Unassociated Document


     

    
 

    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

     

    
      	
              $1,000,000.00

            	 
      	
              June
      12, 2009

            
	 
      	 
      	
              Costa Mesa,
      California

            


    

    


    FOR VALUE
RECEIVED, CNS Response, Inc., a Delaware corporation (the “Company”), promises to pay to
Mr. John Pappajohn (“Investor”, or “Noteholder”), or his
registered assigns, in lawful money of the United States of America, the
principal sum of One Million Dollars ($1,000,000.00), together with a single payment of Ninety Thousand
Dollars ($90,000) (the “Premium
Payment”) to be paid upon
pursuant to Section 2 below.  All unpaid principal,
together with the Premium
Payment and other amounts
payable under this Secured
Convertible Promissory Note (this “Note”) shall be due and payable,
unless converted pursuant
to Section 6 below, on the
earlier of (i) a
declaration by Investor on or after June 30, 2010 (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 granted pursuant to the terms of Section 5 of the
Bridge Note and Warrant Purchase Agreement, dated as of the date hereof between
the Company and Investor (the “Purchase
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 100% 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 other Person
who is the registered holder of this Note.

     

    (d)  “Outstanding Debt” shall mean,
as of a particular time, the sum of (i) the then outstanding principal amount of
this Note and (ii) the Premium Payment.

     

    (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. Premium
Payment.  Subject to Sections 3 and 6, the Premium Payment
shall be payable at the earlier of (i) a declaration by Investor on or after
the Maturity Date that the Outstanding Debt is due and payable, (ii)
prepayment of this Note pursuant to Section 3 below, (iii) conversion of the
Outstanding Debt pursuant to Section 6 and (iv) 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.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    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 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.

     

    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 the Premium Payment on this Note when
due.

     

    (ii) Failure
of the Company to perform or observe any covenant or agreement as required by
this Note and continuation of such failure for a period of ten (10) days
following written notice from Investor.

    (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) George
Carpenter voluntarily or involuntarily terminates his employment with the
Company.

     

    (b) If an
Event of Default occurs and is continuing, Investor may exercise any or all of
the following rights and remedies:

     

    (i) Declare
the Note and the Premium Payment be immediately due and payable, and upon such
declaration, the Note and the Premium Payment 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 5 of
the Purchase Agreement and otherwise available to creditors at law and in
equity.

     

    
      
        
        

      

      
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    6. 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 (excluding the Premium Payment, which would be made in
cash in accordance with Section 2) 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 6(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.

     

    (b) Fractional Shares; 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 by the fraction of a share not
issued pursuant to the previous sentence.

     

    7. Successors and
Assigns.  Subject to the restrictions on transfer described in
Sections 9 and 11 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.

     

    8. 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.

     

    9. 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.  This 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
the Premium Payment 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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    10. Representations
and Warranties.

     

    (a) Investor
represents and warrants to the Company that:

     

    (i) Authorization.  Investor
has full power and authority to enter into this Note.  This Note
constitutes a valid and legally binding obligation of Investor, except as
limited by bankruptcy, insolvency or other laws of general application relating
to or affecting the enforcement of creditors’ rights generally and general
principles of equity.

     

    (ii) Accredited
Investor.  Investor is an “accredited investor” within the
meaning of Rule 501 of Regulation D promulgated under the Securities
Act.

     

    (b) The
Company represents and warrants to Investor that:

     

    (i) Existence of
Company.  The Company is a duly organized Delaware
corporation.  Upon the taking of the actions referred to in Section
4.1 of the Purchase Agreement, the Company will be validly existing in all
jurisdictions where it conducts its business.

     

    (ii) Authority to
Execute.  The execution, delivery and performance by the
Company of this Note and any financing statements hereunder are within the
Company’s corporate powers, have been duly authorized by all necessary corporate
action, do not and will not conflict with any provision of law or organizational
document of the Company (including its Certificate of Incorporation or Bylaws)
or of any agreement or contractual restrictions binding upon or affecting the
Company or any of its property and need no further
stockholder or creditor consent.

     

    (iii) No Stockholder Approval
Required.  No approval of the Company’s stockholders is
required for the issuance of this Note, the granting of the security interest
hereunder or the issuance of any shares of stock upon conversion of this
Note.

     

    (iv) Binding
Obligation.  Upon the taking of the actions referred to in
Section 4.1 of the Purchase Agreement, this Note will be a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, subject, as to enforcement of remedies, to applicable
bankruptcy, insolvency, moratorium, reorganization and similar laws affecting
creditors’ rights generally and to general equitable principles.

     

    (v) Litigation.  Except
as previously disclosed to Investor, no litigation or governmental proceeding is
pending or threatened against the Company which may have a materially adverse
effect on the financial condition,  operations or prospects of the
Company, and to the knowledge of the Company, no basis therefore
exists.

     

    (vi) Intellectual
Property.  To the best of its knowledge, the Company owns or
possesses sufficient legal rights to all patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes necessary for its business as now conducted and
as presently proposed to be conducted, without any known infringement of the
rights of others.  There are no outstanding options, licenses or
agreements of any kind relating to the foregoing proprietary rights, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information and other proprietary rights and processes
of any other person or entity other than such licenses or agreements arising
from the purchase of “off the shelf” or standard products.

     

    
      
        
        

      

      
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    11. 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.

     

    12. 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 hereto, 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.

     

    13. 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 the Investor.

     

    14. Payment.  Payment
shall be made in lawful tender of the United States.

     

    15. Pari Passu
Notes.   Investor acknowledges and agrees that the payment
of the Outstanding Debt under this Note shall be pari passu in right of
payment, to the notes issued to SAIL Venture Partners, LP (“SAIL” or “Noteholder”), dated March 30,
2009 and May 19, 2009 in the aggregate principal amount of $450,000
(collectively, the “SAIL
Note”), as provided for in the Intercreditor Agreement, dated as of the
date hereof, between Investor and SAIL.

     

    16. Relationship
Between Noteholders.  For so long as this Note and either SAIL
Note are outstanding, Investor covenants to consult with and act in concert with
SAIL, or the registered holder of the SAIL Notes in exercising any rights and
remedies available to it under the Uniform Commercial Code (the “UCC”) and Section 5 of this
Note and Section 5 of the Purchase Agreement and (ii) either Investor or SAIL,
individually, may act on behalf of both Investor and SAIL under the terms of
this Note in the event SAIL has the written consent of Investor to so
act.  In the event this Note remains outstanding but either SAIL Note
is not outstanding, (i) all rights and remedies of Investor under this Note
shall remain applicable to the Investor and (ii) all action required under this
Note to be taken by both Investor and SAIL may be taken solely by the
Investor.

     

    17. 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.

     

    18. 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.

     

    19. Effectiveness.  This
Note shall become effective upon the execution by the Company and
Investor.

     

    [Remainder
of Page Intentionally Left Blank]

     

     

    
      
        
        

      

      
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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: 	George
      Carpenter	 
	 	Its:  	Chief
      Executive Officer	 


                     

                     

                     

                     

                     

                     

                     

                    	 	Address: 	2755
      Bristol Street, Suite 285	 
	 	 	Costa
      Mesa, CA 92626	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 


                  

                

              

            

          

        

      

    

     

     

    


     

     

     

     

    Accepted
and agreed:

    


    INVESTOR:

     

    


                                                              


         Mr. John
Pappajohn

    


    
      	
              Address: 

            	
              2166
      Financial Center

              Des Moines,
    IA   50309

            


    

    
    

    
      
         


      

      
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