NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended March 31, 2016 and 2015 respectively.
(Unaudited)
Note 1 Description of business
Organization
Our Company was incorporated in the State of Nevada in 2001, as Neah Power Systems, Inc., and together with its subsidiary, is referred to as the Company, we, us, or our.
Business
We are engaged in the development and sale of renewable energy solutions using our direct methanol micro fuel cell technology, our reformer technology, and our PowerChip® rechargeable battery technology. This allows us to generate hydrogen using our Formira® reformer technology, use that hydrogen, or use methanol directly, using the PowerChip® fuel cell technology, and then store that energy using the PowerChip® battery. Furthermore, the high energy density of the PowerChip battery makes it a very well suited product for consumer and wearable applications, as well as large scale applications. We are developing solutions specifically targeted for the military, transportation vehicles, and portable electronics applications. Our long-lasting, efficient and safe power solutions include devices, such as notebook PCs, military radios, and other power-hungry computer, entertainment and communications products. We use a unique patented, silicon-based design for our micro fuel cells and our PowerChip® battery that create higher power densities and enables lighter-weight, smaller form-factors, and will potentially create more cost effective manufacturing and potentially lower product costs.
Our Formira HOD is a reformer platform for direct on-site generation of hydrogen gas. Customers will be able carry a liquid with a better safety profile and generate hydrogen gas at point of use rather than carrying high pressure hydrogen gas cylinders. The hydrogen is designed to be consumed directly by a fuel cell, using either our PowerChip® silicon based fuel cell, or commercially available proton exchange membrane (PEM) fuel cells. We had also built a very low power, compact fuel cell, call the BuzzCell® , for integration with our BuzzBar® Suite, which is a solar, fuel cell, battery hybrid charging solution for consumers. More recently, we used our PowerChip silicon architecture to develop a rechargeable lithium battery, that has demonstrated high energy density, making it a very suitable product for consumer and wearable applications, as well as larger scale applications where the weight and / or the volume is critical, like automotive applications.
During the first quarter of our 2015 fiscal year, we shipped five systems to the Defense Research and Development Organization (DRDO) of the Government of India, and have built multiple Formira reformer demonstrator units, that we are using for acquisition of customers, and to validate the technology. We have shipped over two hundred BuzzBar® units from our initial low rate initial production (LRIP) , since introduction of the product. The lessons learned from our LRIP production, and feedback on the design, has been incorporated into the design of our next generation product, BuzzBar Gen3. We expect to start manufacturing and shipping BuzzBar Gen 3 on capitalization of the Company.
We currently are doing our battery development at a third party facility in Beaverton, OR, and the Company is primarily focused on the battery development at this time. We are using a variety of consultants for business development, who are located worldwide, and who are compensated based on commercial success. We currently operate out of Edmonds, Washington.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements. The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the fiscal year ended September 30, 2015, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 13, 2016. The information furnished in this Report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of our consolidated financial position, results of operations and cash flows for each period presented. The results of operations for the interim period ended March 31, 2016 may not be indicative of future results.
Use of estimates in the preparation of financial statements
Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates as to the valuation of equity related instruments and valuation allowance for deferred income tax assets.
Consolidation
The consolidated financial statements include the accounts of our Company and our wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated.
7
Table of Contents
Fair value of financial instruments
The carrying value of cash and cash equivalents approximate their fair value (determined based on level 1 inputs in the fair value hierarchy) based on the short-term nature of these financial instruments. The carrying values of the note receivable (before allowance) and notes payable and accrued interest approximate their fair value (determined based on level 3 inputs in the fair value hierarchy) because interest rates approximate market interest rates.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the fiscal and interim reporting periods beginning after December 15, 2017 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. Management is currently evaluating the impact of the Company's pending adoption of ASU 2014-09 on its consolidated financial statements. The effective date of ASU 2014-09 was delayed one year, changed from December 15, 2016 to December 15, 2017 by the FASB in July 2015 although entities can still elect to adopt beginning during fiscal reporting periods, beginning after December 15, 2016.
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15), which provides guidance on managements responsibility in evaluating whether there is substantial doubt about a companys ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 will be effective for the year ended September 30, 2017, with early adoption permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2014-15 on its consolidated financial statements.
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 will be effective for the year ended September 30, 2017, with early adoption permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2015-03 on its consolidated financial statements.
In February 2016, FASB issued Accounting Standards Update No. 2016-02, Leases: Topic 842 (ASU 2016-02) that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Under the new guidance, leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statements of Operations. Lessor accounting is largely unchanged under ASU 2016-02. Adoption of ASU 2016-02 is required for fiscal reporting periods beginning after December 15, 2018, including interim reporting periods within those fiscal years with early adoption being permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is currently evaluating the potential impact of the pending adoption of ASU 2016-02 on its consolidated financial statements.
In March 2016, FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU-2016-09). The updated guidance simplifies and changes how companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of certain items in the statement of cash flows. Adoption of ASU 2016-09 is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years with early adoption being permitted. The Company is currently evaluating the potential impact of the pending adoption of ASU 2016-09 on its consolidated financial statements.
Note 3. Going concern
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of our Company as a going concern
, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The report of our auditors on our Consolidated Financial Statements for our fiscal year ended September 30, 2015 indicates that there is substantial doubt about our ability to continue as a going concern based upon our balance sheet, cash flows and liquidity position. We cannot provide assurance that we will obtain sufficient funds from financing or operating activities to support continued operations or business deployment. Our financial statements for the six months ended March 31, 2016 and 2015 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classifications of liabilities that may result from the outcome of this uncertainty.
Since inception, we have reported net losses, including losses of $4,363,574 and $3,831,809 during the years ended September 30, 2015 and 2014, respectively. We have reported a net loss of $1,377,057 during the six months ended March 31, 2016, and we expect losses to continue in the near future as we grow our operations. At March 31, 2016, we have a working capital deficit of $1,919,173 and an accumulated deficit of $68,108,262.
During the past several years, we have funded our operations through sales of our common and preferred stock, short-term borrowings, and settlement of accounts payable by issuance of common stock. During the six months ended March 31, 2016, we have funded our operations through sales of our preferred stock and debt borrowings. In this regard, during the six months ended March 31, 2016, we raised net cash of $361,164 from our financing activities.
8
Table of Contents
We require additional financing to execute our business strategy and to satisfy our near-term working capital requirements. Our operating expenses will use a significant amount of our cash resources. As of March
31, 2016
, we had $511,108 in accounts payable. Our management seeks to obtain additional financing to fund future operations and to provide additional working capital to fund our business. Without additional funding, our cash is estimated to support our operations through June 2016. We cannot provide assurance that we will obtain sufficient funds from financing or operating activities to support continued operations or business deployment. Without the needed funding or adequate cash flow from operations, we may be forced to curtail our development or cease our operations altogether, which may include seeking protection under the bankruptcy laws.
Note 4. Net Loss per Share
Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. All common stock equivalents are excluded as the effect would be anti-dilutive due to our net losses. The following numbers of shares have been excluded from net loss per share computations for the six months ended March 31, 2016 and 2015, respectively:
|
2016
|
|
2015
|
Convertible Series B Preferred Stock
|
1,161,565,963
|
|
233,633,463
|
Convertible debt
|
1,372,319,166
|
|
191,741,078
|
Common stock options
|
226,288,507
|
|
236,596,007
|
Common stock purchase warrants
|
499,066,382
|
|
328,910,978
|
All of the convertible preferred stock issued is convertible solely at the Companys option. While exercisable, all of the common stock options exercise prices exceed the current market price for common stock.
Note 5. Notes Payable
Notes payable and accrued interest consisted of the following at March 31, 2016 and September 30, 2015:
|
March 31,
2016
|
|
September 30,
2015
|
Convertible debentures
|
$
|
990,678
|
|
$
|
888,510
|
Accrued interest
|
|
75,567
|
|
|
44,570
|
Debt discount
|
|
(477,223)
|
|
|
(72,255)
|
|
$
|
589,022
|
|
$
|
860,825
|
Convertible Promissory Notes Payable Inter Mountain
On May 7, 2014 we received an initial payment on a May 5, 2014 Securities Purchase Agreement with Inter-Mountain Capital Corporation LLC (Inter-Mountain), for the sale of a 5% Secured Convertible Promissory Note in the principal amount of $832,500, which included legal expenses in the amount of $7,500 and a $75,000 original issue discount, for net proceeds of $750,000, consisting of $450,000 paid in cash at closing in May 2014 with the remaining amount of $300,000 funded in March 2015. The outstanding balance of this note in our consolidated balance sheets at December 31, 2015 and September 30, 2015, is zero and $231,010, respectively. The note bore interest at the rate of 5% per annum. All interest and principal was to be repaid on or prior to October 7, 2015. The note, as amended, was convertible into common stock at the lesser of $0.05 per share or 75% (the Conversion Factor) of the average of the three (3) lowest VWAPs in the twenty (20) Trading Days immediately preceding the applicable Conversion (the Market Price), provided that if at any time the average of the three (3) lowest VWAPs in the twenty (20) Trading Days immediately preceding any date of measurement is below $0.01, then in such event the Conversion Factor shall be reduced to 70% for all future Conversions. The Company had the option to prepay the note at the rate of 125%.
9
Table of Contents
We recorded beneficial conversion feature in the amount of $76,706 for the funding paid at initial closing in May of 2014, and an additional $135,178 for the two secured promissory notes funded in March 2015. During the six months ended March 31, 2016 and 2015, we have amortized $5,024 and $31,472, respectively to interest expense in our condensed consolidated statements of operations. During the three months ended December 31, 2015, the Company opted to convert $78,750 of principal and interest into 60,458,806 shares of common stock. On conversion, we recorded a reduction to accrued interest of $2,692, and a reduction to notes payable in the amount of $76,058.
On June 17, 2015 we received an initial payment on a June 16, 2015 Securities Purchase Agreement with Inter-Mountain, for the sale of a 5% Secured Convertible Promissory Note in the principal amount of $832,500, which included legal expenses in the amount of $7,500 and a $75,000 original issue discount, for net proceeds of $750,000, consisting of $150,000 paid in cash at closing and four secured promissory notes payable to the Company, aggregating $600,000, bearing interest at the rate of 5% per annum. On July 31, 2015 one of the secured promissory notes was partially paid and the company received $50,000 and that note has a $100,000 remaining balance. The net value of these notes on our consolidated balance sheet at September 30, 2015 and December 31, 2015, was $227,500 and zero, respectively. The note bore interest at the rate of 5% per annum. All interest and principal was to be repaid on or prior to September 15, 2016. The note was convertible into common stock at the lesser of $0.05 per share or 75% (the Conversion Factor) of the average of the three (3) lowest VWAPs in the twenty (20) Trading Days immediately preceding the applicable Conversion (the Market Price), provided that if at any time the average of the three (3) lowest VWAPs in the twenty (20) Trading Days immediately preceding any date of measurement is below $0.01, then in such event the Conversion Factor shall be reduced to 70% for all future Conversions. The Company had the option to prepay the note at the rate of 125%.
We recorded beneficial conversion feature in the amount of $95,056 for this note during the year ended September 30, 2015. During the six months ended March 31, 2016 and March 31, 2015, we have amortized $67,231 and $0 respectively, to interest expense in our condensed consolidated statements of operations.
These notes were purchased in full in the amount of $388,427.77 by Union Capital LLC on December 16, 2015 (see below). As of March 31, 2016 the Company no longer has a liability to Inter-Mountain Capital Corporation.
Convertible Promissory Note- Rich Niemiec
In December 2014, we issued a convertible promissory note to Rich Niemiec in the amount of $400,000 and warrants to purchase 50,000,000 shares of our common stock at the price of $0.008 per share, subject to adjustment, for proceeds of $400,000. The note is interest bearing at a rate of 10% per annum and had a maturity date of June 18, 2015. The Conversion Price per share of Common Stock shall be the lower of (A) the 10-day trailing volume weighted average price of the Borrowers Common Stock, calculated at time of conversion, or (B) $0.008 (Fixed Price Component) subject to adjustment. The Fixed Price Component of the Conversion Price will be subject to adjustments during the period that the Note is outstanding. Each adjustment shall be at the Holders election, using the 10-day trailing volume weighted average bid price of the Borrowers Common Stock at the time of such election (the New Reference Price). If the New Reference Price is less than the existing Fixed Price Component of the Conversion Price, then the New Reference Price shall be used as the new Fixed Price Component of the Conversion Price subject to a floor of $0.003 per share. This convertible promissory note is senior to all existing debt of the Borrower and is subordinate to any future line of credit backed by the Borrowers accounts receivable and inventory. This convertible note is un-perfected but secured by the assets of the Borrower. Such security interest will be effected upon an Event of Default. The Company recorded a debt discount related to the value of the warrants in the amount of $208,000. The debt discount amount recorded related to the warrants was determined based on the relative fair value of the note payable and the warrants. The fair value of the warrants was determined using the Black-Scholes-Merton model. The Company also recorded a debt discount related to a beneficial conversion feature in the amount of $192,000 for this note. The total debt discount of $400,000 was fully amortized to interest expense in our consolidated statement of operations during the year ended September 30, 2015.
On June 19, 2015, the Company opted for an automatic extension of the maturity date of the Note of six months to December 19, 2015 under the terms of the original agreement. Per these terms, the interest rate increased from 10% per annum to 18% on the outstanding principal balance, and the Company issued a warrant to purchase an additional 52,493,151 shares of common stock at an exercise price of $0.008 per share, pursuant to the terms of the agreement. The fair value of the warrant of $288,712 was determined using the Black-Sholes-Merton model was being amortized to expense over the amended term of the debt with $128,315 amortized to financing costs in our condensed consolidated statement of operations for the six months ended March 31, 2016. Subsequent to December 19, 2015, the Company is currently in discussions with the lender to extend or modify repayment terms.
10
Table of Contents
Convertible Promissory Notes Payable JMJ Financial
On November 4, 2015 we received an initial payment of $30,000 on a Convertible Promissory Note with JMJ Financial , a Nevada sole proprietorship. The note is for an amount of up to $250,000 10% Original Issue Discount (OID) dated October 28, 2015. The Note is interest free if repaid within 90 days of the effective date, otherwise a one time interest charge of 12% shall be applied to the principal balance in addition to the 10% OID. The note was not repaid within 90 days and therefore incurs interest. The maturity date is two years from the effective date of each payment. The note is convertible into common stock at the price lesser of $0.0026 per share or 63% of the lowest trade price in the 25 trading days previous to the conversion.
We recorded beneficial conversion feature in the amount of $20,000 for this note during the six months ended March 31, 2016. During the six months ended March 31, 2016, we have amortized $4,200 to interest expense in our condensed consolidated statements of operations.
December 2015 Convertible Promissory Notes Payable Union Capital
On December 17, 2015 we received proceeds from Union Capital LLC, for the issuance of a 8% Convertible Promissory Note in the principal amount of $170,250 which includes legal expenses in the amount of $70,240.46. In conjunction with the transaction, Union Capital LLC retired the Companys debt obligation to Inter-Mountain Capital LLC in full and we issued a replacement note to Union Capital LLC in the amount of $388,427.77.
The notes bear interest at the rate of 8% per annum. All interest and principal must be repaid on or prior to December 17, 2017. The notes are convertible into common stock at the price of sixty percent (60%) of the lowest trading price in the prior 20 trading days before conversion. The Company had the option to prepay the $170,250 note at the rate of 120% of the face amount if repaid within the first 60 days.
We recorded beneficial conversion feature in the amount of $558,678 for these notes during the six months ended March 31, 2016. During the six months ended March 31, 2016, we have amortized $165,380 to interest expense in our condensed consolidated statements of operations.
During the six months ended March 31, 2016, Union Capital opted to convert $106,000 of principal and $1,364 of interest into 128,850,901 shares of common stock. On conversion, we recorded a reduction to accrued interest of $1,364 and a reduction to notes payable in the amount of $106,000.
February 3, 2016 Convertible Note Payable - Union Capital
On February 3, 2016, we received proceeds from Union Capital LLC, for the issuance of a 8% Convertible Redeemable Note in the principal amount of $28,000, which includes legal expenses in the amount of $2,000.
The note bears interest at the rate of 8% per annum on the unpaid principal balance. All interest and principal must be repaid on or prior to February 3, 2017. The note and interest are convertible into common stock at the price of sixty percent (60%) of the lowest trading price in the prior 20 trading days before conversion. The Company had the option to prepay the $28,000 note at the rate of 120% of the face amount plus any accrued interest if repaid within the first 60 days. If the note is prepaid after 60 days after the issuance date, but less than 121 days after the date of issuance, then the Company can prepay the note at 135% of the face amount plus any accrued interest. If the note is prepaid after 120 days after the issuance date, but less than 180 days after the date of issuance, then the Company can prepay the note at 140% of the face amount plus any accrued interest. This note may not be prepaid after the 6
th
month anniversary.
We recorded beneficial conversion feature in the amount of $28,000 for this note during the six months ended March 31, 2016. During the six months ended March 31, 2016, we have amortized $4,666 to interest expense in our condensed consolidated statements of operations.
February 23, 2016 Convertible Note Payable - Union Capital
On February 23, 2016, we received proceeds from Union Capital LLC, for the issuance of a 8% Convertible Redeemable Note in the principal amount of $50,000, which includes legal expenses in the amount of $2,500 and financing fees of $5,000.
11
Table of Contents
The note bears interest at the rate of 8% per annum on the unpaid principal balance. All interest and principal must be repaid on or prior to February 23, 2017. The note and interest are convertible into common stock at the price of sixty percent (60%) of the lowest trading price in the prior 20 trading days before conversion. The Company had the option to prepay the $50,000 note at the rate of 120% of the face amount plus any accrued interest if repaid within the first 60 days. If the note is prepaid after 60 days after the issuance date, but less than 121 days after the date of issuance, then the Company can prepay the note at 135% of the face amount plus any any accrued interest. If the note is prepaid after 120 days after the issuance date, but less than 180 days after the date of issuance, then the Company can prepay the note at 140% of the face amount plus any accrued interest. This note may not be prepaid after the 6
th
month anniversary.
We recorded beneficial conversion feature in the amount of $50,000 for this note during the six months ended March 31, 2016. During the six months ended March 31, 2016, we have amortized $5,209 to interest expense in our condensed consolidated statements of operations.
Promissory Note - Global Resource Advisors LLC
On September 23, 2015, we settled a trade debt for the issuance of a non-interest bearing note due in 180 days. At any time up to maturity date, the note bearer could have demanded common stock in full satisfaction of the balance. As of the maturity date, March 23, 2016, the note was still unpaid. If the note is unpaid after the maturity date, the company has the option to pay the balance in cash or common stock. The outstanding balance of this note is $30,000 at both March 31, 2016 and September 30, 2015.
Note 6. Preferred Stock and Common Stock
Preferred Stock
- Our board of directors has the authority to designate and issue up to 5,000,000 shares of $0.001 par value preferred stock in one or more series, and to fix and determine the relative economic rights and preferences of preferred shares any or all of which may be greater than the rights of our common stock, as well as the authority to issue such shares without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of the common stock. In addition, shares of preferred stock could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult. As of March 31, 2016, we had one class of preferred stock designated; 2,222,022 shares as Series B preferred stock, leaving 2,777,978 shares of undesignated preferred stock.
Series B Preferred Stock -
As of March 31, 2016 and September 30, 2015, we have 1,198,236 and
1,203,576
shares of Series B preferred stock issued and outstanding, respectively.
Holders of Series B have no redemption rights and each share of Series B is entitled to interest at a simple interest rate of 6% per annum. Series B is convertible, at the discretion of our management, into shares of our common stock, except that the holders of the Series B may elect to convert the Series B into common stock upon or after the resignation or termination of our Chief Executive Officer. The number of shares of common stock issuable upon conversion is calculated by (i) multiplying the number of Series B being converted by the per share purchase price received by the Company for such Series B , and then, multiplying such number by 130% and then dividing this calculated value by the average closing bid price, as defined, or by (ii) first, allocating the Series B proportionately according to the amounts by date of individual cash tranches received by the Company then, second, multiplying the number of Series B being converted, identified by tranche, by the per share purchase price received by the Company for such Series B, and then, multiplying such number or numbers by 130% and, finally, dividing the calculated value(s) by the average closing bid price, as defined. We have the right to redeem the Series B in cash at the face amount plus any accrued, but unpaid dividends.
During the six months ended March 31, 2016, we issued 73,779 shares of Series B preferred stock to Summit Trading Limited at a price per share of $1 for gross cash proceeds of $73,779.
During the six months ended March 31, 2016, we issued 89,875 shares of Series B preferred stock to Sierra Trading Corp at a price per share of $1 for gross cash proceeds of $89,875.
During the six months ended March 31, 2016, the Company opted to convert 83,000 of Series B Preferred Stock together with accrued dividends of $9,446, held by Sierra Trading Corp. into 66,030,614 shares of common stock.
During the six months ended March 31, 2016, the Company opted to convert 85,994 of Series B Preferred Stock together with accrued dividends of $8,562, held by Summit Trading Limited into 69,842,046 shares of common stock.
Pursuant to the terms of the Certificate of Designation of Series B Preferred Stock, redeemed shares are returned to the Companys general designated pool of preferred stock. As of March 31, 2016, there were 1,023,786 shares remaining of Series B Preferred Stock available for issue.
Common Stock
- We are authorized to issue up to 5.4 billion shares of $0.001 par value common stock. Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the holders of our common stock. Subject to the rights of the holders of any class of our capital stock having any preference or priority over our common stock, the holders of shares of our common stock are entitled to receive dividends that are declared by our board of directors out of legally available funds. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in our net assets remaining after payment of liabilities, subject to prior rights of preferred stock, if any, then outstanding. Our common stock has no preemptive rights, conversion rights, redemption rights, or sinking fund provisions, and there are no dividends in arrears or in default. All shares of our common stock have equal distribution, liquidation and voting rights and have no preferences or exchange rights.
12
Table of Contents
Long-term incentive compensation plan
-
Our Long Term Incentive Compensation Plan (the Plan"), as restated, was approved by shareholders in July 2014. The Plan is administered by our board of directors. In July 2014, shareholders also approved an automatic share reserve increase by an amount equal to ten (10%) percent of the common shares available for issuance under the Plan beginning on August 1, 2014, and on each August 1st of the next nine (9) years. The aggregate number of shares available for issuance under the Plan is 393,250,000 as of March 31, 2016. We have granted stock options under the Plan to employees, members of our board of directors, advisors and consultants. No options have been exercised. Options are exercisable for ten years from date of grant.
The following table summarizes stock option activity for the six months ended March 31,2016:
|
Options
Outstanding
|
|
Weighted Average
Exercise Price
|
Outstanding at September 30, 2015
|
232,446,007
|
|
$
|
0.00670
|
Granted
|
-
|
|
|
-
|
Exercised
|
-
|
|
|
-
|
Expired
|
(7,500)
|
|
|
6.67000
|
Forfeited
|
(6,150,000)
|
|
|
0.01215
|
Cancelled
|
-
|
|
|
-
|
Outstanding at March 31, 2016
|
226,288,507
|
|
$
|
0.0053
|
Exercisable at March 31, 2016
|
223,983,507
|
|
$
|
0.0053
|
As of March 31, 2016, the aggregate intrinsic value of options outstanding and options vested, representing the excess of the closing market price of our common stock over the exercise price, are both zero. As of March 31, 2016, we had $20,132 of total unrecognized compensation cost related to unvested options. Unrecognized compensation cost is to be recognized over 19 months with the majority to be recognized in the next fiscal year. We determine the value of share-based compensation using the Black-Scholes-Merton fair value option-pricing model. There were no options granted during the six months ended March 31, 2016.
Warrants
At March 31, 2016, there were warrants outstanding for the purchase of 499,066,382 shares of our common stock at a weighted average exercise price of $0.006 per share.
On November 20, 2015, we issued warrants to purchase 1,000,000, shares of common stock at an exercise price of $0.01 per share, in conjunction with an appointment on an individual to the Companys Strategic Advisory Board. The warrants vested 100% at the time of issuance.
On December 17, 2015, we issued warrants to purchase 1,000,000, shares of common stock at an exercise price of $0.01 per share, to a consultant in conjunction with a consulting agreement. The warrants vested 100% at the time of issuance.
During the three months ending March 31, 2016, we issued warrants to purchase 12,000,000, shares of common stock at an exercise price of $0.0016 per share and 13,000,000, shares of common stock at an exercise price of $0.0029 per share , to consultants in conjunction with consulting agreements. The warrants vested 100% at the time of issuance.
13
Table of Contents
The fair value of the warrants issued was calculated using the Black-Scholes-Merton model. Warrants outstanding at March 31, 2016 expire at various dates from May 2016 to June 2022. A summary of warrant activity during the six months ended March 31, 2016 follows:
|
Warrants
Outstanding
|
Outstanding at September 30, 2015
|
477,542,486
|
Granted
|
27,000,000
|
Exercised
|
-
|
Cancelled
|
-
|
Expired
|
(5,476,104)
|
Outstanding at March 31, 2016
|
499,066,382
|
Note 7. Commitments and Contingencies
Lease
- Our corporate offices and laboratory facilities were leased under a lease agreement amended in November 2011. Under the terms of the lease amendment, the term of the lease continued through October 31, 2013 at a monthly rent of $9,500, plus expenses. Our lease agreement provided for a month-to-month holdover status at the monthly rate of $9,500 plus operating expenses commencing November 1, 2013. The holdover status could be terminated by giving a two month notice to terminate. The facility was vacated during April 2016 and the lease was terminated.
Disputes with various vendors -
Certain of our vendors have brought suits and/or obtained judgments in their favor regarding past due balances owed them by us. We have recorded these past due balances in liabilities in our condensed consolidated balance sheets at March 31, 2016 and September 30, 2015. We do not believe any loss in excess of amounts recorded that could arise would be material. We have not recorded any liabilities for finance charges or legal fees that could be applied by the vendors or lenders to these debts.
Note 8. Related Party Transactions
For purposes of these consolidated financial statements, Summit Trading Limited, Sierra Trading Corp, Green World Trust, and Clean Tech Investors, LLC, are considered related parties due to their beneficial ownership (shareholdings or voting rights) in excess of 5%, or their affiliate status, during the six months ended March 31, 2016 and 2015. All material transactions with these investors and other related parties for the six months ended March 31, 2016 and 2015, not listed elsewhere, are listed below.
During the six months ended March 31, 2016 and 2015, we recorded consulting expense in the amount of $66,000 each period, with Advanced Materials Advisory, LLC (Advanced Materials) for services by David Schmidt as Acting Principal Financial Officer. Advanced Materials is owned by David Schmidt, who was a Member of Neah's Board of Directors as of March 31 2016. The Company has account balances due to Advanced Materials of $224,900 and $170,139 at March 31, 2016 and September 30, 2015, respectively.
Note 9. Subsequent Events
From April 4, 2016 to May 12, 2016, Union Capital converted $54,000 of principal and interest of $1,536 into 113,053,710 shares of common stock in five installments under the Note described in note 5.
In April 2016 the Company entered into a $50,000 Convertible Redeemable Note with Union Capital LLC. The term of this note is one year and carries 8% interest. The note is convertible into common stock at the conversion price of 60% of the lowest trading price in the previous 20 days.
In April and May of 2016, the Company entered into a series of 6-month convertible notes, 8%, that are not allowed to exceed $500,000 in amount. Between April 1, 2016 and May 23, 2016 $186,965 of proceeds were received by the Company pursuant to these notes. The conversion price to be used for these convertible notes is:
14
Table of Contents
The conversion price per share of Common Stock (the Conversion Price) shall be determined (on a pre-Qualified Financing basis) by: (i) calculating the percentage of the entire unpaid principal amount of this Note sought to be converted (the Conversion Percentage); (ii) multiplying the sum of Three Million (3,000,000.00) dollars by the Conversion Percentage (the Conversion Value Amount) ; (iii) then, multiplying the number of issued and outstanding Common Shares of the Company on the Conversion Date by the Conversion Percentage (the Conversion Share Pool), and; (iv) then, dividing the Conversion Value Amount by the Conversion Share Pool. For example, (i) if Holder seeks to convert fifty (50%) percent of Holders One Hundred Thousand ($100,000.00) dollar Note, Holders Conversion Percentage would be 50%; (ii) Holder would then multiply $3,000,000 by 50% and the Conversion Value Amount would be $1,500,000; (iii), then Holder would multiply the outstanding Common Shares, or 500,000,000 (for example) Common Shares, by 50%, the Conversion Percentage, to determine the Conversion Share Pool, or 250,000,000 Common Shares, and; (iv) then, Holder would divide $1,500,000, the Conversion Value Amount, by 250,000,000, the Conversion Share Pool, to determine the Conversion Price of $0.006 per Common Share. In the event that the Borrower consummates a Qualified Financing at a pre-money valuation of less than Three Million (3,000,000.00) dollars, for the purposes of determining the Conversion Price in this Section 1.2, such pre-money valuation (if lower than Three Million (3,000,000) dollars shall replace Three Million (3,000,000.00) dollars in Section 1.2(ii) above.
Between April 1, 2016 and May 17, 2016, 24,000 shares of Series B stock was sold for $24,000.
Substantially all the equipment and leasehold improvements of the Company were sold or scrapped by April 30, 2016. Net proceeds from the sale of equipment was over $30,000.
The Company entered into an agreement with a prospective customer to provide 100 batteries. A $10,000 deposit was received, with the balance of an additional $10,000 to be paid if seven prototype batteries pass tests and certification. Then the order would be completed for 100 units.