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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM 10-KSB
|X| Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2007
|_| Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NUMBER 000-26285
CNS RESPONSE, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 87-0419387
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2755 BRISTOL ST., SUITE 285
COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(714) 545-3288
(ISSUER'S TELEPHONE NUMBER)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of Class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.) Yes |_| No |X|
The issuer's revenues for the fiscal year ended September 30, 2007 were
$238,400.
At December 5, 2007, the aggregate market value of the voting stock held by
non-affiliates of the issuer was $14,072,920.
At January 7, 2008, the issuer had 25,299,547 shares of Common Stock, $0.001 par
value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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EXPLANATORY NOTE
The following Items amend the Annual Report on Form 10-KSB filed by CNS
Response, Inc. (the "Company") on December 7, 2007 (the "Form 10-KSB"), as
permitted by the rules and regulations promulgated by the Securities and
Exchange Commission. The Form 10-KSB is hereby amended to insert those Items as
set forth herein. All capitalized terms used herein but not defined shall have
the meanings ascribed to them in the Form 10-KSB.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the name, age and position of each of
our executive officers and directors as of January 7, 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
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
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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.
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.
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
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.
3
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
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.
4
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 CNSR. 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
CNSR's Scientific Advisors and Media Advisors are experts in their field. During
their tenure, CNSR 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.
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 CNSR, 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
5
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 CNSR, 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."
CODE OF ETHICAL CONDUCT
Our board of directors has adopted a Code of Ethical Conduct (the "Code
of Conduct") which constitutes a "code of ethics" as defined by applicable SEC
rules and a "code of conduct" as defined by applicable NASDAQ rules. We require
all employees, directors and officers, including our Chief Executive Officer,
President and Chief Financial Officer, to adhere to the Code of Conduct in
addressing legal and ethical issues encountered in conducting their work. The
Code of Conduct requires that these individuals avoid conflicts of interest,
comply with all laws and other legal requirements, conduct business in an honest
and ethical manner and otherwise act with integrity and in our best interest.
The Code of Conduct contains additional provisions that apply specifically to
our Chief Financial Officer and other financial officers with respect to full
and accurate reporting. The Code of Conduct is available on our website at
www.cnsresponse.com and is also filed as an exhibit to this Annual Report on
Form 10-KSB/A.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and executive officers and the holders of more than 10%
of our common stock to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of our equity
securities. Based solely on our review of the copies of the forms received by us
and written representations from certain reporting persons that they have
complied with the relevant filing requirements, we believe that, during the year
ended September 30, 2007, all of our executive officers, directors and the
holders of 10% or more of our common stock complied with all Section 16(a)
filing requirements, except for Henry Harbin who did not timely file a Form 3,
Sail Venture Partners, LLC which did not timely file a Form 3, Richardson &
Patel, LLP which did not timely file a Form 3, David Jones who did not timely
file a Form 3, and Leonard Brandt who did not timely file a Form 3.
ITEM 10. 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
6
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 2007 0 0 0 0 0
Chief 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.
(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.
7
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
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
$0.89 per share pursuant to our 2006 Stock Incentive Plan, which vests as
follows: 121,109 shares vested on the grant date and the remaining 847,766
shares will vest in equal monthly installments of approximately 20,185 shares
over forty-two months beginning seven months after the commencement of Mr.
Carpenter's employment with us, subject to Mr. Carpenter's continued employment
with us. In the event of a change of control transaction, Mr. Carpenter's
options are subject to partial acceleration. Mr. Carpenter will be entitled to
four weeks vacation per annum, health and dental insurance coverage for himself
and his dependents, and other fringe benefits that we may offer our employees
from time to time.
Mr. Carpenter's employment is on an "at-will" basis, and Mr. Carpenter
may terminate his employment with us for any reason or for no reason. Similarly,
we may terminate Mr. Carpenter's employment with or without cause. If we
terminate Mr. Carpenter's employment without cause or Mr. Carpenter
involuntarily terminates his employment with us, Mr. Carpenter shall be eligible
to receive as severance his salary and benefits for a period equal to six months
payable in one lump sum upon termination. If Mr. Carpenter is terminated by us
for cause, or if Mr. Carpenter voluntarily terminates his employment, he will
not be entitled to any severance.
The Company has no other employment agreements with its executive
officers.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2007
The following table presents information regarding outstanding options
held by our named executive officers as of the end of our fiscal year ended
September 30, 2007. None of the named executive officers exercised options
during the fiscal year ended September 30, 2007.
8
Number of Securities Underlying
Unexercised Options (#)
--------------------------------------------
Option Exercise Option Expiration
Name Exercisable Unexercisable Price ($) Date
- -------------------------- --------------------- ---------------------- ---------------------- ----------------------
Leonard Brandt (1) 2,124,740 0 0.132 August 11, 2011
83,403 250,208 1.20 August 8, 2012
323,627 645,262 1.09 August 8, 2017
- -------------------------- --------------------- ---------------------- ---------------------- ----------------------
Horace Hertz ((2)) 0 651,249 1.09 August 8, 2017
- -------------------------- --------------------- ---------------------- ---------------------- ----------------------
Brian MacDonald (3) 714,076 0 0.132 August 11, 2011
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 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.
9
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 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table presents information regarding the beneficial
ownership of our common stock as of January 1, 2008 by each of our executive
officers, each of our directors, all of our directors and executive officers as
a group, and each stockholder known by us to be the beneficial owner of more
than 5% of our common stock.
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 from the Company
that are currently exercisable or exercisable within 60 days of January 1, 2008
10
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 January 1, 2008. Unless otherwise indicated,
the address of each of the named executive officers, directors, director
nominees 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 OWNED
-------------------------
PERCENTAGE
OF SHARES
NAME OF BENEFICIAL OWNER NUMBER OUTSTANDING
- ------------------------ ----------- -----------
EXECUTIVE OFFICERS AND DIRECTORS:
Leonard Brandt (1) 9,078,888 31.1%
Director, Chief Executive Officer
and Secretary
David B. Jones(2) 4,338,521 16.4%
Director
Dr. Jerome Vaccaro 15,000 *
Director (3)
Dr. Henry Harbin 18,000 *
Director (4)
Horace Hertz 217,084 *
Chief Financial Officer (5)
George Carpenter 121,109 *
President (6)
Directors and officers as a group
(6 persons) (7) 13,788,602 44.7%
5% STOCKHOLDERS:
Stephen C. Suffin (8) 1,260,316 5.0%
Sail Venture Partners LP (2) 4,338,521 16.4%
Brian MacDonald(9) 2,092,128 8.0%
W. Hamlin Emory (10) 1,312,866 5.1%
Heartland Value Fund (11) 2,340,000 9.1%
EAC Investment Limited Partnership (12) 1,766,279 6.8%
LMA SPC for and on behalf of Map 2
Segregated Portfolio;
Partner Healthcare Offshore Fund, Ltd.;
Partner Healthcare Fund, L.P. (13) 1,625,000 6.3%
* 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.
11
(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. 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 8,248,397 shares of common stock and 5,540,205 shares of
common stock issuable upon the exercise of vested and exercisable
options and warrants.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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 stockholders
is One Market Plaza, Steuart Tower, 22nd Floor, San Francisco, CA
94105.
12
CHANGES IN CONTROL
We do not have any arrangements which may at a subsequent date result
in a change in control.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth certain information regarding our equity
compensation plans as of September 30, 2007.
- -------------------------- -------------------------- -------------------------- ------------------------------
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
- -------------------------- -------------------------- -------------------------- ------------------------------
Equity compensation
plans approved by
security holders.......... 7,436,703 $0.57 17,379,360
Equity compensation
plans not approved by
security holders.......... 0 0 0
Total..................... 7,436,703 $0.57 17,379,360
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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
13
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 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.
14
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
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.
15
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 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 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.
16
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.
ITEM 13. EXHIBITS
See attached Exhibit Index.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for professional services rendered by
Cacciamatta Accountancy Corporation for professional services rendered for the
audit of our annual financial statements and review of the financial statements
included in our Form 10-QSB's or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for fiscal years 2007 and 2006 were $137,000 and $78,500, respectively.
The aggregate fees billed for professional services rendered by Spector
& Wong, LLP for professional services rendered for the audit of our annual
financial statements and review of the financial statements included in our Form
17
10-QSB or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for fiscal year 2006 was
$17,500.
AUDIT-RELATED FEES
Cacciamatta Accountancy Corporation billed us an aggregate of
approximately $0 and $0 in fees for assurance and related services related to
the performance of the audit or review of our financial statements for the
fiscal years ended September 30, 2007 and September 30, 2006, respectively.
Spector & Wong, LLP billed us an aggregate of $0 in fees for assurance
and related services related to the performance of the audit or review of our
financial statements for the fiscal year ended December 31, 2006.
TAX FEES
The aggregate fees to be billed by Cacciamatta Accountancy Corporation
for professional services rendered for tax compliance, tax advice, and tax
planning during our fiscal years ending September 30, 2006 and September 30,
2007 were $0 and $0, respectively.
The aggregate fees to be billed by Spector & Wong for professional
services rendered for tax compliance, tax advice, and tax planning during our
fiscal year ending December 31, 2006 was $1,000.
ALL OTHER FEES
None.
AUDIT COMMITTEE POLICIES AND PROCEDURES
Our Audit Committee, which consists of our entire Board of Directors,
is directly responsible for interviewing and retaining our independent
accountant, considering the accounting firm's independence and effectiveness,
and pre-approving the engagement fees and other compensation to be paid to, and
the services to be conducted by, the independent accountant. During each of the
fiscal years ended September 30, 2007 and September 30, 2006, respectively, our
Board of Directors pre-approved 100% of the services described above.
18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CNS RESPONSE, INC.
By: /s/ Leonard J. Brandt
--------------------------------
Leonard J. Brandt
Chief Executive Officer
(Principal Executive Officer)
Date: January 23, 2008
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Leonard J. Brandt Chief Executive Officer, January 23, 2008
- ----------------------------- Chairman of the Board,
Leonard J. Brandt Secretary
(Principal Executive
Officer)
/s/ George Carpenter President January 23, 2008
- -----------------------------
George Carpenter
/s/ Horace Hertz Chief Financial Officer January 23, 2008
- ----------------------------- (Principal Financial and
Horace Hertz Accounting Officer)
/s/ David B. Jones Director January 23, 2008
- -----------------------------
David B. Jones
Director
- -----------------------------
Jerome Vaccaro, M.D.
/s/ Henry T. Harbin Director January 23, 2008
- -----------------------------
Henry T. Harbin, M.D.
19
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.
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.
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.
20
EXHIBIT
NUMBER EXHIBIT TITLE
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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 mployment 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.*
14.1 CNS Response, Inc. Code of Ethical Conduct
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.
24.1 Power of Attorney (included as part of the Signature Page of the
form 10-KSB) (1)
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934,
as amended.
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934,
as amended.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------
* Management contract or compensatory plan or arrangement.
(1) Previously filed.
21