July 25, 2010 Mr. Pappajohn Suite 2116 Des Moines, IA 50309 Re: Conversion of Secured Promissory Notes.
July 25,
2010
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Suite
2116
Des
Moines, IA 50309
Re: Conversion of Secured
Promissory Notes.
Dear ▇▇.
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Reference
is hereby made to the Secured Promissory Notes (the “Notes”) issued by CNS
Response, Inc. (the “Company”) to you, (the “Holder”) on June 3 and July
25, 2010, each in the original principal amount of $250,000. This
letter agreement will confirm that in addition to the terms and conditions as
set forth in the Notes, the following provisions are also incorporated into the
Notes (Capitalized terms used herein, unless otherwise indicated, shall have the
same meaning as provided for in the Notes):
1. CONVERSION OF
NOTES. The Notes shall be convertible into shares of the
Company’s common stock, par value $0.001 per share (the “Common Stock”), on the terms
and conditions set forth in this Section 1.
(a) Conversion
Right. At any time or times on or after the date hereof, the
Holder shall be entitled to convert any portion of the outstanding and unpaid
Conversion Amount (as defined below) into fully paid and nonassessable shares of
Common Stock in accordance with Section 1(c), at the Conversion Rate (as defined
below). The Company shall not issue any fraction of a share of Common
Stock upon any conversion. If the issuance would result in the
issuance of a fraction of a share of Common Stock equal to or in excess of one
half of one share, the Company shall round such fraction of a share of Common
Stock up to the nearest whole share. The Company shall pay any and
all stock transfer, stamp, documentary and similar taxes (excluding any taxes on
the income or gain of the Holder) that may be payable with respect to the
issuance and delivery of shares of Common Stock to the Holder upon conversion of
any Conversion Amount.
(b) Conversion
Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 1(a) (the “Conversion Rate”) shall be
determined by dividing (x) such Conversion Amount by (y) the Conversion
Price.
(i) “Conversion Amount” means the
sum of (A) the portion of the principal to be converted, redeemed or otherwise
with respect to which this determination is being made and (B) accrued and
unpaid interest with respect to such principal.
(ii) “Conversion Price” means, as of
any Conversion Date (as defined below) or other date of determination, $0.50,
subject to adjustment as provided herein.
(c) Mechanics of
Conversion.
(i) Optional
Conversion. To convert any Conversion Amount into shares of
Common Stock on any date (a “Conversion Date”), the Holder
shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior
to 4:00 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the
Company and (B) if required by Section 1(c)(ii), cause the Note to be delivered
to the Company as soon as practicable on or following such date. On
or before 4:00 p.m., New York Time, on the first (1st)
Business Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile a confirmation of receipt of such Conversion Notice
to the Holder (at the facsimile number provided in the Conversion Notice) and
the Company’s transfer agent, if any (the “Transfer
Agent”). On or before 4:00 p.m., New York Time, on the third
(3rd)
Business Day following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall
issue and deliver to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder shall be
entitled. If the Note is physically surrendered for conversion as
required by Section 1(c)(ii) and the outstanding principal of the Note is
greater than the principal portion of the Conversion Amount being converted,
then the Company shall as soon as practicable and in no event later than three
(3) Business Days after receipt of the Note and at its own expense, issue and
deliver to the Holder a new Note representing the outstanding principal not
converted. The person or persons entitled to receive the shares of
Common Stock issuable upon a conversion of the Note shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on the
Conversion Date.
(ii) Book-Entry.
Notwithstanding anything to the contrary set forth herein, upon conversion of
any portion of the Note in accordance with the terms hereof, the Holder shall
not be required to physically surrender the Note to the Company unless (A) the
full Conversion Amount represented by the Note is being converted or
(B) the Holder has provided the Company with prior written notice (which
notice may be included in a Conversion Notice) requesting physical surrender and
reissue of the Note. The Holder and the Company shall maintain
records showing the principal and interest converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the
Holder and the Company, so as not to require physical surrender of the Note upon
conversion.
2. RIGHTS UPON ISSUANCE OF
OTHER SECURITIES.
(a) Record
Date. If the Company takes a record of the holders of Common
Stock for the purpose of entitling them (A) to receive a dividend or other
distribution payable in Common Stock, Options or in Convertible Securities or
(B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may
be.
(b) Adjustment of Conversion
Price upon Subdivision or Combination of Common Stock; Stock
Dividends. If the Company at any time, or from time to time,
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any
time, or from time to time, combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased. Any adjustment
under this Section 2(b) shall become effective at the close of business on the
date the subdivision or combination becomes effective or, in the case of a stock
dividend or distribution, the date of such event.
(c) (i) Adjustment of Conversion
Price upon Cash Dividends and Distributions. If the Company at
any time, or from time to time, pays a dividend or makes a distribution in cash
to the record holders of any class of Common Stock, then immediately after the
close of business on the day that the Common Stock trades ex-distribution, the
Conversion Price then in effect shall be reduced to an amount equal to the
product of (i) the Conversion Price in effect immediately prior to such dividend
or distribution and (ii) the quotient determined by dividing (A) the Closing
Sale Price of the Common Stock on the day that the Common Stock trades
ex-distribution by (B) the sum of (1) the Closing Sale Price of the Common Stock
on the day that the Common Stock trades ex-distribution plus (2) the amount per
share of such dividend or distribution. The Company shall not be
required to give effect to any adjustment in the Conversion Price pursuant to
this Section 2(c) unless and until the net effect of one or more adjustments
(each of which shall be carried forward until counted toward an adjustment),
determined in accordance with this Section 2(c), shall have resulted in a change
of the Conversion Price by at least 1%, and when the cumulative net effect of
more than one adjustment so determined shall be to change the Conversion Price
by at least 1%, such change in the Conversion Price shall thereon be given
effect.
(ii) Adjustment of Conversion
Price upon Distributions of Capital Stock, Indebtedness or Other Non-Cash
Assets. If the Company at any time, or from time to time,
distributes any shares of capital stock of the Company (other than Common
Stock), evidences of indebtedness or other non-cash assets (including securities
of any person other than the Company but excluding (1) dividends or
distributions paid exclusively in cash or (2) dividends or distributions
referred to in Section 2(b)) to the record holders of any class of Common Stock,
then the Conversion Price then in effect shall be reduced to an amount equal to
the product of (A) the Conversion Price then in effect and (B) a fraction of
which the numerator shall be the Closing Sale Price share of the Common Stock on
the record date fixed for determination of stockholders entitled to receive such
distribution less the fair market value on such record date (as determined by
the Company’s board of directors) of the portion of the capital stock, evidences
of indebtedness or other non-cash assets so distributed applicable to one share
of Common Stock (determined on the basis of the number of shares of Common Stock
outstanding on the record date) and of which the denominator shall be the
Closing Sale Price per share of the Common Stock on such record
date. Notwithstanding the foregoing, if the securities distributed by
the Company to the record holders of any class of Common Stock consist of
capital stock of, or similar equity interests in, a Subsidiary or other business
unit, the Conversion Price shall be decreased so that the same shall be equal to
the rate determined by multiplying the Conversion Price in effect on the record
date with respect to such distribution by a fraction the numerator of which
shall be the average Closing Sale Price of one share of Common Stock over the
Spinoff Valuation Period (as defined below) and of which the denominator shall
be the sum of (x) the average Closing Sale Price of one share of Common Stock
over the ten consecutive Trading Day period (the “Spinoff Valuation Period”)
commencing on and including the fifth Trading Day after the date on which
“ex-dividend trading” commences on the Common Stock on the Principal Market or
any national or regional exchange or market on which the Common Stock is then
listed or quoted and (y) the average Closing Sale Price over the Spinoff
Valuation Period of the portion of the securities so distributed applicable to
one share of Common Stock, such adjustment to become effective immediately prior
to the opening of business on the fifteenth Trading Day after the date on which
“ex-dividend trading” commences.
(d) Other Events; Other
Dividends and Distributions. If any event occurs of the type
contemplated by the provisions of this Section 2 but not expressly provided for
by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company’s board of directors shall make in good faith an adjustment in
the Conversion Price so as to protect the rights of the Holder under the Note;
provided that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 2.
(e) Notice of
Adjustment. Whenever the Conversion Price is adjusted pursuant
to this Section 2, the Company shall promptly mail notice of such adjustment to
the Holder, which notice shall set forth the Conversion Price after adjustment,
the date on which such adjustment became effective and a brief statement of the
facts resulting in such adjustment.
(f) Minimum Adjusted Conversion
Price. Notwithstanding anything to the contrary set forth in
the Note, the Conversion Price shall not be less than $0.30.
3. DEFINED
TERMS. For purposes of this letter agreement, the following
terms shall have the meanings indicated:
(a) “Business Day” means any day
other than Saturday, Sunday or other day on which commercial banks in The City
of New York are authorized or required by law to remain closed.
(b) “Closing Bid Price” and “Closing Sale Price” mean, for
any security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg Financial Markets, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing
trade price, as the case may be, then the last bid price or last trade price,
respectively, of such security prior to 4:00 p.m., New York Time, as reported by
Bloomberg Financial Markets, or if the foregoing do not apply, the last closing
bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg Financial Markets, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg Financial
Markets, the average of the bid prices, or the ask prices, respectively, of any
market makers for such security as reported in the “pink sheets” by Pink Sheets
LLC (formerly the National Quotations Bureau, Inc.). If the Closing
Bid Price or the Closing Sale Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price, as the case may be, of such security on such date shall be
the fair market value as mutually determined by the Company and the
Holder. All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination or other similar transaction
during the applicable calculation period.
(c) “Convertible Securities” means
any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for Common Stock.
(d) “Options” means any rights,
warrants or options to subscribe for or purchase Common Stock or Convertible
Securities.
(e) “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization, any other entity and a
government or any department or agency thereof.
(f)
“Principal Market” means the
OTC Bulletin Board or principal stock exchange or trading market for the Common
Stock, if any.
(g) “Subsidiary” means with respect
to any Person, any corporation, association or other business entity of which
more than 50% of the total voting power of equity entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or trustees or other governing body thereof is at the time owned or
controlled by such Person (regardless of whether such equity is owned directly
or through one or more other Subsidiaries of such Person or a combination
thereof).
(h) “Trading Day” means any day on
which the Common Stock is traded on the Principal Market; provided that “Trading
Day” shall not include any day on which the Common Stock is scheduled to trade
on such exchange or market for less than 4.5 hours or any day that the Common
Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00 p.m., New York Time).
The terms
and conditions of this letter agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the undersigned
parties. This letter agreement and any controversy arising out of or
relating to this letter agreement shall be governed by and construed in
accordance with the internal laws of the State of California, without regard to
conflict of law principles that would result in the application of any law other
than the law of the State of California. This letter agreement may be
executed and delivered in two or more counterparts, including, but not limited
to, by PDF or facsimile, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
If you
are in agreement with the foregoing, please so indicate by signing and returning
a copy of this letter agreement, which will constitute our agreement with
respect to the matters set forth herein.
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Sincerely,
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Chief
Executive Officer
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ACKNOWLEDGED
AND AGREED TO:
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EXHIBIT
I
CONVERSION
NOTICE
Reference
is made to the Convertible Note (the “Note”) issued to the
undersigned by CNS Response, Inc. (the “Company”). In
accordance with and pursuant to the Note, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Note) of the Note indicated
below into shares of Common Stock par value $0.001 per share (the “Common Stock”) of the Company,
as of the date specified below.
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Date
of Conversion:
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Aggregate
Conversion Amount to be converted:
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Please
confirm the following information:
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Conversion
Price:
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Number
of shares of Common Stock to be issued:
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Please
issue the Common Stock into which the Note is being converted in the
following name and to the following address:
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Issue to:
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Facsimile
Number:
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Authorization:
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By:
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Title:
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Dated:
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Account
Number:
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(if
electronic book entry transfer)
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Transaction
Code Number:
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(if
electronic book entry transfer)
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