NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Reporting Status
On May 15, 2017, the Company chose to file a Form 15, terminating its obligation to file current, quarterly and annual SEC reports. The Company intends to maintain its non-reporting status for the foreseeable future (see Note 13 Subsequent Events)
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 silicon based 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 silicon based rechargeable lithium battery. 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 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.
With our Formira hydrogen on demand system, a reformer platform for direct on-site generation of hydrogen gas, customers will be able to 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 silicon based fuel cell, or commercially available proton exchange membrane (PEM) fuel cells.
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 Bothell, Washington.
Due to the greater commercial interest in rechargeable battery systems, we are primarily focusing our limited resources on the development and marketing of our lithium battery technology while at the same time exploring licensing opportunities for the fuel cell and hydrogen markets.
Note 2
Summary of significant accounting policies
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 the Company and our wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated.
Cash and cash equivalents and restricted cash
We consider all highly liquid investments purchased with maturities of three months or less to be cash equivalents. We place our cash balances with high credit quality financial institutions. At times, such balances may be in excess of the FDIC insurance limit. Restricted cash is reported separately and not reported as cash and cash equivalents. Restricted cash is reserved as collateral against a bank issued company credit card.
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
In the normal course of business, we decide to extend credit to certain customers without requiring collateral or other security interests. Management reviews its accounts receivable at each reporting period to provide for an allowance against accounts receivable for an amount that could become uncollectible. This review process may involve the identification of payment problems with specific customers. Periodically we estimate this allowance based on the aging of the accounts receivable, historical collection experience, and other relevant factors, such as changes in the economy and the imposition of regulatory requirements that can have an impact on the industry. These factors continuously change, and can have an impact on collections and our estimation process.
Contingencies
Certain conditions may exist as of the date financial statements are issued, which may result in a loss but which will only be resolved when one or more future events occur or do not occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to pending legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a liability has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable would be disclosed.
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 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.
Property and equipment
Property and equipment is stated at cost. Additions and improvements that significantly add to the productive capacity or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over three to five years. Leasehold improvements are amortized over the lesser of the estimated remaining useful life of the asset or the remaining lease term.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows that we expect to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. We have not recognized any impairment.
Income taxes
We account for income taxes using an asset and liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that we expect to realize. We continue to provide a full valuation allowance to reduce our net deferred tax asset to zero, inasmuch as we have not determined that realization of deferred tax assets is more likely than not. Any provision for income taxes would represent the tax payable for the period and change during the period in net deferred tax assets and liabilities.
Debt discount
We record the value of original issue discounts associated with notes payable on issuance and the recognized value of beneficial conversion feature of debt securities as a debt discount, which is presented net of related notes payable on the consolidated balance sheets and amortized as an adjustment to interest expense over the borrowing term.
Research and development expense
Research and development costs are expensed as incurred.
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share based compensation
We use the Black-Scholes-Merton option pricing model as our method of valuation for stock-based option and warrant awards. Stock-based compensation expense is based on the value of the portion of the stock-based award that will vest during the period, adjusted for expected forfeitures. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual or updated results differ from our current estimates, such amounts will be recorded in the period the estimates are revised. The Black-Scholes-Merton option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results. Our determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected life of the award and expected stock price volatility over the term of the award. Stock-based compensation expense is recognized on a straight-line basis over the applicable vesting period (deemed the requisite service period) based on the fair value of such stock-based awards on the grant date.
Revenue recognition
In general, we recognize revenue when we have persuasive evidence of an arrangement, the services/goods have been provided or delivered to the customer, the price is fixed and determinable, no significant unfulfilled obligations exist, and collectability is reasonably assured. Revenue from research and development arrangements is recognized either (a) as performance is estimated to be completed which is based on factors such as costs or direct labor hours of the project, or (b) using the milestone method if the contractual milestones in the arrangement are determined to be substantive. Each research and development arrangement is analyzed to determine the appropriate revenue recognition method to be utilized. Estimates of performance completion are reviewed on a periodic basis and are subject to change, and changes could occur in the near term. If an estimate is changed, revenue could be impacted significantly. Payments received in excess of amounts earned are recorded as deferred revenue. Revenue from the sale of products and prototypes is generally recognized after both the goods are shipped to the customer and acceptance has been received, if required. Our products are shipped complete and ready to be incorporated into higher-level assemblies by our customers. The terms of the customer arrangements generally pass title and risk of ownership to the customer at the time of shipment. Revenue for the year ended September 30, 2015 included $172,285 from a customer located in India.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation. There has been no impact on previously reported net loss or stockholders deficit from such reclassifications.
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. With no current revenue streams, it is not determinable what the impact of ASU 2014-09 will be. 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 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 and the Company will implement any changes at that time.
In April 2015, the 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. The Company does not expect adoption of ASU 2015-03 to have a material impact on its consolidated financial statements. Upon adoption of ASU 2015-03, deferred loan fees that have historically been recorded as assets will be recorded as a debt discount and netted against the related debt in the consolidated balance sheet.
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the 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, the 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. In future years, the Company will implement any changes as prescribed in this update.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). The updated guidance clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. Adoption of ASU 2016-15 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years with early adoption being permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18) which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The amended guidance requires that amounts that are deemed to be restricted cash and restricted cash equivalents be included in the cash and cash-equivalent balances in the statement of cash flows. A reconciliation between the consolidated balance sheet and the statement of cash flows must be disclosed when the consolidated balance sheet includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. The guidance also requires that changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows. An entity with a material balance of amounts generally described as restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years with early adoption being permitted. The Company is evaluating the potential impact on its consolidated financial statements.
In June 2018, the FASB issued Accounting Standards Update No. 2018-07, Compensation Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The updated guidance seeks to simplify several aspects of the accounting for nonemployee share-based payment transactions. The Company is evaluating the potential impact on its consolidated financial statements.
Note 3
Going concern
The accompanying 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. Since inception, we have reported net losses, including losses of $2,418,835 and $4,363,574 during the years ended September 30, 2016 and 2015, respectively, and we expect losses to continue in the near future as we grow our operations. At September 30, 2016, we have a working capital deficit of $2,614,501, and an accumulated deficit of $69,150,040. Net cash used by operating activities was $878,548 and $1,956,157 during the years ended September 30, 2016 and 2015, respectively. We have funded our operations through sales of our common and preferred stock, short-term borrowings and long-term borrowings. In this regard, during the year ended September 30, 2016, we raised a net amount of $872,582 from our financing activities. These factors raise substantial doubt about our ability to continue as a going concern.
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. Our management intends to raise additional financing to fund future operations and to provide additional working capital to further fund our growth. There is no assurance that such financing will be obtained in sufficient amounts necessary or on terms favorable or acceptable to us to meet our needs. In the event that we cannot obtain additional funds, on a timely basis or our operations do not generate sufficient cash flow, we may be forced to curtail our development or cease our activities. Subsequent to September 30, 2016, we have received additional investment (see note 13).
The accompanying consolidated financial statements 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.
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Common stock equivalents for 2016 and 2015 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 fiscal years ending September 30, 2016 and 2015, respectively:
S
hares
|
2016
|
|
2015
|
Convertible preferred stock
|
922,007,111
|
|
661,749,257
|
Convertible debt
|
1,538,616,111
|
|
364,953,649
|
Common stock options (see note 9)
|
163,931,804
|
|
232,446,007
|
Common stock purchase warrants (see note 9)
|
492,574,124
|
|
477,542,486
|
All of the convertible preferred stock issued is convertible solely at the Companys option. Convertible debt payments are either to be made in cash or in converted shares. (Please see Notes 8 and 9 for specific provisions of convertible of preferred stock and debt instruments.) While being exercisable, all of the common stock options exercise prices exceed the current market price for common stock.
Note 5 Property and equipment
Property and equipment consisted of the following at September 30, 2016 and 2015, respectively:
|
September 30,
2016
|
|
September 30,
2015
|
Laboratory equipment
|
$
|
425,900
|
|
$
|
1,149,219
|
Computer hardware and software
|
|
114,016
|
|
|
213,376
|
Leasehold improvements
|
|
0
|
|
|
579,641
|
Total property and equipment
|
$
|
539,916
|
|
$
|
1,942,236
|
|
|
|
|
| |
Accumulated depreciation and amortization
|
|
(494,141)
|
|
|
(1,872,033)
|
|
|
|
|
|
|
Net property and equipment
|
$
|
45,775
|
|
$
|
70,203
|
Note 6 Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets consist of the following at September 30, 2016 and 2015, respectively:
Prepaid Assets
|
2016
|
|
2015
|
Insurances
|
$
|
6,090
|
|
$
|
14,904
|
Deposits
|
|
13,540
|
|
|
23,298
|
Advanced Payments on Manufactured Product
|
|
13,143
|
|
|
13,143
|
Other
|
|
6,989
|
|
|
12,351
|
Total
|
$
|
39,762
|
|
$
|
63,696
|
Note 7 Accrued compensation due executive officers and board of directors
Due to working capital limitations, we have deferred payments of compensation to our Chief Executive Officer and former Chief Financial Officer, our former Acting Principal Financial Officer and to members of our board of directors, which are included in accrued compensation and related expenses in the accompanying consolidated balance sheets. Accrued compensation due to executive officers and board of directors consisted of the following:
|
September 30, 2016
|
|
September 30, 2015
|
Due to officers
|
$
|
475,232
|
|
$
|
475,972
|
Due to directors
|
|
236,821
|
|
|
184,821
|
Total
|
$
|
712,053
|
|
$
|
660,793
|
Of the balance of the $747,947 and $719,540 in accrued compensation and related expenses in the consolidated balance sheets at September 30, 2016 and 2015, $60,506 and $57,803 respectively is related to accrued paid time off and to accrued payroll taxes on deferred compensation. Included in the $475,232 and $475,972 due to officers at September 31, 2016 and 2015 respectively, is $0 and $170,139, respectively, owed to Advanced Materials Advisory LLC and $60,500 and $0, respectively, owed to Jeffrey A May, PC (see note 12).
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 Notes payable
Notes payable and accrued interest consisted of the following:
|
September 30,
2016
|
|
September 30,
2015
|
Convertible debentures
|
$
|
1,285,133
|
|
$
|
888,510
|
Accrued interest
|
|
156,180
|
|
|
44,570
|
Debt discount
|
|
(219,158)
|
|
|
(72,255)
|
Total
|
$
|
1,222,155
|
|
$
|
860,825
|
Issuance of Convertible Promissory Notes 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 September 30, 2016, 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 was below $0.01, then in such event the Conversion Factor would 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 $76,706 for the funding paid at initial closing in May of 2014, and an additional $135,178 for the amount funded in March 2015. During the years ended September 30, 2016 and 2015, we amortized $5,024 and $178,539 respectively, to interest expense for these notes in our consolidated statements of operations. During the year ended September 30, 2016, 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. During the year ended September 30, 2015, the Company opted to convert $561,093, of principal and interest into 152,134,000 shares of common stock. On conversion, we recorded a reduction to accrued interest of $27,735, and a reduction to notes payable in the amount of $533,358. During the year ended September 30, 2015, The Company also opted to pay one installment of $69,375 in cash and recorded a reduction to accrued interest of $1,243, and a reduction to notes payable in the amount of $68,132.
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 includes 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 had a $100,000 remaining balance. The outstanding net balance of these notes on our consolidated balance sheets at September 30, 2016, and September 30, 2015, is zero and $227,500, 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 was 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 years ended September 30, 2016 and 2015, we amortized $67,231 and $27,825, respectively to interest expense in our consolidated statements of operations.
On December 16, 2015, these notes were paid in full in the amount of $388,427.77 and replaced in the full amount by a note with Union Capital (see below). As of September 30, 2016 the Company no longer has a liability to Inter-Mountain.
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was interest bearing at an initial rate of 10% per annum and had a maturity date of June 18, 2015. The Conversion Price per share of Common Stock would have been 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 would have been subject to adjustments during the period that the Note is outstanding. Each adjustment would have been 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 was less than the existing Fixed Price Component of the Conversion Price, then the New Reference Price would have been used as the new Fixed Price Component of the Conversion Price subject to a floor of $0.003 per share. This convertible promissory note was senior to all existing debt of the Borrower and was subordinate to any future line of credit backed by the Borrowers accounts receivable and inventory. This convertible note was un-perfected but secured by the assets of the Borrower. Such security interest would have been affected 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 for the year ended September 30, 2015. The outstanding balance of this note in our consolidated balance sheet is $400,000 at both September 30, 2016 and 2017.
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 and was being amortized to expense over the amended term of the debt with $128,315 and $160,397 amortized to financing costs in our consolidated statements of operations for the years ended September 30, 2016 and 2015 respectively. Subsequent to September 30, 2016, this obligation has been paid in full (see note 13).
Convertible Promissory Note 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 was for an amount of up to $250,000 10% Original Issue Discount (OID) dated October 28, 2015. The Note was interest free if repaid within 90 days of the effective date, otherwise a one-time interest charge of 12% would be applied to the principal balance in addition to the 10% OID. The note was not repaid within 90 days and therefore incurred interest. The maturity date was to be two years from the effective date of each payment. The note was 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 year ended September 30, 2016. During the year ended September 30, 2016, we amortized $20,000 to interest expense in our consolidated statement of operations.
This note was fully converted to stock by election of note holder during the year ended September 30, 2016, with 122,148,135 shares of stock issued to the note holder, paying off the principal balance of $30,000 and accrued interest of $7,333
.
December 2015 Convertible Promissory Notes Payable Union Capital
On December 17, 2015 we received proceeds from Union Capital LLC (Union Capital), for the issuance of an 8% Convertible Promissory Note in the principal amount of $170,250 which included legal expenses in the amount of $70,240. In conjunction with the transaction, Union Capital retired the Companys debt obligation to Inter-Mountain Capital LLC in full and we issued a replacement note to Union Capital in the amount of $388,428.
The notes bear interest at the rate of 8% per annum. All interest and principal was to have been repaid on or prior to December 17, 2017. The notes were 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 year ended September 30, 2016. During the year ended September 30, 2016, we have amortized $385,295 to interest expense in our consolidated statement of operations.
During the year ended September 30, 2016, Union Capital opted to convert $291,003 of principal and interest into 980,438,264 shares of common stock. On conversion, we recorded a reduction to accrued interest of $9,003 and a reduction to notes payable in the amount of $282,000.
The outstanding balances of these notes were $276,678 at September 30, 2016. Subsequent to September 30, 2016, this obligation was paid in full (see note 13).
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 3, 2016 Convertible Note Payable Union Capital
On February 3, 2016, we received proceeds from Union Capital, for the issuance of an 8% Convertible Redeemable Note in the principal amount of $28,000, which included legal expenses in the amount of $2,000.
The note bore interest at the rate of 8% per annum on the unpaid principal balance. All interest and principal was to have been repaid on or prior to February 3, 2017. The note and interest were 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 was prepaid after 60 days after the issuance date, but less than 121 days after the date of issuance, then the Company would have prepaid the note at 135% of the face amount plus any accrued interest. If the note was prepaid after 120 days after the issuance date, but less than 180 days after the date of issuance, then the Company would have prepaid the note at 140% of the face amount plus any accrued interest. This note could 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 year ended September 30, 2016. During the year ended September 30, 2016, we amortized $18,664 to interest expense in our consolidated statement of operations.
The outstanding balance of this note was $28,000 at September 30, 2016. Subsequent to September, 30, 2016, this obligation was paid in full (see note 13).
February 23, 2016 Convertible Note Payable Union Capital
On February 23, 2016, we received proceeds from Union Capital, for the issuance of an 8% Convertible Redeemable Note in the principal amount of $50,000, which included legal expenses in the amount of $2,500 and financing fees of $5,000.
The note bore interest at the rate of 8% per annum on the unpaid principal balance. All interest and principal was to be repaid on or prior to February 23, 2017. The note and interest were 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 was prepaid after 60 days after the issuance date, but less than 121 days after the date of issuance, then the Company would have prepaid the note at 135% of the face amount plus any accrued interest. If the note was prepaid after 120 days after the issuance date, but less than 180 days after the date of issuance, then the Company would have prepaid the note at 140% of the face amount plus any accrued interest. This note could 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 year ended September 30, 2016. During the year ended September 30, 2016, we amortized $30,211 to interest expense in our consolidated statement of operations.
The outstanding balance of this note was $50,000 at September 30, 2016. Subsequent to September, 30, 2016, this obligation was paid in full (see note 13).
April 01, 2016 Convertible Note Payable Union Capital
On April 2016, we received proceeds from Union Capital, for the issuance of an 8% Convertible Redeemable Note in the principal amount of $50,000, which included legal expenses in the amount of $2,500 and financing fees of $5,000.
The note bore interest at the rate of 8% per annum on the unpaid principal balance. All interest and principal was to be repaid on or prior to April 01, 2017. The note and interest were 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 note terms included the following penalties: if the note was paid within 60 days of issuance date, then it could be paid off at 120% of the face amount plus any accrued interest, if the note was paid after 60 days after the date of issuance but less than 121 days after the issuance date, then the note would have been paid off at 135% of face plus any accrued interest, if the note was paid off after 120 days after the issuance date but less than 180 days after the issuance date, then the note would have been paid off at 140% of the face amount plus any accrued interest. This note could not be prepaid after the 6th month anniversary.
We recorded beneficial conversion feature in the amount of $33,333 for this note during the year ended September 30, 2016. During the year ended September 30, 2016, we have amortized $16,683 to interest expense in our consolidated statement of operations.
The outstanding balance of this note was $50,000 at September 30, 2016. Subsequent to September, 30, 2016, this obligation was paid in full (see note 13).
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Table of Contents
NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six-Month Convertible Promissory Notes
A series of six month notes were issued to various individuals and entities for bridge funding during the year ended September 30, 2016. The notes were of various amounts, from $1,000 to $125,000, totaling $405,455 all of which was outstanding at September 30, 2016. The due dates of these notes ranged from October 19, 2016 to January 17, 2017. The notes bear interest at the rate of 8% per annum on the unpaid principal balance and are secured by the assets of the Company.
The Holder of each note shall have the right, from time to time, commencing upon the Issue Date to convert all or any part of the outstanding and unpaid principal amount of this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion price. The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount by the Conversion Price on the date specified in the notice of conversion.
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. 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, such pre-money valuation if lower than Three Million (3,000,000) dollars shall replace Three Million (3,000,000.00) dollars above. There was no beneficial conversion feature on these notes.
Please see Note 13 for additions, amendments, and conversions of these notes subsequent to September 30, 2016.
Promissory Note Global Resource Advisors LLC
During the year ended September 30, 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 03/23/2016 maturity date the note was still unpaid. Since the note is unpaid after the maturity date, the Company has the option to pay the balance in cash or common stock. The Company is currently in discussions with the note holder to extend or modify repayment terms.
The outstanding balance of this note was $30,000 at both September 30, 2016 and September 30, 2015.
Promissory Note MediaTech Capital Partners LLC
During the year ended September 30, 2016, we entered into an agreement MediaTech Capital Partners LLC (MediaTech). In return for providing strategic and advisory consulting services for up to one year, MediaTech was to be compensated in the form of a convertible note, as mutually agreed upon by MediaTech and us. As of September 30, 2016, the amount due MediaTech was $45,000 and we are still negotiating the terms of the note with MediaTech. Please see Note 13 for activity subsequent to September 30, 2016.
Note 9 Preferred stock and common stock
Preferred Stock
Our board of directors (the Board) 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, the Board 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. Preferred stock is designated 2,222,022 shares to Series B at September 30, 2016 (2,222,022 at September 30, 2015). As of September 30, 2016, there were 2,777,978 shares of undesignated preferred stock.
Series B Preferred Stock
Holders of Series B preferred stock (Series B) have no redemption rights and earn interest at 6% per annum.
In 2016, the Series B holders agreed and the Board took action to terminate the voting rights provisions of the Series B stock. Prior to this action, the holders of the Series B were entitled to vote with the holders of our common stock a number of votes equal to the number of common shares available by conversion. In March 2018, the holders of Series B agreed and the Company took action to reinstate the Series B voting rights to the original terms.
Series B is convertible into common stock, at the sole discretion of management, except in the event of the resignation or termination of Dr. Gerard C. DCouto, our current President and Chief Executive Officer in which case the holders of the Series B could elect to convert the Series B stock to common stock.
The Company may at any time redeem the Series B in cash at the face amount plus any unpaid dividends.
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The number of shares of common stock to be issued upon a 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.
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 September 30, 2016, there were 842,792 shares remaining of Series B Preferred Stock available for issue.
During the year ended September 30, 2016, the Company opted to convert 168,994 shares of Series B preferred stock and associated accrued dividends into 135,872,660 shares of common stock pursuant to the terms of the Series B certificate of designation. Also during the same period, the Company issued 187,654 shares of Series B preferred stock to investors under Securities Purchase Agreements in return for a total of $187,654 in cash. As of September 30, 2016, the Company had 1,222,236 shares of Series B issued and outstanding.
During the year ended September 30, 2015, the Company opted to convert 753,874 shares of Series B preferred stock and associated accrued dividends into 156,010,181 shares of common stock pursuant to the terms of the Series B certificate of designation. Also during the year ended September 30, 2016, the Company issued 642,462 shares of Series B preferred stock to investors under Securities Purchase Agreements in return for a total of $642,463 in cash. As of September 30, 2015, the Company had 1,203,576 shares of Series B issued and outstanding.
All sales of Series B preferred stock during the years ended September 30, 2016 and 2015 were to Summit Trading LLC (Summit) and Sierra Trading Corp (Sierra).
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 the Board 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.
Common stock issued for settlement of liabilities or conversion of notes payable
During the years ended September 30, 2016 and September 30, 2015, we issued 1,163,045,205 and 152,134,000 shares, respectively, valued at $407,086 and $561,093, respectively, on conversion of notes payable and related accrued interest. The carrying value of the notes that were converted during the years ended September 30, 2016 and 2015 amounted to $407,086 and $561,093, respectively. There was no loss on settlement of liabilities recorded in the consolidated statements of operations for either year.
Common stock issued in connection with fees associated with notes payable
In March 2015, the Company issued 3,750,000 shares as a partial payment to Carter, Terry & Company for placement agency services. We recorded $24,000 to financing costs in the consolidated statement of operations for the year ended September 30, 2015 for this transaction. In June 2015, the Company issued 2,181,818 shares of common stock as a partial payment to Carter, Terry & Company for placement agency services. We recorded $12,000 to financing costs in the consolidated statement of operations for the year ended September 30, 2015 for this transaction.
See Note 8 for additional equity transactions in connection with fees associated with notes payable.
Common stock issued for services
During the years ended September 30, 2016 and 2015, we issued 10,761,094 and 6,646,113 shares of our common stock, respectively, valued at $176,518 and $54,375, respectively, to service providers and consultants recorded as marketing and sales expense.
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Table of Contents
NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Board. 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 589,875,000 as of September 30, 2016. We have granted stock options under the Plan to employees, members of the Board, 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 during the years ended September 30, 2016 and September 30, 2015:
|
Options
Outstanding
|
|
Weighted Average
Exercise Price
|
Outstanding at September 30, 2014
|
236,096,007
|
|
$
|
0.0065
|
Granted
|
4,600,000
|
|
|
0.0088
|
Forfeited
|
(8,250,000)
|
|
|
0.0153
|
Cancelled
|
-
|
|
|
-
|
Expired
|
-
|
|
|
-
|
Outstanding at September 30, 2015
|
232,446,007
|
|
$
|
0.0067
|
Granted
|
-
|
|
|
-
|
Forfeited
|
(68,506,703)
|
|
|
0.00697
|
Cancelled
|
-
|
|
|
-
|
Expired
|
(7,500)
|
|
|
6.6667
|
Outstanding at September 30, 2016
|
163,931,804
|
|
$
|
0.0057
|
Exercisable at September 30, 2016
|
163,931,804
|
|
$
|
0.0057
|
There were no options granted during the year ended September 30, 2016. The weighted average fair value of the options granted during the year ended September 30, 2015 was $0.0088 per share. The weighted average remaining contractual lives of outstanding and exercisable options at September 30, 2016 was 6.6 years. As of September 30, 2016, we had no unrecognized compensation cost related to unvested options. As of September 30, 2016, the aggregate intrinsic value of options outstanding and exercisable, representing the excess of the closing market price of our common stock over the exercise price, was $0. Stock-based compensation expense related to options was $24,374 and $301,066 during the years ended September 30, 2016 and 2015, respectively, of which $0 and $75,020 was recognized as general and administrative expense, $24,374 and $134,877 was recognized as marketing and sales expense, and $0 and $91,169 was recognized as research and development expense in 2016 and 2015, respectively. We determine the value of share-based compensation using the Black-Scholes-Merton fair value option-pricing model with weighted average assumptions for options granted during the year ended September 30, 2015 including risk-free interest rate of 1.33%, volatility of 247%, expected lives of 5.75 years, and dividend yield of 0%.
Warrants
At September 30, 2016, we had warrants outstanding for the purchase of 492.6 million shares of our common stock at a weighted average exercise price of $0.0055 per share. The fair value of the warrants is calculated using the Black-Scholes-Merton model. Warrants outstanding at September 30, 2016 expire at various dates from May 2017 to June 2022.
A summary of warrant activity during the years ended
September 30, 201
6 and
201
5 are as follows:
|
Warrants Outstanding
|
Outstanding at September 30, 2014
|
368,585,978
|
Granted
|
443,756,376
|
Exercised
|
-
|
Expired
|
(334,799,868)
|
Cancelled
|
-
|
Outstanding at September 30, 2015
|
477,542,486
|
Granted
|
28,200,000
|
Exercised
|
--
|
Expired
|
(13,168,362)
|
Cancelled
|
--
|
Outstanding at September 30, 2016
|
492,574,124
|
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28,200,000 warrants granted during the year ended September 30, 2016. All were granted to consultants in exchange for services to be provided. All but 900,000 of these warrants have vested as of September 30, 2016.
Of the 443,756,376 warrants granted during the year ended September 30, 2015, 270,263,225 warrants were granted to our CEO and certain board members to replace 60,270,692 previous warrants set to expire in September 2015, in exchange for continued commitment to accrue director fees/wages, continued commitment to assist the Companys capital raising efforts and commitment to continue rendering services to the Company during the current underfunded period. These warrants were fully vested on grant and thus, there was not deemed to be a requisite service period and we recorded the full fair value of these warrants of $918,626 to expense in the year ended September 30, 2015. The fair value was determined by using the Black-Scholes-Merton option pricing model.
Note 10 Income taxes
We have recorded no provision or benefit for income taxes. The difference between tax at the statutory rate and no tax is primarily due to the full valuation allowance. The valuation allowance increased by $637,332 and $1,269,238 during the years ended September 30, 2016 and 2015, respectively. A valuation allowance has been recorded in the full amount of total deferred tax assets as it has not been determined that it is more likely than not that these deferred tax assets will be realized. As of September 30, 2016, we have net operating loss carry forwards of $56.1 million, which begin to expire in 2023 and will continue to expire through 2036 if not otherwise utilized. Our ability to use such net operating losses and tax credit carry forwards is subject to annual limitations due to change of control provisions under Sections 382 and 383 of the Internal Revenue Code, and such limitation would be significant. Realization is dependent on generating sufficient taxable income prior to expiration.
Deferred income taxes represent the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.
Significant components of our deferred tax assets and liabilities and related valuation allowances at September 30, 2016 and, 2015 are as follows:
Deferred Taxes
|
2016
|
|
2015
|
Net operating loss carry forward
|
$
|
19,622,226
|
|
$
|
19,068,950
|
Share-based compensation
|
|
3,024,470
|
|
|
2,964,454
|
R&D Tax Credit Carry forward
|
|
953,928
|
|
|
953,928
|
Other
|
|
288,274
|
|
|
264,235
|
TOTAL DEFERRED TAX ASSETS
|
|
23,888,898
|
|
|
23,251,567
|
|
|
|
|
| |
Deferred Tax Liability
|
|
(528,808)
|
|
|
(528,808)
|
Valuation Allowance
|
|
(23,360,090)
|
|
|
(22,722,759)
|
Deferred Tax Assets & Liabilities, net
|
$
|
-
|
|
$
|
-
|
We have identified our federal tax return as our major tax jurisdiction, as defined. Tax years from 2011 are subject to audit. We believe our income tax filing positions and deductions will be sustained on audit and we do not anticipate any adjustments that would result in a material change to our financial position. No reserves for uncertain income tax positions have been recorded. Our policy for recording interest and penalties associated with uncertain income tax positions is to record such items as a component of interest expense.
Note 11 Commitments and contingencies
Lease and Facilities
Our rent expense for the years ended September 30, 2016 and 2015 was $90,092 and $159,127, respectively. As of September 30, 2016, we do not have any lease commitments. In March 2015, we entered into a consulting agreement with Polaris Laboratories for $2,000 per month to provide consulting services along with access to laboratory facilities where some of our equipment is stored. This agreement can be discontinued with 30 days notice. The remaining personal property assets are being stored in a local, Seattle area storage facility on a month-to-month agreement at minimal cost.
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Table of Contents
NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
From time to time, the Company is subject to various legal proceedings that arise in the ordinary course of business. In the opinion of management, none of which are currently material to our operations.
Disputes with various vendors
Certain of our vendors and lenders 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 consolidated balance sheets at September 30, 2016 and 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.
Accounts Payable reduction
During the years ending September 30, 2016 and 2015, the Company reduced accounts payable by $125,092 and $331,560, respectively, that the Company determined it no longer had a legal obligation to the vendors based upon the vendors legal status and the applicable legal statutes. A gain of $125,092 and $303,646, respectively, was recognized in our consolidated statements of operations for the years ended September 30, 2016 and 2015
Note 12 Related party transactions
For purposes of these consolidated financial statements, Summit, Sierra and Green World Trust, are considered related parties due to their beneficial ownership (shareholdings or voting rights) in excess of 5%, or their affiliate status, during the years ended September 30, 2016 and 2015. All material transactions with these investors and other related parties for the years ended September 30, 2016 and 2015, not listed elsewhere, are listed below.
During the year ended September 30, 2016, the Company opted to convert 83,000 shares of Series B into 66,030,614 shares of common stock per the Series B certificate of designation for Sierra in three separate tranches.
During the year ended September 30, 2016, the Company opted to convert 85,994 shares of Series B into 69,842,046 shares of common stock per the Series B certificate of designation for Summit in three separate tranches.
During the year ended September 30, 2015, the Company opted to convert 250,789 shares of Series B, together with dividends in the amount of $16,486, into 57,336,304 shares of common stock per the Series B certificate of designation for Sierra in one tranche.
During the year ended September 30, 2015, the Company opted to convert 503,085 shares of Series B, together with dividends in the amount of $29,677, into 98,673,877 shares of common stock per the Series B certificate of designation for Summit in three separate tranches.
All sales of Series B during the years ended September 30, 2016 and 2015 were to Summit and Sierra.
During the years ended September 30, 2016 and 2015, we recorded consulting expense in the amount of $66,000 and $132,000, respectively, 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 also a member of the Board until March 2016. The Company had account balances with Advanced Materials Advisory LLC of $224,900 and $170,139 at September 30, 2016 and 2015, respectively, included in liabilities. Effective March 31, 2016, Mr. Schmidt resigned from the Board and as Acting Principal Financial Officer.
On April 15, 2016, the Company appointed Jeffrey A. May as Chief Financial Officer and principal financial officer of the Company effective as of that date. In the year ended September 30, 2016, we recorded $55,000 in expense for his services in these roles. The Company had an account balance of $60,500 with Mr. May as of September 30, 2016, included in liabilities in the consolidated balance sheet.
Note 13 Subsequent events
Due to the capital constraints and the costs associated with being an SEC reporting company and maintaining its public status, the Company chose to file a Form 15 on May 15, 2017, terminating its obligation to file current, quarterly and annual SEC reports. The Company intends to maintain its non-reporting status for the foreseeable future, and will evaluate its various options based upon future business development. At the request of the Financial Industry Regulatory Agency (FINRA), the Company is filing this Form 10-K and the Form 10-Q for the following quarter to make our filings current as of the filing date of the Form 15.
Subsequent to September 30, 2016, the Company has satisfied all loan obligations with Union Capital through conversions to common stock and cash payments in payment of principal and interest. In May 2017, the Company paid $439,678 in cash against the loans, of which $285,728 was applied to principal and $153,950 to interest. In July 2017, Union Capital opted to convert $42,664 of principal and interest into 237,019,787 shares of common stock, of which $35,000 was applied against principal and $7,664 to accrued interest. In April 2018, Union Capital opted to convert $30,864 of principal and interest into 257,199,566 shares of common stock of which $22,825 was applied against principal and $8,039 to accrued interest. In April and June 2018, the Company paid $23,065 in remaining principal and interest, of which $15,960 was applied against principal and $7,105 to accrued interest.
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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the period from October 2016 through May 2017, the Company entered into an additional series of Six Month Convertible notes (see Note 8) and received proceeds of $458,500. These notes carry the same terms and 8% interest rate as the earlier notes and are secured by the assets of the Company. In total, the Company has received $864,000 in proceeds from these convertible notes. During the period from April 2017 and through March 2018, the Company entered into amendments to extend the original maturity dates for $496,500 of these agreements with interest accruing during such periods at the rate of ten (10%) percent, per annum thereafter, if not paid in full or if not converted in full into the Borrowers Common Stock on or before the extended maturity date, the Promissory Note maturity date would be automatically extended for an additional six (6) months with interest accruing during such period at the rate of twelve (12%) percent, per annum. In March 2018, the Company and investors of $819,000 of the bridge notes entered into a Convertible Note Settlement Agreement whereby the notes would be converted into 549,607 shares of the new Class A Common Stock. The Company is negotiating with the remaining note holders to also convert the remaining $45,000 in notes.
In April 2017, the Company entered into a securities purchase agreement with Image Securities FZC to sell 370,000,000 shares of the Companys common stock for a total of $5 million, beginning with an initial $1,000,000 followed by $200,000 per month for 20 months. In May 2018, the Company entered into an amended agreement with the investor to instead purchase 1,162,000 shares of Class A Common Stock for the $5 million investment. As of the date of this report, the Company has received $2,200,000 from this investor for 511,280 shares of Class A Common Stock.
In May 2017, the Company paid the $400,000 principal balance Rich Niemiec in cash. The Company has also issued 26,700,000 of common stock in payment of $154,236 in accrued interest.
In August 2017, the Company entered into a Trade Debt Settlement Agreement and Promissory Note with MediaTech where, in exchange of a trade debt balance of $45,000, the Company agreed to issue 3,462,000 shares of common stock in settlement of the obligation.
In September 2017, Jeffrey May resigned as Chief Financial Officer and principal financial officer.
In February 2018, the Company entered into an agreement to sell 1,622,400 shares of its new Class A Common Stock when authorized to an investor from Dubai, United Arab Emirates for a purchase price of $2,000,000. In May 2018, the Company and the investor agreed to an amendment committing an additional 597,100 shares of Class A Common Stock for a purchase price of $716,520. As of the date of this report, the Company has received $700,000 in proceeds from this investor.
In March of 2018, the Company filed with the State of Nevada an Amendment to Certificate of Designation After Issuance of Class or Series which restored the common stock voting rights of holders of Series B to state the holders of the Series B Preferred Stock will be entitled to vote with the Companys Common Stock with the number of votes equal to the number of common shares available by conversion to the holders of the Series B Preferred Stock as calculated in Section 9(c)(ii).
In March 2018 upon approval by the Board, owners of a majority of the Companys outstanding voting shares, voted to amend its Articles of Incorporation to authorize 15,000,000 new Class A Common Shares (Class A Common Stock). The shares shall rank senior to the Companys common stock and any class or series of capital stock in case of distribution of the assets of the Corporation in the event of liquidation. The Class A Common Stock shall be entitled to a dividend, accruing at the simple interest rate of 10%, payable in cash or shares of Class A Common Stock upon declaration by the Board. The holders of the Class A Common Stock will be entitled to twenty thousand (20,000) votes per share and will be entitled to vote with the Companys Common Stock on all matters properly brought before the shareholders of the Company. In April 2018, the Company filed with the State of Nevada an Amendment to Certificate of Designation After Issuance of Class or Series to affect these changes. In addition, the Company also amended its Articles of Incorporation to change its name to XNRGI, Inc. In May 2018, owners of a majority of the Company's voting shares approved these actions. The name change is pending FINRA approval.
In March 2018, the Board approved the 2018 Class A Common Shares Stock Plan (the Plan) which permits the Company to grant various types of stock incentive awards. The Plan reserves an aggregate 4,800,000 shares of Class A Common Stock for awards under the Plan. In May 2018, owners of a majority of the Company's voting shares approved the Plan.
In May 2018, the Company entered into an agreement to sell 71,429 shares of its new Class A Common Stock to an investor from Dubai, United Arab Emirates for a purchase price of $100,000. As of the date of this report, the Company has received the $100,000 in proceeds from this investor.
In May 2018, the Company entered into an agreement with Summit and Sierra to convert all shares of Series B to shares of the new Class A Common Stock. Summit holds 592,542 shares of Series B to be converted into 228,571 shares of Class A Common Stock. Sierra holds 629,695 shares of Series B to be converted into 265,637 shares of Class A Common Stock.
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