Annual report pursuant to Section 13 and 15(d)

STOCKHOLDERS' EQUITY

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STOCKHOLDERS' EQUITY
 12 Months Ended
Sep. 30, 2012
Stockholders' Equity Note [Abstract]  
Stockholders' Equity Note Disclosure [Text Block]
5. STOCKHOLDERS’ EQUITY

 

Common and Preferred Stock

 

As of September 30, 2012, the Company is authorized to issue 100,000,000 shares of common stock at par value of $0.001 per share and the number of shares issued and outstanding was 1,914,175.

 

As of September 30, 2012, 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, 2012, Colorado CNS Response, Inc. is authorized to issue 1,000,000 no par value shares of common stock.

 

As of September 30, 2012, 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 3,123 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 $14.10 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.

 

On September 19, 2012 the BluMont Capital Corp. ITF Northern Rivers Innovation RSP Fund converted $1,900 of their $50,000 August 2012 Note to 40,000 shares of common stock at a conversion price of $0.04718 per share.

 

Stock-Option Plan

 

On August 3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options (ISO) or non-statutory stock options (NSO), stock appreciation rights and stock unit grants to eligible employees, directors and consultants and is administered by the board of directors. A total of 333,334 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 100,000 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 333,334 to 666,667 shares of stock. The amendment also increased the limit on shares issued within a calendar year to any eligible employee or director from 100,000 to 133,333 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 305,000 options to staff members, directors, advisors and consultants, of which 288,334 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 $16.50 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 March 11, 2011, the Board of Directors also approved an additional grant of 15,834 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 $14.10 per share was based on the quoted closing share price of the Company’s stock on March 11, 2011.

  

On March 22, 2012, our Board of Directors approved the CNS Response, Inc. 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”), reserved 333,334 shares of stock for issuance and approved the grant of options to purchase 42,670 shares of common stock pursuant to such plan at an exercise price of $3.00 per share, including options to purchase 8,334 shares to each of our directors Zachary McAdoo and Maurice DeWald. The 2012 Plan will be submitted for approval to our stockholders at our 2013 Annual Meeting of Stockholders.  Absent stockholder approval, the options will be cancelled and the 2012 Plan will not become effective.

 

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, 2012 and 2011 is as follows:

 

As of September 30, 2012, 70,825 options were exercised and there were 504,076 options and 6,132 restricted shares outstanding under the amended 2006 Plan leaving 85,634 shares which will not be issued as this 2006 Plan is frozen. 42,670 options have been issued under the 2012 Plan, of which none have been exercised and 290,664 remain available for issuance subject to shareholder approval of the 2012 Plan.

 

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:

    2012     2011  
Annual dividend yield     -       -  
Expected life (years)     5       5  
Risk-free interest rate     1.13 %     2.04 %
Expected volatility     274 %     281 %
Fair value of options granted   $ 3.00     $ 14.10  

 

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, 2012 and 2011 is as follows:

 

    For the year ended
September 30,		  
    2012     2011  
Cost of Neurometric Services revenues   $ 10,200     $ 10,200  
Research     99,200       199,300  
Product Development     72,500       67,700  
Sales and marketing     196,800       209,000  
General and administrative     972,100       1,119,200  
Total   $ 1,350,800     $ 1,605,400  

 

Total unrecognized compensation as of September 30, 2012 amounted to $1,565,500.

 

A summary of stock option activity is as follows:

 

    Number of
Shares		     Weighted Average
Exercise Price		  
Outstanding at September 30, 2010     522,396     $ 18.60  
                 
Granted     15,834       14.10  
Exercised     -       -  
Forfeited     (14,029 )     14.10  
                 
Outstanding at September 30, 2011     524,201     $ 19.88  
                 
Granted     42,670       3.00  
Exercised     -       -  
Forfeited     (20,125 )     24.08  
                 
Outstanding at September 30, 2012     546,746     $ 17.08  

 

Following is a summary of the status of options outstanding at September 30, 2012:

 

Exercise
Price		     Number
of Shares		     Weighted
Average
Contractual
Life		     Weighted
Average
Exercise
Price		     Vested at
September
30, 2012		     Weighted
Average
Remaining
Life
(Years)		     Aggregate
Intrinsic
Value at
September
30, 2012		  
                                       
$ 3.00       42,670     10 years     $ 3.00       5,334       9.5     $ -  
$ 3.60       28,648     10 years       3.60       28,648       3.9       -  
$ 3.96       32,928     10 years       3.96       32,928       3.9       -  
$ 9.00       4,525     10 years       9.00       4,525       4.1       -  
$ 12.00       28,535     10 years       12.00       19,056       7.7       -  
$ 14.10       12,152     10 years       14.10       6,110       8.4       -  
$ 15.30       1,373     10 years       15.30       1,373       6.0       -  
$ 16.50       262,441     10 years       16.50       184,206       7.4       -  
$ 17.70       953     10 years       17.70       953       3.9       -  
$ 24.00       4,667     10 years       24.00       4,667       5.2       -  
$ 26.70       32,297     10 years       26.70       32,297       5.0       -  
$ 28.80       11,767     10 years       28.80       11,767       5.5       -  
$ 32.70       83,790     10 years       32.70       83,790       4.9            -  
                                                     
Total       546,746             $ 17.08       415,654       6.6     $ -  

 

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 439,689 shares of our common stock, at exercise prices ranging from $3.00 per share to $36.00 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 the 2012 Stock Incentive Plan, which is subject to approval by our stockholders, at a meeting of stockholders to be called as soon as practicable in the second quarter of 2013.

 

Warrants to Purchase Common Stock

 

 The warrant activity for the year ending September 30, 2012 and year ending September 30, 2011 respectively are described as follows:

 

Warrants     Exercise
Price		     Issued, Surrendered or Expired in Connection With:
  716,810             Warrants outstanding at October 1, 2010
                 
  111,100     $ 9.00     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.
                 
  5,558     $ 9.90     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:
                 
138,897   $ 9.00 1) A January Note in the principal amount of $50,000, and a warrant to purchase 2,778 shares were issued to the Company’s Chief Financial Officer, Paul Buck.
2) Three January 2011 Notes in aggregate principal amount of $562,500, and warrants to purchase 31,251 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 2011 Notes in aggregate principal amount of $437,500, and warrants to purchase 24,307 shares were issued to SAIL 2010 Co-Investment Partners, L.P., an entity likewise affiliated with Mr. Jones.
4) Two January 2011 Notes in aggregate principal amount of $100,000, and a warrant to purchase 5,556shares 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 22,223 shares were issued to Pyxis 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 8,334 shares were issued to Cummings Bay Capital LP which has the same fund manager as the Pyxis 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 11,112 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 2,778 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 2011 Notes in aggregate amount of $550,000 were issued to new accredited investors together with warrants to purchase 30,558 shares.
                 
  10,002     $ 9.90     These warrants were issued Monarch Capital who acted as placement agents in raising $750,000 from three investors who purchased January 2011 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 purchased January 2011 Notes pursuant to the Note and Warrant Purchase agreement described in Note 3.
                 
  (1,412 )   $ 0.30     Warrants expired
                 
  (565 )   $ 0.30     Warrants were surrendered in a net issue exercise: 539 shares were issued in lieu of cash.
                 
  980,390             Warrants outstanding at September 30, 2011
                 
  613,782     $ 3.00     As a result of the issuance of October 2011 Notes at a conversion of $3.00 and associated warrants to purchase common stock at an exercise price of $3.00, the ratchet provision in the October and January 2011 Notes was triggered with the resultant adjustment in the number of shares convertible at the lowered conversion price of $3.00 down from $9.00 and the consequential adjustment in the number of warrants issued to the October and January Note Holders.
                 
  31,112     $ 3.00     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.
                 
  (2,823 )   $ 0.30     Warrants were surrendered in a cash exercise for 2,823 shares.
                 
  696,673     $ 3.00    

These warrants were issued to 11 investors who purchased notes for $2,000,000 pursuant to the 2011 Bridge Purchase Agreement described in note 4 were as follows:

1)    Three October 2011 Notes in aggregate principal amount of $750,000, and warrants to purchase 250,002 shares were issued to John Pappajohn, a director of the Company.  

2)    Two October 2011 Notes in aggregate amount of $80,000 were issued to accredited investors, who had previously invested in the Company, together with warrants to purchase 26,667 shares.

3)    An October 2011 Note in the principal amount of $250,000, and a warrant to purchase 83,334 shares were issued to the Zanett Opportunity Fund, an entity affiliated with Zachary McAdoo, who was subsequently appointed a director of the Company.     

4)    Three October 2011 Notes in aggregate amount of $180,000 were issued to accredited investors, who had previously invested in the Company, together with warrants to purchase 60,001 shares.  

5)    An October 2011 Note in the principal amount of $40,000, and a warrant to purchase 13,334 shares were issued to the Zanett Opportunity Fund, an entity affiliated with Zachary McAdoo, who is a director of the Company.    

6)    A unsecured Bridge Note in the principal amount of $90,000, and a warrant to purchase 30,000 shares were issued to the Zanett Opportunity Fund, an entity affiliated with Zachary McAdoo, who is a director of the Company.

7)    Four October 2011 Notes in aggregate amount of $700,000 and a warrant to purchase 233,335 shares were issued to four new investors to the company.
                 
  5,334     $ 3.00     These warrants were issued to Monarch Capital who acted as placement agents in raising $80,000 from two investors who purchased October 2011 Notes pursuant to the 2011 Bridge Note January Purchase Agreement described in Note 4.
                 
  15,167     $ 3.00     These warrants were issued to Innerkip Capital Management who acted as placement agents in raising $650,000 from three investors who purchased October 2011 Notes pursuant to the 2011 Bridge Note January Purchase Agreement described in Note 4.    
                 
  (175,195 )     $0.30 to $54.0     Warrants expired
                 
  2,164,440             Warrants outstanding at September 30, 2012

 

At September 30, 2012, there were warrants outstanding to purchase 2,164,440 shares of the Company’s common stock. The exercise price of the outstanding warrants range from $3.00 to $9.90 with a weighted average exercise price of $4.35.  The warrants expire at various times starting 2012 through 2018.