UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

____________________________ 

FORM 10-Q

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

For the quarterly period ended March 31, 2015

Commission file number 000-49962

_______________________

NEAH POWER SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)

_______________________

22118 20th Avenue SE, Suite 142
Bothell, Washington 98021
(Address of principal executive offices)

(425) 424-3324
(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

NeahPowerSystems, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2015

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EXPLANATORY NOTE

As used herein, the terms “Neah,” “Neah Power,” “Neah Power Systems,” “Company,” “we,” “our” and like references mean and include both Neah Power Systems, Inc., a Nevada corporation, and our wholly-owned subsidiary, Neah Power Systems, Inc., a Washington corporation.

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Specifically, all statements other than statements of historical facts included in this Quarterly Report on Form 10-Q regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to management. When used in this Annual Report on Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “continue” and “intend,” and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements.

These statements reflect our current view with respect to future events and are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that such expectations will be achieved. Future events and actual results, financial and otherwise, may differ materially from those expressed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no duty to update or revise any forward-looking statements after the date of this Quarterly Report on Form 10-Q and the documents incorporated herein by reference or to conform them to actual results, new information, future events or otherwise, except as may be required by law.

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PART 1 - FINANCIAL INFORMATION

Item 1.   Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended March 31, 2015 and 2014

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2015 and 2014

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

For the six months ended March 31, 2015

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended March 31, 2015 and 2014 respectively.

(Unaudited)

Note 1.   Organization and Description of Business

Organization

Our Company was incorporated in the State of Nevada in 2001, as NeahPower 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.   Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements. The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the fiscal year ended September 30, 2014, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 23, 2014. The information furnished in this Report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of our consolidated financial position, results of operations and cash flows for each period presented. The results of operations for the interim period ended March 31, 2015 may not be indicative of future results.

Use of estimates in the preparation of financial statements

Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates as to the valuation of equity related instruments and valuation allowance for deferred income tax assets.

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Consolidation

The consolidated financial statements include the accounts of our Company and our wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated.

Fair value of financial instruments

The carrying value of cash and cash equivalents approximate their fair value (determined based on level 1 inputs in the fair value hierarchy) based on the short-term nature of these financial instruments. The carrying values of the note receivable (before allowance) and notes payable and accrued interest approximate their fair value (determined based on level 3 inputs in the fair value hierarchy) because interest rates approximate market interest rates.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the fiscal and interim reporting periods beginning after December 15, 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.

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  ASU 2015-03 will be effective for the year ended September 30, 2017, with early adoption permitted.  The Company is currently evaluating the impact of its pending adoption of ASU 2015-03 on its consolidated financial statements.

Note 3. Going concern

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of our Company as a going concern. 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. We have reported a net loss of $1,904,157 during the six months ended March 31, 2015, and we expect losses to continue in the near future as we grow our operations. At March 31, 2015, we have a working capital deficit of $1,674,890 and accumulated deficit of $64,271,788. Net cash used by operating activities was $1,072,256 and $984,789 during the six months ended March 31, 2015 and 2014, respectively. We have funded our operations primarily through sales of our common and preferred stock and short-term borrowings. In this regard, during the six months ended March 31, 2015, we raised net cash of $860,596 from our financing activities.

Note 4. Net Loss per Share

Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. All common stock equivalents are excluded as the effect would be anti-dilutive due to our net losses. The following numbers of shares have been excluded from net loss per share computations for the six months ended March 31, 2015 and 2014, respectively:

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Note 5.  Notes Payable

Notes payable and accrued interest consisted of the following at March 31, 2015 and September 30, 2014:

Convertible Promissory Notes Payable – Inter Mountain

On May 7, 2014 we received an initial payment on a May 5, 2014 Securities Purchase Agreement with Inter-Mountain Capital Corporation LLC (“Inter-Mountain”), for the sale of a 5% Secured Convertible Promissory Note in the principal amount of $832,500, which 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.  On March 9, 2015, the two secured promissory notes payable were paid and the Company received proceeds in the amount of $300,000 and the note has been fully funded by Inter-Mountain.   We are carrying the value of these notes on our condensed consolidated balance sheets at March 31, 2015, and September 30, 2014, in the amount of $538,853 and $502,500, respectively. 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. 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%.

We recorded beneficial conversion feature in the amount of $76,706 for the funding paid at initial closing in May of 2014, and an additional $135,178 for the two secured promissory notes funded in March 2015. During the three and six months ended March 31, 2015, we have amortized $31,472 and 49,172, respectively, to interest expense in our condensed consolidated statements of operations. During the six months ended March 31, 2015, the Company opted to convert $244,218 of principal and interest into 54,179,510 shares of common stock. On conversion, we recorded a reduction to accrued interest of $18,703, and a reduction to notes payable in the amount of $225,515. 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.

Convertible Promissory Note- Rich Niemiec

In December 2014, we issued a convertible promissory note to Rich Niemiecin the amount of $400,000 and warrants to purchase 50,000,000 shares of our common stock at the price of $0.008 per share, subject to adjustment, for proceeds of $400,000. The note is interest bearing at a rate of 10% per annum and has a maturity date of June 18, 2015. The Conversion Price per share of Common Stock shall be the lower of (A) the 10-day trailing volume weighted average bid price of the Borrower’s Common Stock, calculated at time of conversion, or (B) $0.008 (“Fixed Price Component”) subject to adjustment.  The Fixed Price Component of the Conversion Price will be subject to adjustments during the period that the Note is outstanding. Each adjustment shall be at the Holder’s election, using the 10-day trailing volume weighted average bid price of the Borrower’s Common Stock at the time of such election (the “New Reference Price”). If the New Reference Price is less than the existing Fixed Price Component of the Conversion Price, then the New Reference Price shall be used as the new Fixed Price Component of the Conversion Price subject to a floor of $0.003 per share.  This convertible promissory note is senior to all existing debt of the Borrower and is subordinate to any future line of credit backed by the Borrower’s accounts receivable and inventory.  This convertible note is un-perfected but secured by the assets of the Borrower.  Such security interest will be effected upon an Event of Default.  On December 29, 2014, Rich Niemiecsubmitted a Conversion Price Adjustment per the agreement lowering the Fixed Price Component of the convertible promissory note to $0.0065 per share and adjusting the warrant exercise price to $0.0078 per share.

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.  Debt discount of $200,001 and $222,224 respectively, has been amortized to interest expense in our condensed consolidated statement of operations for the three and six months ended March 31, 2015.

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Note 6.  Preferred Stock and Common Stock

Preferred Stock- Our board of directors has the authority to designate and issue up to 5,000,000 shares of $0.001 par value preferred stock in one or more series, and to fix and determine the relative economic rights and preferences of preferred shares any or all of which may be greater than the rights of our common stock, as well as the authority to issue such shares without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of the common stock. In addition, shares of preferred stock could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult. As of March 31, 2015, we had one class of preferred stock designated; 3,500,000 shares as Series B preferred stock, leaving 1,500,000 shares of undesignated preferred stock.

Series B Preferred Stock - As of March 31, 2015 and September 30, 2014, we have 1,366,204 and 1,314,988 shares of Series B preferred stock issued and outstanding, respectively.  Holders of Series B have no redemption rights and each share of Series B is entitled to interest at a simple interest rate of 6% per annum. Series B is convertible, at the discretion of our management, into shares of our common stock, except that the holders of the Series B may elect to convert the Series B into common stock upon or after the resignation or termination of our Chief Executive Officer. The number of shares of common stock issuable upon conversion is calculated by (i) multiplying the number of Series B being converted by the per share purchase price received by the Company for such Series B , and then, multiplying such number by 130% and then dividing this calculated value by the average closing bid price, as defined, or by (ii) first, allocating the Series B proportionately according to the amounts by date of individual cash tranches received by the Company then, second, multiplying the number of Series B being converted, identified by tranche, by the per share purchase price received by the Company for such Series B, and then, multiplying such number or numbers by 130% and, finally, dividing the calculated value(s) by the average closing bid price, as defined. The holders of the Series B are entitled to vote with the holders of our common stock with the number of votes equal to the number of common shares available by conversion to the holders of the Series B. We have the right to redeem the Series B in cash at the face amount plus any accrued, but unpaid dividends.

On February 20, 2015, the Company filed an Amendment to Certificate of Designation After Issuance of Class or Series with the State of Nevada increasing the number of Series B Preferred Stock designated to 3,500,000.

During the six months ended March 31, 2015, we issued 198,728 shares of Series B preferred stock to Summit Trading Limited at a price per share of $1 for gross cash proceeds of $198,728.

On January 12, 2015, the Company opted to convert 147,511 of Series B Preferred Stock together with accrued dividends of $7,489, held by Summit Trading Ltd., into 26,168,962 shares of common stock.

Pursuant to the terms of the Certificate of Designation of Series B Preferred Stock, redeemed shares are returned to the Company’s general designated pool of preferred stock.  As of March 31, 2015, there were 1,462,180 shares remaining of Series B Preferred Stock available for issue.

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 services – During the six months ended March 31, 2015, the Company issued 583,334 shares of common stock to Consilium Global Research for services rendered and recorded $8,750 to marketing and sales expense.

In January 2015, the Company issued 1,250,000 shares of common stock to Complete Advisory Partners LLC for services rendered under a contract dated April 8, 2014. We recorded $9,125 to prepaid service contracts and have amortized $3,041 to marketing and sales expense in the quarter ending March 31, 2015.

Effective January 1, 2015, the Company entered into an agreement with Crescendo Communications, LLC, for investor relations services for 12 months. The monthly payment consists of $3,000 in cash and $7,000 in shares of common stock priced at previous 5 day volume weighted average price. We issued 2,843,118 shares of common stock during the quarter ended March 31, 2015 under the contract and recorded $21,000 to marketing expense.

In March 2015, the Company issued 200,000 shares as a partial payment to TheFinancialNetwork.com under the terms of an agreement dated March 9, 2015. We recorded $1,500 to marketing and sales expense for this transaction.

Common Stock issued in connection with note 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 for this transaction.

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 March 31, 2015.   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.

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The following table summarizes stock option activity for the six months ended March 31, 2015:

As of March 31, 2015, the aggregate intrinsic value of options outstanding and options vested, representing the excess of the closing market price of our common stock over the exercise price, are both $1,000,072. As of March 31, 2015, we had $154,466 of total unrecognized compensation cost related to unvested options. Unrecognized compensation cost is to be recognized over 19 months with the majority to be recognized in the current fiscal year. We determine the value of share-based compensation using the Black-Scholes-Merton fair value option-pricing model.  There were no options granted during the three months ended March 31, 2015, but 1,600,000 during the six months ended March 31, 2015.

Warrants– At March 31, 2015, there were warrants outstanding for the purchase of 328,910,978 shares of our common stock at a weighted average exercise price of $0.012 per share. During the six months ended March 31, 2015, we issued warrants to purchase a total of 50,000,000, shares of common stock at an exercise price of $0.008 per share, in conjunction with the issuance of a promissory note (see note 5). The fair value of the warrants issued was calculated using the Black-Scholes-Merton model. Warrants outstanding at March 31, 2015 expire at various dates from April 2015 to December 2021. A summary of warrant activity during the six months ended March 31, 2015 follows:

Between April 1 2015 and June 30, 2015, 139,227,582 warrants with the exercise prices between $0.005 and $0.015 are expiring. The warrants were issued in connection with prior funding efforts in the same period in 2012.

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Note 7. Commitments and Contingencies

Lease - Our corporate offices and laboratory facilities are leased under a lease agreement amended in November 2011.  Under the terms of the lease amendment, the term of the lease continued through October 31, 2013 at a monthly rent of $9,500, plus expenses. Our lease agreement 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.

Disputes with various vendors - Certain of our vendors have brought suits and/or obtained judgments in their favor regarding past due balances owed them by us. We have recorded these past due balances in liabilities in our condensed consolidated balance sheets at March 31, 2015 and September 30, 2014. We do not believe any loss in excess of amounts recorded that could arise would be material. We have not recorded any liabilities for finance charges or legal fees that could be applied by the vendors or lenders to these debts.

Note 8.  Related Party Transactions

For purposes of these consolidated financial statements, Summit Trading Limited, 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 six months ended March 31, 2015 and 2014. All material transactions with these investors and other related parties for the six months ended March 31, 2015 and 2014, not listed elsewhere, are listed below.

During the six months ended March 31, 2015 and 2014, we recorded consulting expense in the amount of $66,000 and $87,750, 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 $129,989 and $113,489 at March 31, 2015 and September 30, 2014, respectively.

Note 9. Subsequent Events

In April 2015, the Company issued to Summit Trading Ltd. 76,888 Series B Preferred Stock at a price per share of $1 for proceeds of $76,888 under two separate Security Purchase Agreements.

On April 6, 2015, the Company opted to convert 254,338 shares of Summit Trading Ltd. Series B Preferred Stock, together with accrued dividends of $14,983, into 44,318,735 shares of common stock at a price per share of $0.0079.

In April and may 2015, Inter-Mountain converted $108,750 of principal and interest into 23,398,570 shares of common stock in three separate installments under the Note described in note 5.

In January 2015 the Company entered into a definitive agreement to acquire 100% of the outstanding shares of Shorai, Inc. (“Shorai”), a lithium ion battery company, by way of mergers with NeahPower subsidiaries. The acquisition purchase price is a combination of a $1,000,000 cash payment and the issuance of up to $2,200,000 in Preferred Stock of NeahPower to the three shareholders of Shorai.  Pursuant to the agreement, NeahPower had until February 28, 2015 to make the $1,000,000 cash payment and close the merger transaction. In the event that the closing conditions of the agreement cannot be met, NeahPower will pay to Shorai termination fee equal to 3% of the merger consideration.  Upon consummation, NeahPower will enter into an employment agreement with the founder of Shorai, David Radford, who shall be appointed to its Board and continue to manage the Shorai operations.  Effective April 17, 2015 NeahPower entered into a second amendment of the definitive agreement to acquire 100% of the outstanding shares of Shorai. The amendment allows for an extension of the agreement and amends the date by which the company would make a $1,000,000 cash payment and close the merger transaction to May 14, 2015. As of the date of this report the merger transaction has not been closed.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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Recent Financing Activities

In February and March 2015, the Company sold 180,225 Series B preferred shares to Summit Trading Ltd, for the purchase price of $180,227 pursuant to the terms of five separate Securities Purchase Agreements.

On March 9, 2015, Inter-Mountain opted to fund the two Buyer Trust Deed notes for a total of $300,000. In connection with this funding, the Company paid $24,000 and 3,750,000 shares in placement agency fees to Carter, Terry & Company.

Results of Operations

For the three and six months ended March 31, 2015, compared to the three and six months ended March 31, 2014.

We recorded revenues of $6,008 and cost of revenues of $3,186 for the three months ended March 31, 2015, and revenues of $185,269 and cost of revenues of $11,544 for the six months ended March 31, 2015 due primarily to revenues from a customer purchase order contract for proof of concept trial fuel cells, in addition to some revenues from direct consumer sales, compared to zero revenue and zero cost of revenue for the three and six months ended March 31, 2014.  Through October and November 2014, the Defense Research and Development Organization of the Government of India completed the proof of concept trial and the Company recognized $172,285 of revenue.  Product testing, qualification and acceptance were completed by December 2014. Substantially all expenses related to this development project were incurred in prior periods and expensed as incurred and thus there are no expenditures included in cost of revenues for the six months ended March 31, 2015, related to this. Cost of revenues represent the expenses of labor, parts and materials associated with the production of the direct consumer sales units. 

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 three months ended March 31, 2015 increased $53,859 to $248,372 from $194,513 in the three months ended March 31, 2014 and increased $306,673 to $663,474 from $356,801 in the six months ended March 31, 2015 as compared to the same period in 2014. The three month increase was primarily due to increases in salaries of $63,623, and a decrease of project expenses of $9,764.  The six month increase was primarily due to increases in salaries of $130,940, and an increase of project expenses of $175,733.

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 three months ended March 31, 2015 increased by $186,677, to $374,128 from $187,451 in the three months ended March 31, 2014 and increased by $145,861 to $561,513 from $415,652 in the six months ended March 31, 2015 as compared to the same period in 2014.  The three month increase was primarily due to an increase in Marketing salaries, wages, benefits and stock compensation of $56,155 to $123,721 from $67,566, and an increase in business development consultants, patent expense, public relations consultants, travel and other related expenses of $130,522 to $250,407 from $119,885.  The six month increase was primarily due to an increase in Marketing salaries, wages, benefits and stock compensation of $86,835 to $236,655 from $149,820, and an increase in business development consultants, patent expense, public relations consultants, travel and other related expenses of $59,026 to $324,858 from $265,832.

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 $12,902 to $198,830 from $211,732 in the three months ended March 31, 2015 and increased $5,476 to $492,649 from $487,173 in the six months ended March 31, 2015 compared to same periods in 2014. The decrease in G&A expense in the three months ended March 31, 2015 compared with the same period in 2014 and the increase in G&A expense in the six months ended March 31, 2015 compared with the same period in 2014 was primarily due to the following:

·         a decrease in board compensation  of $100 to $17,951 from $18,051 for the three months period ended March 31, 2015 compared to the same period in 2014.   An increase in board compensation of $2,255 to $38,357 from $36,102 for the six months period ending March 31, 2015 compared to the same period in 2014.  

·         a decrease in stock option compensation of $24,025 to $22,282 from $46,307 for the three months period ended March 31, 2015 compared to the same period in 2014.   A decrease in stock option compensation of $73,621 to $67,294 from $140,915 for the six months period ending March 31, 2015 compared to the same period in 2014.

·         a decrease in salaries expense of $26,903 to $30,031 from $56,934 for the three months period ended March 31, 2015 compared to the same period in 2014. A decrease in salaries expense of $25,089 to $64,556 from $89,645 for the six months period ending March 31, 2015 compared to the same period in 2014. 

·         an increase in professional services of $71,079 to $117,898 from $46,819 for the three months period ended March 31, 2015 compared to the same period in 2014.  An increase in professional services of $140,832 to $303,089 from $162,257 for the six months period ending March 31, 2015 compared to the same period in 2014.  

·         a decrease in facility cost of $7,965 to $3,693 from $11,658 for the three months period ended March 31, 2015 compared to the same period in 2014.  A decrease in facility cost of $13,708 to $8,064 from $21,772 for the six months period ending March 31, 2015 compared to the same period in 2014.  

·         a decrease in other expenses of $24,988  to $6,975 from $31,963 for the three months period ended March 31, 2015 compared to the same period in 2014.  A decrease in other expenses of $25,193 to $11,289 from $36,482 for the six months period ending March 31, 2015 compared to the same period in 2014.  

Interest expense increased by $231,059 to $236,828 from $5,769 for the three months period ended March 31, 2015 compared to the same period in 2014.  Interest expense increased by $239,062 to $293,464 from $54,402 for the six months period ended March 31, 2015 compared to the same period in 2014.   The increase is due to amortization of additional debt discount related to new debt issued during the three and six month periods ending March 31, 2015.

Financing costs increased $41,357 to $60,857 from $19,500 for the three months period ended March 31, 2015 compared to the same period in 2014.  Financing costs decreased by $88,248 to $73,982 from $162,230 for the six months period ended March 31, 2015 compared to the same period in 2014. The increase in financing costs for the three months ending March 31, 2015, is due to fees and shares issued to a placement agency for services. The decrease in financing costs for the six months ending March 31, 2015 compared to the same period in 2014 was due to the costs associated with heavy financing activity and new debt in 2014.

Loss on settlement of liabilities decreased $404,258 to $0 for both the three and six months ended March31, 2015 compared to the same periods in 2014.  The loss incurred during 2014 was due to loss on debt conversion to stock.

During the three and six months ended March 31, 2015, we recorded a gain on sale of equipment of $1,000 and $13,500 compared with $0 recorded in the same periods of 2014.

We are not certain how the current economic conditions may affect our business. Because of the current global economic conditions, 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.

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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 included in our September 30, 2014, form 10-K.

Off-Balance Sheet Arrangements

As of March 31, 2015 we did not have any off-balance sheet arrangements.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

Item 4.  Controls and Procedures.

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PART II - OTHER INFORMATION

Item 1.    Legal Proceedings.

Item 1A.  Risk Factors.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

Item 3.    Defaults Upon Senior Securities.   

Item 4.    Mine Safety Disclosures.

Item 5.    Other Information.

Item 6.    Exhibits.

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SIGNATURES

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Exhibit Index