Quarterly report pursuant to Section 13 or 15(d)

STOCKHOLDERS' DEFICIT

v2.4.0.8
STOCKHOLDERS' DEFICIT
 9 Months Ended
Jun. 30, 2014
Stockholders' Equity Note [Abstract]  
Stockholders' Equity Note Disclosure [Text Block]
5.
STOCKHOLDERS’ DEFICIT
 
Common and Preferred Stock
 
On April 2, 2012, the Company announced that on March 30, 2012 it had filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation (the “Amendment”) to (i) effect a 1-for-30 reverse stock split (“reverse split”) of its Common Stock, effective at 5:00 p.m. Pacific Time on April 2, 2012 (the “Effective Time”), and (ii) simultaneously therewith reduce the number of authorized shares of Common Stock available for issuance under the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), from 750 million to 100 million. Because the Amendment did not reduce the number of authorized shares of Common Stock in the same proportion as the reverse split, the effect of the Amendment was to increase the number of shares of Common Stock available for issuance relative to the number of shares issued and outstanding.
 
At the Effective Time, immediately and without further action by the Company’s stockholders, every 30 shares of the Company’s Common Stock issued and outstanding immediately prior to the Effective Time were automatically combined into one share of Common Stock. In the event the reverse split left a stockholder with a fraction of a share, the number of shares due to that stockholder was rounded up. Further, any options, warrants and rights outstanding as of the Effective Time that were subject to adjustment were adjusted in accordance with the terms thereof. These adjustments included, without limitation, changes to the number of shares of Common Stock that would be obtained upon exercise or conversion of such securities, and changes to the applicable exercise or purchase price.
 
As of June 30, 2014, the Company is authorized to issue 195,000,000 shares of stock of which 180,000,000 are Common Stock at par value of $0.001 per share; the remaining 15,000,000 shares, with a par value of $0.001 per shares are blank-check preferred stock which the Board are expressly authorized to provide, for one or more series of preferred stock and, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers, if any, of the shares of such series, and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of each series of preferred stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.
 
As of June 30, 2014, 100,627,409 shares of Common Stock were issued and outstanding and no shares of preferred stock were issued or outstanding.
 
As of June 30, 2014, CNS California is authorized to issue 100,000,000 no par value shares of two classes of stock, 80,000,000 of which was designated as common shares and 20,000,000 of which was designated as preferred shares.
 
As of June 30, 2014, Colorado CNS Response, Inc. is authorized to issue 1,000,000 no par value shares of Common Stock.
 
As of June 30, 2014, Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of Colorado CNS Response, Inc., is authorized to issue 10,000 no par value shares of Common Stock.
 
As a condition of the November 28, 2012 closing of the 2012 Bridge Financing, the Company also entered into Employment Compensation Forfeiture and Exchange Agreements (the “Forfeiture and Exchange Agreements”) with three of its executive officers, George Carpenter, Paul Buck and Michael Darkoch. Pursuant to these agreements, the executives agreed to waive receipt of and release the Company from the payment of 50% of their salaries accrued from August 31, 2010 to September 30, 2012 (amount waived was $56,250 for George Carpenter, $66,083 for Paul Buck and $43,333 for Michael Darkoch), in consideration for which the Company agreed to issue to such executives a certain number of shares of its Common Stock (56,250 for George Carpenter, 66,083 for Paul Buck and 43,333 for Michael Darkoch). Any remaining accrued salary remains outstanding and shall be paid (i) from time to time at the discretion of the Board to the extent the Board determines that such payment will not jeopardize the ability of the Company to continue as a going concern; or (ii) upon the closing of any single financing transaction (including a single financing transaction that contemplates multiple closings) in which the Company receives proceeds of $5 million or more. Additionally, where applicable, the executives agreed to waive receipt of and release the Company from the payment of any previously approved bonus award. Under the agreements, the Company agreed to indemnify the executives for all federal and state income tax payable and actually paid by the executive related directly to the receipt of the Common Stock, the per share value of which was not expected to be more than the conversion price of the October 2012 Notes which was $0.04718 per share.
 
From January 18, 2013 through September 30, 2013, the $1,998,200 of October 2012 Note holders converted all their debt and interest thereon into 44,085,044 shares of Common Stock, at a conversion price of $0.04718 per share. (Refer to Note 6. Related Party Transactions)
 
On January 31, 2013, SAIL Capital Partners converted all their notes convertible at $1.00 in the aggregate principal amount of $1,250,000 and $219,800 of interest thereon into 1,469,816 shares of Common Stock. Of these conversions $250,000 was an October 2010 Note together with interest of $53,300 converted into 303,313 shares of Common Stock at a conversion price of $1.00 per share. $1,000,000 in aggregate were six January 2011 Notes together with interest of $166,500 which converted into 1,166,503 shares of Common Stock at a conversion price of $1.00.
 
From February 22, 2013 through September 12, 2013, 39 accredited investors purchased an aggregate of 12,180,000 shares of Common Stock at a price of $0.25 per share in private placement transactions. The Company received gross aggregate cash proceeds of $3,045,000. (Refer to Note 6. Related Party Transactions)

On March 26, 2013, the Board resolved to amend the Company’s Charter in order to:
 
1)
increase the number of shares of Common Stock authorized for issuance under the Charter from 100,000,000 to 150,000,000; and
2)
create one or more series of preferred stock, par value $0.001 per share, and authorize 15,000,000 shares of such preferred stock for issuance.
 
This amendment to the Charter was approved by more than 80% of the stockholders eligible to vote at the annual meeting of stockholders which was held on May 23, 2013.
  
On August 12, 2013, pursuant to an offer to all holders of debt convertible into Common Stock at $1.00 per share, all holders agreed to convert $7,723,300 of convertible debt, which included $1,359,400 interest thereon, into 30,893,419 shares of Common Stock, at a per share price of $0.25. (Refer to Note 6. Related Party Transactions)
 
Below is a summary of all promissory notes conversions:
 
Conversion of Notes
 
Shares of
Common
Stock
 
Conversion
Date
 
Conversion
Price
 
Principal
Amount
 
Interest
 
Total
 
Fiscal Year 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2012 Notes: Unsecured convertible notes
 
 
40,000
 
 
09/19/12
 
$
0.04718
 
$
1,800
 
$
100
 
$
1,900
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2010 Notes: Senior
 
 
303,313
 
 
01/31/13
 
$
1.00
 
$
250,000
 
$
53,300
 
$
303,300
 
subordinated convertible notes
 
 
13,943,539
 
 
08/12/13
 
$
0.25
 
 
2,773,900
 
 
712,000
 
 
3,485,900
 
Total October 2010 Notes:
 
 
14,246,852
 
 
 
 
 
 
 
$
3,023,900
 
$
765,300
 
$
3,789,200
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2011 Notes:
 
 
1,166,503
 
 
01/31/13
 
$
1.00
 
$
1,000,000
 
$
166,500
 
$
1,166,500
 
Subordinated convertible notes
 
 
7,336,500
 
 
08/12/13
 
$
0.25
 
 
1,500,000
 
 
334,100
 
 
1,834,100
 
Total January 2011 Notes:
 
 
8,503,003
 
 
 
 
 
 
 
$
2,500,000
 
$
500,600
 
$
3,000,600
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2011 Notes: Subordinated convertible notes
 
 
9,205,680
 
 
08/12/13
 
$
0.25
 
$
2,000,000
 
$
301,400
 
$
2,301,400
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 2012 Notes: Unsecured convertible note
 
 
407,700
 
 
08/12/13
 
$
0.25
 
$
90,000
 
$
11,900
 
$
101,900
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2012 Notes: Unsecured convertible notes
 
 
44,085,044
 
 
01/18/13 through
09/30/13
 
$
0.04718
 
$
1,998,200
 
$
81,800
 
$
2,080,000
 
Total of Notes Converted in Fiscal 2013
 
 
76,448,279
 
 
 
 
 
 
 
$
9,612,100
 
$
1,661,000
 
$
11,273,100
 
Total of Notes Converted
 
 
76,488,279
 
 
 
 
 
 
 
$
9,613,900
 
$
1,661,100
 
$
11,275,000
 
 
From August 30, 2013 through September 30, 2013, pursuant to a subscription agreement, 10 vendors converted an aggregate $502,100 of trade payables into 2,008,318 shares of Common Stock, par value $0.001, at a price for $0.25 per share. (Refer to Note 6. Related Party Transactions)
 
From October 4, 2013 through February 14, 2014, 29 accredited investors purchased an aggregate of 5,900,000 shares of Common Stock, at a price of $0.25 per share pursuant to private placements. The Company received gross aggregate cash proceeds of $1,475,000. (Refer to Note 6. Related Party Transactions)
 
Between November 11, 2013 and December 20, 2013, the Company issued an aggregate of 1,446,380 shares of its Common Stock, as full and complete settlement of trade payables totaling an aggregate $1,466,800 owed to two creditors who are also accredited investors.
 
On March 21, 2014, the Board resolved to amend the Company’s Charter in order to further increase the number of shares of Common Stock authorized for issuance under the Charter from 150,000,000 to 180,000,000. This amendment to the Charter was approved by more than 65% of the stockholders eligible to vote at the annual meeting of stockholders which was held on May 13, 2014.
 
Stock-Option Plans
 
On August 3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options (ISO) or non-statutory stock options (NSO), stock appreciation rights and stock unit grants to eligible employees, Directors and consultants and is administered by the Board. A total of 667,667 shares of stock were ultimately reserved for issuance under the 2006 Plan. As of June 30, 2014, 70,825 options were exercised and there were 501,924 options and 6,132 restricted shares outstanding under the amended 2006 Plan leaving 87,786 shares which will not be issued as the 2006 Plan has been frozen. The outstanding options have exercise prices to purchase shares of Common Stock ranging from $3.60 to $32.70.
 
In June, 2011, we entered into agreements with the majority of our 2006 Plan option holders pursuant to which holders of options to purchase an aggregate of 439,689 shares of our Common Stock 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).
 
On March 22, 2012, our Board approved the CNS Response, Inc. 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”), reserved 333,334 shares of stock for issuance and approved the grant of options to purchase 42,670 shares of Common Stock pursuant to such plan at an exercise price of $3.00 per share, including options to purchase 8,334 shares to each of our Directors Zachary McAdoo and Maurice DeWald.
 
On December 10, 2012, the Board approved the amendment of the Company’s 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”) to increase the shares authorized for issuance under the 2012 Plan from 333,334 shares to 5,500,000 shares and granted to each of its three existing members as well as to each Richard Turner, Robert Follman, Andrew Sassine and Thomas Tierney (collectively, the “New Board Members”) options to purchase 250,000 shares of its Common Stock pursuant to the 2012 Plan at an exercise price of $0.04718 per share. The options vest evenly over 36 months starting from the date of grant. The Board furthermore granted to each of the five former Directors who had departed the Board effective November 30, 2012, (George Carpenter, Henry Harbin, George Kallins, David Jones, and Maurice DeWald), options to purchase 25,000 shares of its Common Stock pursuant to the 2012 Plan at an exercise price of $0.04718 per share. These options to former Directors are fully vested. Finally, the Board granted to the Company’s executive officers options to purchase shares of its Common Stock pursuant to the 2012 Plan at an exercise price of $0.04718 per share as follows: George Carpenter 1,200,000 shares, Paul Buck 1,400,000 shares and Michael Darkoch 920,000 shares. These options vest in increments of 12.5% at the beginning of each quarter starting from the date of grant.
 
Based on the volume of shares traded on the open market, during the period October 1, 2012 through to December 10, 2012, the date of the option grant, management judged that the Company’s stock was not actively traded as only $15,000 worth of stock was traded on 11 of 48 trading days during this period at prices ranging from $0.76 to $0.83. In a contemporaneous transaction, Senior Secured Convertible Notes (“October 2012 Notes”) with a conversion price of $0.04718 were purchased by accredited third party investors. Given the very low volume of stock which was not actively traded, compared to the volume of October 2012 Notes purchased, management’s judgment was that the pricing of the October 2012 Notes at $0.04718 represented a better determinant of fair value of the Company’s Common Stock on December 10, 2012.
 
On January 14, 2013, the Board granted options to purchase 1,960,000 shares of Common Stock to members of staff and 1,600,000 share of Common Stock to key consultants. The options granted to staff vest evenly over 48 months starting on the date of grant. The options granted to consultants vest evenly over 36 months starting on the date of grant. All these options have an exercise price of $0.04718 per share.
 
Based on the volume of shares traded on the open market, during the period October 1, 2012 through to January 14, 2013, the date of the option grant, management judged that the Company’s stock was not actively traded as only $36,700 worth of stock was traded on 21 of 50 trading days during this period at prices ranging from $0.49 to $2.50. There had been a recent transaction which closed on November 30, 2012 whereby $2 million of Senior Secured Convertible Notes (“October 2012 Notes”) with a conversion price of $0.04718 were purchased by accredited third party investors. Given the low volume of stock which was not actively traded when compared to the volume of October 2012 Notes purchased, management judged that the pricing of the October 2012 Notes at $0.04718 represented a better determinant of fair value of the Company’s Common Stock on January 14, 2013.
 
On March 26, 2013, the Board approved the amendment of the Company’s 2012 Plan to increase the shares authorized for issuance under the 2012 Plan from 5,500,000 shares to 15,000,000 shares. The Board also granted options to purchase 250,000 shares of Common Stock to Thomas Tierney upon his election to be Chairman of the Board. These options granted to Mr. Tierney vest evenly over 36 months starting on the date of grant and have an exercise price of $0.25 per share.
 
Based on the volume of shares traded on the open market, during the period January 1, 2013 through to March 26, 2013, the date of the option grant, management judged that the Company’s stock was not actively traded as only $283,400 worth of stock was traded on 22 of 58 trading days during this period at prices ranging from $0.46 to $0.83. There was a contemporaneous transaction whereby $695,000 worth of a $2.5 million private placement offering of Common Stock at a price of $0.25 per share were purchased by accredited third party investors. Given the low volume of stock which was not actively traded, compared to the volume of the private placement of Common Stock, management judged that the pricing of the private placement of Common Stock at $0.25 per share represented a better determinant of fair value of the Company’s Common Stock on March 26, 2013.
 
The 2012 Plan, as amended, was approved by our stockholders at the 2013 annual meeting held on May 23, 2013.
 
On October 8, 2013, the Board granted to the Company’s two executive officers and two senior managers (collectively, the “Managers”) options to purchase shares of its Common Stock pursuant to the 2012 Omnibus Incentive Compensation Plan, as amended (the “2012 Plan”), at an exercise price of $0.25 per share as follows: George Carpenter 435,000 shares, Paul Buck 470,000 shares, Stewart Navarre 385,000 shares and Brian MacDonald 310,000. These options vest pro-rata over 12 months starting from the date of grant. The four managers have agreed to forego a portion of their salaries in fiscal year 2014 as follows: George Carpenter $98,000, Paul Buck $106,500, Stewart Navarre $83,600 and Brian MacDonald $66,700. These executive officers and managers will be paid out of the salaries which were earned and accrued during fiscal year 2012 and fiscal year 2013. The accruals to be paid out are equivalent to the fiscal year 2014 salaries that each of the executive officers and managers agreed to forego in lieu of receiving options.
 
On November 8, 2013, the Board granted 700,000 options to purchase shares of its Common Stock pursuant to the 2012 Plan, at an exercise price of $0.25 per share to select consultants and staff, excluding the managers.
 
Based on the volume of shares traded on the open market, during the period July 1, 2013 through to November 8, 2013, which covers the both option grant dates of October 8, 2013, and November 8, 2013, management judged that the Company’s stock was not actively traded, due to the fact that only $180,000 worth of stock was traded on 51 of 93 trading days during this period at prices ranging from $0.30 to $1.74. There was a contemporaneous transaction whereby $2,047,500 worth of stock was purchased in a private placement offering of Common Stock at a price of $0.25 per share by accredited investors. Given the low volume of stock, which was not actively traded, compared to the volume of the private placement of Common Stock, management judged that the pricing of the private placement of Common Stock at $0.25 per share represented a better determinant of fair value of the Company’s Common Stock on the dates that the options were granted.
 
As of June 30, 2014, 11,490,575 options are issued and outstanding under the 2012 Plan, none of which have been exercised and 3,509,425 remain available for issuance. The outstanding options have exercise prices to purchase shares of Common Stock ranging from $0.04718 to $0.25.
 
Stock-based compensation expense is recognized over the employees’ or service provider’s requisite service period, generally the vesting period of the award. Stock-based compensation expense included in the accompanying statements of operations for the three months and nine months ended June 30, 2014 and 2013 is as follows:
 
 
 
For the three months ended
June 30,
 
 
 
2014
 
2013
 
Cost of Neurometric Services revenues
 
$
-
 
$
2,700
 
Research
 
 
8,200
 
 
21,900
 
Product Development
 
 
55,700
 
 
33,600
 
Sales and marketing
 
 
21,300
 
 
30,300
 
General and administrative
 
 
87,400
 
 
205,000
 
Total
 
$
172,600
 
$
293,500
 
 
 
 
For the nine months ended
June 30,
 
 
 
2014
 
2013
 
Cost of Neurometric Services revenues
 
$
5,100
 
$
7,900
 
Research
 
 
55,100
 
 
70,800
 
Product Development
 
 
193,900
 
 
82,600
 
Sales and marketing
 
 
72,300
 
 
129,400
 
General and administrative
 
 
513,300
 
 
696,300
 
Total
 
$
839,700
 
$
987,000
 
 
Total unrecognized compensation as of June 30, 2014 amounted to $439,400.
 
A summary of stock option activity is as follows:
 
 
Number of
Shares
 
Weighted Average
Exercise Price
 
Outstanding at September 30, 2013
 
 
9,749,594
 
$
1.00
 
Granted
 
 
2,300,000
 
 
0.25
 
Exercised
 
 
-
 
 
-
 
Forfeited
 
 
-
 
 
-
 
Outstanding at December 31, 2013
 
 
12,049,594
 
$
0.86
 
Granted
 
 
-
 
 
-
 
Exercised
 
 
-
 
 
-
 
Forfeited
 
 
(57,095)
 
 
0.13
 
Outstanding at March 31, 2014
 
 
11,992,499
 
$
0.86
 
Granted
 
 
-
 
 
-
 
Exercised
 
 
-
 
 
-
 
Forfeited
 
 
-
 
 
-
 
Outstanding at June 30, 2014
 
 
11,992,499
 
$
0.86
 
  
Following is a summary of the status of options outstanding at June 30, 2014:
 
Exercise
Price
Number
of Shares
Weighted Average
Contractual Life
 
Weighted Average
Exercise Price
 
$
0.04718
 
 
8,920,300
 
 
10 years
 
$
0.04718
 
 
0.25
 
 
2,527,605
 
 
10 years
 
 
0.25
 
 
3.00
 
 
42,670
 
 
10 years
 
 
3.00
 
 
3.60
 
 
28,648
 
 
10 years
 
 
3.60
 
 
3.96
 
 
32,928
 
 
10 years
 
 
3.96
 
 
9.00
 
 
4,525
 
 
10 years
 
 
9.00
 
 
12.00
 
 
28,535
 
 
10 years
 
 
12.00
 
 
14.10
 
 
10,000
 
 
10 years
 
 
14.10
 
 
15.30
 
 
1,373
 
 
10 years
 
 
15.30
 
 
16.50
 
 
262,441
 
 
10 years
 
 
16.50
 
 
17.70
 
 
953
 
 
10 years
 
 
17.70
 
 
24.00
 
 
4,667
 
 
10 years
 
 
24.00
 
 
26.70
 
 
32,297
 
 
10 years
 
 
26.70
 
 
28.80
 
 
11,767
 
 
10 years
 
 
28.80
 
$
32.70
 
 
83,790
 
 
10 years
 
 
32.70
 
 
Total
 
 
11,992,499
 
 
 
 
$
0.86
 
 
Warrants to Purchase Common Stock
 
The warrant activities for the period starting October 1, 2012 through June 30, 2014 are described as follows:
 
Warrants
 
 
Exercise
Price $
 
 
Issued, Surrendered or Expired in Connection With:
 
 
2,164,440
 
 
 
 
  
Warrants outstanding at September 30, 2012
 
 
(1,617,345)
 
 
3.00
 
 
Warrants forfeited pursuant to the Amended and Restated Consent, Note Amendment and Warrant Forfeiture Agreement dated October 24, 2012.
 
 
127,173
 
 
0.04718
 
 
Warrants issued to Monarch Capital who acted as placement agents in raising $60,000 from one investor who purchased October 2012 Notes pursuant to the 2012 Bridge Note October Purchase Agreement described in Note 4.
 
 
519,288
 
 
0.04718
 
 
Warrants issued to Tony Pullen who acted as placement agent in raising $350,000 from three investors who purchased October 2012 Notes pursuant to the 2012 Bridge Note October Purchase Agreement described in Note 4.
 
 
100,000
 
 
0.25
 
 
Warrants issued to D&D Securities Inc. in connection with the Company’s private offering to select accredited investors of shares of restricted Common Stock, par value $0.001 per share, in a private placement agreement dated February 20, 2013.
 
 
204,000
 
 
0.275
 
 
Warrants issued to Monarch Capital who acted as placement agents in raising $510,000 from sixteen accredited investors who purchased restricted Common Stock, par value $0.001 per share, in a private placement agreement dated February 20, 2013 and May 23, 2013.
 
 
1,497,556
 
 
3.03
 
 
Warrants outstanding at September 30, 2013
 
 
120,000
 
 
0.275
 
 
Warrants issued to Monarch Capital who acted as placement agents in raising $300,000 from 11 accredited investors who purchased restricted Common Stock, par value $0.001 per share, in a private placement agreements dated October 2, 2013 and January 8, 2014.
 
 
32,200
 
 
0.25
 
 
Warrants issued to D&D Securities Inc. who acted as placement agents in raising $115,000 from three accredited investors who purchased restricted Common Stock, par value $0.001 per share, in a private placement agreement dated January 8, 2014.
 
 
(519,288)
 
 
0.04718
 
 
Warrants exercised as of January 29, 2013.
 
 
(89,021)
 
 
0.04718
 
 
Warrants exercised as of June 20, 2014.
 
 
1,041,447
 
$
4.37
 
 
Warrants outstanding at June 30, 2014
 
  
As of June 30, 2014, warrants to purchase 1,041,447 shares of the Company’s Common Stock were outstanding. The exercise prices of the outstanding warrants range from $0.04718 to $9.90 with a weighted average exercise price of $4.37. The warrants expire at various times starting 2014 through 2019.