UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: September 30, 2014

OR

¨            TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-49962

(Exact name of registrant as specified in its charter)

(425) 424-3324

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Exchange Act:

 Common Stock, $0.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨   No x 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨  No x 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x   No ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No ¨ 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of a “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   (Check One)

Overview

Neah Power Systems, Inc. (NPWZ) is engaged in the development and sale of renewable energy solutions using proprietary fuel cell technology. Our fuel cells are designed to replace existing rechargeable and non-rechargeable battery technology in a variety of applications. We are developing solutions specifically targeted for the military, transportation, and portable electronics applications, and are continuing to pursue additional applications for our technology. 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 are developing two classes of fuel cells, one referred to as the PowerChip™  and the other as the BuzzCell™. We are also developing a hydrogen gas generating reformer technology referred to as Formira™.  The PowerChip™ is a silicon based fuel cell that uses traditional computer chip manufacturing to build the fuel cell.  The BuzzCell™  product was developed during the last two years using some processing steps of the PowerChip™  technology and using polymeric materials for a lower cost, consumer oriented product. The PowerChip™  is targeted for applications where the quality of the surrounding air is unpredictable or not available like diesel-fumes contaminated environments or underwater applications. The BuzzCell™  product uses air from the surrounding environment and is targeted for consumer-oriented and less aggressive applications for lower power ranges. The Company is also developing Formira™, a reformer platform for direct on-site generation of hydrogen gas. Customers will be able carry a liquid with a more acceptable safety profile and generate hydrogen gas at point of use rather than carrying high pressure hydrogen gas cylinders.  Our technology and its applications have been validated both by our own research and customer results. We believe our fuel cells will outperform lithium ion batteries and other similar power sources, with longer run time, shorter recharge time, ease of portability, and other measures of performance. We anticipate that our fuel cell solution will be particularly beneficial in applications requiring the use of more than one battery because the user will only need to use a single fuel cell with a supply of smaller fuel cartridges, resulting in reduced overall size and weight.

We have an intellectual property portfolio consisting of 14 issued patents, 8 patents pending, that are being developed and various trade secrets for our proprietary technology.  We use a unique, patented and award winning, silicon-based design for our Powerchip™  micro fuel cells that enable higher power densities, lower cost and compact form-factors. The PowerChip™  technology has been recognized for both its innovativeness and its application potential from noted sources including the 2012 ZINO Green finalist, the 2010 WTIA finalist, 2010 Best of What’s New Popular Science and other awards.

Strategy and Current Business

Along with our on-going efforts to develop and improve our technology, we have sought out interested third parties and potential customers to purchase and validate our products and to explore potential sales and licensing opportunities. In 2012 we delivered a commercial system based on the PowerChip™  platform to a Fortune 150 US Defense Supplier.  The defense supplier is exploring the use of our PowerChip™  fuel cell for a range of applications including soldier power, remote power stations, and unmanned underwater and aerial vehicles. We have submitted grants jointly with this defense supplier and expect results from these submissions.  We also shipped PowerChip™  and BuzzBar™  products to a Fortune 110 Consumer company and continue to have dialog with this customer. In October 2013, we received a purchase order from the Defense Research and Development Organization (DRDO) of the Government of India for multiple units. In November 2013 we acquired certain fuel cell assets from Clean Tech Investors, LLC along with a direct investment into the Company. These assets open up other large markets that Neah intends to serve going forward.  Earlier in the year the company accepted pre-orders for BuzzBar™  products and in August 2014 began shipping BuzzBar™  products both to those who ordered and to larger retail potential partners.

This success was made possible by our efforts to advance the development and maturity of our systems, improve design, and test longevity of the fuel cell and completion of a closed loop, self-contained system, not requiring the availability of oxygen from the environment. This “anaerobic” system is an important differentiating feature of our PowerChip™  fuel cell technology. The “non-air breathing” feature of creating its own oxygen allows operation in a wide range of environmental conditions that is not dependent upon temperature, humidity, or particulate. This would include extreme environments, such as underwater, high atmospheric, or particulate or gaseous contaminated conditions.  This is an important feature for underwater, aerial, and other mission critical applications. The fuel cell is insensitive to relative humidity and temperature only to the extent of the freezing point of the fuel itself.

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The BuzzBar™  product is based on an Anion Exchange Membrane, and uses some processing steps from the PowerChip™  technology to build a cost effective product for consumer oriented applications.  We intend to discuss our BuzzBar™  technology in more detail as we implement patent protection around this technology.

Our PowerChip™  technology was developed to address various issues seen with the incumbent PEM-based direct methanol fuel cells. We believed an entirely new design approach was necessary to achieve the power density, manufacturability, cost and reliability, and the unique ability to operate in anaerobic (non air-breathing) environments required by portable electronic devices and transportation applications. Furthermore, since our design is based largely on standard silicon wafer processing, we believe that it should have significant manufacturing advantages over traditional fuel cells. Compared to competing direct methanol fuel cell technologies that use carbon-based electrodes and solid PEM’s, we believe that our fuel cell’s silicon-based approach will deliver higher power output, lower cost for the equivalent size of fuel cell, a cost efficient manufacturing model that is used by the semiconductor industry, and aerobic and anaerobic operations.

Comparison between Porous Silicon Fuel Cells and PEM-Based Designs

We believe that the principal advantages of our PowerChip™  approach over PEM-based designs include:

We believe that the principal disadvantages of our approach consist of the following factors:

As an ongoing effort to increase the competitiveness of our product, we are focused on the following continuous improvement programs that we believe will further enhance the performance differentiation of our fuel cell, reduce the cost, and enhance manufacturability and increase lifetime and reliability:

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Readers should carefully consider the risks described below in evaluating our business, prospects and results of operations and before making an investment decision in our common stock. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations and financial results. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected.

Risks Related to Our Business

We need to raise significant additional capital to continue our business operations.

Our current monthly cash operating expenses are approximately $210,000. We have no significant revenues and we expect that our current cash will last us only through December 2014. Accordingly, we will need to raise financing to fund our operations. In the event we are unable to obtain the additional financing required to meet our cash needs, on a timely basis, we will have to reduce or curtail operations which would materially and adversely affect our development efforts, and we may need to seek protection under the bankruptcy laws. Even if such financing is obtained, it may not be on commercially acceptable terms or may otherwise substantially dilute the equity interests of our current shareholders.

Our auditors have issued a “going concern” modification in their report on our Consolidated Financial Statements.

The auditors’ report on our Consolidated Financial Statements as of September 30, 2014 and 2013 indicates that there is substantial doubt about our ability to continue as a going concern based upon our accumulated deficit and negative working capital at September 30, 2014, our recurring net losses, and the cash used in operations for the year ended September 30, 2014. We may be unable to obtain sufficient funds from financing activities or our planned operations to support our continued business. If we cannot continue as a going concern, we may need to substantially revise our business plan, cease operations, sell or seek protection under the bankruptcy laws.

We have incurred net losses each year since our inception and had accumulated losses of approximately $ 62.4 million through September 30, 2014. We expect to continue to incur net losses at least through our fiscal year 2015 and these losses may be substantial. To implement our business strategy, we will continue to incur considerable research and development expenses and capital expenditures. Accordingly, if we are unable to generate substantial revenues to cover these expenses we will not achieve profitability.

Commercialization, market acceptance, and productization risks

We are transitioning from a developmental organization to a commercialization organization. Neah has traditionally focused on development of the PowerChip™  technology and has a pilot-scale facility in Bothell to manufacture units. As the Company transitions to commercialization of the technology, there are risks related to the Company’s ability to hire and retain the appropriate talent, ability to scale up the output using internal or outsourced manufacturing, ability of our suppliers to supply the needed quality and quantity of subcomponents, and other raw materials used in our fuel cells and to do it in a cost effective fashion. Fuel cells are a disruptive technology that requires customer and market acceptance.

The fuel cell market is an emerging market, and the adoption by defense, commercial and consumer markets is in the early stages. There is no guarantee of adoption, and further more, cost effectiveness, customer adoption, government regulation and other restrictions could inhibit the adoption of fuel cell technology. As the Company focuses on commercialization of the technology, our quarterly operating results are likely to fluctuate significantly in the future. Fluctuations in our quarterly financial performance may result from research and development costs, increased sales, general and administrative (SG&A) expenses, and the predictability will be very low of sales orders, contracts, and follow business and other commercial opportunities.

Technical risks

Neah’s technology acceptance requires customers and markets to accept a new paradigm for the operation of fuel cells. The Company also strives to continuously improve its products, and there is the risk of the Company not achieving certain milestones or completion of commercial systems.  Methanol, which is flammable, is the fuel of choice for this class of fuel cells by the Company, as well as its competitors. The energy from the methanol is extracted using an electrochemical reaction which does not include combustion. While the Company intends to package the systems so that they are virtually leak proof, there can be no assurance that will not be manufacturing defects that cause of these acids whose concentrations are comparable to “wet” batteries. The availability and price of methanol would affect the adoption of the fuel cell technology. Our business exposes us to the risk of harmful substances escaping into the environment, resulting in personal injury or loss of life, damage to or destruction of property, and natural resource damage. Our business is subject to numerous federal, state and local laws, regulations and policies that govern environmental protection. These laws and regulations have changed frequently in the past and it is reasonable to expect additional changes in the future, and we are not currently insured against such risks.

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The intellectual property is the primary asset of the Company. Our ability to compete effectively will depend, in part, on our ability to maintain the exclusive ownership of our technology and manufacturing processes through a combination of patent and trade secret protection, non-disclosure agreements and other arrangements. Patents may not be issued under pending applications and any issued patents that we hold may not provide adequate protection for our products or processes. Moreover, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States and any resulting patents may be difficult to enforce. There can be no assurance that our competitors will not either independently develop proprietary information that is the same or similar to ours or obtain access to our proprietary information. In addition, there can be no assurance that we would prevail if challenges to our intellectual property rights were asserted by third parties against us.

As a result of a government grant, the U.S. government will obtain rights in certain of our technology, including inventions, developed with their funding. In addition, the U.S. government may require us to grant to a third party an exclusive license to any inventions resulting from the grant if the government determines that we have not taken adequate steps to commercialize the inventions. The rights of the U.S. government may adversely impact sales or license of our products.

Risks Related to Our Common Stock

We could issue a significant amount of common stock or a series of preferred stock that would dilute and adversely affect our shareholders.

Our amendment to the articles of incorporation authorize the issuance of 1,800,000,000 shares of common stock and 5,000,000 shares of “blank check” preferred stock, with designations, rights and preferences that may be determined from time to time by our board of directors, which may be superior to those attached to the common stock. As of the date of this Annual Report on Form 10-K, we have the following designated classes of preferred stock:

Our stock price is volatile, and we do not intend to pay any cash dividends.

There is a very limited public market for our common stock. We cannot predict the extent to which, or if, investor interest will lead to the development of an active and liquid trading market. If a market for our common stock develops, the price at which our common stock will trade may be highly volatile and may fluctuate as a result of a number of factors, including the number of shares available for sale in the market, variations in our actual and anticipated operating results, our failure to timely achieve technical milestones or to commercialize our fuel cell systems, changes in technology or competitive fuel cell solutions, and our failure to meet analysts’ performance expectations.

We have not paid any cash dividends on our common stock and we do not intend to declare and pay any cash dividends on our common stock. Stock markets, particularly the OTCBB where our stock is currently traded, have experienced extreme price and volume fluctuations, and the market prices of securities of technology companies have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may not be able to resell their shares on a timely basis if at all, and may lose some or all of their investment.

Our common stock is subject to penny stock rules.

Our common stock is subject to the SEC regulations for “penny stock.” Penny stock includes any non-Nasdaq or other exchange listed equity security that has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock; a disclosure schedule set forth by the SEC relating to the penny stock market must be delivered to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for the common stock. The regulations also require that monthly statements be sent to holders of penny stock, which disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock.

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In addition, our common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell our common stock to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 (exclusive of the value of their primary residence) or annual incomes exceeding $200,000 individually, or $300,000 together with their spouse)). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their shares of such common stock.

None.

Our corporate offices and laboratory facilities are located at 22118 20th Ave SE, Suite 142, Bothell Washington, where we lease approximately 2,000 square feet of office space and 4,053 square feet of laboratory space. As of November 1, 2011 we entered into an amended lease agreement with the landlord to extend our lease through October 31, 2013. As of November 1, 2013, Neah has a holdover month-to-month agreement with the landlord at no change in monthly rent. (Please see Note 13 to our Notes to Consolidated Financial Statements). The average monthly rental payment including utilities and operating expenses for the facility is approximately $12,000 per month. We believe that the leased facility is in good condition and adequate to meet our current and anticipated requirements.

From time to time, we become subject to legal proceedings and other claims that arise in the ordinary course of business. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict. An unfavorable resolution of one or more of these lawsuits would materially adversely affect our business, results of operations, or financial condition. The need to defend any such claims could require payments of legal fees and our limited financial resources could severely impact our ability to defend any such claims.

As of September 30, 2014 we remained a party to certain judgments and legal actions related to failure to pay outstanding invoices on Accounts Payable, representing a total liability of approximately $164,000 which is included in our financial statements as Accounts Payable. We continue to work with these vendors to negotiate and settle these debts, based on available cash resources.

                Not applicable.

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As a smaller reporting company, we are not required to provide the information required by this item.

Overview and Background

The following management’s discussion and analysis is intended to provide information necessary to understand our audited condensed consolidated financial statements and highlight certain other financial information, which in the opinion of management, will enhance a reader’s understanding of our financial condition, changes in financial condition, and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material changes in our financial condition and operating results during the year ended September 30, 2014, compared to the year ended September 30, 2013. Operating results for the year ended September 30, 2014 are not necessarily indicative of the results that may be expected for any future period. Investors should read the following discussion and analysis in conjunction with our audited financial statements and related notes for the year ended September 30, 2014.

We are developing two classes of fuel cells, one referred to as the PowerChip™ and the other as the BuzzCell™. The PowerChip™ is a silicon based fuel cell that uses traditional computer chip manufacturing to build the fuel cell. The BuzzCell™ product was developed during the last two years using some processing steps of the PowerChip™ technology and using polymeric materials for a lower cost, consumer oriented product. The PowerChip™ is targeted for applications (anaerobic) where the quality of the surrounding air is unpredictable or not available like diesel-fumes contaminated environments or underwater applications. The BuzzCell™ product uses air from the surrounding environment and is targeted for consumer-oriented and less aggressive applications for lower power ranges. The Company is also developing Formira™, 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.  Our technology and its applications have been validated both by our own research and customer results. We believe our fuel cells will outperform lithium ion batteries and other similar power sources, with longer run time, shorter recharge time, ease of portability, and other measures of performance. We anticipate that our fuel cell solution will be particularly beneficial in applications requiring the use of more than one battery because the user will only need to use a single fuel cell with a supply of smaller fuel cartridges, resulting in reduced overall size and weight.

We have an intellectual property portfolio consisting of 14 issued patents, 8 patents pending, that are being developed and various trade secrets for our proprietary technology.  We use a unique, patented and award winning, silicon-based design for our Powerchip™  micro fuel cells that enable higher power densities, lower cost and compact form-factors. The PowerChip™  technology has been recognized for both its innovativeness and its application potential from noted sources including the 2012 ZINO Green finalist, the 2010 WTIA finalist, 2010 Best of What’s New Popular Science and other awards.

Our business model includes the potential to license the manufacturing of our fuel cells or to purchase product directly from the Company. Previously, our business plan had an outsourced manufacturing business model, subcontracting to third parties substantially all of the production and assembly. The shift to emphasize a licensing strategy, while continuing an outsourced manufacturing model, is intended to further leverage existing third-party manufacturing capacity in the semiconductor industry.  We also intend to design and distribute the fuel cartridges that these fuel cells require for refueling. We anticipate that we will generate future revenues from the sale and licensing of both fuel cartridges and the completed fuel cells. Our business plan contemplates that we will subcontract to third parties substantially all of the production and assembly of the fuel cells and fuel cartridges.

For the PowerChip™  technology, we are focusing our initial sales strategy on markets requiring anaerobic or low oxygen content environments, such as underwater, transportation, aerospace and military applications. Our product focus for fiscal 2015 will be directed to our business with the large US defense supplier and the proposal to the commercial aviation provider, as well as fuel cell range extenders for electric and other recreational vehicles.  For the PowerChip™  and the BuzzBar™  suite of products, we will also continue to pursue adoption in the consumer markets. While the size of the consumer markets is very significant, the adoption cycle can be much longer than the other markets that we are currently focused on.

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The deployment of our business strategy has been delayed during 2013 and 2014 by the availability of capital and our inability to raise sufficient capital to fund ongoing operations, sales and marketing and production. Assuming we are able to continue to obtain sufficient financing, we intend to focus on production and delivery of products to customers and sales efforts. We intend to continue to develop business relationships and demonstrate our technology to potential leading edge adopters.

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 $3,831,809 and $2,385,899 during the years ended September 30, 2014 and 2013, respectively, and we expect losses to continue in the near future as we grow our operations. At September 30, 2014, we have a working capital deficit of $1,132,228, and an accumulated deficit of $62,367,631. Net cash used by operating activities was $2,513,568 and $745,966 during the years ended September 30, 2014 and 2013, respectively. We have funded our operations through sales of our common and preferred stock, and short-term borrowings. In this regard, during the year ended September 30, 2014, we raised a net amount of $2,954,488 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.

Recent Financing Activities

On November 21, 2013, we issued 36,901,400 shares of our common stock to Clean Tech Investors, LLC, at a price per share of $0.019 and received gross proceeds of $700,000 under the terms of a Security Purchase Agreement.

In December 2013, we issued 36,000 shares of Series B Preferred Stock to Summit Trading Limited at a price per share of $1 and received gross proceeds of $36,000 under the terms of a Security Purchase Agreement.

On March 28, 2014, we issued 475,119 shares of Series B Preferred Stock to Sierra Trading Corp at a price per share of $1 and received gross proceeds of $475,119 under the terms of a Security Purchase Agreement.

On March 28, 2014, we issued 237,270 shares of Series B Preferred Stock to Summit Trading Limited at a price per share of $1 and received gross proceeds of $237,270 under the terms of a Security Purchase Agreement.

On May 15, 2014, we issued 250,789 shares of Series B Preferred Stock to Sierra Trading Corp at a price per share of $1 and received gross proceeds of $250,789 under the terms of a Security Purchase Agreement.

On June 9, 2014, we issued 229,816 shares of Series B Preferred Stock to Summit Trading Limited at a price per share of $1 and received gross proceeds of $229,816 under the terms of a Security Purchase Agreement.

On June 11, 2014, we issued 33,333,333 shares of our common stock to John de Neufville at a price per share of $0.015 and received gross proceeds of $500,000 under the terms of a Security Purchase Agreement. We also issued two three year warrants, one to purchase 8,333,333 shares of common stock with an exercise price of $0.003 per share, and one to purchase 3,333,333 shares of common stock with an exercise price of $0.0375.

On June 30, 2014, we issued 85,994 shares of Series B Preferred Stock to Summit Trading Limited at a price per share of $1 and received gross proceeds of $85,994 under the terms of a Security Purchase Agreement.

Liquidity and Capital Resources

We used cash of $2,513,568 in our operating activities in the year ended September 30, 2014, compared to $745,966 in the same period in 2013. During the year ended September 30, 2014, our use of cash was offset by $690,395 for the payment of services with equity instruments and $73,713 by the amortization of certain debt discounts.  We also incurred a non-cash loss of $403,133 related to losses on debt settlements. During the year ended September 30, 2014, we incurred changes in operating assets and liabilities of $ 10,563 that off set our use of cash.

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We used $44,458 for investing activities related to fixed asset purchases and received $64,327 in proceeds from sales of fixed assets in the year ended September 30, 2014, compared to zero in the same period in 2013.  Changes in cash from investing activities in 2014 reflect net capital proceeds of $15,869.

Our financing activities provided cash of $2,954,488 in the year ended September 30, 2014 compared to $529,167 in the same period in 2013. During the year ended September 30, 2014, we:

·     sold common stock and received net proceeds of $1,200,000;

·     sold Series B preferred stock and received net proceeds of $1,314,988; and

·     received proceeds from convertible debentures, net of payments of principals, of $437,500

·     received net proceeds from warrant exercise of $2,000.

Results of Operations

Year Ended September 30, 2014, Compared to Year Ended September 30, 2013

Revenues for the years ended September 30, 2014 and 2013 were $1,787 and $149,179 respectively. Fiscal year 2014 consisted of sales of various BuzzBar and related products to individuals. In fiscal year 2013 revenue is predominately from a multi year development contract with a customer.

Research and development expenses (“R&D”) consist primarily of salaries and other personnel-related expenses, facilities costs, and other laboratory and research related expenses. Total R&D costs for the year ended September 30, 2014 increased by $734,749 to $1,300,265 from $565,516 for the same period in 2013.  The increase was primarily due to increase in R&D salaries and wages of $262,080, an increase in project expenses of $423,391 and an increase in facilities cost and depreciation expense of $49,278.

Marketing and sales expenses (“Marketing”) consist primarily of salaries and other personnel-related expenses, marketing, patent expenses, public relations consultants, and other related expenses to market products and prepare for placement of product into market. Total Marketing costs for the year ended September 30, 2014 increased by $274,133, to $823,685 from $549,552 for the same period in 2013.  The increase was primarily due to increase in Marketing salaries, wages, benefits and stock compensation of $101,004 to $293,765 from $192,761, an increase in marketing, patent expense, public relations consultants and other related expenses of $173,129 to $529,920 from $356,791.

General and administrative expenses (“G&A”) consist primarily of salaries and related expenses for our management, finance and related personnel, professional fees, such as accounting and legal, corporate insurance and facilities costs, and non-employee members of our board of directors.  G&A expenses decreased to $932,017 from $1,093,637 for the same period in 2013.  The decrease in G&A expense in the year ended September 30, 2014 of $161,620 was primarily due to the following:

Interest expense decreased by $71,011 for the year ended September 30, 2014 to $100,061 compared with $171,072 in the same period in fiscal 2013. The decrease in the year ended September 30, 2014 compared with the same period in 2013 was primarily due to lower debt discount costs amortized to interest expense in 2014.

Financing costs increased $239,794 to $276,694 from $36,900, recorded in the same period in 2013.  The increase in the year ended September 30, 2014 compared with the same period in 2013 was primarily due to increased costs of acquiring new debt in 2014.

Loss on settlements of liabilities increased $345,411 to $403,133 from $57,722, recorded in the same period in 2013.  The increase in the year ended September 30, 2014 compared with the same period in 2013 was primarily due to increased share issuances necessary to settle debt with stock and warrants.

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We are not certain how the current economic downturn may affect our business. Because of the global recession, government agencies and private industry may not have the funds to purchase its power systems. It may also be more difficult for us to raise capital in the current economic environment. Other than as discussed herein, the Company does not know of any material trends, events or uncertainties that may impact its operations in the future.

Critical Accounting Policies and Estimates

We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. Our critical accounting policies include revenue recognition, accounting for research and development costs, accounting for contingencies, accounting for income taxes, and accounting for share-based compensation. For a more detailed discussion on our accounting policies, see Note 2 to our Consolidated Financial Statements.

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. At September 30, 2014 there is $20,244 of deferred revenue included in other liabilities on the consolidated balance sheet ($10,601 at September 30, 2013).  Revenue from the sale of products 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.

Research and development expense

Research and development costs are expensed as incurred.

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 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.

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.

Off-Balance Sheet Arrangements

As of September 30, 2014 we did not have any off-balance sheet arrangements.

As a smaller reporting company, we are not required to provide the information required by this item.

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The information required by this Item is set forth in our Consolidated Financial Statements and Notes thereto beginning at page F-1 of this Annual Report on Form 10-K.

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See Notes to Consolidated Financial Statements

F-2

See Notes to Consolidated Financial Statements

F-3

NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

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 formic acid fuel cell technology and our reformer technology. Our fuel cells are designed to replace existing rechargeable battery technology in a variety of applications and can run in either aerobic or anaerobic modes. 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 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.

We are developing two classes of fuel cells, one referred to as the PowerChip™  and the other as the BuzzCell™  product. The PowerChip™ is a silicon based fuel cell that uses traditional computer chip manufacturing to build the fuel cell. The BuzzCell™  product was developed during the last two years using some processing steps of the PowerChip™  technology and using polymeric materials for a lower cost, consumer oriented product. The PowerChip™  is targeted for applications (anaerobic) where the quality of the surrounding air is unpredictable or not available like diesel-fumes contaminated environments or underwater applications. The BuzzCell™  product uses air from the surrounding environment and is targeted for consumer-oriented and less aggressive applications for lower power ranges. The Company is also developing Formira™, 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.

Our laboratory facilities and corporate office are located in Bothell, Washington.

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.

F-6

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 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.

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.

F-7

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. At September 30, 2014 there is $20,244 of deferred revenue included in other liabilities on the consolidated balance sheet ($10,601 at September 30, 2013).  Revenue from the sale of products 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.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.  There has been no impact on previously reported net income (loss) or shareholders’ 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, 2016 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.

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s 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.

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 $3,831,809 and $2,385,899 during the years ended September 30, 2014 and 2013, respectively, and we expect losses to continue in the near future as we grow our operations. At September 30, 2014, we have a working capital deficit of $1,132,228, and an accumulated deficit of $62,367,631. Net cash used by operating activities was $ 2,513,568 and $745,966 during the years ended September 30, 2014 and 2013, respectively. We have funded our operations through sales of our common and preferred stock, and short-term borrowings. In this regard, during the year ended September 30, 2014, we raised a net amount of $2,954,488 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.

F-8

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.

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 2014 and 2013 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:

Note 5 – Property and equipment

Property and equipment consisted of the following:

Note 6 – Note receivable

In May 2011, we announced that we had signed a non-binding letter of intent to acquire privately-held Exigent Security Products, Inc. (“Exigent”). We have since discontinued our efforts to consummate this acquisition and we have terminated this letter of intent. During the year ended September 30, 2011 and in conjunction with the acquisition efforts, we advanced $47,500 to Exigent pursuant to a note receivable due in June 2012, which bears interest at 10% per annum and is collateralized by certain technology. The total principal and interest due has been fully reserved as of September 30, 2014 and 2013.

Note 7 – Prepaid Expenses and Other Current Assets

Prepaid Expenses and Other Current Assets consist of the following at September 30, 2014 and 2013:

The prepaid consulting services are related to various investor relations and marketing agreements for services related to various business and related matters.

Note 8 – 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, 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:

Of the balance of $414,898 and $381,873 in accrued compensation and related expenses in the consolidated balance sheets at September 30, 2014 and 2013, $64,133 and $70,333 respectively is related to accrued paid time off and to accrued payroll taxes on deferred compensation.

Note 9 – Other liabilities

Other liabilities consisted of the following:

Notes payable and accrued interest consisted of the following:

Settlement or Reduction of Notes Payable and Accounts Payable

In October 2013, we issued a convertible promissory note to an investor in the amount of $20,000 for net proceeds of $19,000. The note bore interest at a rate of 6% per annum and had a maturity date of September 30, 2014. The Company recorded beneficial conversion feature in the amount of $14,965 for this note, which has been amortized to interest expense in the year ended September 30, 2014. In April 2014, the note holder converted the $20,000 note in full into 1,504,139 shares of common stock.

During the year ended September 30, 2014, one of our convertible note holders converted the remaining balance of $38,274 plus interest into 14,068,600 share of common stock. The Company amortized the remaining beneficial conversion feature in the amount of $23,427 to interest expense in our consolidated statement of operations for the year ended September 30, 2014.

In October 2013 we received $100,000 under two security purchase agreements together with two 18% senior debentures. The debentures were to be paid back if the Company raises in excess of $265,000 in debt or equity financing.  The debentures carried a minimum interest amount equal to $2,250 each. In December 2013 the Company paid $52,250 to each of the holders in full payment of the notes and also issued 1,978,143 shares of common stock each per the agreement. We recorded $37,980 to finance charges for this stock issuance in our consolidated statement of operations for the year ended September 30, 2014.

F-10

In December 2013 we exercised the Company’s right to prepay a convertible note of $32,500. The note bore interest at a rate of 8% per annum and included a prepayment penalty of 50%.The Company recorded $16,250 in prepayment penalties to finance charges in our consolidated statement of operations for the year ended September 30, 2014, and amortized the remaining beneficial conversion feature of $14,481 to interest expense in our consolidated statement of operations for the year ended September 30, 2014. The note has been returned “paid-in-full”.

In March 2014 the Company and one of its note holders agreed to convert a $100,000 note plus interest of $5,742 dated July 1, 2013, into 17,000,000 shares of common shares with a fair value of $510,000. We recorded $404,258 to loss on debt conversion in our consolidated statement of operations for the year ended September 30, 2014 for this conversion.

Issuance of Convertible Promissory Notes

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 (“the 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 $450,000 paid in cash at closing and two secured promissory notes payable to the Company, aggregating $300,000, bearing interest at the rate of 5% per annum.  The security for the Note is solely the two secured promissory notes payable to Inter-Mountain.  These two secured promissory notes payable to the Company may be prepaid, without penalty, all or portion of the outstanding balance along with accrued but unpaid interest at any time prior to maturity. We are carrying the net value of these notes on our consolidated balance sheet at September 30, 2014, in the amount of $502,500. The Company has no obligation to pay Inter-Mountain any amounts on the unfunded portion of the Note.  The Note bears interest at the rate of 5% per annum.  All interest and principal must be repaid on or prior to October 7, 2015. However, the payment terms of the Note causes full repayment of the current net amount in less than 12 months and therefore is classified as a current liability. The Note is convertible into common stock at the price of $0.05 per share.  The Company has the option to prepay the Note at the rate of 125%. The Company recorded beneficial conversion feature in the amount of $76,706 of which $28,321 has been expensed to interest expense in our consolidated statement of operations during the year ended September 30, 2014.

Note 11 – 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. Preferred stock is designated 2,000,000 shares to Series B at September 30, 2014 (1,000,000 at September 30, 2013).

Series B Preferred Stock

Holders of Series B preferred stock (“Series B”) have no redemption rights and earn interest at 6% per annum. The holders of the Series B are entitled to vote with the holders of our common stock a number of votes equal to the number of common shares available by conversion. 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. D’Couto, our current President and Chief Executive Officer in which case the holders of the Series B can elect to convert the Series B stock to common stock. As well we have the right to redeem the Series B in cash at the face amount plus any unpaid dividends.

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.

During the year ended September 30, 2013, the holders of our Series B converted 193,000 shares of Series B preferred stock, together with $6,379 of accrued dividends, into 45,795,900 shares of common stock. We also issued 59,000 shares of Series B preferred stock to the same investor under a Securities Purchase Agreement in return for $59,000 in cash. 

During the year ended September 30, 2014, the Company opted to convert 286,700 shares of Series B preferred stock, together with dividends in the amount of $55,577, into 56,266,153 shares of common stock pursuant to the terms of the Series B certificate of designation.  Also during the same period, the Company issued 1,314,988 shares of Series B preferred stock to investors under Securities Purchase Agreements in return for a total of $1,314,998 in cash. As of September 30, 2014, we had 1,314,988 shares of Series B issued and outstanding.

F-11

Common Stock

We are authorized to issue up to 1.8 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.

Common stock issued for settlement of liabilities or conversion of notes payable

During the years ended September 30, 2014 and 2013, we issued 33,898,739 and 96,961,185 shares, respectively, valued at $597,278 and $422,674, respectively, on conversion of notes payable and in settlement for certain of our outstanding notes and accounts payable. 

The carrying value of the liabilities that were converted or settled during the year ended September 30, 2014, amounted to $193,020 resulting in a loss on settlement of liabilities of $404,258 recorded in the consolidated statement of operations.  See Note 10 for additional discussion on the transaction that resulted in this loss.

The carrying value of the liabilities that were converted or settled during the year ended September 30, 2013, amounted to $334,711 resulting in a loss on settlement of liabilities of $87,963 recorded in the consolidated statement of operations.  During the year ended September 30, 2013, the Company was also able to settle or reduce other outstanding liability balances for which no common shares were issued.  These settlements and reductions resulted in a gain of $30,241 being recognized which are included in loss on settlement of liabilities in the consolidated statement of operations.

Common stock issued in connection with fees associated with notes payable

In March 2014, the Company issued 1,538,462 shares of common stock to Clark Dodge & Company in consideration of a finder’s fee under a Bridge Loan Engagement Letter dated October 1, 2013. We recorded $10,000 to financing costs in the consolidated statement of operations for the year ended September 30, 2014 for this transaction.

In May 2014, we issued 1,800,000 shares of common stock and $36,000 in cash to Carter Terry & Company in consideration of a fee under a Placement Agent Agreement dated March 4, 2014. The Company recorded $72,000 to financing costs in the consolidated statement of operations for the year ended September 30, 2014 for this transaction.

See Note 10 for additional stock transactions in connection with fees associated with notes payable.

Common stock issued as donation

In August 2014, the Board of Directors approved a common stock share issuance of 937,500 shares as a donation to Asante Africa. The Company recorded $15,000 in our consolidated statement of operations to general and administrative expenses for this transaction.

Common stock issued for services

During the years ended September 30, 2014 and 2013, we issued 5,673,346 and 12,770,973 shares of our common stock, respectively, valued at $115,750 and $104,000, respectively, to service providers and consultants. We recorded $28,645 to prepaid expense and $87,105 as marketing and sales expense in the year ended September 30, 2014 and $16,750 to prepaid expense and $87,750 as marketing and sales expense in the year ended September 30, 2013.

Common stock issued for cash and assets

In November 2013, the Company entered into agreements with Clean Tech Investors, LLC (“Clean Tech”), to issue 60,100,000 shares of restricted common stock of the Company to Clean Tech for $700,000 of cash and equipment and other fixed assets with an estimated fair value of $120,633.  In connection with the agreements with Clean Tech, our board of directors appointed William M. Shenkin, a managing member of Clean Tech, to serve on the Company’s board.  The fair value of the common stock issued as of the date of the agreements was approximately $313,000 which was less than the value of cash and fixed assets received of $821,000.  The additional $508,000 is considered a capital contribution by Clean Tech in relation to the significant ownership interest and board seat.

F-12

During the years ended September 30, 2014 and 2013, we issued 33,333,333 and 101,850,764 shares of restricted common stock to multiple investors and received gross proceeds of $500,000 and $338,000 respectively. We also issued  11,666,666 and 6,922,078 three-year warrants with a weighted average exercise price of $0.032 and $0.015 per share respectively.

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 357,500,000 as of September 30, 2014.   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.

In prior years, the Company established an equity and cash compensation plan called the Sales Incentive Plan.  In August 2013, the Board terminated the Sales Incentive Plan and the eight individuals who held stock option grants issued under the Sales Incentive Plan agreed to accept new stock option grants to be issued under the Plan in exchange for their outstanding grants.  The cancellation of the stock options issued under the Sales Incentive Plan (total of 219,200,000 underlying shares) and subsequent issuance of new stock options under the Plan (total of 219,200,000 underlying shares) have been accounted for as a modification.  The stock options issued under the Sales Incentive Plan were to vest upon the attainment of certain sales targets.  The attainment of these sales targets was not deemed probable of achievement at the date of the modification and thus the cumulative compensation cost to be recognized related to the modified award is the modified award's fair value at the date of the modification of $917,226 which will be recognized over the requisite service period (which is equal to the vesting period of the new options).

The following table summarizes stock option activity during the years ended September 30, 2014 and September 30, 2013:

As of September 30, 2014, 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, is $1,606,206 and $1,208,868 respectively.

Stock-based compensation expense related to options was $541,341 and $244,137 during the years ended September 30, 2014 and 2013, respectively, of which $230,226 was recognized as general and administrative expense, $163,172 was recognized as marketing and sales expense, and $147,943 was recognized as research and development expense in 2014, and substantially all was recognized as general and administrative expense in 2013. We determine the value of share-based compensation using the Black-Scholes-Merton fair value option-pricing model with weighted average assumptions for options and warrants granted during the years ended September 30, 2014 and 2013 including risk-free interest rates of 1.49% and 0.07%, respectively, volatility of 251% and 236%, respectively, expected lives of 6.3 and 10 years, respectively, and dividend yield of 0%.

F-13

Warrants

At September 30, 2014, we had warrants outstanding for the purchase of 368.6 million shares of our common stock at a weighted average exercise price of $0.014 per share. The fair value of the warrants is calculated using the Black-Scholes-Merton model. Warrants outstanding at September 30, 2014 expire at various dates from November 2014 to April 2019.

A summary of warrant activity during the years ended September 30, 2014 and 2013 are as follows:

In March and May 2014, three of our warrant holders opted to convert their warrants to purchase 1,913,333 shares of common stock via cashless exercise into 1,412,204 shares of common stock.

Note 12 – 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 increase in the valuation allowance was $1,238,080 and $449,307 during the years ended September 30, 2014 and 2013, 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, 2014, we have net operating loss carry forwards of $53.52 million, which begin to expire in 2023 and will continue to expire through 2034 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, 2014 and, 2013 are as follows:

We have identified our federal tax return as our “major” tax jurisdiction, as defined. Tax years since inception in 1999 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.

F-14

Note 13 – Commitments and contingencies

Lease

Our rent expense for the years ended September 30, 2014 and 2013 was $145,218 and $143,118, respectively. Our lease agreement provides for a month-to-month holdover status at the monthly rate of $9,500 plus operating expenses commencing November 1, 2013. The holdover status can be terminated by giving a two month notice to terminate.

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, 2014 and 2013. 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 14 – Related party transactions

For purposes of these consolidated financial statements,  Summit Trading Limited, Green World Trust, Clean Tech Investors, LLC, Bard Associates, and Sierra Trading Corp., are considered related parties due to their beneficial ownership (shareholdings or voting rights) in excess of 5% during the years ended September 30, 2014 and 2013. All material transactions with these investors and other related parties for the years ended September 30, 2014 and 2013, not listed elsewhere, are listed below.

In May 2013 we issued 4,347,826 shares of common stock, together with three-year warrants to purchase 519,480 shares of common stock at a strike price of $0.0154, for net proceeds of $20,000 pursuant to a Security Purchase Agreement with Green World Trust.

In June 2013, the board approved the conversion of 193,000 of Summit Trading LLC series B preferred stock into 45,795,900 shares of common stock. The conversions were calculated in accordance with the Series B Certificate of Designation.

During the year ended 2014, the Company opted to convert 142,200 shares of Series B preferred stock, together with dividends in the amount of $21,151, into 26,777,382 shares of common stock per the Series B certificate of designation for Sierra Trading Corp in three separate tranches.

During the year ended 2014, the Company opted to convert 144,500 shares of Series B preferred stock, together with dividends in the amount of $34,426, into 29,488,771 shares of common stock per the Series B certificate of designation for Summit Trading Limited in three separate tranches.

F-15

All sales of Series B preferred stock during the years ended September 30, 2014 and 2013 were to Summit Trading LLC and Sierra Trading Corp.

During the fiscal year ended September 30, 2013, we issued an unsecured 8% interest bearing note in the amount of $100,000 to Summit Trading Limited in consideration for marketing and investor relations services. In April 2014, the Company paid the note in full by converting the note into 17,000,000 shares of unrestricted common stock (see Note 10).

In July 2013 we issued 10,395,010 shares of common stock, together with three-year warrants to purchase 324,675 shares of common stock at a strike price of $0.0154, for net proceeds of $25,000 pursuant to a Security Purchase Agreement with Jeffrey Sakaguchi, chairman of the board.

In July 2013 we issued 49,064,449 shares of common stock together with three-year warrants to purchase 1,532,468 shares of common stock at a strike price of $0.0154, for net proceeds of $118,000 pursuant to a Security Purchase Agreement with an entity related to Green World Trust.

During the years ended September 30, 2014 and 2013, we recorded consulting expense in the amount of $158,900 and $82,500, 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 is also a Member of Neah's Board of Directors.  The Company had accounts payable balances due to Advanced Materials of $113,489 and $78,750 at September 30, 2014 and 2013, respectively.

Note 15 – Subsequent events

On November 11, 2014, the Company and Inter-Mountain signed a Global Amendment to the Loan Documents dated May 5, 2014 discussed in note 10.  Instead of a fixed installment amount being due on an applicable installment date, the Global Amendment provides for a lower installment amount being paid with the difference being carried to the next installment period.

In November and December 2014, pursuant to the Global Amendment, the Company issued 15,664,746 shares of unrestricted common stock to Inter-Mountain as installments pursuant to the terms of the Loan and the Global Amendment.

In December 2014, the Company issued 291,667 shares to a vendor for services rendered, pursuant to an agreement.

On December 18, 2014, Neah Power Systems, Inc. (“we” or the “Company”) entered into a Six Month Convertible Promissory Note and corresponding Convertible Note Purchase Agreement (the “Note”) with Rich Niemiec (the “Investor”).  The Note has a principal balance of $400,000 and carries a 10% per annum interest rate with a maturity date of June 19, 2015.  The Note is convertible into shares of the Company’s Common Stock at the lower of (A) the 10-day trailing volume weighted average bid price of the Company’s Common Stock, calculated at time of conversion, or (B) $0.008 per share.  As part of the transaction, the Company issued the Investor a Warrant to purchase 50,000,000 shares of the Company’s Common Stock at $0.008 per share, subject to adjustment. 

The purchase and sale of shares of Common Stock pursuant to the Securities Agreement are being made pursuant to a private placement transaction exemption under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The offering was not conducted in connection with a public offering and no public solicitation or advertisement was made or relied upon by the investors in connection with the offering.

Management has used the framework set forth in the report entitled Internal Control – Integrated Framework 1992 published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to evaluate the effectiveness of our internal control over financial reporting. Management was unable to implement its remediation plans during 2014 due to cost considerations. As a result of the material weaknesses described below, management has concluded that our internal control over financial reporting was not effective as of September 30, 2014.

Management has determined that, as of the September 30, 2014 measurement date, there were deficiencies in both the design and the effectiveness of our internal control over financial reporting. Management has assessed these deficiencies and determined that there were various material weaknesses in our internal control over financial reporting. The existence of a material weakness or weaknesses is an indication that there is a more than remote likelihood that a material misstatement of our financial statements will not be prevented or detected in a future period.

Management has assigned a high priority to the short-and long-term improvement of our internal control over financial reporting. We have listed below the nature of the material weaknesses we have identified: