 2011, 2,124,740 options were exercised and there were 15,714,871 options and 183,937 restricted shares outstanding under the amended 2006 Plan leaving 1,976,452 shares available for issuance of future awards.

 

Stock-based compensation expense is recognized over the employees’ or service provider’s requisite service period, generally the vesting period of the award. Stock-based compensation expense included in the accompanying statements of operations for the three months ended December 31, 2011 and 2010 is as follows:

 

    For the three months ended
December 31, 		 
    2011     2010  
Cost of Neurometric Services revenues   $ 2,500     $ 2,500  
Research     27,300       72,400  
Product Development     16,900       16,900  
Sales and marketing     48,800       66,900  
General and administrative     240,000       275,500  
Total   $ 335,500     $ 434,200  

 

Total unrecognized compensation as of December 31, 2011 amounted to $2,547,300.

 

A summary of stock option activity is as follows:

 

    Number of
Shares 		    Weighted Average
Exercise Price		  
Outstanding at September 30, 2011     15,725,121     $ 0.62  
Granted     -       -  
Exercised     -       -  
Forfeited     (10,250 )     0.47  
Outstanding at December 31, 2011     15,714,871     $ 0.62  

      

Following is a summary of the status of options outstanding at December 31, 2011:

   

Exercise
Price 		  Number
of Shares 		    Weighted
Average
Contractual
Life 		    Weighted
Average
Exercise
Price 		 
                   
$0.12     859,270       10 years     $ 0.12  
$0.132     987,805       10 years       0.132  
$0.30     135,700       10 years       0.30  
$0.59     28,588       10 years       0.59  
$0.80     140,000       10 years       0.80  
$0.89     968,875       10 years       0.89  
$0.96     352,974       10 years       0.96  
$1.09     2,513,549       10 years       1.09  
$1.20     243,253       5 years       1.20  
$0.40     856,000       10 years       0.40  
$0.47     464,750       10 years       0.47  
$0.51     41,187       10 years       0.51  
$0.55     8,122,920       10 years       0.55  
Total     15,714,871             $ 0.62  

   

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 the completion of proposed offering. The new 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 three months ending December 31, 2011 and year ending September 30, 2011 respectively are described as follows:

   

Warrants     Exercise
Price 		    Issued, Surrendered or Expired in Connection With:
  21,504,313             Warrants outstanding at October 1, 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.
                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:
  4,166,660     $ 0.30     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
  18,413,141     $ 0.10     As a result of the issuance of $2M Bridge Notes at a conversion of $0.10 and associated warrants to purchase common stock at an exercise price of $0.10, the ratchet provision in the October and January Notes was triggered with the resultant adjustment in the number of shares convertible at the lowered conversion price of $0.10 down from $0.30 and the consequential adjustment in the number of warrants issued to the October and January Note Holders.
  933,336     $ 0.10     As mentioned above the ratchet provision in the issued placement agent warrants was also triggered with the resultant adjustment in the number of warrants being issued to the placement agents.
  (84,661 )   $ 0.01     Warrants were surrendered in a cash exercise for 84,661 shares.
  10,800,000     $ 0.10     These warrants were issued to 4 investors who purchased notes for $1,080,000 pursuant to the $2M Bridge Purchase Agreement described in note 3.  Of the 4 accredited investors during the October 2011 through December 2011 period, three have had prior relationships with the Company as follows:
1) Three $2M Bridge Notes in aggregate principal amount of $750,000, and warrants to purchase 7,500,000 shares were issued to John Pappajohn, a director of the Company.
2) Two $2M Bridge Notes in aggregate amount of $80,000 were issued to accredited investors, who had previously invested in the Company, together with warrants to purchase 800,000 shares.
3) A $2M Bridge Note in the principal amount of $250,000, and a warrant to purchase 2,500,000 shares were issued to the Zanett Opportunity Fund, an entity affiliated with Zachary McAdoo, who was subsequently appointed a director of the Company.
  80,000     $ 0.10     These warrants were issued to Monarch Capital who acted as placement agents in raising $80,000 from two investors who purchased $2M Bridge Notes pursuant to the $2M Bridge Note January Purchase Agreement described in Note 3.
  (2,628,504 )   $  0.01 to $1.812     Warrants expired
  56,925,015             Warrants outstanding at December 31, 2011

  

At December 31, 2011, there were warrants outstanding to purchase 56,925,015 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 $0.23.  The warrants expire at various times starting 2012 through 2018.