Annual report pursuant to Section 13 and 15(d)

STOCKHOLDERS' DEFICIT

v2.4.1.9
STOCKHOLDERS' DEFICIT
 12 Months Ended
Sep. 30, 2014
Stockholders' Equity Note [Abstract]  
Stockholders' Equity Note Disclosure [Text Block]
6.
STOCKHOLDERS’ DEFICIT
 
Common and Preferred Stock
   
As of September 30, 2014, the Company is authorized to issue 195,000,000 shares of stock of which 180,000,000 are Common Stock at par value of $0.001 per share; the remaining 15,000,000 shares, with a par value of $0.001 per shares are blank-check preferred stock which the Board are expressly authorized to provide, for one or more series of preferred stock and, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers, if any, of the shares of such series, and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of each series of preferred stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.
 
As of September 30, 2014, 101,667,409 shares of Common Stock were issued and outstanding. No shares of preferred stock were issued or outstanding.
    
As a condition of the November 28, 2012 closing of the 2012 Bridge Financing, the Company also entered into Employment Compensation Forfeiture and Exchange Agreements (the “Forfeiture and Exchange Agreements”) with three of its executive officers. Pursuant to these agreements, the executives agreed to waive receipt of and release the Company from the payment in aggregate of $165,700 representing 50% of their accrued and unpaid salaries in consideration for which the Company agreed to issue to such executives an aggregate 165,666 shares of its Common Stock. The per share value of the Common Stock $0.04718 per share, the same as the conversion price of the October 2012 Notes. (Refer to Note 8. Related Party Transactions)
 
From January 18, 2013, through September 30, 2013, the $1,998,200 of holders’ of October 2012 Notes converted all their debt and interest thereon into 44,085,044 shares of Common Stock, at a conversion price of $0.04718 per share. (Refer to Note 8. Related Party Transactions)
 
On January 31, 2013, SAIL Capital Partners converted all their notes convertible at $1.00 in the aggregate principal amount of $1,250,000 and $219,800 of interest thereon into 1,469,816 shares of Common Stock. (Refer to Note 4. Convertible Debt and Equity Financings and Note 8. Related Party Transactions)
 
From February 22, 2013, through September 12, 2013, 39 accredited investors purchased an aggregate of 12,180,000 shares of Common Stock at a price of $0.25 per share in private placement transactions. The Company received gross aggregate cash proceeds of $3,045,000. (Refer to Note 8. Related Party Transactions)
  
On March 26, 2013, the Board resolved to amend the Company’s Charter in order to:
 
1)
increase the number of shares of Common Stock authorized for issuance under the Charter from 100,000,000 to 150,000,000; and
 
2)
create one or more series of preferred stock, par value $0.001 per share, and authorize 15,000,000 shares of such preferred stock for issuance.
 
This amendment to the Charter was approved by more than 80% of the stockholders eligible to vote at the annual meeting of stockholders which was held on May 23, 2013.
  
On August 12, 2013, pursuant to an offer to all holders of debt convertible into Common Stock at $1.00 per share, all holders agreed to convert $7,723,300 of convertible debt, which included $1,359,400 interest thereon, into 30,893,419 shares of Common Stock, at a per share price of $0.25. (Refer to Note 6. Related Party Transactions)
  
Below is a summary of all promissory notes conversions:
 
 
 
Shares of
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
 
Conversion
 
Conversion
 
Principal
 
 
 
 
 
Conversion of Notes
 
Stock
 
Date
 
Price
 
Amount
 
Interest
 
Total
 
Fiscal Year 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2012 Notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured convertible notes
 
 
40,000
 
09/19/12
 
$
0.04718
 
$
1,800
 
$
100
 
$
1,900
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2010 Notes: Senior
 
 
303,313
 
01/31/13
 
$
1.00
 
$
250,000
 
$
53,300
 
$
303,300
 
subordinated convertible notes
 
 
13,943,539
 
08/12/13
 
$
0.25
 
 
2,773,900
 
 
712,000
 
 
3,485,900
 
Total October 2010 Notes:
 
 
14,246,852
 
 
 
 
 
 
$
3,023,900
 
$
765,300
 
$
3,789,200
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2011 Notes:
 
 
1,166,503
 
01/31/13
 
$
1.00
 
$
1,000,000
 
$
166,500
 
$
1,166,500
 
Subordinated convertible notes
 
 
7,336,500
 
08/12/13
 
$
0.25
 
 
1,500,000
 
 
334,100
 
 
1,834,100
 
Total January 2011 Notes:
 
 
8,503,003
 
 
 
 
 
 
$
2,500,000
 
$
500,600
 
$
3,000,600
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2011 Notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated convertible notes
 
 
9,205,680
 
08/12/13
 
$
0.25
 
$
2,000,000
 
$
301,400
 
$
2,301,400
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 2012 Notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured convertible note
 
 
407,700
 
08/12/13
 
$
0.25
 
$
90,000
 
$
11,900
 
$
101,900
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2012 Notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured convertible notes
 
 
44,085,044
 
01/18/13 through 09/30/13
 
$
0.04718
 
$
1,998,200
 
$
81,800
 
$
2,080,000
 
Total of Notes Converted in Fiscal 2013
 
 
76,448,279
 
 
 
 
 
 
$
9,612,100
 
$
1,661,000
 
$
11,273,100
 
Total of Notes Converted
 
 
76,488,279
 
 
 
 
 
 
$
9,613,900
 
$
1,661,100
 
$
11,275,000
 
 
From August 30, 2013, through September 30, 2013, pursuant to a subscription agreement, 10 vendors converted an aggregate $502,100 of trade payables into 2,008,318 shares of Common Stock, par value $0.001, at a price for $0.25 per share. (Refer to Note 8. Related Party Transactions)
 
From October 4, 2013, through February 14, 2014, 29 accredited investors purchased an aggregate of 5,900,000 shares of Common Stock, at a price of $0.25 per share pursuant to private placements. The Company received gross aggregate cash proceeds of $1,475,000. (Refer to Note 8. Related Party Transactions)
 
Between November 11, 2013, and December 20, 2013, the Company issued an aggregate of 1,446,380 shares of its Common Stock valued at $361,500, as full and complete settlement of trade payables totaling an aggregate $1,466,800 owed to two creditors who are also accredited investors. As a result of this transaction the Company recorded a gain on extinguishment of debt of $1,105,200.
  
On March 21, 2014, the Board resolved to amend the Company’s Charter in order to further increase the number of shares of Common Stock authorized for issuance under the Charter from 150,000,000 to 180,000,000. This amendment to the Charter was approved by more than 65% of the stockholders eligible to vote at the annual meeting of stockholders held on May 13, 2014.
 
From July 8, 2014 through July 23, 2014, 8 accredited investors purchased an aggregate of 1,040,000 shares of Common Stock, at a price of $0.25 per share pursuant to private placements. The Company received gross aggregate cash proceeds of $260,000. (Refer to Note 8. Related Party Transactions)
 
On January 29, 2014 and June 20, 2014, placement agent warrants to purchase in aggregate 608,309 shares of Common Stock with a price of $0.04718 per share were exercised on a net basis resulting in the issuance of 564,467 shares of Common Stock.
   
Stock-Option Plans
 
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. A total of 667,667 shares of stock were ultimately reserved for issuance under the 2006 Plan. As of September 30, 2014, 70,825 options were exercised and there were 501,924 options and 6,132 restricted shares outstanding under the amended 2006 Plan leaving 87,786 shares which will not be issued as the 2006 Plan has been frozen. The outstanding options have exercise prices to purchase shares of Common Stock ranging from $3.60 to $32.70.
  
On March 22, 2012, our Board 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.
 
On December 10, 2012, the Board approved the amendment of the Company’s 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”) to increase the shares authorized for issuance under the 2012 Plan from 333,334 shares to 5,500,000 shares and granted to each of its three existing members as well as to each Richard Turner, Robert Follman, Andrew Sassine and Thomas Tierney (collectively, the “New Board Members”) options to purchase 250,000 shares of its Common Stock pursuant to the 2012 Plan at an exercise price of $0.04718 per share. The options vest evenly over 36 months starting from the date of grant. The Board furthermore granted to each of the five former Directors who had departed the Board effective November 30, 2012, (George Carpenter, Henry Harbin, George Kallins, David Jones, and Maurice DeWald), options to purchase 25,000 shares of its Common Stock pursuant to the 2012 Plan at an exercise price of $0.04718 per share. These options to former Directors are fully vested. Finally, the Board granted to the Company’s executive officers options to purchase shares of its Common Stock pursuant to the 2012 Plan at an exercise price of $0.04718 per share as follows: George Carpenter 1,200,000 shares, Paul Buck 1,400,000 shares and Michael Darkoch 920,000 shares. These options vest in increments of 12.5% at the beginning of each quarter starting from the date of grant.
 
Based on the volume of shares traded on the open market, during the period October 1, 2012 through to December 10, 2012, the date of the option grant, management judged that the Company’s stock was not actively traded as only $15,000 worth of stock was traded on 11 of 48 trading days during this period at prices ranging from $0.76 to $0.83. In a contemporaneous transaction, Senior Secured Convertible Notes (“October 2012 Notes”) with a conversion price of $0.04718 were purchased by accredited third party investors. Given the very low volume of stock which was not actively traded, compared to the volume of October 2012 Notes purchased, management’s judgment was that the pricing of the October 2012 Notes at $0.04718 represented a better determinant of fair value of the Company’s Common Stock on December 10, 2012.
 
On January 14, 2013, the Board granted options to purchase 1,960,000 shares of Common Stock to members of staff and 1,600,000 share of Common Stock to key consultants. The options granted to staff vest evenly over 48 months starting on the date of grant. The options granted to consultants vest evenly over 36 months starting on the date of grant. All these options have an exercise price of $0.04718 per share.
 
Based on the volume of shares traded on the open market, during the period October 1, 2012 through to January 14, 2013, the date of the option grant, management judged that the Company’s stock was not actively traded as only $36,700 worth of stock was traded on 21 of 50 trading days during this period at prices ranging from $0.49 to $2.50. There had been a recent transaction which closed on November 30, 2012 whereby $2 million of Senior Secured Convertible Notes (“October 2012 Notes”) with a conversion price of $0.04718 were purchased by accredited third party investors. Given the low volume of stock which was not actively traded when compared to the volume of October 2012 Notes purchased, management judged that the pricing of the October 2012 Notes at $0.04718 represented a better determinant of fair value of the Company’s Common Stock on January 14, 2013.
  
On March 26, 2013, the Board approved the amendment of the Company’s 2012 Plan to increase the shares authorized for issuance under the 2012 Plan from 5,500,000 shares to 15,000,000 shares. The Board also granted options to purchase 250,000 shares of Common Stock to Thomas Tierney upon his election to be Chairman of the Board. These options granted to Mr. Tierney vest evenly over 36 months starting on the date of grant and have an exercise price of $0.25 per share.
 
Based on the volume of shares traded on the open market, during the period January 1, 2013, through to March 26, 2013, the date of the option grant, management judged that the Company’s stock was not actively traded as only $283,400 worth of stock was traded on 22 of 58 trading days during this period at prices ranging from $0.46 to $0.83. There was a contemporaneous transaction whereby $695,000 worth of a $2.5 million private placement offering of Common Stock at a price of $0.25 per share were purchased by accredited third party investors. Given the low volume of stock which was not actively traded, compared to the volume of the private placement of Common Stock, management judged that the pricing of the private placement of Common Stock at $0.25 per share represented a better determinant of fair value of the Company’s Common Stock on March 26, 2013.
 
The 2012 Plan, as amended, was approved by our stockholders at the 2013 annual meeting held on May 23, 2013.
 
On October 8, 2013, the Board granted to the Company’s two executive officers and two senior managers (collectively, the “Managers”) options to purchase shares of its Common Stock pursuant to the 2012 Omnibus Incentive Compensation Plan, as amended (the “2012 Plan”), at an exercise price of $0.25 per share as follows: George Carpenter 435,000 shares, Paul Buck 470,000 shares, Stewart Navarre 385,000 shares and Brian MacDonald 310,000. These options vest pro-rata over 12 months starting from the date of grant. The four managers have agreed to forego a portion of their salaries in fiscal year 2014 as follows: George Carpenter $98,000, Paul Buck $106,500, Stewart Navarre $83,600 and Brian MacDonald $66,700. These executive officers and managers will be paid out of the salaries which were earned and accrued during fiscal year 2012 and fiscal year 2013. The accruals to be paid out are equivalent to the fiscal year 2014 salaries that each of the executive officers and managers agreed to forego in lieu of receiving options.
 
On November 8, 2013, the Board granted 700,000 options to purchase shares of its Common Stock pursuant to the 2012 Plan, at an exercise price of $0.25 per share to select consultants and staff, excluding the managers. The staff options vest evenly over 48 months starting on the date of grant; consultant options vest evenly over 36 months starting on the date of grant.
 
On July, 2014, the Board granted 425,000 options to purchase shares of its Common Stock pursuant to the 2012 Plan, at an exercise price of $0.26 per share to select consultants. These options vest evenly over 36 months starting on the date of grant.
 
Based on the volume of shares traded on the open market, during the period July 1, 2013, through to November 8, 2013, which covers the both option grant dates of October 8, 2013, and November 8, 2013, management judged that the Company’s stock was not actively traded, due to the fact that only $180,000 worth of stock was traded on 51 of 93 trading days during this period at prices ranging from $0.30 to $1.74. There was a contemporaneous transaction whereby $2,047,500 worth of stock was purchased in a private placement offering of Common Stock at a price of $0.25 per share by accredited investors. Given the low volume of stock, which was not actively traded, compared to the volume of the private placement of Common Stock, management judged that the pricing of the private placement of Common Stock at $0.25 per share represented a better determinant of fair value of the Company’s Common Stock on the dates that the options were granted.
 
As of September 30, 2014, 11,915,575 options are issued and outstanding under the 2012 Plan, none of which have been exercised and 3,084,425 remain available for issuance. The outstanding options have exercise prices to purchase shares of Common Stock ranging from $0.04718 to $0.25.
 
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:
 
 
 
2014
 
 
2013
 
Annual dividend yield
 
 
-
 
 
 
-
 
Expected life (years)
 
 
5
 
 
 
5
 
Risk-free interest rate
 
 
1.42% - 1.76
%
 
 
0.62% - 0.79
%
Expected volatility
 
 
116% - 129
%
 
 
380% - 393
%
Fair value of options granted
 
$
0.21
 
 
$
0.05 - 0.25
 
 
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, 2014 and 2013 is as follows:
 
 
 
For the fiscal year ended
 
 
 
September 30,
 
 
 
2014
 
 
2013
 
Cost of Neurometric Services revenues
 
$
5,100
 
 
$
10,600
 
Research
 
 
65,500
 
 
 
92,700
 
Product Development
 
 
249,700
 
 
 
113,300
 
Sales and marketing
 
 
87,700
 
 
 
155,500
 
General and administrative
 
 
600,700
 
 
 
885,200
 
Total
 
$
1,008,700
 
 
$
1,257,300
 
 
Total unrecognized compensation as of September 30, 2014 amounted to $360,300.
 
A summary of stock option activity is as follows: 
 
 
Number of
 
Weighted Average
 
 
 
Shares
 
Exercise Price
 
Outstanding at September 30, 2012
 
 
546,746
 
$
17.08
 
Granted
 
 
9,205,000
 
 
0.05
 
Exercised
 
 
-
 
 
-
 
Forfeited
 
 
(2,152)
 
 
14.10
 
Outstanding at September 30, 2013
 
 
9,749,594
 
$
1.00
 
Granted
 
 
2,725,000
 
 
0.25
 
Exercised
 
 
-
 
 
-
 
Forfeited
 
 
(57,095)
 
 
12.67
 
Outstanding at September 30, 2014
 
 
12,417,499
 
$
0.84
 
  
Following is a summary of the status of options outstanding at September 30, 2014:
 
 
 
 
 
 
Weighted
 
Weighted
 
Vested and
 
Weighted
 
Aggregate Intrinsic
 
 
 
 
 
 
Average
 
Average
 
Exercisable at
 
Average
 
Value at $0.22 price
 
Exercise
 
Number
 
Contractual
 
Exercise
 
September
 
Remaining
 
per share at
 
Price
 
of Shares
 
Life
 
Price
 
30, 2014
 
Life (Years)
 
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
$
0.04718
 
 
8,920,300
 
 
10 years
 
$
0.04718
 
 
6,538,494
 
 
8.2
 
$
1,541,606
 
$
0.25
 
 
2,527,605
 
 
10 years
 
 
0.25
 
 
1,951,216
 
 
9.0
 
 
-
 
$
0.26
 
 
425,000
 
 
10 years
 
 
0.26
 
 
35,417
 
 
9.8
 
 
-
 
$
3.00
 
 
42,670
 
 
10 years
 
 
3.00
 
 
37,929
 
 
7.5
 
 
-
 
$
3.60
 
 
28,648
 
 
10 years
 
 
3.60
 
 
28,648
 
 
1.9
 
 
-
 
$
3.96
 
 
32,928
 
 
10 years
 
 
3.96
 
 
32,928
 
 
1.9
 
 
-
 
$
9.00
 
 
4,525
 
 
10 years
 
 
9.00
 
 
4,525
 
 
2.1
 
 
-
 
$
12.00
 
 
28,535
 
 
10 years
 
 
12.00
 
 
28,535
 
 
5.7
 
 
-
 
$
14.10
 
 
10,000
 
 
10 years
 
 
14.10
 
 
8,958
 
 
6.5
 
 
-
 
$
15.30
 
 
1,373
 
 
10 years
 
 
15.30
 
 
1,373
 
 
4.0
 
 
-
 
$
16.50
 
 
262,441
 
 
10 years
 
 
16.50
 
 
262,441
 
 
5.4
 
 
-
 
$
17.70
 
 
953
 
 
10 years
 
 
17.70
 
 
953
 
 
1.9
 
 
-
 
$
24.00
 
 
4,667
 
 
10 years
 
 
24.00
 
 
4,667
 
 
3.2
 
 
-
 
$
26.70
 
 
32,297
 
 
10 years
 
 
26.70
 
 
32,297
 
 
3.0
 
 
-
 
$
28.80
 
 
11,767
 
 
10 years
 
 
28.80
 
 
11,767
 
 
3.5
 
 
-
 
$
32.70
 
 
83,790
 
 
10 years
 
 
32.70
 
 
83,790
 
 
2.8
 
 
-
 
 
Total
 
 
12,417,499
 
 
 
 
$
0.843
 
 
9,063,938
 
 
4.79
 
$
1,541,606
 
 
Warrants to Purchase Common Stock
 
  The warrant activity for the period starting October 1, 2012, through September 30, 2014, is described as follows:
 
 
 
Exercise
 
 
 
 
Warrants
 
Price
 
 
Issued, Surrendered or Expired in Connection With:
 
2,164,440
 
$
 
 
 
Warrants outstanding at October 1, 2012
 
(1,617,345)
 
 
3.00
 
 
Warrants forfeited pursuant to the Amended and Restated Consent, Note Amendment and Warrant Forfeiture Agreement dated October 24, 2012
 
 
 
 
 
 
 
 
 
127,173
 
 
0.04718
 
 
These warrants were issued to Monarch Capital who acted as placement agents in raising $60,000 from one investor who purchased October 2012 Notes pursuant to the 2012 Bridge Note October Purchase Agreement.
 
 
 
 
 
 
 
 
 
519,288
 
 
0.04718
 
 
These warrants due to be issued to Tony Pullen who acted as placement agents in raising $350,000 from three investors who purchased October 2012 Notes pursuant to the 2012 Bridge Note October Purchase Agreement.
 
 
 
 
 
 
 
 
 
152,000
 
 
0.275
 
 
These warrants were issued to Monarch Capital who acted as placement agents in raising $380,000 from twelve accredited investors who purchased common stock, par value $0.001 per share, in private placement agreements dated February 20, 2013 and May 23, 2013.
 
 
 
 
 
 
 
 
 
100,000
 
 
0.25
 
 
These warrants were issued to D&D Securities Inc. in connection with the Company’s private offering to select accredited investors of shares of restricted common stock at a private of $0.25 per share, in a private placement agreement dated February 20, 2013.
 
 
 
 
 
 
 
 
 
52,000
 
 
0.275
 
 
These warrants were issued to Monarch Capital who acted as placement agents in raising $520,000 from five accredited investors who purchased common stock, par value $0.001 per share, in a private placement agreement dated May 23, 2013.
 
 
 
 
 
 
 
 
 
1,497,556
 
$
3.03
 
 
Warrants outstanding at September 30, 2013
 
120,000
 
 
0.275
 
 
Warrants issued to Monarch Capital who acted as placement agents in raising $300,000 from 11 accredited investors who purchased restricted common stock, par value $0.001 per share, in a private placement agreements dated October 2, 2013 and January 8, 2014.
 
 
 
 
 
 
 
 
 
32,200
 
 
0.25
 
 
Warrants issued to D&D Securities Inc. who acted as placement agents in raising $115,000 from three accredited investors who purchased restricted common stock, par value $0.001 per share, in a private placement agreement dated January 8, 2014.
 
 
 
 
 
 
 
 
 
(519,288)
 
 
0.04718
 
 
Warrants exercised as of January 29, 2013.
 
(89,021)
 
 
0.04718
 
 
Warrants exercised as of June 20, 2014.
 
(226,703)
 
 
$9.00 to $9.90
 
 
Warrants expired
 
 
 
 
 
 
 
 
 
814,744
 
$
3.07
 
 
Warrants outstanding at September 30, 2014
 
 
At September 30, 2014, there were warrants outstanding to purchase 814,744 shares of the Company’s common stock. The exercise price of the outstanding warrants range from $0.04718 to $9.90 with a weighted average exercise price of $3.07.  The warrants expire at various times starting 2014 through 2019.