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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 2008
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________.
Commission file number 0-26285
CNS RESPONSE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0419387
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2755 BRISTOL STREET, SUITE 285
COSTA MESA, CA 92626
(Address of principal executive offices)
(714) 545-3288
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [_]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [_] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
As of February 12, 2009, the issuer had 25,299,547 shares of common
stock, par value $.001 per share, issued and outstanding.
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CNS RESPONSE, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION..............................................3
Item 1. Financial Statements...............................................3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended December 31, 2008 and 2007..............3
Condensed Consolidated Balance Sheets as of December 31, 2008
(unaudited) and September 30, 2008.................................4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended December 31, 2008 and 2007..............5
Unaudited Condensed Consolidated Statements of Stockholders'
Equity (Deficit) for the three months ended December 31,
2008 and 2007......................................................6
Notes to Unaudited Condensed Consolidated Financial Statements.....7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................14
Item 3. Quantitative And Qualitative Disclosures About Market Risk........22
Item 4. Controls and Procedures...........................................22
PART II OTHER INFORMATION.................................................24
Item 1A. Risk Factors......................................................24
Item 6. Exhibits..........................................................24
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CNS RESPONSE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
DECEMBER 31,
2008 2007
------------ ------------
REVENUES
Laboratory Information Services $ 28,400 $ 58,700
Clinical Services 143,200 --
------------ ------------
171,600 58,700
------------ ------------
OPERATING EXPENSES
Cost of laboratory services revenues 33,500 37,900
Research and development 682,400 372,500
Sales and marketing 263,200 38,700
General and administrative 625,500 671,600
------------ ------------
Total operating expenses 1,604,600 1,120,700
------------ ------------
OPERATING LOSS (1,433,000) (1,062,000)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income (expense), net 1,100 54,000
------------ ------------
Total other income 1,100 54,000
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,431,900) (1,008,000)
Income taxes -- 800
------------ ------------
NET LOSS $ (1,431,900) $ (1,008,800)
============ ============
NET LOSS PER SHARE:
Basic $ (0.06) $ (0.04)
Diluted $ (0.06) $ (0.04)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 25,299,547 25,299,547
Diluted 25,299,547 25,299,547
See accompanying Notes to Condensed Consolidated Financial Statements.
3
CNS RESPONSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2008 2008
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 1,021,600 $ 1,997,000
Accounts receivable (net of allowance for doubtful accounts
of $17,200 (unaudited) as of December 31, 2008 and $ 17,200
as of September 30, 2008) 89,300 98,200
Prepaid and other 125,500 189,400
------------ ------------
Total current assets 1,236,400 2,284,600
Other assets 26,400 28,700
Goodwill 320,200 320,200
------------ ------------
TOTAL ASSETS $ 1,583,000 $ 2,633,500
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (including amounts due to related parties of
$6,800 (unaudited) as of December 31, 2008 and $6,800 as of
September 30, 2008) $ 285,100 $ 335,700
Accrued liabilities 228,200 207,500
Deferred compensation (including $ 107,000 (unaudited) and
$107,000 to related parties as of December 31, 2008 and
September 30, 2008 respectively) 239,800 264,900
Accrued patient costs 628,800 397,500
Accrued consulting fees 65,000 67,600
Accrued interest 44,300 42,600
Convertible promissory notes 50,000 50,000
Current portion of long-term debt 90,400 88,500
------------ ------------
Total current liabilities 1,631,600 1,454,300
LONG -TERM LIABILITIES
Note payable to officer 95,800 118,600
Capital lease 7,100 7,700
------------ ------------
Total long term liabilities 102,900 126,300
COMMITMENTS AND CONTINGENCIES
Stockholders' equity (deficit):
Common stock, $0.001 par value; authorized, 750,000,000
shares, issued and outstanding, 25,299,547 shares as of
December 31, 2008 and September 30, 2008 25,300 25,300
Additional paid-in capital 17,928,800 17,701,300
Accumulated deficit (18,105,600) (16,673,700)
------------ ------------
Total stockholders' equity (deficit) (151,500) 1,052,900
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,583,000 $ 2,633,500
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
4
CNS RESPONSE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
DECEMBER 31,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,431,900) $ (1,008,800)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and Amortization 2,300 26,700
Stock-based compensation 227,500 417,300
Changes in operating assets and liabilities:
Accounts receivable 8,900 4,200
Prepaids and other current assets 63,900 (26,200)
Accounts payable (50,600) (43,800)
Accrued liabilities 22,400 1,500
Deferred compensation (25,100) (200)
Accrued consulting fees (2,600) (18,000)
Accrued patient costs 231,300 --
------------ ------------
Net cash used in operating activities (953,900) (647,300)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in other assets -- (20,400)
------------ ------------
Net cash used in investing activities -- (20,400)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note (21,000) --
Prepayment of lease (500) --
------------ ------------
Net cash used in financing activities (21,500) --
------------ ------------
Net decrease in cash (975,400) (667,700)
Cash, beginning of period 1,997,000 5,790,100
------------ ------------
Cash, end of period $ 1,021,600 $ 5,122,400
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 6,000 $ --
============ ============
Income taxes $ -- $ 800
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
5
CNS RESPONSE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ADDITIONAL
FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
BALANCE - September 30, 2008 25,299,247 $ 25,300 $ 17,701,300 $(16,673,700) $ 1,052,900
Stock- based compensation -- -- 227,500 -- 227,500
Net loss for the three months ended December 31, 2008 -- -- -- (1,431,900) (1,431,900)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2008 25,299,247 $ 25,300 $ 17,928,800 $(18,105,600) $ (151,500)
============ ============ ============ ============ ============
ADDITIONAL
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
BALANCE - September 30, 2007 25,299,247 $ 25,300 $ 16,630,000 $(11,302,200) $ 5,353,100
Stock- based compensation -- -- 417,300 -- 417,300
Net loss for the three months ended December 31, 2007 -- -- -- (1,008,800) (1,008,800)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2007 25,299,247 $ 25,300 $ 17,047,300 $(12,311,000) $ 4,761,600
============ ============ ============ ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
6
CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
ORGANIZATION AND NATURE OF OPERATIONS
CNS Response, Inc. (the "Company") was incorporated as Strativation,
Inc. in Delaware on July 10, 1984. In connection with a merger on March 7, 2007
with CNS Response, Inc., a California corporation, the Company changed its name
to its current name and commenced its current operations. The Company utilizes a
patented system that guides psychiatrists and other physicians to determine a
proper treatment for patients with mental, behavioral and/or addictive
disorders. The Company also intends to guide pharmaceutical developers in the
development of new and approved pharmaceuticals.
In addition, as a result of its acquisition of Neuro-Therapy Clinic,
P.C. ("NTC") on January 11, 2008, the Company provides behavioral health care
services. NTC is a center for highly-advanced testing and treatment of
neuropsychiatric problems, including learning, attentional and behavioral
challenges, mild head injuries, as well as depression, anxiety, bipolar and all
other common psychiatric disorders. Through this acquisition, the Company
expects to advance neurophysiology data collection, beta-test planned
technological advances in rEEG, advance physician training in rEEG and
investigate practice development strategies associated with rEEG.
GOING CONCERN UNCERTAINTY
The Company has a limited operating history and its operations are
subject to certain risks and uncertainties frequently encountered by rapidly
evolving markets. These risks include the failure to develop or supply
technology or services, the ability to obtain adequate financing, competition
within the industry and technology trends.
To date, the Company has financed its cash requirements primarily from
debt and equity financings. It will be necessary for the Company to raise
additional funds in order to continue to conduct its business. The Company's
liquidity and capital requirements depend on several factors, including the rate
of market acceptance of its services, the ability to expand and retain its
customer base, its ability to execute its current business plan and other
factors. The Company is currently exploring additional sources of capital but
there can be no assurances that any financing arrangement will be available in
amounts and terms acceptable to the Company.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of CNS
Response, Inc. ("CNS," "we," "us," "our" or the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and include all the accounts of CNS and its wholly owned subsidiaries CNS
California and NTC. Certain information and note disclosures, normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States, have been condensed or omitted pursuant
to such rules and regulations. The unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of our financial position as of
December 31, 2008 and our operating results, cash flows, and changes in
stockholders' equity for the interim periods presented. The September 30, 2008
balance sheet was derived from our audited financial statements but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. These condensed consolidated financial statements
and the related notes should be read in conjunction with our financial
statements and notes for the year ended September 30, 2008 which are included in
our current report on Form 10-K, filed with the Securities and Exchange
Commission on January 13, 2009.
7
CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and revenues and
expenses in the financial statements. Examples of estimates subject to possible
revision based upon the outcome of future events include, among others,
recoverability of long-lived assets and goodwill, stock-based compensation, the
allowance for doubtful accounts, the valuation of equity instruments, use and
other taxes. Actual results could differ from those estimates.
The results of operations for the three months ended December 31, 2008
are not necessarily indicative of the results that may be expected for future
periods or for the year ending September 30, 2009.
2. CONVERTIBLE PROMISSORY NOTES
Prior to September 30, 2006, CNS California issued convertible
promissory notes with detachable warrants from time to time to fund its
operations. The notes bear interest at 8% per year, compounded annually, and are
payable on demand. The terms of the notes provide for the (i) conversion of
principal and accrued interest into the same type of securities issued by CNS
California upon a qualified institutional financing, the amount of which
financing varies between notes and ranges from $1 to $4 million, and (ii)
conversion price to be equal to the same price as the shares sold in the
financing. The notes provide for an aggregate of $2,196,000 in principal to
convert automatically and $920,700 to convert at the note holders' options based
upon certain financing requirements (as defined).
In October 2006, CNS California and the note holders of certain
convertible promissory notes converted notes with an aggregate outstanding
balance of $3,061,700 and related accrued and unpaid interest of $1,005,300 at
September 30, 2006 into 5,993,515 shares of CNS California Series A Preferred
Stock. In addition, the exercise price of warrants to purchase 1,062,116 shares
of the CNS California common stock issued to such note holders was changed to
$0.59 per share. Upon CNS California's merger with the Company, the preferred
shares were converted into 5,993,515 shares of the Company's common stock and
the warrants were converted into warrants to purchase 1,062,116 shares of the
Company's common stock at $0.59 per share. The consolidated financial statements
of the Company presented reflect the issuance of these shares as common stock.
As of September 30, 2008 and December 31, 2008, one note with a
principal balance of $50,000 was outstanding.
3. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
As of December 31, 2008 the Company is authorized to issue 750,000,000
shares of common stock.
As of December 31, 2008, CNS California is authorized to issue
100,000,000 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.
8
CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2008, Colorado CNS Response, Inc. is authorized to
issue 1,000,000 shares of common stock.
As of December 31, 2008, Neuro-Therapy Clinic, P.C., 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.
STOCK-OPTION PLAN
On August 3, 2006, CNS California adopted the CNS California 2006 Stock
Incentive Plan (the "2006 Plan"). The 2006 Plan provides for the issuance of
awards in the form of restricted shares, stock options (which may constitute
incentive stock options (ISO) or non-statutory stock options (NSO), stock
appreciation rights and stock unit grants to eligible employees, directors and
consultants and is administered by the board of directors. A total of 10 million
shares of stock are reserved for issuance under the 2006 Plan. As of December
31, 2008, there were 8,730,754 options and 183,937 restricted shares outstanding
under the 2006 Plan and 1,085,309 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. The Company has adopted
SFAS No. 123R (revised 2004), "Share-Based Payment", and related
interpretations. Under SFAS No. 123R, share-based compensation cost is measured
at the grant date based on the calculated fair value of the award. 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 of options granted during the 3 months ended December 31, 2008: no
dividends, risk free rate of 3.77%, volatility of 211% and expected life of 5
years.
The expense is recognized over the employees' or service provider's
requisite service period, generally the vesting period of the award. Stock-based
compensation expense included in the accompanying statements of operations for
the three months ended December 31, 2008 and 2007 is as follows:
FOR THE THREE MONTHS
ENDED DECEMBER 31,
2008 2007
---------- ----------
Operations ......................................... $ 4,000 $ 4,000
Research and development ........................... 65,200 75,500
Sales and marketing ................................ 41,800 --
General and administrative ......................... 116,500 337,800
---------- ----------
Total ..................................... $ 227,500 $ 417,300
========== ==========
Total unrecognized compensation as of December 31, 2008 amounted to
$1,730,900
9
CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock option activity is as follows:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
Outstanding at September 30, 2008 ....... 8,964,567 $ 0.60
Granted ............................ 24,000 $ 0.51
Exercised .......................... -- --
Forfeited .......................... (257,813) $ 0.51
Outstanding at December 31, 2008 ........ 8,730,754 $ 0.61
Weighted average fair value of options
granted during:
3 months ended December 31, 2008 ... $ 0.50
Following is a summary of the status of options outstanding at December
31, 2008:
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE NUMBER OF SHARES CONTRACTUAL LIFE EXERCISE PRICE
$0.12 859,270 10 years $0.12
$0.132 3,112,545 7 years $0.132
$0.30 135,700 10 years $0.30
$0.59 28,588 10 years $0.59
$0.80 140,000 10 years $0.80
$0.89 968,875 10 years $0.89
$0.96 496,746 10 years $0.96
$1.09 2,614,232 10 years $1.09
$1.20 333,611 5 years $1.20
$0.51 41,187 10 Years $0.51
================ ================
Total 8,730,754 $0.60
================ ================
WARRANTS TO PURCHASE COMMON STOCK
At September 30, 2008, there were warrants outstanding to purchase
6,899,353 shares of the Company's common stock at exercise prices ranging from
$0.01 to $1.812 with a weighted average exercise price of $1.04. The warrants
expire at various times through 2017. No warrants were issued or exercised
during the quarter ended December 31, 2008. Accordingly, all warrants are
outstanding at December 31, 2008.
4. LONG-TERM DEBT
During the year ended September 30, 2008 the Company issued a note
payable to an officer in connection with the acquisition of NTC. The note is
non-interest bearing and the Company determined its fair value by imputing
interest at an annual rate of 8%. As of September 30, 2008 and December 31 2008
the note has an outstanding principal balance in the amount of $205,300 and
184,300 respectively.
10
CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. REPORTABLE SEGMENTS
The Company operates in two business segments: Laboratory Information
Services and clinic. Laboratory Information Services provide reports ("rEEG
Reports") that assist physicians with treatment strategies for patients with
behavioral (psychiatric and/or addictive) disorders based on the patient's own
physiology. Clinic operates NTC, a full service psychiatric practice.
The following tables show operating results for the Company's
reportable segments, along with reconciliation from segment gross profit to
(loss) from operations, the most directly comparable measure in accordance with
generally accepted accounting principles in the United States, or GAAP:
THREE MONTHS ENDED DECEMBER 31, 2008
LABORATORY
INFORMATION
SERVICES CLINIC ELIMINATIONS TOTAL
------------ ------------ ------------ ------------
Revenues ................... $ 32,200 $ 149,600 $ (10,200) $ 171,600
Operating expenses:
Cost of revenues ......... 33,500 3,800 (3,800) 33,500
Research and development . 682,400 -- -- 682,400
Sales and marketing ...... 260,600 2,600 -- 263,200
General and administrative 481,300 150,600 (6,400) 625,500
------------ ------------ ------------ ------------
Total operating expenses . $ 1,457,800 $ 157,000 $ (10,200) $ 1,604,600
------------ ------------ ------------ ------------
Loss from operations ....... $ (1,425,600) $ (7,400) $ 0 $ (1,433,000)
============ ============ ============ ============
The following table includes selected segment financial information as of
December 31, 2008, related to goodwill and total assets:
Laboratory
Information
Services Clinic Total
---------- ---------- ----------
Goodwill .................. $ 320,200 $ -- $ 320,200
========== ========== ==========
Total assets .............. $1,527,800 $ 55,200 $1,583,000
========== ========== ==========
6. EARNINGS PER SHARE
In accordance with SFAS 128, "Computation of Earnings Per Share," basic
net income (loss) per share is computed by dividing the net income (loss) to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. For the three months ended December 31, 2008 and 2007, the
Company has excluded all common equivalent shares from the calculation of
diluted net loss per share as such securities are anti-dilutive.
11
CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the net income (loss) and shares used to compute net
income (loss) per share for the three months ended December 31, 2008 and 2007 is
as follows:
2008 2007
--------------- ---------------
Net loss for computation of basic net loss per share .. $ (1,431,900) $ (1,008,000)
--------------- ---------------
Net loss for computation of dilutive net loss per share $ (1,431,900) $ (1,008,000)
=============== ===============
Basic net loss per share .............................. $ (0.06) $ (0.04)
=============== ===============
Diluted net loss per share ............................ $ (0.06) $ (0.04)
=============== ===============
Basic weighted average shares outstanding ............. 25,299,547 25,299,547
Dilutive common equivalent shares ..................... -- --
--------------- ---------------
Diluted weighted average common shares ................ 25,299,547 25,299,547
=============== ===============
Anti-dilutive common equivalent shares not included in
the computation of dilutive net loss per share:
Convertible debt .............................. 4,995,000 4,995,000
Warrants ...................................... 6,899,353 6,899,353
Options ....................................... 8,941,598 8,545,578
7. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
From time to time the Company is subject to legal proceedings and
claims, which arise in the ordinary course of its business. The Company believes
that although there can be no assurances as to the disposition of the
proceedings, based upon information available to the Company at this time, the
expected outcome of these matters would not have a material impact on the
Company's results of operations or financial condition.
LEASE COMMITMENTS
The Company leases its headquarters and Laboratory Information Services
space under an operating lease. In November 2008, the Company entered into a new
six-month lease for its headquarters at the same location expiring in May 2009
and requiring monthly rentals of $3,610.
The Company leases space for its Clinical Services operations under an
operating lease. The base rental as of December 2008 is $5,726 per month. This
increases to $6,021 per month in March 2009 through to the termination of the
lease on February 28, 2010.
12
CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company also sub-leases space for its Clinical Services operations
on a month-to-month basis for $1,075 per month.
The Company leases a copier for $216 per month which it accounts for as
a capital lease with an interest rate of 9% per year. The lease terminates in
February 2013 at which time the copier can be purchased at fair value.
FUTURE MINIMUM LEASE PAYMENT AND DEBT MATURITIES
At December 31, 2008, the estimated future minimum lease payment under
non-cancelable operating and capital leases and debt maturities were as follows:
OPERATING CAPITAL DEBT
YEAR ENDING DECEMBER 31, LEASES LEASE MATURITIES TOTAL
--------- --------- --------- ---------
2009 .............................. 89,700 2,600 100,000 192,300
2010 .............................. 12,000 2,600 100,000 114,600
2011 .............................. -- 2,600 -- 2,600
2012 .............................. -- 2,600 -- 2,600
2013 .............................. -- 400 -- 400
--------- --------- --------- ---------
Total ........................... $ 101,700 $ 10,800 $ 200,000 $ 312,500
Less interest ..................... (4,400) (1,800) (15,700) (21,900)
--------- --------- --------- ---------
Net present value ................. 97,300 9,000 184,300 290,600
Less current portion .............. (89,700) (1,900) (88,500) (180,100)
--------- --------- --------- ---------
Long-term debt and lease obligation $ 7,600 $ 7,100 $ 95,800 $ 110,500
========= ========= ========= =========
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE INFORMATION CONTAINED IN THIS FORM 10-Q IS INTENDED TO UPDATE THE
INFORMATION CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 2008 AND PRESUMES THAT READERS HAVE ACCESS TO, AND WILL HAVE READ,
THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" AND OTHER
INFORMATION CONTAINED IN SUCH FORM 10-K. THE FOLLOWING DISCUSSION AND ANALYSIS
ALSO SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS FORM
10-Q.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONDENSED CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND
CASH FLOWS OF CNS RESPONSE, INC. FOR THE THREE MONTHS ENDED DECEMBER 31, 2008
AND 2007. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ARE "FORWARD-LOOKING
STATEMENTS" THAT INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED UPON JUDGMENTS
CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF, AMONG OTHER THINGS, THE FACTORS REFERRED TO BELOW UNDER THE CAPTION
"CAUTIONARY STATEMENTS AND RISK FACTORS."
OVERVIEW
We are a life sciences company with two distinct business segments. Our
Laboratory Information Services business, which we consider our primary
business, is focused on the commercialization of a patented system that guides
psychiatrists and other physicians to determine a proper treatment for patients
with behavioral (psychiatric and/or addictive) disorders. Our Clinical Services
business operated by Neuro-Therapy Clinic, P.C. ("NTC") is a full service
psychiatric practice.
LABORATORY INFORMATION SERVICES
In connection with our Laboratory Information Services business, we
have developed an extensive proprietary database (the "CNS Database") consisting
of over 13,000 clinical outcomes across over 2,000 patients who had psychiatric
or addictive problems. For each patient, we have compiled
electroencephalographic ("EEG") scans, symptoms, course of treatment and
outcomes often across multiple treatments from multiple psychiatrists and
physicians. Using the CNS Database, our technology compares a patient's EEG scan
to the outcomes in the CNS Database and ranks treatment options based on
treatment success of patients having similar neurophysiology. Trademarked as
Referenced-EEG(R) ("rEEG(R)"), this patented technology allows us to create and
provide simple reports ("rEEG Reports") that specifically guide physicians to
treatment strategies based on the patient's own physiology.
Our business is focused on increasing the demand for our rEEG services.
We believe the key factors that will drive broader adoption of rEEG will be
acceptance by healthcare providers of its clinical benefits, demonstration of
the cost-effectiveness of using our technology, reimbursement by third-party
payers, expansion of our sales force and increased marketing efforts.
CLINICAL SERVICES
In January 2008, we acquired our largest customer, the Neuro-Therapy
Clinic, P.C. ("NTC") located in Colorado. Upon the completion of the
transaction, NTC became a wholly-owned subsidiary of ours. NTC operates one of
the largest psychiatric medication management practices in the state of
Colorado, with nine full time and four part time employees including
psychiatrists and clinical nurse specialists with prescribing privileges. Daniel
A. Hoffman, M.D. is the medical director at NTC, and, after the acquisition,
became our Chief Medical Officer.
NTC, having performed a significant number of rEEG's, serves an
important resource in our product development, the expansion of our CNS
Database, production system development and implementation, along with the
integration of our rEEG services into a medical practice. Through NTC, we also
expect to successfully develop marketing and patient acquisition strategies for
our Laboratory Information Services business. Specifically, NTC is learning how
to best communicate the advantages of rEEG to patients and referring physicians
in the local market. We will share this knowledge and developed communication
programs learned through NTC with other physicians using our services, which we
believe will help drive market acceptance of our services. In addition, we plan
to use NTC to train practitioners across the country in the uses of rEEG
technology.
14
We view our Clinical Services business as secondary to our Laboratory
Information Services business, and we have no current plans to expand this
business.
BUSINESS OPERATIONS
Since our inception, we have generated significant net losses. As of
December 31, 2008, we had an accumulated deficit of $18.2 million. We incurred
operating losses of $5.5 million for the fiscal year ended September 30, 2008.
For the quarters ended December 31, 2008 and 2007 we incurred losses of $1.5
million and $1.0 million respectively. We expect our net losses to continue for
at least the next several years. We anticipate that a substantial portion of our
capital resources and efforts will be focused on research and development, scale
up of our commercial organization, and other general corporate purposes.
Research and development projects include the completion of clinical trials
which are essential to validate the efficacy of our products and services
relating to our rEEG technology across different type of behavioral disorders,
the enhancement of the CNS Database and, to a lesser extent, the application of
rEEG to pharmaceutical development.
FINANCIAL OPERATIONS OVERVIEW
REVENUES
Our Laboratory Information Services revenues are derived from the sale
of rEEG Reports to physicians. Physicians are generally billed upon delivery of
a rEEG Report. The list prices of our rEEG Reports to physicians range from $200
to $800 with $400 being the most frequent charge.
Patient service revenue is generated as a result of providing services
to patients on an outpatient basis. Patient service revenue is recorded at our
established billing rates less contractual adjustments. Generally, collection in
full is not expected on our established billing rates. Contractual adjustments
are recorded to state our patient service revenue at the amount we expect to
collect for the services provided based on amounts due from third-party payors
at contractually determined rates.
COST OF REVENUES
Cost of revenues are for Laboratory Information Services and represent
the cost of direct labor, the amortization of a purchased database and costs
associated with external processing, analysis and consulting review necessary to
render an individualized test result. Costs associated with performing our tests
are expensed as the tests are performed. We continually evaluate the feasibility
of hiring our own personnel to perform most of the processing and analysis
necessary to render an rEEG Report.
Cost of revenues for Clinical Services are not broken out separately
but are included in general and administrative expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses are associated with our Laboratory
Information Services and primarily represent costs incurred to design and
conduct clinical studies, improve rEEG processing, add data to the CNS Database,
improve analytical techniques and advance application of the methodology to
additional clinical diagnosis. We charge all research and development expenses
to operations as they are incurred.
SALES AND MARKETING
For our Laboratory Information Services, our selling and marketing
expenses consist primarily of personnel costs and the costs of educating
physicians, laboratory personnel and other healthcare professionals regarding
our products and services.
15
For our Clinical Services, selling and marketing costs relate to
advertising to attract patients to the clinic.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses consist primarily of personnel,
occupancy, legal, accounting and other professional and administrative costs for
both our Laboratory Information Services and Clinical Services businesses.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
This discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these condensed consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as revenues and expenses during the
reporting periods. We evaluate our estimates and judgments on an ongoing basis.
We base our estimates on historical experience and on various other factors we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results could therefore
differ materially from those estimates under different assumptions or
conditions.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our condensed
consolidated financial statements.
REVENUE RECOGNITION
We have generated limited revenues since our inception. Revenues for
our Laboratory Service product are recognized when an rEEG Report is delivered
to a Client-Physician. For our Clinical Services, revenues are recognized when
the services are performed.
STOCK-BASED COMPENSATION EXPENSE
Stock-based compensation expense, which is a non-cash charge, results
from stock option grants. Compensation cost is measured at the grant date based
on the calculated fair value of the award. We recognize stock-based compensation
expense on a straight-line basis over the vesting period of the underlying
option. The amount of stock-based compensation expense expected to be amortized
in future periods may decrease if unvested options are subsequently cancelled or
may increase if future option grants are made.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
As earlier described, we operate in two business segments: Laboratory
Information Services and Clinical Services. Our Laboratory Information Services
business focuses on the delivery of reports ("rEEG Reports") that assist
physicians with treatment strategies for patients with behavioral (psychiatric
and/or addictive) disorders based on the patient's own physiology. Our Clinical
Services business operated through NTC provides full service psychiatric
services. For comparative purposes below, our Laboratory Information Services
business represents all of our business in 2007 and our Clinical Services
business represents the operations of Neuro-Therapy Clinic since its acquisition
on January 11, 2008.
The following table presents consolidated statement of operations data
for each of the periods indicated as a percentage of revenues.
16
THREE MONTHS ENDED
DECEMBER 31,
2008 2007
-------- --------
Revenues ............................................. 100% 100%
Cost of revenues ..................................... 20 65
-------- --------
Gross profit ......................................... 80 35
Research and development ............................. 398 635
Sales and marketing .................................. 153 66
General and administrative expenses .................. 365 1,144
-------- --------
Operating loss ....................................... (835) (1,810)
Other income (expense), net .......................... (1) 91
-------- --------
Net income (loss) .................................... (834)% (1,719)%
======== ========
REVENUES
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31, PERCENT
2008 2007 CHANGE
------------ ------------ -------------
Laboratory Service Revenues ..... $ 28,400 $ 58,700 (52%)
Clinical Service Revenues ....... 143,200 -- *
------------ ------------
Total Revenues .................. $ 171,600 $ 58,700 192%
* Not Meaningful
With respect to our Laboratory Information Services business, the
number of non clinical study related rEEG Reports delivered for the period
decreased from 167 in 2007 to 74 in 2008 while the average price per report
increased from approximately $351 in 2007 to $383 in 2008 (clinical study
related rEEG reports are provided free of charge). The reduction in the number
of non clinical study rEEG Reports delivered during the period was primarily due
to the acquisition of NTC, which was our largest customer in 2007. We do not
expect to drive broader adoption of reports based on our rEEG technology until
the completion of our multi-site clinical study to validate the efficacy of our
products. Accordingly, we anticipate that Laboratory Services Revenues will not
increase materially in the current fiscal year.
Our Clinical Services revenue is as a result of patient billings for
psychiatric services rendered. Currently, we do not plan to expand our Clinical
Services business, and therefore we do not anticipate a significant increase in
revenues generated by this business segment.
COST OF REVENUES
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31, PERCENT
2008 2007 CHANGE
------------ ------------ -------------
Cost of Laboratory Information
Services revenues ............ $ 33,500 $ 37,900 (12%)
Cost of Laboratory Information Services revenues consists of payroll
costs, consulting costs, and other miscellaneous charges. Consulting costs
primarily represent external costs associated with the processing and analysis
of rEEG Reports and range between $75 and $100 per rEEG Report. For the quarter
ended December 31, 2008, cost of revenues were $33,500 consisting primarily of
direct labor and benefit costs (which includes stock-based compensation costs)
of $26,400 and consulting fees of $6,700. For the quarter ended December 31,
2007, cost of revenues were $37,900, which includes direct labor and benefit
costs (which includes stock based compensation costs) of $21,700, and consulting
fees of $15,400. Consulting fees decreased in 2008 due to the lower number of
rEEG Reports delivered and also due to our in-house capabilities which reduced
the need for consulting services. We ultimately expect cost of revenues to
decrease as a percentage of revenues as operating efficiencies improve.
17
RESEARCH AND DEVELOPMENT
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31, PERCENT
2008 2007 CHANGE
------------ ------------ -------------
Laboratory Information Services
research and development ..... $ 682,400 $ 372,500 83%
Research and development expenses consist of clinical studies, projects
for training doctors associated with our research studies, patents costs,
consulting fees, payroll costs (including stock-based compensation costs),
expenses related to database enhancements and maintenance, and other
miscellaneous costs. Research and development costs for the quarter ended
December 31, 2008, primarily consisted of the following costs: patient cost of
$359,200 associated with our studies to prove the efficacy of our technology;
payroll costs of $199,600; patent costs of $56,700; recruiting costs of $27,200;
consultant costs of $5,950; database costs of $6,300; and conference and travel
costs of $5,400. For the comparable period for 2007, research and development
costs included: patient costs of $46,800, payroll costs of $160,000, patent
costs of $20,000, recruiting costs of $25,000, consultant costs of $88,900,
database costs of $12,600 and conference and travel costs of $1,500.
Compared to the three month period ended December 31, 2007, patient
costs for the three month period ended December 31, 2008 increased by $312,500
due to the ramp-up of a second and larger clinical trial in 2008 which we
believe is important to proving the efficacy of our technology. As a result of
our clinical trial, our payroll costs associated with research and development
also increased for the three month period ended December 31, 2008 compared to
the comparable quarter in 2007 by $39,600 as we changed our staffing mix (with
more personnel dedicated to our research and development efforts instead of
sales) and brought on board our Chief Medical Officer who was previously a
consultant to our business to help lead our clinical trials. Compared to the
three month period ended December 31, 2007, consulting costs were reduced by
$83,000 in the period ending December 31, 2008 primarily because Mr. Hoffman's
services (our Chief Medical Officer) were brought in house. Patent costs
increased by $36,700 from the comparable period in 2007 as a result of
additional legal fees incurred associated with patenting procedures.
SALES AND MARKETING
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31, PERCENT
2008 2007 CHANGE
------------ ------------ -------------
Sales and Marketing
Laboratory Information Services $ 260,600 $ 38,700 573%
Clinical Services ............ *
2,600 --
------------ ------------
Total Sales and Marketing ....... $ 263,200 $ 38,700 580%
============ ============
* Not Meaningful
Sales and marketing expenses associated with our Laboratory Information
Services business consist primarily of payroll and benefit costs, including
stock-based compensation; advertising and marketing, including the internet;
consulting fees and conference and travel expenses. Sales and marketing
expenses, which were $260,600 for the quarter ended December 31, 2008, primarily
consisted of the following expenses: payroll and benefits $152,900, advertising
and marketing $29,800, consulting $38,900 and conferences and travel $17,800.
For the comparable period in 2007 total sales and marketing costs were $38,700
and consisted of the following: payroll and benefits $18,800, advertising and
marketing $7,300, consulting $11,100 and conferences and travel $300.
18
Compared to the three month period ended December 31, 2007, payroll and
benefits increased during the period ended December 31, 2008 with the addition
of marketing personnel including a Vice President for commercial operations, an
additional salesperson and administrative help. Also in the three month period
ended December 31, 2008 compared to the same period in 2007, consulting fees,
including stock based compensation, increased by $30,900; advertising and
marketing expenses increased by $22,500 and expenses associated with attendance
at conferences and travel increased by $17,500. These additional expenses were
incurred with the goal of enhancing the recognition of our technology within the
psychiatric and patient communities.
The Clinical Services sales and marketing expenses consists of
advertising in various media so as to attract patients to the clinic. We
currently do not plan to expand our Clinical Services business, and therefore we
expect that our sales and marketing expenses associated with this business
segment will not materially change.
GENERAL AND ADMINISTRATIVE
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31, PERCENT
2008 2007 CHANGE
------------ ------------ -------------
General and administrative
Laboratory Information Services $ 474,900 $ 671,600 (29%)
Clinical Services .............. $ 150,600 -- *
------------ ------------
Total General and administrative $ 625,500 $ 671,600 (7%)
============ ============
* Not Meaningful
General and administrative expenses for our Laboratory Information
Services business are largely comprised of payroll and benefit costs, including
stock based compensation, legal and other professional and consulting fees,
occupancy costs, insurance and conference and travel costs. For the quarter
ended December 31, 2008 General and Administrative costs were $474,900. This
consisted of salaries and benefit costs of $123,200 and stock based compensation
costs of $116,500; legal fees of $72,400 and other professional and consulting
fees of $98,900; occupancy costs of $17,400, insurance costs of $18,800 and
conference and travel costs of $17,400. For the similar period in 2007 these
costs were $671,600 and consisted of the following: salaries and benefit costs
of $156,500 and stock based compensation costs of $337,800; legal fees of $8,300
and other professional and consulting fees of $87,900; occupancy costs of
$16,200, insurance costs of $18,800 and conference and travel expenses of
$32,200.
With respect to our Laboratory Information Services business, in the
quarter ended December 30, 2008 in comparison to the same period in 2007,
payroll and benefit expenses declined by $33,300 as a result of staff reductions
and staff turnover and stock based compensation expenses declined by $221,000 as
one officer had a large block of option grants which vested immediately in the
quarter ended December 31, 2007 which expense did not recur in 2008. As compared
to the comparable period in 2007, legal fees increased by $64,000 and consulting
services increased by a net $11,000. The increase in consulting fees primarily
resulted from increases in accounting services and software design and
development services which were partially offset by a reduction in the cost of
investor relations services. Conference and travel related costs declined by
$16,400 due to reduced conference attendance.
General and administrative expenses of $150,600 for our Clinical
Services business for the quarter ended December 31, 2008 includes all costs
associated with operating NTC. This includes all payroll costs, medical
supplies, occupancy costs and other general and administrative costs.
19
INTEREST INCOME (EXPENSE)
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31, PERCENT
2008 2007 CHANGE
------------ ------------ -------------
Laboratory Information Services
(Expense), net .............. $ 1,200 $ 54,000 (98%)
Clinical Services (Expense) ..... (100) -- *
------------ ------------
Total interest income (expense) . $ 1,100 $ 54,000 (98%)
============ ============
* Not Meaningful
With respect to our Laboratory Information Services business, we earned
interest income of $7,100 for the quarter ended December 31, 2008 from interest
bearing accounts. This was offset by $5,900 of interest expense on promissory
notes. For the comparable period in 2007, net interest income was $54,000, which
resulted from interest earned on $7.8 million in cash raised in our private
placement which we completed in May 2007.
With respect to our Clinical Services business, the interest expense of
$100 relates to an equipment lease.
NET LOSS
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31, PERCENT
2008 2007 CHANGE
------------ ------------ -------------
Laboratory Information Services
net loss ..................... $ (1,424,400) $ (1,008,800) 41%
Clinical Services net loss ...... (7,500) -- *
------------ ------------
Total Net Loss .................. $ (1,431,900) $ (1,008,800) 42%
============ ============
* Not Meaningful
The increase in net loss of $423,100 is due primarily to increases in
our research and development and sales and marketing effort, offset by revenue
generated by our Clinical Services business. We expect to incur net losses for
the next few years as we continue to improve our rEEG technology and reaffirm
its validity through clinical studies, increase the penetration of our products
in the marketplace, and hire additional personnel.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have incurred significant losses and, as of
December 31, 2008, we had an accumulated deficit of approximately $18.1 million.
We have not yet achieved profitability and anticipate that we will continue to
incur net losses for the foreseeable future. We expect that our research and
development, and selling and marketing expenses will continue to grow and, as a
result, we will need to generate significant product revenues to achieve
profitability. There can be no assurance of achieving profitability.
As of December 31, 2008 we had approximately $1 million in cash and
cash equivalents and a working capital deficit balance of approximately $172,000
compared to approximately $5.1 million in cash and cash equivalents and a
working capital balance of approximately $4.7 million at December 31, 2007.
20
SOURCES OF LIQUIDITY
Since our inception substantially all of our operations have been
financed primarily from equity and debt financings. Through December 31, 2008,
we had received proceeds of $8.6 million from the sale of stock, $3,116,000 from
the issuance of convertible promissory notes and $220,000 from the issuance of
common stock to employees in connection with expenses paid by such employees on
behalf of the company.
CASH FLOWS
Net cash used in operating activities was $950,000 for the quarter
ended December 31, 2008 compared to $650,000 for quarter ended December 31,
2007. The increase in cash used of $250,000 was primarily attributable to an
increase in research and development and sales and marketing expenses, and
increases in payroll expenses.
No investing activities occurred for the quarter ended December 31,
2008 as compared to the $20,400 used to purchase office furniture during the
quarter ended December 31, 2007.
Net cash of $21,500 used in connection with financing activities
during the quarter ended December 31, 2008 resulted primarily from a principal
payment of $21,000 made on the promissory note issued to Dr. Hoffman in
connection with our acquisition of NTC. There were no financing activities
during the quarter ended December 31, 2007.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As of December 31, 2008, our major contractual obligations were the
remaining balance on a promissory note of $184,300 plus interest at 8% issued in
connection with our acquisition of NTC and operating leases for office space
totaling $97,300. As of December 31, 2007, our only significant contractual
obligation was for leased space.
OPERATING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS
Our continued operating losses and limited capital raise substantial
doubt about our ability to continue as a going concern. We expect to continue to
incur substantial operating losses in the future and to make capital
expenditures to keep pace with the our research and development programs and our
commercial operations. We expect that our existing cash will be used to fund
working capital and for capital expenditures and other general corporate
purposes. The amount and timing of actual expenditures may vary significantly
depending upon a number of factors, such as the progress of our product
development, regulatory requirements, commercialization efforts and the amount
of cash used by operations.
Until we can generate a sufficient amount of revenues to finance our
cash requirements, which we may never do, we expect to finance future cash needs
primarily through public or private equity offerings, debt financings,
borrowings or strategic collaborations. We do not know whether additional
funding will be available on acceptable terms, or at all, especially given the
market conditions that currently prevail.
We currently anticipate that our cash and collections from sale of our
services will not be sufficient to fund our operations for at least the next 12
months. Consequently we anticipate raising additional funds in 2009.
INCOME TAXES
Since our inception, we have incurred operating losses and,
accordingly, have not recorded a provision for federal income taxes for any
periods presented. As of September 30, 2008, we had net operating loss
carryforwards for federal income tax purposes of $12.4 million. If not utilized,
the federal net operating loss carryforwards will expire beginning in 2021.
Utilization of net operating loss and credit carryforwards may be subject to a
substantial annual limitation due to restrictions contained in the Internal
Revenue Code that are applicable if we experience an "ownership change". The
annual limitation may result in the expiration of our net operating loss and tax
credit carryforwards before they can be used.
21
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements or financing activities with
special purpose entities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Members of the company's management, including our Principal Executive
and Financial Officer, Leonard J. Brandt, have evaluated the effectiveness of
our disclosure controls and procedures, as defined by paragraph (e) of Exchange
Act Rules 13a-15 or 15d-15, as of December 31, 2008, the end of the period
covered by this report. Based upon that evaluation, Mr. Brandt has concluded
that, for the reasons described below, our disclosure controls and procedures
were not effective. The company has undertaken remedial measures to address the
material weakness and significant deficiencies discussed below, and plans to
continue to implement procedures to address such weakness and deficiencies, so
long as the perceived benefits of such controls are deemed by management to
outweigh their costs.
In reaching our conclusion that our disclosure controls and procedures
were not effective, we considered the findings of an external finance and
accounting advisory firm with relevant SEC compliance experience, who informed
management of "material weaknesses" and several "significant deficiencies" that
collectively may constitute a "material weakness" in our internal control over
financial reporting.
A "material weakness" is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim financial
statements will not be prevented or detected on a timely basis.
A "significant deficiency" is a deficiency, or combination of
deficiencies, in internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit attention by those
responsible for oversight of our financial reporting.
The following material weakness was identified:
o We do not have proper oversight and review by upper management
of the accounting and finance function.
In order to address the above material weakness, Leonard Brandt has
taken a more active role in the oversight and review of our accounting and
finance functions by assuming certain responsibilities typically performed by a
Chief Financial Officer, while we seek a long-term replacement for Brad Luce,
our former Vice President Finance and Control, who resigned during the quarter.
In the coming quarters, we intend to further improve our upper management's
oversight and review of our accounting and finance functions by considering the
addition of controls, which we believe will mitigate the identified material
weakness.
At our quarter ended December 31, 2008, the following significant
deficiencies were identified, which in combination with other deficiencies may
constitute a material weakness:
o We do not have proper segregation of duties within the
accounting and finance function.
o We do not have a comprehensive and formalized accounting and
procedures manual.
During the quarter, we retained the services of outside consultants to
perform various accounting and finance functions for us. As a result of the
hiring of our consultants, we believe that we have improved the segregation of
duties within our accounting and finance functions. Going forward, we plan to
explore additional internal controls that we can implement that will allow us to
achieve greater segregation of duties in our accounting and finance functions.
We also intend to put in place a comprehensive and formalized accounting and
procedures manual that is tailored to the size of our business.
22
To the knowledge of our management, including our PEO and PFO, none of
the aforementioned material weaknesses or significant deficiencies led to a
misstatement of our results of operations for the quarter ended December 31,
2008, or statement of financial position as of December 31, 2008.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Other than as stated above, there were no changes in our internal
control over financial reporting or in other factors identified in connection
with the evaluation required by paragraph (d) of exchange act rules 13a-15 or
15d-15 that occurred during the quarter ended December 31, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
23
PART II
OTHER INFORMATION
ITEM 1A. RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking statements,
which are subject to a variety of risks and uncertainties. Other actual results
could differ materially from those anticipated in those forward-looking
statements as a result of various factors, including those set forth in Item 7A
of our Annual Report on Form 10-K for the year ended September 30, 2008. There
have been no material changes to such risk factors during the three months ended
December 31, 2008.
ITEM 6. EXHIBITS
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- ---------------------------------------------------------------
31.1 Certification of Principal Executive Officer pursuant to
Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Principal Financial Officer pursuant to
Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CNS Response, Inc.
Date: February 17, 2009 /s/ Len Brandt
-------------------------------------
By: Len Brandt
Its: Chief Executive Officer
(Principal Executive, Financial and
Accounting Officer)
25