Exhibit 10.2
 
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.
SECURED CONVERTIBLE PROMISSORY NOTE
 
$___________
________ __, 2009
 
Costa Mesa, California

 
FOR VALUE RECEIVED, CNS Response, Inc., a Delaware corporation (the “Company”),
promises to pay to SAIL Venture Partners, LP (“Investor”), or its assigns, in
lawful money of the United States of America, the principal sum of two hundred
thousand ($200,000), together with interest from the date of this note (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 secured by a lien on all of the assets of the
Company pursuant to the terms of Section 6 below.  This Note is issued pursuant
to the Bridge Note and Warrant Purchase Agreement, dated May 14, 2009 (the
“Agreement”), and all capitalized terms not defined in this Note shall have the
meaning ascribed to them in the Agreement.
 
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 85% 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.
 
(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.
 
 
 

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3.      Prepayment.  This Note may not be prepaid except with the prior written
consent of Investor.  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 closing of the Liquidation Event, concurrently with the closing of
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.
 
5.      Events of Default.
 
(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 a
Note when due.
 
(ii)                 Failure of the Company to perform or observe any covenant
or agreement as required by the Loan Documents.
 
(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)                 The initiation of a proxy fight by a shareholder of the
Company against the management of the Company.
 
(vii)                 The initiation of a lawsuit against the Company or any of
its shareholders by any party, including a shareholder of the Company.
 
(viii)                 George Carpenter voluntarily or involuntarily terminates
his employment with the Company.
 
(ix)                 Investor determines, in its sole discretion, that the
Company will not close by June 30, 2009 an equity financing in the Company in an
amount and on terms acceptable to Investor.
 
(x)                 Any of the representations and warranties of the Company
made in any Loan Document are not true and correct in any material respect as of
the date of such Loan Document.
 

 
 

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(b)           If an Event of Default occurs and is continuing, Investor may
exercise any or all of the following rights and remedies:
 
(i)                 Declare this Note, all interest thereon, and all other
obligations under or pursuant to the Loan Documents to be immediately due and
payable, and upon such declaration, this Note, interest and such other
obligations 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
Investor under Section 6 below and otherwise available to creditors at law and
in equity.
 
6.      Security Agreement.
 
(a)           Grant of Security Interest.
 
(i)                 The Company, in consideration of the indebtedness described
in this Note, hereby grants and conveys to Investor 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.
 
(ii)                 Investor and Company agree that the indebtedness evidenced
by the Note 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, except that the indebtedness evidenced by the Note
is subordinate and junior in right of payment to the indebtedness of the Company
evidenced by those certain notes, dated March 30, 2009, issued to Investor and
Brandt Ventures, GP.  All liens and security interests at any time granted by
the Company to secure the Note, 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, except
that the liens and security interests securing the Note are subordinate and
junior to the liens and security interest securing indebtedness of the Company
evidenced by those certain notes, dated March 30, 2009, issued to Investor and
Brandt Ventures, GP.  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 copyrights, any other intellectual property, all data that
comprises the QEEG patient database, all forms of receivables, and all
guaranties and securities therefore; all right, title and interest in and to the
TRD study and its contents, results and documentation; all right, title and
interest in and to any and all past, present and future studies and their
contents, results and documentations.
 
 
 

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(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.
 
(c)           Removal of Collateral Prohibited.  The Company shall not
permanently remove the Collateral from its premises without the written consent
of Investor, 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 senior right
of payment or other interest of Investor, then Investor may make such
appearance, disburse such sums and take such action as they deem necessary to
protect their interest, including but not limited to: (a) disbursement of
reasonable attorney’s fees; (b) entry upon the Company’s property to make
repairs to the Collateral; and (c) procurement of satisfactory insurance that is
reasonable under the circumstances; provided, however, Investor may undertake
the foregoing only if it has first provided written notice of the Event of
Default to the Company, and the Company has failed to cure such Event of Default
within ten (10) days of receipt of such notice.  Any amounts disbursed by
Investor pursuant to this Section 6(d), with interest thereon, shall become
additional indebtedness of the Company secured by this Section 6.  Unless the
Company and Investor agree to other terms of payment, such amounts shall be
immediately due and payable, and if Investor notifies the Company within five
(5) days of such disbursement, all such amounts shall bear interest from the
date which is ten (10) days following the date of disbursement at the rate
stated in the Note.
 
(e)           Forbearance by Investor Not a Waiver.  Any forbearance by Investor
in exercising any right or remedy hereunder, or otherwise afforded by applicable
law, shall not by a waiver of or preclude the exercise of, any right or
remedy.  The acceptance by Investor of payment of any sum secured by this Note
after the due date of such payment shall not be a waiver of the right of either
Investor to either require prompt payment when due of all other sums so secured
or to declare a default for failure to make prompt payment.  No action taken by
Investor shall waive the right of either Investor to accelerate the indebtedness
secured by this Section 6 and seek such other remedies as are provided by the
Note and/or applicable law.
 
(f)           Uniform Commercial Code Security Agreement.  This Section 6 is
intended to be a security agreement pursuant to the Uniform Commercial Code for
any of the items specified above as part of the Collateral which, under
applicable law, may be subject to a security interest pursuant to the Uniform
Commercial Code of Delaware, California or any applicable jurisdiction where the
Collateral may be located (the “UCC”), and the Company hereby grants Investor a
security interest in said items.  The Company agrees that Investor may file any
appropriate document in the appropriate jurisdiction as a financing statement
for any of the Collateral.  In addition, the Company agrees to execute and
deliver to Investor, upon its request, any financing statements, as well as
extensions, renewals and amendments thereof, and reproductions of this Note in
such form as Investor may require to perfect a security interest with respect to
the Collateral.  The Company shall pay all costs of filing such financing
statements and any extensions, renewal, amendments and releases thereof, and
shall pay all reasonable costs and expenses of any record searches for financing
statements Investor may reasonably require.  Upon the occurrence and during the
continuance of an Event of Default, Investor shall have the remedies of a
secured party under the UCC and may exercise all rights and remedies available
under the UCC and this Note.

 
 

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(g)           Rights of Investor.
 
(i)                 Upon the occurrence of an Event of Default, Investor may
require the Company to assemble the Collateral and make it available to Investor
at the place to be designated by Investor which is reasonable convenient to both
parties.  Investor may sell all or any part of the Collateral as a whole or in
parcels either by public auction, private sale, or other method of disposition
pursuant to UCC.  Investor may bid at any public sale on all or any portion of
the public sale or of the Collateral.  Investor shall give the Company
reasonable notice of the time and place of any public sale or of the time after
which any private sale or other disposition of the Collateral is to be made, and
notice given at least ten (10) days before the time of the sale or other
disposition shall be conclusively presumed to be reasonable.
 
(ii)                 Notwithstanding any provision of this Note, Investor shall
be under no obligation to offer to sell the Collateral.  In the event Investor
offers to sell the Collateral, Investor will be under no obligation to
consummate a sale of the Collateral if, in their reasonable business judgment,
none of the offers received by him reasonably approximates the fair value of the
Collateral.
 
(iii)                 In the event Investor elects not to sell the Collateral,
Investor may elect to follow the procedures set forth in the UCC for retaining
the Collateral in satisfaction of the Company’s obligation, subject to the
Company’s rights under such procedures.  To the extent allowable by the UCC, the
Company agrees to allow Investor to take possession and ownership of all right,
title and interest in and to the TRD study and its contents, results and
documentation without judicial process upon the occurrence of an Event of
Default.  The Company further acknowledges and agrees, after consultation with
its advisors, that in the event the Company becomes a debtor in any bankruptcy
or other insolvency proceeding, whether voluntarily or involuntarily, in
consideration of the significant value and benefits being conferred on the
Company pursuant to the terms of this Note, any automatic stay that may
otherwise apply to Investor in the context of such proceeding is hereby
voluntarily waived as to Investor to the extent necessary to allow Investor to
exercise its rights to foreclose or otherwise take possession and ownership of
all right, title and interest in and to the TRD study and its contents, results
and documentation.
 
(h)           Remedies Cumulative.  Each remedy provided in this Note is
distinct and cumulative to all other rights or remedies under this Note or
afforded by law or equity, and may be exercised concurrently, independently, or
successively, in any order whatsoever.
 
7.      Conversion.
 
(a)           Automatic Conversion.  In the event that the Company consummates,
while the Outstanding Debt is outstanding, an equity financing of not less than
$1,500,000, excluding any and all notes and other liabilities or indebtedness
which are converted, and with the principal purpose of raising capital (a
“Qualified Equity Financing”), then the Outstanding Debt shall automatically
convert into the number of securities issued as part of the Qualified Equity
Financing equal to the quotient of (x) the Outstanding Debt divided by (y) the
Equity Financing Conversion Price.  The securities shall otherwise be issued on
the same terms as such shares are issued to the lead investor that purchases the
securities in the Qualified Equity Financing.  Upon such conversion, Investor
hereby agrees to execute and deliver to the Company all transaction documents
related to the Qualified Equity Financing, including a purchase agreement and
other ancillary agreements having substantially the same terms (other than
price) as those agreements entered into by the other purchasers of the
securities, subject to Investor’s reasonable review and approval.  Investor also
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
Qualified Equity Financing for cancellation; provided, however, that upon
satisfaction of the conditions set forth in this Section 7(a), the Outstanding
Debt shall be deemed converted and the Company shall have no other obligation to
repay the Outstanding Debt, whether or not this Note is delivered for
cancellation as set forth in this sentence.
 
 
 

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(b)           Optional Conversion.  In the event that the Company issues
preferred stock that is not part of a Qualified Equity Financing, Investor may,
at its sole option, convert the Outstanding Debt into the number of shares of
such preferred stock equal to the quotient of (x) the Outstanding Debt divided
by (y) 85% of the lowest per share price for which such preferred stock was
issued (the “Optional Conversion Price”).  Investor may exercise this optional
conversion right by sending notice to the Company any time after the issuance of
the preferred stock for so long as the Outstanding Debt is outstanding.  The
preferred stock shall otherwise be issued on the same terms as such shares are
issued to the largest purchaser of such shares.  Upon such conversion, Investor
hereby agrees to execute and deliver to the Company all transaction documents
related to the purchase of the preferred stock, including a purchase agreement
and other ancillary agreements, if applicable, having substantially the same
terms (other than price) as those agreements entered into by the other
purchasers of the preferred stock, subject to Investor’s reasonable review and
approval.  Investor also 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  for cancellation; provided, however, that upon
satisfaction of the conditions set forth in this Section 7(b), the Outstanding
Debt shall be deemed converted and the Company shall have no other obligation to
repay the Outstanding Debt, whether or not this Note is delivered for
cancellation as set forth in this sentence.
 
(c)           Fractional Shares; Interest; Effect of Conversion.  No fractional
shares shall be issued upon conversion of the Outstanding Debt.  In lieu of the
Company issuing any fractional shares to Investor upon the conversion of the
Outstanding Debt, the Company shall pay to Investor an amount equal to the
product obtained by multiplying the Equity Financing Conversion Price or
Optional Conversion Price, as applicable, by the fraction of a share not issued
pursuant to the previous sentence.
 
8.      Successors and Assigns.  Subject to the restrictions on transfer
described in Sections 10 and 12 below, the rights and obligations of the Company
and Investor shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
 
9.      Waiver and Amendment.  Any provision of this Note may be amended, waived
or modified upon the written consent of the Company and Investor. Any such
amendment, waiver or modification effected in accordance with this paragraph
shall be binding upon the Company and Investor.
 
10.           Transfer of this Note or Securities Issuable on Conversion
Hereof.  With respect to any offer, sale or other disposition of this Note or
securities into which such Note may be converted, Investor will give written
notice to the Company prior thereto, describing briefly the manner thereof,
together with a written opinion of Investor’s counsel, or other evidence if
reasonably satisfactory to the Company, to the effect that such offer, sale or
other distribution may be effected without registration or qualification (under
any federal or state law then in effect, as applicable). Upon receiving such
written notice and reasonably satisfactory opinion, if so requested, or other
evidence, the Company, as promptly as practicable, shall notify Investor that
Investor may sell or otherwise dispose of this Note or such securities, all in
accordance with the terms of the notice delivered to the Company.  Each Note
thus transferred and each certificate representing the securities thus
transferred shall bear a legend as to the applicable restrictions on
transferability in order to ensure compliance with the Act, unless in the
opinion of counsel for the Company such legend is not required in order to
ensure compliance with the Securities Act.  The Company may issue stop transfer
instructions to its transfer agent in connection with such
restrictions.  Subject to the foregoing transfers of this Note shall be
registered upon registration books maintained for such purpose by or on behalf
of the Company.  Prior to presentation of this Note for registration of
transfer, the Company shall treat the registered holder hereof as the owner and
holder of this Note for the purpose of receiving all payments of principal and
interest hereon and for all other purposes whatsoever, whether or not this Note
shall be overdue and the Company shall not be affected by notice to the
contrary.  Notwithstanding the foregoing, Investor may assign this Note or
securities into which such Note may be converted to an affiliated entity without
the prior written consent of the Company so long as such assignment complies
with applicable law.
 
 
 

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11.           Representations and Warranties.
 
(a)           Investor represents and warrants to the Company that the
representations and warranties made by the Investor in Section 3 of the
Agreement are true, correct and complete as of the date hereof.
 
(b)           The Company represents and warrants to Investor that the
representations and warranties made by the Company in Section 2 of the Agreement
are true, correct and complete as of the date hereof.
 
12.           Assignment by the Company.  Neither this Note nor any of the
rights, interests or obligations hereunder may be assigned, in whole or in part
(other than by operation of law) by the Company without the prior written
consent of Investor.
 
13.           Notices.  All notices, requests, demands, consents, instructions
or other communications required or permitted hereunder shall be in writing and
faxed, mailed or delivered to each party at the respective addresses of the
parties as set forth on the signature page to the Agreement, or at such other
address or facsimile number as a party shall have furnished to the other party
in writing.  All such notices and communications will be deemed effectively
given the earlier of (i) when received, (ii) when delivered personally,
(iii) one business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one business day after being deposited with an
overnight courier service of recognized standing or (v) four days after being
deposited in the U.S. mail, first class with postage prepaid.
 
14.           Employees and Agents.  Investor may take any action hereunder by
or through agents or employees so long as such agents or employees are duly
authorized to so act on behalf of Investor.
 
15.           Payment.  Payment shall be made in lawful tender of the United
States.
 
16.           Expenses; Waivers.  If this Note is not paid when due and Investor
takes any action to enforce Investor’s rights hereunder, the Company shall
promptly pay upon demand by Investor all such reasonable costs of collection,
including reasonable attorneys’ fees, whether or not litigation is
commenced.  The Company hereby waives notice of default, presentment or demand
for payment, protest or notice of nonpayment or dishonor and all other notices
or demands relative to this instrument.  The Company also shall pay for all
attorney’s fees incurred by Investor related to the drafting and preparation of
this Note.
 
17.           Governing Law.  This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state; provided, however,
that the perfection of the security interests in the Collateral shall be
governed and controlled by the laws of the relevant jurisdiction or
jurisdictions under the UCC.
 
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The Company has caused this Note to be issued as of the date first written above
and agrees to all the terms set forth above.
 

 
CNS RESPONSE, INC.
             
By:
   
Name:
   
Title:
 

 

Accepted and agreed:       INVESTOR: SAIL VENTURE PARTNERS, LP               By:
    Name:     Title:
 
 

 
Address:      600 Anton Blvd., Suite 1010
Costa Mesa, CA 92626

 
 

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