Quarterly report pursuant to Section 13 or 15(d)

STOCKHOLDERS' EQUITY

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STOCKHOLDERS' EQUITY
 9 Months Ended
Jun. 30, 2011
Stockholders' Equity Note [Abstract]  
Stockholders' Equity Note Disclosure [Text Block]
4.
STOCKHOLDERS’ EQUITY

Common and Preferred Stock

As of June 30, 2011 the Company is authorized to issue 750,000,000 shares of common stock.

As of June 30, 2011, 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.

As of June 30, 2011, Colorado CNS Response, Inc. is authorized to issue 1,000,000 shares of common stock.

As of June 30, 2011, Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of Colorado CNS Response, Inc., is authorized to issue 10,000 shares of common stock, no par value per share.

On April 25, 2011 we issued 93,679 shares of common stock as payment in lieu of cash for an aggregate amount of $44,029 owed to two vendors who had provided consulting services to the Company.  These shares were issued to these vendors, who were also accredited investors, at $0.47 per share. This was based on the quoted closing price of the Company’s stock on March 11, 2011, which was the date that our Board approved this stock issuance.
Stock-Option Plan

On August 3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options (ISO) or non-statutory stock options (NSO), stock appreciation rights and stock unit grants to eligible employees, directors and consultants and is administered by the board of directors. A total of 10 million shares of stock were initially reserved for issuance under the 2006 Plan.

The 2006 Plan initially provided that in any calendar year, no eligible employee or director shall be granted an award to purchase more than 3 million shares of stock. The option price for each share of stock subject to an option shall be (i) no less than the fair market value of a share of stock on the date the option is granted, if the option is an ISO, or (ii) no less than 85% of the fair market value of the stock on the date the option is granted, if the option is a NSO; provided, however, if the option is an ISO granted to an eligible employee who is a 10% shareholder, the option price for each share of stock subject to such ISO shall be no less than 110% of the fair market value of a share of stock on the date such ISO is granted. Stock options have a maximum term of ten years from the date of grant, except for ISOs granted to an eligible employee who is a 10% shareholder, in which case the maximum term is five years from the date of grant. ISOs may be granted only to eligible employees.

On March 3, 2010, the Board of Directors approved an amendment to the 2006 Plan which increased the number of shares reserved for issuance under the 2006 Plan from 10 million to 20 million shares of stock.  The amendment also increased the limit on shares issued within a calendar year to any eligible employee or director from 3 million to 4 million shares of stock.  The amendment was approved by shareholders at the annual meeting held on April 27, 2010.

On March 3, 2010, the Board of Directors also approved the grant of 9,150,000 options to staff members, directors, advisors and consultants, of which 8,650,000 were in fact granted.  For staff members the options will vest equally over a 48 month period while for directors, advisors and consultants the options will vest equally over a 36 month period.  The effective grant date for accredited investors was March 3, 2010 and the exercise price of $0.55 per share was based on the quoted closing share price of the Company’s stock at the time of grant.  For non-accredited investors the grant date will be determined at some time after obtaining a permit from the State of California allowing the granting of options to non-accredited investors.  This permit was granted by the State of California in July 2010.  No options have been granted to non-accredited investors at this time.

On July 5, 2010, the Board of Directors also approved an additional grant of 800,000 options to a new member of the executive management team, a new member of the board of directors and a new advisor to the Company.  The respective vesting periods are the same as those for the abovementioned March 3, 2010 grants.  The effective grant date for these accredited investors was July 5, 2010 and the exercise price of $0.40 per share was based on the quoted closing share price of the Company’s stock on July 2, 2010 as markets were closed for the 4th of July holiday weekend.

On March 11, 2011, the Board of Directors also approved an additional grant of 475,000 options to staff members of the Company.  The options will vest equally over a 48 month period.  The effective grant date for these accredited investors was March 11, 2011 and the exercise price of $0.47 per share was based on the quoted closing share price of the Company’s stock on March 11, 2011.

As of June 30, 2011, 2,124,740 options were exercised and there were 15,725,121 options and 183,937 restricted shares outstanding under the amended 2006 Plan leaving 1,966,202 shares available for issuance of future awards.

Stock-based compensation expense is recognized over the employees’ or service provider’s requisite service period, generally the vesting period of the award. Stock-based compensation expense included in the accompanying statements of operations for the periods ended June 30, 2011 and 2010 is as follows:

   
For the three months ended
June 30,
 
   
2011
   
2010
 
Cost of Neurometric Services revenues
  $ 2,500     $ 6,600  
Research and development
    45,800       107,000  
Sales and marketing
    48,800       58,700  
General and administrative
    282,900       267,200  
Total
  $ 380,000     $ 439,500  

   
For the nine months ended
June 30,
 
   
2011
   
2010
 
Cost of Neurometric Services revenues
  $ 7,600     $ 15,500  
Research and development
    221,200       250,700  
Sales and marketing
    160,200       123,900  
General and administrative
    836,400       469,800  
Total
  $ 1,225,400     $ 859,900  

A summary of stock option activity is as follows:

   
Number of
Shares
   
Weighted   Average
Exercise Price
 
Outstanding at September 30, 2010
    15,670,973     $ 0.62  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    (420,852 )     0.69  
Outstanding at December 31, 2010
    15,250,121     $ 0.62  
Granted
    475,000       0.47  
Exercised
    -       -  
Forfeited
    -       -  
Outstanding at March 31, 2011
    15,725,121     $ 0.62  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    -       -  
Outstanding at June 30, 2011
    15,725,121     $ 0.62  

Following is a summary of the status of options outstanding at June 30, 2011:

Exercise Price
   
Number of Shares
 
Weighted Average
Contractual Life
 
Weighted Average
Exercise Price
 
                 
$ 0.12       859,270  
10 years
  $ 0.12  
$ 0.132       987,805  
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       352,974  
10 years
  $ 0.96  
$ 1.09       2,513,549  
10 years
  $ 1.09  
$ 1.20       243,253  
5 years
  $ 1.20  
$ 0.40       856,000  
10 years
  $ 0.40  
$ 0.47       475,000  
10 years
  $ 0.47  
$ 0.51       41,187  
10 years
  $ 0.51  
$ 0.55       8,122,920  
10 years
  $ 0.55  
Total
      15,725,121       $ 0.62  

In connection with our application to list our shares of common stock on the TSXV, we have entered into agreements on June 3, 2011 with the majority of our option holders pursuant to which holders of options to purchase an aggregate of 13,190,658 shares of our common stock, at exercise prices ranging from $0.12 per share to $1.09 per share, have agreed to amend their options to permit exercise only in cash and to limit the period during which the options may be exercised post-termination to 90 days (for employees) and twelve months (for consultants).
Furthermore, in connection with the application, we have agreed to freeze any further grants or exercises of securities under the 2006 Plan and adopt a new stock incentive plan subject to and in connection with the completion of this proposed offering. The new plan, which we refer to as the 2011 Stock Incentive Plan, would be subject to approval by our stockholders, which we expect to seek at a meeting of stockholders to be called as soon as practicable following completion of the proposed offering.
Warrants to Purchase Common Stock

At October 1, 2009, there were warrants outstanding to purchase 15,537,485 shares.  During the year ended September 30, 2010, a further 9,300,161 warrants were granted, of which 500,000 were cancelled and replaced with 1,706,560 warrants pursuant to the Note and Warrant Purchase agreement dated October 1, 2010 as described below and in note 3.  Furthermore 3,333,333 warrants were exercised.  The warrant activity is described as follows:

Warrants to Purchase
 
Exercise
Price
 
Issued in Connection With:
5,893,334 shares
  $ 0.30  
Associated with the second, third and fourth closing of the 2009 private placement transaction of 11,786,667 shares at $0.30 with 50% warrant coverage as described in Note 3.
           
1,200,267 shares
  $ 0.33  
Associated with warrants for the lead and secondary placement agents for private placement as described in Note 3.
           
(3,333,333) shares
  $ 0.30  
These warrants were surrendered in a net issue exercise and 2,456,126 shares were issued in lieu of cash.
           
500,000 shares
  $ 0.30  
These warrants were granted to individual staff members of Equity Dynamics, Inc. a Company owned by Mr. Pappajohn, for their efforts in providing consulting services associated with the Company’s financing activities.
           
852,812 shares
  $ 0.30  
These warrants were issued to Mr. John Pappajohn, a Director of the Company, pursuant to the October Note and Warrant Purchase agreement described in note 3; whereby two outstanding convertible notes of $250,000 each, issued on June 3 and July 25, 2010 respectively, and 250,000 outstanding warrants issued on July 25, 2010, with an exercise price of $0.50,  were cancelled and exchanged on October 1, 2010 for two October Notes of $250,000 each plus unpaid interest and warrants to purchase 852,812 shares of common stock.
           
256,125 shares
  $ 0.30  
These warrants were issued to Deerwood Partners, LLC which is controlled by Dr. George Kallins, a Director of the Company, pursuant to the October Note and Warrant Purchase Agreement described in note 3; whereby two Deerwood Notes of $125,000 each, issued on July 5 and August 20, 2010 respectively, and 75,000 outstanding warrants issued on August 20, 2010, with an exercise price of $0.56 were, cancelled and exchanged on November 3, 2010 for two October Notes of $125,000 each plus unpaid interest and warrants to purchase 256,125 shares of common stock.
           
256,125 shares
  $  0.30  
These warrants were issued to Deerwood Holdings, LLC which is controlled by Dr. George Kallins, a Director of the Company, pursuant to the October Note and Warrant Purchase Agreement described in note 3; whereby the two Deerwood Notes of $125,000 each, issued on July 5 and August 20, 2010 respectively, and 75,000 outstanding warrants issued on August 20, 2010, with an exercise price of $0.56, were cancelled and exchanged on November 3, 2010 for two October notes of $125,000 each plus unpaid interest and warrants to purchase 256,125 shares of common stock.
           
341,498 shares
  $ 0.30  
These warrants were issued to SAIL, of which Mr. David Jones, a Director of the Company, is a senior partner of the general partner.  SAIL had undertaken to guarantee the four abovementioned Deerwood notes which were issued on July 5 and August 20, 2010.  For this guarantee SAIL was issued 100,000 warrants on August 20, 2010 with an exercise price of $0.56.  Upon the cancellation and exchange of the Deerwood Notes on November 3, 2010, SAIL undertook to guarantee the four replacement October Notes,  in exchange for the cancellation of the SAIL’s 100,000 outstanding warrants which were replaced with new warrants in the amount of 341,498.

At September 30, 2010, there were warrants outstanding to purchase 21,504,313 shares of the Company’s common stock which includes a net 1,206,560 shares which were the result of the cancellation and reissuance of warrants in accordance with the October Purchase Agreement detailed above and in Note 3.

For the three months ended December 31, 2010, no warrants were exercised and an additional 3,499,995 warrants were issued as follows:

3,333,329 shares
  $ 0.30  
These warrants were issued to eight investors who purchased notes for $2,222,220 pursuant to the October Purchase Agreement described in note 3.  These investors included three directors of the Company, Mr. David Jones, Mr. John Pappajohn and Dr. George Kallins, each of whom purchased notes for $250,000 ($750,000 in aggregate) either directly or through an entity that they control.
           
166,666 shares
  $ 0.33  
These warrants were issued to Monarch Capital who acted as placement agents in raising $500,000 from two investors who purchase notes pursuant to the October Purchase agreement described in note 3.

For the three months ended March 31, 2011, no warrants were exercised and an additional 2,516,661 warrants were issued as follows:

2,333,329 shares
  $ 0.30  
These warrants were issued to ten investors who purchased notes for $1,400,000 pursuant to the January Purchase Agreement described in note 3.  Of the ten accredited investors in the January, seven have previous relationships with the Company as follows: 1) an Unsecured Note in the principal amount of $50,000, and a warrant to purchase 83,333 shares, were issued to the Company’s Chief Financial Officer, Paul Buck, 2) an Unsecured Note in the principal amount of $187,500, and a warrant to purchase 312,500 shares, were issued to SAIL Venture Partners, LP, of which David Jones, a director of the Company, is a senior partner of the general partner, 3) an Unsecured Note in the principal amount of $62,500, and a warrant to purchase 104,166 shares, were issued to SAIL 2010 Co-Investment Partners, L.P., an entity likewise affiliated with Mr. Jones, 4) two Unsecured Notes in the principal amount of $400,000 and $200,000 respectively (for an aggregate of $600,000), and two warrants to purchase 666,666 shares and 333,333 shares, respectively (for an aggregate of 999,999 shares), were issued to two investors who had first invested in the Company in October 2010, 5) an Unsecured Note in principal amount of $50,000 and a warrant to purchase 83,333 shares were issued to a prior investor who also provides medical consulting services to the Company, and 6) an Unsecured Note in the principal amount of $50,000 and a warrant to purchase 83,333 shares, was issued to a trust, the trustee of which is the father-in-law of the Company’s Chief Executive Officer, George Carpenter.
           
183,332 shares
  $ 0.33  
These warrants were issued Monarch Capital who acted as placement agents in raising $550,000 from three investors who purchase Unsecured Notes pursuant to the January Note and Warrant Purchase agreement described in note 3.

For the three months ended June 30, 2011, no warrants were exercised, 42,332 warrants expired and an additional 1,949,997 warrants were issued as follows:

1,833,331 shares
  $ 0.30  
These warrants were issued to five investors who purchased notes for $1,100,000 pursuant to the January Purchase Agreement described in Note 3.  Of the five accredited investors in the January, four have previous relationships with the Company as follows: 1) an Unsecured Note in the principal amount of $50,000, and a warrant to purchase 83,333 shares, were issued to Meyer Proler MD who first invested in the Company in October 2010, 2) an Unsecured Note in the principal amount of $250,000 and $125,000 respectively, and a warrant to purchase 416,666 and 208,333 respectively, shares, were issued to SAIL Venture Partners, LP, of which David Jones, a director of the Company, is a senior partner of the general partner, 3) an Unsecured Note in the principal amount of $250,000 and $125,000 respectively, and a warrant to purchase 416,666 and 208,333 shares, respectively, were issued to SAIL 2010 Co-Investment Partners, LP, an affiliate of SAIL Venture Partners, L.P., 4) an Unsecured Note in the principal amount of $150,000, and a warrant to purchase 250,000 shares, were issued to Cummins Bay Capital LP which has the same fund manager as Highland Long/Short Healthcare Fund which first invested Company in October 2010, 5) an Unsecured Note in the principal amount of $150,000, and a warrant to purchase 250,000 shares, were issued to John M. Pulos, a new investor.
           
116,666 shares
  $ 0.33  
These warrants were issued Monarch Capital who acted as placement agents in raising $200,000 from two investors who purchase Unsecured Notes pursuant to the January Purchase Agreement described in Note 3 and Antaeus Capital, Inc who acted as placement agent in raising $150,000 from one investor who is purchased Unsecured Notes pursuant to the Note and Warrant Purchase agreement described in Note 3.

At June 30, 2011, there were warrants outstanding to purchase 29,428,635  shares of the Company’s common stock.  The exercise price of the outstanding warrants range from $0.01 to $1.812 with a weighted average exercise price of $0.49.  The warrants expire at various times 2011 through 2018.

In connection with our application to list our securities on the TSXV and the contemplated public offering of securities in Canada and the United States, we have entered into the following agreements on June 3, 2011 with holders of our October Notes, Unsecured Notes, and related warrants:
1.           Holders of our convertible notes in the aggregate principal amount of $5,523,900 and holders of warrants to purchase 9,673,213 shares of our common stock issued in connection with our convertible notes and the related guaranties (representing 100% of the aggregate principal amount of notes and related warrants outstanding), have entered into an agreement with us, which we refer to as the “Agreement to Convert and Amend.”   Pursuant to the Agreement to Convert and Amend, holders have agreed to amend and convert their notes and to amend their warrants conditioned on the closing of the proposed offering, provided that this proposed offering yields gross proceeds to us of at least $10 million. Assuming such condition is met, the amendments to the notes and warrants would be effective immediately prior to the closing of this proposed offering.  The amendments would remove the restrictive covenants imposed on us by the October Purchase Agreement and January Purchase Agreement, restate the conversion provisions to permit conversion solely in connection with the proposed offering, remove full ratchet anti-dilution protection from the terms of the notes and the warrants, and change the expiration dates of all warrants to June 30, 2016, unless the warrants, by their current terms, expire sooner.  The related conversion would be effective immediately prior to the closing of the proposed offering.  Assuming the proposed offering had been consummated on June 30, 2011, notes in the aggregate principal amount and accrued interest through June 30, 2011 of approximately $5,781,300 would have been converted into 19,270,833 shares of our common stock.  As consideration for the above amendments and conversions, we expect to issue warrants to purchase an aggregate of 4,603,270 shares of our common stock to holders of our notes and related warrants, with each holder receiving a warrant to purchase a number of shares of common stock corresponding to 25% of the number of shares issuable upon conversion of the principal amount of his or her notes.
2.           Holders of 100% of our 2010 Placement Agent Warrants and 2011 Placement Agent Warrants initially issued to Monarch Capital Group LLC and Antaeus Capital, Inc. have agreed to amend such warrants to remove full ratchet anti-dilution protection from the terms of the warrants.  This amendment is conditioned on the closing of the proposed offering, provided that the proposed offering yields gross proceeds to us of at least $10 million, and is effective immediately prior to the closing of the proposed offering.  As consideration for this amendment, we expect to issue warrants to purchase an aggregate of 116,664 shares of our common stock to such holders, with each holder receiving a warrant to purchase a number of shares of common stock corresponding to 25% of the number of shares issuable upon exercise of their placement agent warrants.
3.           Holders of warrants exercisable for 500,000 shares of common stock, which were initially issued on July 5, 2010, have agreed to amend their warrants to change the expiration date of such warrants to the date that is the fifth anniversary of the initial listing of our shares on the TSXV. This amendment is conditioned on the closing of the proposed offering, provided that the proposed offering yields gross proceeds to us of at least $10 million and that shares of our common stock are listed on the TSXV, and is effective immediately prior to the closing of the proposed offering.