THIS NOTE
AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED .
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED .
CNS RESPONSE, INC.
SENIOR SECURED CONVERTIBLE
PROMISSORY NOTE
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$250,000.00
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March 30,
2009
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Costa Mesa
, California
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FOR VALUE RECEIVED, CNS Response, Inc., a
Delaware corporation (the “ Company ”), promises
to pay to SAIL Venture Partners, LP (“ Investor
”), or its registered assigns, in lawful money of the United
States of America, the principal sum of Two Hundred Fifty Thousand
Dollars ($250,000.00), together with
interest from the date of this Note on the unpaid principal balance
at a rate equal to 8.0% per annum, computed on the basis of the
actual number of days elapsed and a year of 365
days. All unpaid principal, together with any then
unpaid and accrued interest and other amounts payable hereunder,
shall be due and payable, unless converted pursuant to Section 7
below, on the earlier of (i) a declaration by Investor on or
after June 30, 2009 (the “ Maturity Date ”) that
such amounts are due and payable or (ii) when, upon or
after the occurrence of an Event of Default (as defined below),
such amounts are made due and payable in accordance with the terms
hereof. This Note is one of two “Notes” in
the form hereof issued by the Company on or about the date hereof
(this Note, together with such other Note, the
“Notes” ). This Note is secured by a
lien on all of the assets of the Company pursuant to the terms of
Section 6 below.
The following is a statement of the rights of
Investor and the conditions to which this Note is subject, and to
which the Company and Investor agree:
1. Definitions . As
used in this Note, the following capitalized terms have the
following meanings:
(a) “ Company ” includes the
corporation initially executing this Note and any Person which
shall succeed to or assume the obligations of the Company under
this Note.
(b) “ Equity Financing Conversion
Price ” shall mean 90% of the per share price paid for
the securities in the Qualified Equity Financing.
(c) “ Investor ” shall mean
the Person specified in the introductory paragraph of this Note or
any Person who is the registered holder of this Note, and “
Investors ” shall mean the Persons who are the
registered holders of the Notes.
(d) “ Outstanding Debt
” shall mean, as of a particular time, the then outstanding
principal amount of this Note and all then accrued and unpaid
interest thereon.
(e) “ Person ” shall mean and
include an individual, a partnership, a corporation (including a
business trust), a joint stock company, a limited liability
company, an unincorporated association, a joint venture or other
entity or a governmental authority.
(f) “ Securities Act ” shall
mean the Securities Act of 1933, as amended.
2. Interest . Subject
to Sections 3 and 7, accrued interest on this Note shall be payable
on the earlier of (i) a declaration
by Investor on or after the Maturity Date that the Outstanding Debt
is due and payable and (ii) when, upon or after the
occurrence of an Event of Default (as defined below), the
Outstanding Debt is made due and payable in accordance with the
terms hereof . For the sake of clarity, this Note
shall remain outstanding in the event that the registered holder of
the other Note issued on or around the date hereof makes the
declaration set forth in clause (i) of this Section 2 with respect
to such other Note and the Investor does not make such a
declaration with respect to this Note.
3. Prepayment . This
Note may not be prepaid except with the prior written consent of
the Investors holding outstanding Notes. Notwithstanding
any other provision of this Note, if prior to the date on which all
of the Outstanding Debt is repaid there is a liquidation,
dissolution or winding-up of the Company (a “ Liquidation
Event ”), then, unless Investor provides written notice
to the Company to the contrary prior to the Liquidation Event,
concurrently with the Liquidation Event, in full satisfaction of
the Outstanding Debt, the Company shall pay Investor an amount
equal to the product of (x) 250% multiplied by (y) the
Outstanding Debt. Investor agrees to deliver the
original of this Note (or a notice to the effect that the original
Note has been lost, stolen or destroyed along with an indemnity
with respect thereto in a form satisfactory to the Company) at the
closing of the Liquidation Event for cancellation; provided,
however , that upon payment of the amounts set forth above with
respect to the Outstanding Debt, the Outstanding Debt shall be
deemed satisfied and paid in full and the Company shall have no
other obligation with respect to the Outstanding Debt, whether or
not this Note is delivered for cancellation as set forth in the
preceding sentence.
4. Notice of Defaults . The
Company shall furnish to Investor written notice of the occurrence
of any Event of Default hereunder promptly following the occurrence
thereof.
(a) The occurrence of any of the following shall
constitute an “ Event of Default ”:
(i) Failure of the Company to pay the principal
or interest on either Note when due.
(ii) Failure of the Company to perform or
observe any covenant or agreement as required by either Note and
continuation of such failure for a period of ten (10) days
following written notice from the Investors.
(iii) The Company makes a general assignment for
the benefit of creditors.
(iv) Any proceeding is instituted by or against
the Company seeking to adjudicate it bankrupt or insolvent, and
such proceeding is not dismissed within sixty (60) days.
(v) The entry against the Company of a final
judgment, decree or order for the payment of money in the excess of
$25,000 and the continuance of such judgment, decree or order
unsatisfied for a period of thirty (30) days without a stay of
execution.
(vi) Any representation or warranty of the
Company made in this Note is proven not to have been true and
correct in any material respect as of the date of this
Note.
(vii) Leonard Brandt voluntarily or
involuntarily terminates his employment with the
Company.
(b) If an Event of Default occurs and is
continuing, the Investors may exercise any or all of the following
rights and remedies:
(i) Declare the Note and all interest thereon to
be immediately due and payable, and upon such declaration, the Note
and all interest thereon shall immediately be due and payable,
without presentment, demand, protest or any notice of any kind, all
of which are expressly waived.
(ii) Exercise any and all other rights and
remedies available to the Investors under Section 6 below and
otherwise available to creditors at law and in equity.
(a) Grant of Senior Security
Interest.
(i) The Company, in consideration of the
indebtedness described in this Note, hereby grants and conveys to
both Investors a security interest in and to all of the
Company’s existing and future right, title and interest in,
to and under the Collateral as defined in Section 6(b) of this
Note. The respective rights of each of the two Investors
in respect of the Collateral shall remain on a parity with one
another without preference, priority or distinction during all
times when both Notes are outstanding.
(ii) The Investors and Company agree that the
indebtedness evidenced by the Notes is senior in right of payment
to all presently existing and hereafter arising indebtedness for
borrowed money of the Company, and any other indebtedness of the
Company. All liens and security interests at any time
granted by the Company to secure the Notes, including the
Collateral, are senior to all presently existing and hereafter
arising liens and security interests in the assets of the
Collateral which secure any and all other
indebtedness. The Company has taken, and will take, all
actions necessary to make the statements in this Section 6(a)(ii)
true.
(b) Property. The property
subject to the security interest (the
“Collateral” ) is as follows:
(i) Equipment and Fixtures.
All equipment of every type and description owned by
the Company, including (without limitation) all present and future
machinery, furniture, fixtures, manufacturing equipment, shop
equipment, office and recordkeeping equipment, parts, tools,
supplies and other goods (except inventory) used or bought for use
by the Company for any business or enterprise and including all
goods that are or may be attached or affixed to or otherwise become
fixtures upon any real property.
(ii) Accounts Receivable and Other
Intangibles. All of the Company’s accounts,
chattel paper, contract rights, commissions, warehouse receipts,
bills of lading, delivery orders, drafts, acceptances, notes,
securities and other instruments; documents; general intangibles,
patents and trademarks, applications for patents and trademarks
including, but not limited to, the patent application
entitled “Method for Classifying and Treating Physiologic
Brain Imbalances Using Quantitative EEG,” know-how,
proprietary information, all software source and object code
whether created or licensed by the Company, all data that comprises
the QEEG patient database, all forms of receivables, and all
guaranties and securities therefore.
(iii) Inventory and Other Tangible Personal
Property. All of the Company’s inventory,
including all goods, merchandise, materials, raw materials, work in
progress, finished goods, now owned or hereinafter acquired and
held for sale or lease or furnished or to be furnished under
contracts or service agreements or to be used or consumed in the
Company’s business and all other tangible personal property
of the Company.
(iv) After-Acquired Property.
All property of the types described in Sections
6(b)(i)-(iii), or similar thereto, that at any time hereafter may
be acquired by Company including, but not limited to, all
accessions, parts, additions and replacements.
(v) Products and Proceeds.
All products and proceeds of the Collateral from the
sale or other disposition of any of the Collateral described or
referred to in 6(b)(i)-(iv), including (without limitation) all
accounts, instruments, chattel paper or other rights to payment,
money, insurance proceeds and all refunds of insurance premiums due
or to become due under all insurance policies covering the forgoing
property.
Notwithstanding
the foregoing, the security interest granted herein shall not
extend to and the term “Collateral” shall not include
any contract right or licenses to the extent that any such contract
or license prohibits the granting of a security interest therein,
and the granting of a security interest in such contract or license
would cause the Company to be in breach thereof or otherwise lose
its rights thereunder.
(c) Removal of Collateral Prohibited.
The Company shall not permanently remove the Collateral
from its premises without the written consent of both Investors,
except that the Company may dispose of Collateral in the ordinary
course of business.
(d) Protection of Security Interest.
If an Event of Default has occurred and is continuing,
or if any action or proceeding is commenced which materially
adversely affects the Collateral or title hereto or the
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