ITEM 1A. RISK FACTORS

Not applicable.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

In April 2016 we relocated from our Bothell, Washington corporate office to our current office located at 22722 29^th Drive SE, Suite 100, Bothell, WA 98021. We pay rent to for the current office on a month-to-month basis. Through a consulting and service contract, we also have access to laboratory facilities in Beaverton, Oregon on an as needed basis. (See Note 11 to our Notes to Consolidated Financial Statements).

ITEM 3. LEGAL PROCEEDINGS

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.

ITEM 4. MINE SAFETY DISCLOSURES

                 Not applicable.

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PART II       

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock trades on the OTC “Pink Sheets” markets under the symbol “NPWZ.”  Set forth below are the range of high and low closing transactions for the periods indicated as reported by NASDAQ.  The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

The last sale price of our common stock on July 27, 2018 was $0.0004. The source of the data is www.nasdaq.com.

Holders

As of July 29, 2018, there were approximately 400 holders of record of our common stock. This number does not include beneficial owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.

Dividends

We have not paid any cash dividends to date and do not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of our business. There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend: (i) we would not be able to pay our debts as they become due in the usual course of business; or (ii) our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution, unless otherwise permitted under our articles of incorporation.

Unregistered Sales of Equity Securities

The information below lists all of the securities we sold during the fiscal year that ended September 30, 2016, other than those sales previously reported in a Current Report on Form 8-K or a Quarterly Report on Form 10-Q, which were not registered under the Securities Act, including all sales of reacquired securities, as well as new issues, securities issued in exchange for property, services, or other securities, and new securities resulting from the modification of outstanding securities. No underwriting discounts or commissions were incurred in connection with any of the following transactions. Each of the transactions was conducted as a private placement, without the use of any general solicitation, and was exempt from registration under Section 4(2) of the Securities Act.

In August and September of 2016, Union Capital LLC converted $55,574 of notes payable and interest into 345,162,084 shares of common stock. (See Note 8 to our Notes to Consolidated Financial Statements).

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.

ITEM 6. SELECTED FINANCIAL DATA

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

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview and Background

We are engaged in the development and sale of renewable energy solutions using our direct methanol micro fuel cell technology, our reformer technology, and our silicon based rechargeable battery technology. This allows us to generate hydrogen using our Formira reformer technology, use that hydrogen, or use methanol directly, using the fuel cell technology, and then store that energy using the silicon based rechargeable lithium battery We are developing solutions specifically targeted for the military, transportation vehicles, and portable electronics applications. Our long-lasting, efficient and safe power solutions include devices, such as notebook PCs, military radios, and other power-hungry computer, entertainment and communications products. We use a unique patented, silicon-based design for our micro fuel cells and our battery that create higher power densities and enables lighter-weight, smaller form-factors, and will potentially create more cost effective manufacturing and potentially lower product costs.

With our Formira Hydrogen on demand system, a reformer platform for direct on-site generation of hydrogen gas, customers will be able carry a liquid with a better safety profile and generate hydrogen gas at point of use rather than carrying high pressure hydrogen gas cylinders. The hydrogen is designed to be consumed directly by a fuel cell, using either our silicon based fuel cell, or commercially available proton exchange membrane (PEM) fuel cells.

We currently are doing our battery development at a facility in Beaverton, OR, and the Company is primarily focused on the battery development at this time. We are using a variety of consultants for business development, who are located worldwide, and who are compensated based on commercial success. We currently operate out of Bothell, Washington.

Due to a combination of tepid interest in fuel cell and hydrogen generation technology, and severe capital constraints, the Company is exploring various licensing avenues for the fuel cell and hydrogen generation technologies, and is focusing its limited resources on the development of the silicon based rechargeable lithium battery.

The deployment of our business strategy has been delayed during 2015 and 2016 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 $2,418,835 and $4,363,574 during the years ended September 30, 2016 and 2015, respectively, and we expect losses to continue in the near future as we grow our operations. At September 30, 2016, we have a working capital deficit of $2,614,501, and an accumulated deficit of $69,150,040. Net cash used by operating activities was $878,548 and $1,956,157 during the years ended September 30, 2016 and 2015, respectively. We have funded our operations through sales of our common and preferred stock, and short-term borrowings. In this regard, during the year ended September 30, 2016, we raised a net amount of $872,582 from our financing activities. These factors raise substantial doubt about our ability to continue as a going concern. Subsequent to September 30, 2016, we have received additional investment (see Note 13 to our Notes to Consolidated Financial Statements).

 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

 In December 2015, we received proceeds from Union Capital LLC, for the issuance of an 8% Convertible Promissory Note in the principal amount of $170,250. In conjunction with the transaction, Union Capital LLC retired the Company’s debt obligation to Inter-Mountain Capital LLC in full and we issued a replacement note to Union Capital LLC in the amount of $388,428.

 In February 2016, we received proceeds from Union Capital LLC, for the issuance of an 8% Convertible Redeemable Note in the principal amount of $28,000. Also in February 2016, we received proceeds from this lender for the issuance of an 8% Convertible Redeemable Note in the principal amount of $50,000, which included legal expenses in the amount of $2,500 and financing fees of $5,000.

 In April 2016, we received proceeds from Union Capital LLC, for the issuance of an 8% Convertible Redeemable Note in the principal amount of $50,000.

 During the year ended September 30, 2016, we received proceeds for a series of six month notes issued to various individuals bearing interest at the rate of 8% per annum on the unpaid principal balance. The notes were of various amounts, from $1,000 to $125,000, totaling $405,455.

 During the year ending September 30, 2016, we issued 187,654 shares of Series B preferred stock to Sierra Trading Corp and Summit Trading LLC at a price per share of $1 for gross cash proceeds of $187,654.

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Liquidity and Capital Resources

 We used cash of $878,548 in our operating activities in the year ended September 30, 2016, compared to $1,956,157 in the same period in 2015. During the year ended September 30, 2016, our use of cash was offset by $176,519 for the payment of services with equity instruments and $543,108 by the amortization of certain debt discounts. We also incurred a non-cash gain of $125,092 related to gain on debt settlements. During the year ended September 30, 2016, we incurred changes in operating assets and liabilities of $776,456 that off set our use of cash.

We used $0 for investing activities related to fixed asset purchases and received $61,497 in proceeds from sales of fixed assets in the year ended September 30, 2016, compared to $9,572 and $13,500, respectively, in the same period in 2015.  

Our financing activities provided cash of $872,582 in the year ended September 30, 2016 compared to $1,481,831 in the same period in 2015. During the year ended September 30, 2016, we:

·         sold Series B preferred stock and received net proceeds of $187,654; and

·         received proceeds from convertible notes payable, net of payments of principals and deferred loan fees, of $684,928

Results of Operations

Year Ended September 30, 2016, Compared to Year Ended September 30, 2015

Revenues for the years ended September 30, 2016 and 2015 were $0 and $196,073 respectively. In fiscal year 2015 revenue was predominately from a multiyear 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, 2016 decreased by $896,925 to $423,912 from $1,320,837 for the same period in 2015.  The decrease was primarily due to decrease in R&D salaries and wages of $412,785, a decrease in project expenses of $411,891 and a decrease in facilities cost and depreciation expense of $72,249, due to a reduction in operating activities.

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, 2016 decreased by $529,291 to $761,208 from $1,290,499 for the same period in 2015. The decrease was primarily due to decrease in Marketing salaries, wages, benefits and stock compensation of $433,340 to $143,003 from $576,343, a decrease in marketing, patent expense, public relations consultants and other related expenses of $95,950 to $618,206 from $714,156.

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 $521,030 from $1,275,375 for the same period in 2015. The decrease in G&A expense in the year ended September 30, 2016 of $754,345  was primarily due to the following:

·         a decrease in employee and director stock compensation expense of $508,338 to $0 from $508,338, recorded for the same period in 2015. The decrease was due to no issuance of warrants compared to the issuance of new warrants to the directors in the same period in 2015. The new warrants were issued and expensed to replace warrants that had expired for the directors.

·         a decrease in board compensation of $12,372 to $52,000 from $64,372, recorded in the same period in 2015. The decrease is due to a reduction in board meeting attendance in 2016, compared to 2015.

·         an increase in other expenses of $8,609 to $60,996 from $52,387 recorded in the same period in 2015. The increase is nearly all due to an increase in travel expenses of the directors and officers.

·         a decrease in salaries expense of $70,982 to $49,860 from $120,842 (including payroll taxes and benefits), recorded for the same period in 2015. Most of the salary expense is due to reduction of staffing in 2016, compared to 2015.

·         a decrease in professional services of $171,262 to $358,174 from $529,436, recorded for the same period in 2015. Most of the decrease in professional services is due to the decrease in legal and accounting expenses.

Interest expense increased by $22,738 for the year ended September 30, 2016 to $692,105 compared with $669,368 in the same period in fiscal 2015. The increase in the year ended September 30, 2016 compared with the same period in 2015 was primarily due to increases in notes payable as new debt was added during 2016.

Financing costs decreased $96,331 to $206,343 from $302,674, recorded in the same period in 2015. The decrease in the year ended September 30, 2016 compared with the same period in 2015 was primarily due to decreased costs in acquiring new debt.

Gain on settlements of liabilities decreased $178,554 to $125,092 from $303,646, recorded in the same period in 2015. The decrease in the year ended September 30, 2016 compared with the same period in 2015 was primarily due to a large gain recorded in 2015, when liabilities were removed due to reaching the statute of limitations for vendor debt recovery, compared to a smaller gain recorded in 2016 as less liabilities were removed. 

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We are not certain how the current economic conditions may affect our business. Government agencies and private industry may not have the funds to purchase our power systems. We may find it difficult to raise capital. 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. Revenue from the sale of products and prototypes is generally recognized after both the goods are shipped to the customer and acceptance has been received, if required. Our products are shipped complete and ready to be incorporated into higher-level assemblies by our customers. The terms of the customer arrangements generally pass title and risk of ownership to the customer at the time of shipment.

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, 2016 we did not have any off-balance sheet arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 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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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Description of business

Organization

Our Company was incorporated in the State of Nevada in 2001, as Neah Power Systems, Inc., and together with its subsidiary, is referred to as the “Company”, “we”, “us”, or “our”. 

Reporting Status

On May 15, 2017, the Company chose to file a Form 15, terminating its obligation to file current, quarterly and annual SEC reports. The Company intends to maintain its non-reporting status for the foreseeable future (see Note 13 – Subsequent Events)

Business

We are engaged in the development and sale of renewable energy solutions using our direct methanol micro fuel cell technology, our reformer technology, and our silicon based rechargeable battery technology. This allows us to generate hydrogen using our Formira® reformer technology, use that hydrogen, or use methanol directly, using the PowerChip® fuel cell technology, and then store that energy using the silicon based rechargeable lithium battery. We are developing solutions specifically targeted for the military, transportation vehicles, and portable electronics applications. Our long-lasting, efficient and safe power solutions include devices, such as notebook PCs, military radios, and other power-hungry computer, entertainment and communications products. We use a unique patented, silicon-based design for our micro fuel cells and our battery that create higher power densities and enables lighter-weight, smaller form-factors, and will potentially create more cost effective manufacturing and potentially lower product costs.

With our Formira hydrogen on demand system, a reformer platform for direct on-site generation of hydrogen gas, customers will be able to carry a liquid with a better safety profile and generate hydrogen gas at point of use rather than carrying high pressure hydrogen gas cylinders. The hydrogen is designed to be consumed directly by a fuel cell, using either our silicon based fuel cell, or commercially available proton exchange membrane (PEM) fuel cells.

We currently are doing our battery development at a third party facility in Beaverton, OR, and the Company is primarily focused on the battery development at this time. We are using a variety of consultants for business development, who are located worldwide, and who are compensated based on commercial success. We currently operate out of Bothell, Washington.

Due to the greater commercial interest in rechargeable battery systems, we are primarily focusing our limited resources on the development and marketing of our lithium battery technology while at the same time exploring licensing opportunities for the fuel cell and hydrogen markets.

Note 2 – Summary of significant accounting policies

Use of estimates in the preparation of financial statements

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

Consolidation

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

Cash and cash equivalents and restricted cash

We consider all highly liquid investments purchased with maturities of three months or less to be cash equivalents. We place our cash balances with high credit quality financial institutions. At times, such balances may be in excess of the FDIC insurance limit. Restricted cash is reported separately and not reported as cash and cash equivalents. Restricted cash is reserved as collateral against a bank issued company credit card.

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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable

In the normal course of business, we decide to extend credit to certain customers without requiring collateral or other security interests. Management reviews its accounts receivable at each reporting period to provide for an allowance against accounts receivable for an amount that could become uncollectible. This review process may involve the identification of payment problems with specific customers. Periodically we estimate this allowance based on the aging of the accounts receivable, historical collection experience, and other relevant factors, such as changes in the economy and the imposition of regulatory requirements that can have an impact on the industry. These factors continuously change, and can have an impact on collections and our estimation process.

Contingencies

Certain conditions may exist as of the date financial statements are issued, which may result in a loss but which will only be resolved when one or more future events occur or do not occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to pending legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a liability has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable would be disclosed.

Fair value of financial instruments

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

Property and equipment

Property and equipment is stated at cost. Additions and improvements that significantly add to the productive capacity or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over three to five years. Leasehold improvements are amortized over the lesser of the estimated remaining useful life of the asset or the remaining lease term.

Impairment of long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows that we expect to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. We have not recognized any impairment.

Income taxes

We account for income taxes using an asset and liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that we expect to realize. We continue to provide a full valuation allowance to reduce our net deferred tax asset to zero, inasmuch as we have not determined that realization of deferred tax assets is more likely than not. Any provision for income taxes would represent the tax payable for the period and change during the period in net deferred tax assets and liabilities.

Debt discount

We record the value of original issue discounts associated with notes payable on issuance and the recognized value of beneficial conversion feature of debt securities as a debt discount, which is presented net of related notes payable on the consolidated balance sheets and amortized as an adjustment to interest expense over the borrowing term.

Research and development expense

Research and development costs are expensed as incurred.

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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Share based compensation

We use the Black-Scholes-Merton option pricing model as our method of valuation for stock-based option and warrant awards. Stock-based compensation expense is based on the value of the portion of the stock-based award that will vest during the period, adjusted for expected forfeitures. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual or updated results differ from our current estimates, such amounts will be recorded in the period the estimates are revised. The Black-Scholes-Merton option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results. Our determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected life of the award and expected stock price volatility over the term of the award. Stock-based compensation expense is recognized on a straight-line basis over the applicable vesting period (deemed the requisite service period) based on the fair value of such stock-based awards on the grant date.

Revenue recognition

In general, we recognize revenue when we have persuasive evidence of an arrangement, the services/goods have been provided or delivered to the customer, the price is fixed and determinable, no significant unfulfilled obligations exist, and collectability is reasonably assured. Revenue from research and development arrangements is recognized either (a) as performance is estimated to be completed which is based on factors such as costs or direct labor hours of the project, or (b) using the milestone method if the contractual milestones in the arrangement are determined to be substantive. Each research and development arrangement is analyzed to determine the appropriate revenue recognition method to be utilized. Estimates of performance completion are reviewed on a periodic basis and are subject to change, and changes could occur in the near term. If an estimate is changed, revenue could be impacted significantly. Payments received in excess of amounts earned are recorded as deferred revenue. Revenue from the sale of products and prototypes is generally recognized after both the goods are shipped to the customer and acceptance has been received, if required. Our products are shipped complete and ready to be incorporated into higher-level assemblies by our customers. The terms of the customer arrangements generally pass title and risk of ownership to the customer at the time of shipment. Revenue for the year ended September 30, 2015 included $172,285 from a customer located in India.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation. There has been no impact on previously reported net loss or stockholders’ deficit from such reclassifications.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the fiscal and interim reporting periods beginning after December 15, 2017 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. Management is currently evaluating the impact of the Company's pending adoption of ASU 2014-09 on its consolidated financial statements. With no current revenue streams, it is not determinable what the impact of ASU 2014-09 will be. The effective date of ASU 2014-09 was delayed one year, changed from December 15, 2016 to December 15, 2017 by the FASB in July 2015 although entities can still elect to adopt beginning during fiscal reporting periods, beginning after December 15, 2016.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an 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 and the Company will implement any changes at that time.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 will be effective for the year ended September 30, 2017. The Company does not expect adoption of ASU 2015-03 to have a material impact on its consolidated financial statements. Upon adoption of ASU 2015-03, deferred loan fees that have historically been recorded as assets will be recorded as a debt discount and netted against the related debt in the consolidated balance sheet.

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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases: Topic 842 (ASU 2016-02) that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Under the new guidance, leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statements of Operations. Lessor accounting is largely unchanged under ASU 2016-02. Adoption of ASU 2016-02 is required for fiscal reporting periods beginning after December 15, 2018, including interim reporting periods within those fiscal years with early adoption being permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is currently evaluating the potential impact of the pending adoption of ASU 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU-2016-09). The updated guidance simplifies and changes how companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of certain items in the statement of cash flows. Adoption of ASU 2016-09 is required for fiscal reporting periods beginning after December 15, 2016. In future years, the Company will implement any changes as prescribed in this update.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). The updated guidance clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. Adoption of ASU 2016-15 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years with early adoption being permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18) which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The amended guidance requires that amounts that are deemed to be restricted cash and restricted cash equivalents be included in the cash and cash-equivalent balances in the statement of cash flows. A reconciliation between the consolidated balance sheet and the statement of cash flows must be disclosed when the consolidated balance sheet includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. The guidance also requires that changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows. An entity with a material balance of amounts generally described as restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years with early adoption being permitted. The Company is evaluating the potential impact on its consolidated financial statements.

In June 2018, the FASB issued Accounting Standards Update No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The updated guidance seeks to simplify several aspects of the accounting for nonemployee share-based payment transactions. The Company is evaluating the potential impact on its consolidated financial statements.

Note 3 – Going concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of our Company as a going concern. Since inception, we have reported net losses, including losses of $2,418,835 and $4,363,574 during the years ended September 30, 2016 and 2015, respectively, and we expect losses to continue in the near future as we grow our operations. At September 30, 2016, we have a working capital deficit of $2,614,501, and an accumulated deficit of $69,150,040. Net cash used by operating activities was $878,548 and $1,956,157 during the years ended September 30, 2016 and 2015, respectively. We have funded our operations through sales of our common and preferred stock, short-term borrowings and long-term borrowings. In this regard, during the year ended September 30, 2016, we raised a net amount of $872,582 from our financing activities. These factors raise substantial doubt about our ability to continue as a going concern.

We require additional financing to execute our business strategy and to satisfy our near-term working capital requirements. Our operating expenses will use a significant amount of our cash resources. Our management intends to raise additional financing to fund future operations and to provide additional working capital to further fund our growth. There is no assurance that such financing will be obtained in sufficient amounts necessary or on terms favorable or acceptable to us to meet our needs. In the event that we cannot obtain additional funds, on a timely basis or our operations do not generate sufficient cash flow, we may be forced to curtail our development or cease our activities. Subsequent to September 30, 2016, we have received additional investment (see note 13).

The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classifications of liabilities that may result from the outcome of this uncertainty.

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Note 4 – Net loss per share

Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Common stock equivalents for 2016 and 2015 are excluded as the effect would be anti-dilutive due to our net losses. The following numbers of shares have been excluded from net loss per share computations for the fiscal years ending September 30, 2016 and 2015, respectively:

All of the convertible preferred stock issued is convertible solely at the Company’s option. Convertible debt payments are either to be made in cash or in converted shares. (Please see Notes 8 and 9 for specific provisions of convertible of preferred stock and debt instruments.) While being exercisable, all of the common stock options exercise prices exceed the current market price for common stock.

Note 5 – Property and equipment

Property and equipment consisted of the following at September 30, 2016 and 2015, respectively:

Note 6 – Prepaid Expenses and Other Current Assets

Prepaid Expenses and Other Current Assets consist of the following at September 30, 2016 and 2015, respectively:

Note 7 – Accrued compensation due executive officers and board of directors

Due to working capital limitations, we have deferred payments of compensation to our Chief Executive Officer and former Chief Financial Officer, our former Acting Principal Financial Officer and to members of our board of directors, which are included in accrued compensation and related expenses in the accompanying consolidated balance sheets. Accrued compensation due to executive officers and board of directors consisted of the following:

Of the balance of the $747,947 and $719,540 in accrued compensation and related expenses in the consolidated balance sheets at September 30, 2016 and 2015, $60,506 and $57,803 respectively is related to accrued paid time off and to accrued payroll taxes on deferred compensation. Included in the $475,232 and $475,972 due to officers at September 31, 2016 and 2015 respectively, is $0 and $170,139, respectively, owed to Advanced Materials Advisory LLC and $60,500 and $0, respectively, owed to Jeffrey A May, PC (see note 12).

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Note 8 – Notes payable

Notes payable and accrued interest consisted of the following:

Issuance of Convertible Promissory Notes – Inter-Mountain

On May 7, 2014 we received an initial payment on a May 5, 2014 Securities Purchase Agreement with Inter-Mountain Capital Corporation LLC (“Inter-Mountain”), for the sale of a 5% Secured Convertible Promissory Note in the principal amount of $832,500, which included legal expenses in the amount of $7,500 and a $75,000 original issue discount, for net proceeds of $750,000, consisting of $450,000 paid in cash at closing in May 2014 with the remaining amount of $300,000 funded in March 2015. The outstanding balance of this note in our consolidated balance sheets at September 30, 2016, and September 30, 2015, is zero and $231,010, respectively. The note bore interest at the rate of 5% per annum. All interest and principal was to be repaid on or prior to October 7, 2015. The note, as amended, was convertible into common stock at the lesser of $0.05 per share or 75% (the “Conversion Factor”) of the average of the three (3) lowest VWAPs in the twenty (20) Trading Days immediately preceding the applicable Conversion (the “Market Price”), provided that if at any time the average of the three (3) lowest VWAPs in the twenty (20) Trading Days immediately preceding any date of measurement was below $0.01, then in such event the Conversion Factor would be reduced to 70% for all future Conversions. The Company had the option to prepay the note at the rate of 125%.

We recorded beneficial conversion feature in the amount of $76,706 for the funding paid at initial closing in May of 2014, and an additional $135,178 for the amount funded in March 2015. During the years ended September 30, 2016 and 2015, we amortized $5,024 and $178,539 respectively, to interest expense for these notes in our consolidated statements of operations. During the year ended September 30, 2016, the Company opted to convert $78,750, of principal and interest into 60,458,806 shares of common stock. On conversion, we recorded a reduction to accrued interest of $2,692, and a reduction to notes payable in the amount of $76,058. During the year ended September 30, 2015, the Company opted to convert $561,093, of principal and interest into 152,134,000 shares of common stock. On conversion, we recorded a reduction to accrued interest of $27,735, and a reduction to notes payable in the amount of $533,358. During the year ended September 30, 2015, The Company also opted to pay one installment of $69,375 in cash and recorded a reduction to accrued interest of $1,243, and a reduction to notes payable in the amount of $68,132.

On June 17, 2015 we received an initial payment on a June 16, 2015 Securities Purchase Agreement with Inter-Mountain, for the sale of a 5% Secured Convertible Promissory Note in the principal amount of $832,500, which includes legal expenses in the amount of $7,500 and a $75,000 original issue discount, for net proceeds of $750,000, consisting of $150,000 paid in cash at closing and four secured promissory notes payable to the Company, aggregating $600,000, bearing interest at the rate of 5% per annum. On July 31, 2015 one of the secured promissory notes was partially paid and the Company received $50,000 and that note had a $100,000 remaining balance. The outstanding net balance of these notes on our consolidated balance sheets at September 30, 2016, and September 30, 2015, is zero and $227,500, respectively. The note bore interest at the rate of 5% per annum. All interest and principal was to be repaid on or prior to September 15, 2016. The note was convertible into common stock at the lesser of $0.05 per share or 75% (the “Conversion Factor”) of the average of the three (3) lowest VWAPs in the twenty (20) Trading Days immediately preceding the applicable Conversion (the “Market Price”), provided that if at any time the average of the three (3) lowest VWAPs in the twenty (20) Trading Days immediately preceding any date of measurement was below $0.01, then in such event the Conversion Factor shall be reduced to 70% for all future Conversions. The Company had the option to prepay the note at the rate of 125%.

We recorded beneficial conversion feature in the amount of $95,056 for this note during the year ended September 30, 2015. During the years ended September 30, 2016 and 2015, we amortized $67,231 and $27,825, respectively to interest expense in our consolidated statements of operations.

On December 16, 2015, these notes were paid in full in the amount of $388,427.77 and replaced in the full amount by a note with Union Capital (see below). As of September 30, 2016 the Company no longer has a liability to Inter-Mountain.

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Convertible Promissory Note- Rich Niemiec

In December 2014, we issued a convertible promissory note to Rich Niemiec in the amount of $400,000 and warrants to purchase 50,000,000 shares of our common stock at the price of $0.008 per share, subject to adjustment, for proceeds of $400,000. The note was interest bearing at an initial rate of 10% per annum and had a maturity date of June 18, 2015. The Conversion Price per share of Common Stock would have been the lower of (A) the 10-day trailing volume weighted average price of the 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 would have been subject to adjustments during the period that the Note is outstanding. Each adjustment would have been 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 was less than the existing Fixed Price Component of the Conversion Price, then the New Reference Price would have been used as the new Fixed Price Component of the Conversion Price subject to a floor of $0.003 per share. This convertible promissory note was senior to all existing debt of the Borrower and was subordinate to any future line of credit backed by the Borrower’s accounts receivable and inventory. This convertible note was un-perfected but secured by the assets of the Borrower. Such security interest would have been affected upon an Event of Default. The Company recorded a debt discount related to the value of the warrants in the amount of $208,000. The debt discount amount recorded related to the warrants was determined based on the relative fair value of the note payable and the warrants. The fair value of the warrants was determined using the Black-Scholes-Merton model. The Company also recorded a debt discount related to a beneficial conversion feature in the amount of $192,000 for this note. The total debt discount of $400,000 was fully amortized to interest expense in our consolidated statement of operations for the year ended September 30, 2015. The outstanding balance of this note in our consolidated balance sheet is $400,000 at both September 30, 2016 and 2017.

On June 19, 2015, the Company opted for an automatic extension of the maturity date of the Note of six months to December 19, 2015 under the terms of the original agreement. Per these terms, the interest rate increased from 10% per annum to 18% on the outstanding principal balance, and the Company issued a warrant to purchase an additional 52,493,151 shares of common stock at an exercise price of $0.008 per share, pursuant to the terms of the agreement. The fair value of the warrant of $288,712 was determined using the Black-Sholes-Merton model and was being amortized to expense over the amended term of the debt with $128,315 and $160,397 amortized to financing costs in our consolidated statements of operations for the years ended September 30, 2016 and 2015 respectively. Subsequent to September 30, 2016, this obligation has been paid in full (see note 13).

Convertible Promissory Note Payable – JMJ Financial

On November 4, 2015 we received an initial payment of $30,000 on a Convertible Promissory Note with JMJ Financial, a Nevada sole proprietorship. The note was for an amount of up to $250,000 10% Original Issue Discount (“OID”) dated October 28, 2015. The Note was interest free if repaid within 90 days of the effective date, otherwise a one-time interest charge of 12% would be applied to the principal balance in addition to the 10% OID. The note was not repaid within 90 days and therefore incurred interest. The maturity date was to be two years from the effective date of each payment. The note was convertible into common stock at the price lesser of $0.0026 per share or 63% of the lowest trade price in the 25 trading days previous to the conversion.

We recorded beneficial conversion feature in the amount of $20,000 for this note during the year ended September 30, 2016. During the year ended September 30, 2016, we amortized $20,000 to interest expense in our consolidated statement of operations.

This note was fully converted to stock by election of note holder during the year ended September 30, 2016, with 122,148,135 shares of stock issued to the note holder, paying off the principal balance of $30,000 and accrued interest of $7,333.

December 2015 Convertible Promissory Notes Payable – Union Capital

On December 17, 2015 we received proceeds from Union Capital LLC (“Union Capital”), for the issuance of an 8% Convertible Promissory Note in the principal amount of $170,250 which included legal expenses in the amount of $70,240. In conjunction with the transaction, Union Capital retired the Company’s debt obligation to Inter-Mountain Capital LLC in full and we issued a replacement note to Union Capital in the amount of $388,428.

The notes bear interest at the rate of 8% per annum. All interest and principal was to have been repaid on or prior to December 17, 2017. The notes were convertible into common stock at the price of sixty percent (60%) of the lowest trading price in the prior 20 trading days before conversion. The Company had the option to prepay the $170,250 note at the rate of 120% of the face amount if repaid within the first 60 days.

We recorded beneficial conversion feature in the amount of $558,678 for these notes during the year ended September 30, 2016. During the year ended September 30, 2016, we have amortized $385,295 to interest expense in our consolidated statement of operations.

During the year ended September 30, 2016, Union Capital opted to convert $291,003 of principal and interest into 980,438,264 shares of common stock. On conversion, we recorded a reduction to accrued interest of $9,003 and a reduction to notes payable in the amount of $282,000.

The outstanding balances of these notes were $276,678 at September 30, 2016. Subsequent to September 30, 2016, this obligation was paid in full (see note 13).

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February 3, 2016 Convertible Note Payable – Union Capital

On February 3, 2016, we received proceeds from Union Capital, for the issuance of an 8% Convertible Redeemable Note in the principal amount of $28,000, which included legal expenses in the amount of $2,000.

The note bore interest at the rate of 8% per annum on the unpaid principal balance. All interest and principal was to have been repaid on or prior to February 3, 2017. The note and interest were convertible into common stock at the price of sixty percent (60%) of the lowest trading price in the prior 20 trading days before conversion. The Company had the option to prepay the $28,000 note at the rate of 120% of the face amount plus any accrued interest if repaid within the first 60 days. If the note was prepaid after 60 days after the issuance date, but less than 121 days after the date of issuance, then the Company would have prepaid the note at 135% of the face amount plus any accrued interest. If the note was prepaid after 120 days after the issuance date, but less than 180 days after the date of issuance, then the Company would have prepaid the note at 140% of the face amount plus any accrued interest. This note could not be prepaid after the 6^th month anniversary.

We recorded beneficial conversion feature in the amount of $28,000 for this note during the year ended September 30, 2016. During the year ended September 30, 2016, we amortized $18,664 to interest expense in our consolidated statement of operations.

The outstanding balance of this note was $28,000 at September 30, 2016. Subsequent to September, 30, 2016, this obligation was paid in full (see note 13).

February 23, 2016 Convertible Note Payable – Union Capital

On February 23, 2016, we received proceeds from Union Capital, for the issuance of an 8% Convertible Redeemable Note in the principal amount of $50,000, which included legal expenses in the amount of $2,500 and financing fees of $5,000. 

The note bore interest at the rate of 8% per annum on the unpaid principal balance. All interest and principal was to be repaid on or prior to February 23, 2017. The note and interest were convertible into common stock at the price of sixty percent (60%) of the lowest trading price in the prior 20 trading days before conversion. The Company had the option to prepay the $50,000 note at the rate of 120% of the face amount plus any accrued interest if repaid within the first 60 days. If the note was prepaid after 60 days after the issuance date, but less than 121 days after the date of issuance, then the Company would have prepaid the note at 135% of the face amount plus any accrued interest. If the note was prepaid after 120 days after the issuance date, but less than 180 days after the date of issuance, then the Company would have prepaid the note at 140% of the face amount plus any accrued interest. This note could not be prepaid after the 6^th month anniversary.

We recorded beneficial conversion feature in the amount of $50,000 for this note during the year ended September 30, 2016. During the year ended September 30, 2016, we amortized $30,211 to interest expense in our consolidated statement of operations. 

The outstanding balance of this note was $50,000 at September 30, 2016. Subsequent to September, 30, 2016, this obligation was paid in full (see note 13).

April 01, 2016 Convertible Note Payable – Union Capital

On April 2016, we received proceeds from Union Capital, for the issuance of an 8% Convertible Redeemable Note in the principal amount of $50,000, which included legal expenses in the amount of $2,500 and financing fees of $5,000. 

The note bore interest at the rate of 8% per annum on the unpaid principal balance. All interest and principal was to be repaid on or prior to April 01, 2017. The note and interest were convertible into common stock at the price of sixty percent (60%) of the lowest trading price in the prior 20 trading days before conversion.

The note terms included the following penalties: if the note was paid within 60 days of issuance date, then it could be paid off at 120% of the face amount plus any accrued interest, if the note was paid after 60 days after the date of issuance but less than 121 days after the issuance date, then the note would have been paid off at 135% of face plus any accrued interest, if the note was paid off after 120 days after the issuance date but less than 180 days after the issuance date, then the note would have been paid off at 140% of the face amount plus any accrued interest. This note could not be prepaid after the 6th month anniversary.

We recorded beneficial conversion feature in the amount of $33,333 for this note during the year ended September 30, 2016. During the year ended September 30, 2016, we have amortized $16,683 to interest expense in our consolidated statement of operations.

The outstanding balance of this note was $50,000 at September 30, 2016. Subsequent to September, 30, 2016, this obligation was paid in full (see note 13).

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Six-Month Convertible Promissory Notes

A series of six month notes were issued to various individuals and entities for bridge funding during the year ended September 30, 2016. The notes were of various amounts, from $1,000 to $125,000, totaling $405,455 all of which was outstanding at September 30, 2016. The due dates of these notes ranged from October 19, 2016 to January 17, 2017. The notes bear interest at the rate of 8% per annum on the unpaid principal balance and are secured by the assets of the Company.

The Holder of each note shall have the right, from time to time, commencing upon the Issue Date to convert all or any part of the outstanding and unpaid principal amount of this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion price. The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount by the Conversion Price on the date specified in the notice of conversion.

The conversion price per share of Common Stock (the “Conversion Price”) shall be determined (on a pre-Qualified Financing basis) by: (i) calculating the percentage of the entire unpaid principal amount of this Note sought to be converted (the “Conversion Percentage”); (ii) multiplying the sum of Three Million (3,000,000.00) dollars by the Conversion Percentage (the “Conversion Value Amount”) ; (iii) then, multiplying the number of issued and outstanding Common Shares of the Company on the Conversion Date by the Conversion Percentage (the “Conversion Share Pool”), and; (iv) then, dividing the Conversion Value Amount by the Conversion Share Pool. In the event that the Borrower consummates a Qualified Financing at a pre-money valuation of less than Three Million (3,000,000.00) dollars, for the purposes of determining the Conversion Price, such pre-money valuation if lower than Three Million (3,000,000) dollars shall replace “Three Million (3,000,000.00) dollars above. There was no beneficial conversion feature on these notes.

Please see Note 13 for additions, amendments, and conversions of these notes subsequent to September 30, 2016.

Promissory Note – Global Resource Advisors LLC

During the year ended September 30, 2015, we settled a trade debt for the issuance of a non-interest bearing note due in 180 days. At any time up to maturity date, the note bearer could have demanded common stock in full satisfaction of the balance. As of the 03/23/2016 maturity date the note was still unpaid. Since the note is unpaid after the maturity date, the Company has the option to pay the balance in cash or common stock. The Company is currently in discussions with the note holder to extend or modify repayment terms.

The outstanding balance of this note was $30,000 at both September 30, 2016 and September 30, 2015.

Promissory Note – MediaTech Capital Partners LLC

During the year ended September 30, 2016, we entered into an agreement MediaTech Capital Partners LLC (MediaTech). In return for providing strategic and advisory consulting services for up to one year, MediaTech was to be compensated in the form of a convertible note, as mutually agreed upon by MediaTech and us. As of September 30, 2016, the amount due MediaTech was $45,000 and we are still negotiating the terms of the note with MediaTech. Please see Note 13 for activity subsequent to September 30, 2016.

Note 9 – Preferred stock and common stock

Preferred Stock

Our board of directors (“the Board”) has the authority to designate and issue up to 5,000,000 shares of $0.001 par value preferred stock in one or more series, and to fix and determine the relative economic rights and preferences of preferred shares any or all of which may be greater than the rights of our common stock, as well as the authority to issue such shares without further stockholder approval. As a result, the Board could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of the common stock. In addition, shares of preferred stock could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult. Preferred stock is designated 2,222,022 shares to Series B at September 30, 2016 (2,222,022 at September 30, 2015). As of September 30, 2016, there were 2,777,978 shares of undesignated preferred stock.

Series B Preferred Stock

Holders of Series B preferred stock (“Series B”) have no redemption rights and earn interest at 6% per annum.

In 2016, the Series B holders agreed and the Board took action to terminate the voting rights provisions of the Series B stock. Prior to this action, the holders of the Series B were entitled to vote with the holders of our common stock a number of votes equal to the number of common shares available by conversion. In March 2018, the holders of Series B agreed and the Company took action to reinstate the Series B voting rights to the original terms.

Series B is convertible into common stock, at the sole discretion of management, except in the event of the resignation or termination of Dr. Gerard C. D’Couto, our current President and Chief Executive Officer in which case the holders of the Series B could elect to convert the Series B stock to common stock.

The Company may at any time redeem the Series B in cash at the face amount plus any unpaid dividends.

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The number of shares of common stock to be issued upon a conversion is calculated by (i) multiplying the number of Series B being converted by the per share purchase price received by the Company for such Series B, and then, multiplying such number by 130% and then dividing this calculated value by the average closing bid price, as defined, or by (ii) first, allocating the Series B proportionately according to the amounts by date of individual cash tranches received by the Company then, second, multiplying the number of Series B being converted, identified by tranche, by the per share purchase price received by the Company for such Series B , and then, multiplying such number or numbers by 130% and, finally, dividing the calculated value(s) by the average closing bid price, as defined.

Pursuant to the terms of the Certificate of Designation of Series B Preferred Stock, redeemed shares are returned to the Company’s general designated pool of preferred stock. As of September 30, 2016, there were 842,792 shares remaining of Series B Preferred Stock available for issue.

During the year ended September 30, 2016, the Company opted to convert 168,994 shares of Series B preferred stock and associated accrued dividends into 135,872,660 shares of common stock pursuant to the terms of the Series B certificate of designation. Also during the same period, the Company issued 187,654 shares of Series B preferred stock to investors under Securities Purchase Agreements in return for a total of $187,654 in cash. As of September 30, 2016, the Company had 1,222,236 shares of Series B issued and outstanding.

During the year ended September 30, 2015, the Company opted to convert 753,874 shares of Series B preferred stock and associated accrued dividends into 156,010,181 shares of common stock pursuant to the terms of the Series B certificate of designation. Also during the year ended September 30, 2016, the Company issued 642,462 shares of Series B preferred stock to investors under Securities Purchase Agreements in return for a total of $642,463 in cash. As of September 30, 2015, the Company had 1,203,576 shares of Series B issued and outstanding.

All sales of Series B preferred stock during the years ended September 30, 2016 and 2015 were to Summit Trading LLC (“Summit”) and Sierra Trading Corp (“Sierra”).

Common Stock

We are authorized to issue up to 5.4 billion shares of $0.001 par value common stock. Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the holders of our common stock. Subject to the rights of the holders of any class of our capital stock having any preference or priority over our common stock, the holders of shares of our common stock are entitled to receive dividends that are declared by the Board out of legally available funds. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in our net assets remaining after payment of liabilities, subject to prior rights of preferred stock, if any, then outstanding. Our common stock has no preemptive rights, conversion rights, redemption rights, or sinking fund provisions, and there are no dividends in arrears or in default. All shares of our common stock have equal distribution, liquidation and voting rights and have no preferences or exchange rights.

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

During the years ended September 30, 2016 and September 30, 2015, we issued 1,163,045,205 and 152,134,000 shares, respectively, valued at $407,086 and $561,093, respectively, on conversion of notes payable and related accrued interest. The carrying value of the notes that were converted during the years ended September 30, 2016 and 2015 amounted to $407,086 and $561,093, respectively. There was no loss on settlement of liabilities recorded in the consolidated statements of operations for either year. 

Common stock issued in connection with fees associated with notes payable

In March 2015, the Company issued 3,750,000 shares as a partial payment to Carter, Terry & Company for placement agency services. We recorded $24,000 to financing costs in the consolidated statement of operations for the year ended September 30, 2015 for this transaction. In June 2015, the Company issued 2,181,818 shares of common stock as a partial payment to Carter, Terry & Company for placement agency services. We recorded $12,000 to financing costs in the consolidated statement of operations for the year ended September 30, 2015 for this transaction.

See Note 8 for additional equity transactions in connection with fees associated with notes payable.

Common stock issued for services

During the years ended September 30, 2016 and 2015, we issued 10,761,094 and 6,646,113 shares of our common stock, respectively, valued at $176,518 and $54,375, respectively, to service providers and consultants recorded as marketing and sales expense.

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Long-term incentive compensation Plan

Our Long Term Incentive Compensation Plan (the “Plan"), as restated, was approved by shareholders in July 2014. The Plan is administered by the Board. In July 2014, shareholders also approved an automatic share reserve increase by an amount equal to ten (10%) percent of the common shares available for issuance under the Plan beginning on August 1, 2014, and on each August 1st of the next nine (9) years. The aggregate number of shares available for issuance under the Plan is 589,875,000 as of September 30, 2016. We have granted stock options under the Plan to employees, members of the Board, advisors and consultants. No options have been exercised. Options are exercisable for ten years from date of grant.

The following table summarizes stock option activity during the years ended September 30, 2016 and September 30, 2015:

There were no options granted during the year ended September 30, 2016. The weighted average fair value of the options granted during the year ended September 30, 2015 was $0.0088 per share. The weighted average remaining contractual lives of outstanding and exercisable options at September 30, 2016 was 6.6 years. As of September 30, 2016, we had no unrecognized compensation cost related to unvested options. As of September 30, 2016, the aggregate intrinsic value of options outstanding and exercisable, representing the excess of the closing market price of our common stock over the exercise price, was $0. Stock-based compensation expense related to options was $24,374 and $301,066 during the years ended September 30, 2016 and 2015, respectively, of which $0 and $75,020 was recognized as general and administrative expense, $24,374 and $134,877 was recognized as marketing and sales expense, and $0 and $91,169 was recognized as research and development expense in 2016 and 2015, respectively. We determine the value of share-based compensation using the Black-Scholes-Merton fair value option-pricing model with weighted average assumptions for options granted during the year ended September 30, 2015 including risk-free interest rate of 1.33%, volatility of 247%, expected lives of 5.75 years, and dividend yield of 0%.

Warrants

At September 30, 2016, we had warrants outstanding for the purchase of 492.6 million shares of our common stock at a weighted average exercise price of $0.0055 per share. The fair value of the warrants is calculated using the Black-Scholes-Merton model. Warrants outstanding at September 30, 2016 expire at various dates from May 2017 to June 2022.

A summary of warrant activity during the years ended September 30, 2016 and 2015 are as follows:

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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

28,200,000 warrants granted during the year ended September 30, 2016. All were granted to consultants in exchange for services to be provided. All but 900,000 of these warrants have vested as of September 30, 2016.

Of the 443,756,376 warrants granted during the year ended September 30, 2015, 270,263,225 warrants were granted to our CEO and certain board members to replace 60,270,692 previous warrants set to expire in September 2015, in exchange for continued commitment to accrue director fees/wages, continued commitment to assist the Company’s capital raising efforts and commitment to continue rendering services to the Company during the current underfunded period. These warrants were fully vested on grant and thus, there was not deemed to be a requisite service period and we recorded the full fair value of these warrants of $918,626 to expense in the year ended September 30, 2015. The fair value was determined by using the Black-Scholes-Merton option pricing model. 

Note 10 – Income taxes

We have recorded no provision or benefit for income taxes. The difference between tax at the statutory rate and no tax is primarily due to the full valuation allowance. The valuation allowance increased by $637,332 and $1,269,238 during the years ended September 30, 2016 and 2015, respectively. A valuation allowance has been recorded in the full amount of total deferred tax assets as it has not been determined that it is more likely than not that these deferred tax assets will be realized. As of September 30, 2016, we have net operating loss carry forwards of $56.1 million, which begin to expire in 2023 and will continue to expire through 2036 if not otherwise utilized. Our ability to use such net operating losses and tax credit carry forwards is subject to annual limitations due to change of control provisions under Sections 382 and 383 of the Internal Revenue Code, and such limitation would be significant. Realization is dependent on generating sufficient taxable income prior to expiration.

Deferred income taxes represent the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.

Significant components of our deferred tax assets and liabilities and related valuation allowances at September 30, 2016 and, 2015 are as follows:

We have identified our federal tax return as our “major” tax jurisdiction, as defined. Tax years from 2011 are subject to audit. We believe our income tax filing positions and deductions will be sustained on audit and we do not anticipate any adjustments that would result in a material change to our financial position. No reserves for uncertain income tax positions have been recorded. Our policy for recording interest and penalties associated with uncertain income tax positions is to record such items as a component of interest expense.

Note 11 – Commitments and contingencies

Lease and Facilities

Our rent expense for the years ended September 30, 2016 and 2015 was $90,092 and $159,127, respectively. As of September 30, 2016, we do not have any lease commitments. In March 2015, we entered into a consulting agreement with Polaris Laboratories for $2,000 per month to provide consulting services along with access to laboratory facilities where some of our equipment is stored. This agreement can be discontinued with 30 days’ notice. The remaining personal property assets are being stored in a local, Seattle area storage facility on a month-to-month agreement at minimal cost.

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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Litigation

From time to time, the Company is subject to various legal proceedings that arise in the ordinary course of business. In the opinion of management, none of which are currently material to our operations.

Disputes with various vendors

Certain of our vendors and lenders have brought suits and/or obtained judgments in their favor regarding past due balances owed them by us. We have recorded these past due balances in liabilities in our consolidated balance sheets at September 30, 2016 and 2015. We do not believe any loss in excess of amounts recorded that could arise would be material. We have not recorded any liabilities for finance charges or legal fees that could be applied by the vendors or lenders to these debts.

Accounts Payable reduction

During the years ending September 30, 2016 and 2015, the Company reduced accounts payable by $125,092 and $331,560, respectively, that the Company determined it no longer had a legal obligation to the vendors based upon the vendors’ legal status and the applicable legal statutes. A gain of $125,092 and $303,646, respectively, was recognized in our consolidated statements of operations for the years ended September 30, 2016 and 2015

Note 12 – Related party transactions

For purposes of these consolidated financial statements, Summit, Sierra and Green World Trust, are considered related parties due to their beneficial ownership (shareholdings or voting rights) in excess of 5%, or their affiliate status, during the years ended September 30, 2016 and 2015. All material transactions with these investors and other related parties for the years ended September 30, 2016 and 2015, not listed elsewhere, are listed below.

During the year ended September 30, 2016, the Company opted to convert 83,000 shares of Series B into 66,030,614 shares of common stock per the Series B certificate of designation for Sierra in three separate tranches.

During the year ended September 30, 2016, the Company opted to convert 85,994 shares of Series B into 69,842,046 shares of common stock per the Series B certificate of designation for Summit in three separate tranches.

During the year ended September 30, 2015, the Company opted to convert 250,789 shares of Series B, together with dividends in the amount of $16,486, into 57,336,304 shares of common stock per the Series B certificate of designation for Sierra in one tranche.

During the year ended September 30, 2015, the Company opted to convert 503,085 shares of Series B, together with dividends in the amount of $29,677, into 98,673,877 shares of common stock per the Series B certificate of designation for Summit in three separate tranches.

All sales of Series B during the years ended September 30, 2016 and 2015 were to Summit and Sierra.

During the years ended September 30, 2016 and 2015, we recorded consulting expense in the amount of $66,000 and $132,000, respectively, with Advanced Materials Advisory, LLC (“Advanced Materials”) for services by David Schmidt as Acting Principal Financial Officer. Advanced Materials is owned by David Schmidt, who was also a member of the Board until March 2016. The Company had account balances with Advanced Materials Advisory LLC of $224,900 and $170,139 at September 30, 2016 and 2015, respectively, included in liabilities. Effective March 31, 2016, Mr. Schmidt resigned from the Board and as Acting Principal Financial Officer.

On April 15, 2016, the Company appointed Jeffrey A. May as Chief Financial Officer and principal financial officer of the Company effective as of that date. In the year ended September 30, 2016, we recorded $55,000 in expense for his services in these roles. The Company had an account balance of $60,500 with Mr. May as of September 30, 2016, included in liabilities in the consolidated balance sheet.

Note 13 – Subsequent events 

Due to the capital constraints and the costs associated with being an SEC reporting company and maintaining its public status, the Company chose to file a Form 15 on May 15, 2017, terminating its obligation to file current, quarterly and annual SEC reports. The Company intends to maintain its non-reporting status for the foreseeable future, and will evaluate its various options based upon future business development. At the request of the Financial Industry Regulatory Agency (“FINRA”), the Company is filing this Form 10-K and the Form 10-Q for the following quarter to make our filings current as of the filing date of the Form 15.

Subsequent to September 30, 2016, the Company has satisfied all loan obligations with Union Capital through conversions to common stock and cash payments in payment of principal and interest. In May 2017, the Company paid $439,678 in cash against the loans, of which $285,728 was applied to principal and $153,950 to interest. In July 2017, Union Capital opted to convert $42,664 of principal and interest into 237,019,787 shares of common stock, of which $35,000 was applied against principal and $7,664 to accrued interest. In April 2018, Union Capital opted to convert $30,864 of principal and interest into 257,199,566 shares of common stock of which $22,825 was applied against principal and $8,039 to accrued interest. In April and June 2018, the Company paid $23,065 in remaining principal and interest, of which $15,960 was applied against principal and $7,105 to accrued interest.

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NEAH POWER SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the period from October 2016 through May 2017, the Company entered into an additional series of Six Month Convertible notes (see Note 8) and received proceeds of $458,500. These notes carry the same terms and 8% interest rate as the earlier notes and are secured by the assets of the Company. In total, the Company has received $864,000 in proceeds from these convertible notes. During the period from April 2017 and through March 2018, the Company entered into amendments to extend the original maturity dates for $496,500 of these agreements with interest accruing during such periods at the rate of ten (10%) percent, per annum thereafter, if not paid in full or if not converted in full into the Borrower’s Common Stock on or before the extended maturity date, the Promissory Note maturity date would be automatically extended for an additional six (6) months with interest accruing during such period at the rate of twelve (12%) percent, per annum. In March 2018, the Company and investors of $819,000 of the bridge notes entered into a Convertible Note Settlement Agreement whereby the notes would be converted into 549,607 shares of the new Class A Common Stock. The Company is negotiating with the remaining note holders to also convert the remaining $45,000 in notes.

In April 2017, the Company entered into a securities purchase agreement with Image Securities FZC to sell 370,000,000 shares of the Company’s common stock for a total of $5 million, beginning with an initial $1,000,000 followed by $200,000 per month for 20 months. In May 2018, the Company entered into an amended agreement with the investor to instead purchase 1,162,000 shares of Class A Common Stock for the $5 million investment. As of the date of this report, the Company has received $2,200,000 from this investor for 511,280 shares of Class A Common Stock.

In May 2017, the Company paid the $400,000 principal balance Rich Niemiec in cash. The Company has also issued 26,700,000 of common stock in payment of $154,236 in accrued interest.

In August 2017, the Company entered into a “Trade Debt Settlement Agreement and Promissory Note” with MediaTech where, in exchange of a trade debt balance of $45,000, the Company agreed to issue 3,462,000 shares of common stock in settlement of the obligation.

In September 2017, Jeffrey May resigned as Chief Financial Officer and principal financial officer.

In February 2018, the Company entered into an agreement to sell 1,622,400 shares of its new Class A Common Stock when authorized to an investor from Dubai, United Arab Emirates for a purchase price of $2,000,000. In May 2018, the Company and the investor agreed to an amendment committing an additional 597,100 shares of Class A Common Stock for a purchase price of $716,520. As of the date of this report, the Company has received $700,000 in proceeds from this investor.

In March of 2018, the Company filed with the State of Nevada an Amendment to Certificate of Designation After Issuance of Class or Series which restored the common stock voting rights of holders of Series B to state “the holders of the Series B Preferred Stock will be entitled to vote with the Company’s Common Stock with the number of votes equal to the number of common shares available by conversion to the holders of the Series B Preferred Stock as calculated in Section 9(c)(ii).”

In March 2018 upon approval by the Board, owners of a majority of the Company’s outstanding voting shares, voted to amend its Articles of Incorporation to authorize 15,000,000 new Class A Common Shares (“Class A Common Stock”). The shares shall rank senior to the Company’s common stock and any class or series of capital stock in case of distribution of the assets of the Corporation in the event of liquidation. The Class A Common Stock shall be entitled to a dividend, accruing at the simple interest rate of 10%, payable in cash or shares of Class A Common Stock upon declaration by the Board. The holders of the Class A Common Stock will be entitled to twenty thousand (20,000) votes per share and will be entitled to vote with the Company’s Common Stock on all matters properly brought before the shareholders of the Company. In April 2018, the Company filed with the State of Nevada an “Amendment to Certificate of Designation After Issuance of Class or Series” to affect these changes. In addition, the Company also amended its Articles of Incorporation to change its name to XNRGI, Inc. In May 2018, owners of a majority of the Company's voting shares approved these actions. The name change is pending FINRA approval.

In March 2018, the Board approved the 2018 Class A Common Shares Stock Plan (“the Plan”) which permits the Company to grant various types of stock incentive awards. The Plan reserves an aggregate 4,800,000 shares of Class A Common Stock for awards under the Plan. In May 2018, owners of a majority of the Company's voting shares approved the Plan.

In May 2018, the Company entered into an agreement to sell 71,429 shares of its new Class A Common Stock to an investor from Dubai, United Arab Emirates for a purchase price of $100,000. As of the date of this report, the Company has received the $100,000 in proceeds from this investor.

In May 2018, the Company entered into an agreement with Summit and Sierra to convert all shares of Series B to shares of the new Class A Common Stock. Summit holds 592,542 shares of Series B to be converted into 228,571 shares of Class A Common Stock. Sierra holds 629,695 shares of Series B to be converted into 265,637 shares of Class A Common Stock.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There are not and have not been any disagreements between us and our accountants on any matter of accounting principles, practices or financial statement disclosure.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of senior management, which is comprised of our Chief Executive Officer (“CEO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our CEO concluded that our disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act due to the material weaknesses in our internal control over financial reporting. A discussion of the material weaknesses in our internal control over financial reporting is described below.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, is a process designed by, or under the supervision of, our CEO or persons performing similar functions, and effected by our board of directors, management or other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, with the participation of our CEO, has established and maintained policies and procedures designed to maintain the adequacy of our internal control over financial reporting, and include those policies and procedures that:

·         pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

·         provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

·         provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the interim or annual Consolidated Financial Statements.

In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in the Internal Control Integrated Framework-2013, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management was unable to implement its remediation plans during 2016 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, 2016.

Management has determined that, as of the September 30, 2016 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:

·         inadequate personnel for documenting and execution of processes related to accounting for transactions;

·         inadequate segregation of duties due to the limited size of the accounting staff; and

·         a lack of experienced personnel with relevant accounting and financial reporting experience, due in part to our limited financial resources.

We intend to design and implement policies and procedures to remediate the material weaknesses in our internal control over financial reporting in future fiscal accounting years, including the continued implementation of a new accounting system and related internal procedures, and pending the financial resources, the hiring of a qualified staff.

Management does not believe that any of our annual or interim financial statements issued to date contain a material misstatement as a result of the aforementioned weaknesses in our internal control over financial reporting.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.

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Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting or in other factors during the fourth fiscal quarter ended September 30, 2016 that materially affected, or is likely to materially affect, our internal control over financial reporting.

Limitations on Internal Controls

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all errors or misstatements and all fraud. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance that the objectives of the policies and procedures are met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Board of Directors and Executive Officers

The table below lists certain biographical information regarding our current directors and executive officers. As of July 23, 2018, our board of directors consists of three directors. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal. Executive officers are appointed by our board of directors, and each executive officer holds his office until he resigns or is removed by our Board or his successor is elected then qualified. There are no family relationships among members of our management or our Board.

Background / Experience                      

Dr. Gerard C. (Chris) D’Couto. Dr. Gerard C. D’Couto has served as a member of our Board since January 28, 2008 and as our Chief Executive Officer and President since February 2008. Dr. D’Couto previously served as our Chief Operating Officer and Executive Vice President from September 2007 until February 2008. Prior to joining us, Dr. D’Couto served as senior director of marketing at Form Factor Inc. from January 2006 until September 2007, where he headed the launch of NAND flash and DRAM sort probe cards. Prior to that, Dr. D’Couto had a nine-year tenure at Novellus Systems, Inc., with positions of increasing responsibility ranging from product management to technology development and sales. Prior to that, Dr. D’Couto worked at Varian Associates and as a consultant to Intel Corporation. Dr. D’Couto received a bachelor’s degree in chemical engineering from the Coimbatore Institute of Technology in India and also received a master’s and a doctoral degree in chemical engineering from Clarkson University in New York. Dr. D’Couto also earned an MBA from the Haas School of Business at the University of California, Berkeley. Dr. D’Couto was chosen to serve on our Board because of his management and operational skills from his business school education and past management positions as well as his technical knowledge related to our fuel cell technology.

Jon M. Garfield. Jon M. Garfield has served on our Board since May 2008. Mr. Garfield formerly served as the CFO of Monte Nido LLC a behavioral healthcare treatment facility from 2015 to January 2016. He also served as a board member of Seaniemac International, Ltd. (OTCMKTS: BETS) from 2013 until 2016.  Mr. Garfield served as Chief Executive Officer of technology company Clearant, Inc. (OTCBB: CLRA) from January 2007 until August 2010 and as Chief Financial Officer at Clearant, Inc. from September 2006 until August 2010. Mr. Garfield has served as a member of Clearant, Inc.’s board of directors from May 2007 until August 2010. From September 2001 through 2006, Mr. Garfield served as an independent financial consultant, including advising as to SEC reporting obligations and Sarbanes-Oxley compliance. From 1998 until 2001, he served as Chief Financial Officer of a telecom service provider and a software developer. From 1996 to 1998, he served as Vice President of Acquisitions for the formerly NYSE-listed ground transportation consolidator Coach USA, Inc. From 1991 to 1996, Mr. Garfield served as Corporate Assistant Controller of Maxxim Medical, Inc., a formerly New York Stock Exchange listed manufacturer and distributor. During 1986 to 1991, Mr. Garfield practiced public accounting with Arthur Andersen and PricewaterhouseCoopers. Mr. Garfield received a Bachelor of Business Administration in Accounting from University of Texas, Austin. Mr. Garfield was chosen to serve on our Board because of his past experience in chief executive officer and chief financial officer roles at public companies and because of his financial literacy.

Paul Sidlo. Paul Sidlo, a former member of the Company’s Board of Directors (2008-2009) has served now on our board since February 2017. Mr. Sidlo was formerly the CEO and President of REZN8 Production which he founded in 1987 and is currently a Special Projects Manager consultant. REZN8 Productions was an early pioneer company in the 3D computer animation user interface. REZN8 Productions engages with clients that included Microsoft, XBOX, Netflix, Microsoft Surface, Microsoft Home of the Future, Citibank, Intel, five Olympics, 14 Super Bowls, the Academy Awards, and CBS, NBC, ABC, and Fox Networks, for which Mr. Sidlo received nine Emmy awards. Since 2001, he has served as a Strategic Consultant and Board member of EMN8 (now Tillster), an enterprise that provides order and pay solutions for the retail businesses such as Yum International, Pizza Hut, KFC, Burger King, Taco Bell, Baskin Robins and the top 40 quick-service restaurants around the world. Between 2014 and 2016, Mr. Sidlo served as Executive Vice President, Partner and Chief Marketing Officer for Litricity, a company that developed and patented a way to reduce the capital cost of its solar energy system while at the same time increasing the electricity output. In addition, he served as a Marketing Consultant to Amici Enterprises from 2015 to 2016, a company that provides industrial, commercial and government organizations with a proven cool, clean, conditioned power technology that reduces total power consumption by 20% to 40%. Mr. Sidlo graduated from Ohio State University with a BA in Communications.

Board Committees

During fiscal 2016 and to the date of this report, there have been five standing committees of our board of directors - Audit, Compensation, Nominating, Financing and Governance Committees.

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Audit Committee

We have an Audit Committee of the Board consisting only of Jon M. Garfield as its sole member and Chair. Our Board has determined that Mr. Garfield qualifies as an Audit Committee financial expert. In addition to being independent under Nasdaq Marketplace Rule 5605(a)(2), Mr. Garfield meets the additional independence and qualification standards for audit committee members set forth in Nasdaq Marketplace Rule 5605(c)(2)(A). The Audit Committee functions in part as an independent and objective party with oversight of our financial reporting process and internal controls.

Compensation Committee

The Compensation Committee consists only of Jon M Garfield. The functions of the Compensation Committee are to review and approve the goals of the Chief Executive Officer, to review and approve salaries, bonuses and other benefits payable to our executive officers and to administer our Long Term Incentive Compensation Plan and the surviving cash portion of the Director, Officer, and Employee Sales Incentive Plan.

Nominating Committee

The Nominating Committee consists of Jon M Garfield, and Gerard C. D’Couto. The Nomination Committee is responsible for proposing a slate of directors for election by the stockholders at each annual stockholders meeting and for proposing candidates to fill any vacancies.

Financing Committee

The Financing Committee consists only of Gerard C. D’Couto as its sole member and Chair. The Financing Committee is responsible for evaluating various financing options and recommending to the full Board various financing avenues.

Governance Committee

The Governance Committee consists only of Jon M Garfield . The Governance Committee is responsible for supervision and oversight of our general operations.

Code of Ethics

We have adopted a Code of Ethics and Business Conduct for our principal executive, financial and accounting officers. The Code of Ethics addresses such issues as conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of our assets, compliance with applicable laws (including insider trading laws) and reporting of illegal or unethical behavior. We are committed to ensuring transparent and good corporate governance in our dealings with all stakeholders. Our Code of Ethics can be found on our website at http://www.neahpower.com.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our securities, to file with the SEC reports of ownership of our securities and changes in reported ownership. Officers, directors and greater than ten percent stockholders are required by SEC rules to furnish us with copies of all Section 16(a) reports they file.

 Based solely on a review of the reports furnished to us, or written representations from reporting persons that reportable transactions were reported, we believe that during the fiscal year ended September 30, 2016, our officers, directors and greater than ten percent stockholders timely filed the reports they were required to file under Section 16(a).

ITEM 11. EXECUTIVE COMPENSATION

 The following table shows for each of the two fiscal years ended September 30, 2016 and 2015, all compensation awarded or paid to, or earned by, Gerard C. D’Couto, our Chief Executive Officer and David Schmidt, our Acting Principal Officer (“collectively, the  “Named Executive Officers”).  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 (see Note 11 to our Notes to Consolidated Financial Statements).  Other than the Named Executive Officers, we had no executive officers whose compensation exceeded $100,000 during the fiscal years ended September 30, 2016 and 2015.

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Summary Compensation Table 

(1)           This column represents the aggregate grant-date fair value of the awards computed in accordance with FASB ASC Topic 718. These amounts reflect our accounting value for these awards and do not necessarily correspond to the actual value that may be realized by the named executive officer. The assumptions used in the calculation of these amounts are described in Note 11 to our Consolidated Financial Statements included with this Annual Report on Form 10-K.

(2)           Consists of health related benefits provided to employees.

(3)           Mr. May served as Chief Financial Officer from April 2016 through the date of his resignation in September 2017. Amounts for Mr. May are for consulting fees earned from his appointment date through September 30, 2016.

(4)           Mr. Schmidt is a Board member and a consultant.  Amounts for Mr. Schmidt are earned consulting fees for the years ended September 30, 2016 and September 30, 2015. Mr. Schmidt resigned from the board in April 2016.

Outstanding Equity Awards at Fiscal Year-End

    The following table sets forth information regarding the outstanding equity awards held by our Named Executive Officers as of September 30, 2016:  

(1)    These warrants replace 41,705,537 previous warrants in exchange for continued commitment to accrue director fees/wages, continued commitment to assist the Company’s capital raising efforts and commitment to continue rendering services to the Company during the current underfunded period. These warrants are fully vested as of September 30, 2015.

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 589,875,000 as of September 30, 2016.   We have granted stock options under the Plan to employees, members of our board of directors, advisors and consultants. No options have been exercised. Options are exercisable for ten years from date of grant.

Employment, Severance and Change in Control Agreements

Under the terms of the Offer Letter entered into between Dr. Gerard C. (Chris) D’Couto and the Company when Dr. D’Couto joined us as Chief Operating Officer, Dr. D’Couto receives a per annum base salary of $225,000 and a bonus equal to 50% of his base salary upon the completion of certain milestones. In the event Dr. D’Couto’s employment is terminated (i) for any reason other than for cause or a winding down of our operations or (ii) due to a change in control where he is not offered a comparable position at a similar compensation, Dr. D’Couto will be entitled to a severance payment equal to six months of his then current base salary.

In June 2012, we appointed David Schmidt, a member of our Board of Directors and Chairman of the Governance and Nominating Committees, to serve part time as Acting Principal Financial Officer of the Company. Acting Principal Financial Officer services and consulting services were provided by Advanced Materials Advisory LLC on a monthly basis at the rate of $11,000 per month. Mr. Schmidt resigned from the board in April 2016.

In April 2016, we appointed Jeffrey A. May as Chief Financial Officer and principal financial officer of the Company. Mr. May’s services were provided through Jeffrey A. May, PC on a monthly basis at the rate of $11,000 per month.

Compensation of Directors

On August 23, 2011, our Board of Directors approved a Cash Compensation Plan for the directors on the Board, to be administered by the Compensation Committee. The Cash Compensation Plan effective as of August 23, 2011 and covers current members of the Board. Cash compensation will accrue effective from the date that the director originally joined the Board, but no earlier than June 1, 2009 and, with the exception of retainer compensation, will be pro-rated based on attendance at Board and Committee meetings. The effectiveness of the Cash Compensation Plan and the payment of compensation are conditional upon our receiving cash in the amount of at least $1.5 million either by direct outside investment or from sales or from licensing revenues. The following sets forth the cash compensation plan: 

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Except as described above, we do not have any formal policy for the compensation of our non-employee directors. Our Board has made grants of stock options to our outside directors at various times as compensation for our director’s service on the Board. In the future, we anticipate adopting a policy of paying directors a fee for their attendance at board and committee meetings if the financial condition of our Company improves.

The following table sets forth information regarding the compensation of directors during the fiscal year ended September 30, 2016:

Director Compensation

(1)     This column represents the aggregate grant-date fair value of the awards computed in accordance with FASB ASC Topic 718. These amounts reflect our accounting value for these awards and do not necessarily correspond to the actual value that may be realized by the named executive officer. The assumptions used in the calculation of these amounts are described in note 11 to our Consolidated Financial Statements included with this Annual Report on Form 10-K.

(2)     Dr. D’Couto’s compensation for fiscal year 2016 is fully reflected in the “Summary Compensation Table” above. Mr. D’Couto received no additional compensation for his service as a director.

(3)     Mr. Sakaguchi’s earned fees of $25,000 have been deferred as of September 30, 2016. During the year ended September 30, 2015, Mr. Sakaguchi received 28,707,742 warrants that replace 6,427,344 previous warrants in exchange for continued commitment to accrue director fees/wages, continued commitment to assist the Company’s capital raising efforts and commitment to continue rendering services to the Company during the current underfunded period. These warrants are fully vested as of September 30, 2015. Mr. Sakaguchi resigned from the board in February 2017.  

(4)     Mr. Garfield’s earned fees of $13,500 have been deferred as of September 30, 2016. During the year ended September 30, 2015, Mr. Garfield received 54,213,548 warrants that replace 12,137,811 previous warrants in exchange for continued commitment to accrue director fees/wages, continued commitment to assist the Company’s capital raising efforts and commitment to continue rendering services to the Company during the current underfunded period. These warrants are fully vested as of September 30, 2015.

(5)     Mr. Shenkin’s earned fees of $13,500 have been deferred as of September 30, 2016. Mr. Shenkin resigned from the board in September 2017.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table presents information as of September 30, 2016 concerning the beneficial ownership of our common stock and each of our outstanding classes of preferred by the following persons or groups:

·         each person who, to our knowledge, beneficially owns more than 5% of our common stock or any class of preferred stock;

·         each Named Executive Officer identified in the Executive Compensation table above;

·         each of our current directors; and

·         all of our current directors and executive officers as a group.

Percentage of common stock beneficially owned is based on 2,596,508,421 shares of common stock outstanding on September 30, 2016. In accordance with SEC rules, when we computed the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed as outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of September 30, 2016. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

This table is based upon information supplied by executive officers, directors and principal shareholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, to our knowledge, each of the shareholders named in this table has sole voting and investment power with respect to the common stock shown as beneficially owned. The address for each of our officers and directors is c/o Neah Power Systems, Inc., 22722 29th Drive SE, Suite 100, Bothell, WA 98021.

(1)     Gerard C. D’Couto is the beneficial owner of 331,414,830 shares of common stock, which consists of 400,002 common shares, 187,341,935 shares of common stock underlying warrants, and 143,672,893 shares of common stock underlying options.

(2)     Jeffrey Sakaguchi is the beneficial owner of 48,415,489 shares of common stock, which consists of 10,395,010 shares of common shares, 35,135,086 shares of common stock underlying warrants and 2,885,393 shares of common stock underlying options.

(3)     Jon Garfield is the beneficial owner of 69,252,377 shares of common stock, which consists of 66,351,359 shares of common stock underlying warrants and 2,901,018 shares of common stock underlying options.

(4)     Sierra Trading Corp (“Sierra”) is a Florida corporation. We have been advised that Daisy Rodriguez owns 100% of Sierra. Daisy Rodriguez is a private investor married to the primary beneficiary of Summit Trading Limited. Sierra owns 629,695 shares of our series B preferred stock which is convertible at our sole option into shares of our common stock. As of September 30, 2016 the shares would have been convertible into an estimated 505,597,111 shares of our common stock (the exact number of which is not determinable at this time because the Series B are convertible into shares of our common stock based on the future trading price of our common stock). 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.

(5)     Summit Trading Limited (“Summit”) is a Bahamian holding company and is owned by the Weast Family Trust. The Weast Family Trust is a private trust established for the benefit of C.S. Arnold, Daisy Rodriguez, Stephanie Kaye and Tracia Fields. C.S. Arnold is the settlor of the Weast Family Trust. The natural person exercising voting control of the shares of our common stock held by Summit is Daryl Orenge. The address of Summit is Charlotte House, P.O. Box N-65, Charlotte Street, Nassau, Bahamas. Summit owns 59,750 shares of our common stock and 592,541 shares of our preferred series B stock, which is convertible at our sole option into shares of our common stock. As of September 30, 2016 the series B shares would have been convertible into an estimated  416,410,000  shares of our common stock (the exact number of which is not determinable at this time because the Series B are convertible into shares of our common stock based on the future trading price of our common stock). 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.

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Description of Equity Incentive Compensation Plans

We have one equity compensation plan; our 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 589,875,000 as of September 30, 2016. We have granted stock options under the Plan to employees, members of our board of directors, advisors and consultants. No options have been exercised. Options are exercisable for ten years from date of grant.

The table below sets forth certain information as of September 30, 2016 regarding the shares of common stock available for grant or granted under our equity incentive plans:

Equity Incentive Compensation Plan Information

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

Transactions that existed or occurred between us and any of our executive officers or directors, or any affiliate of or person related to any of them, since the beginning of 2015 fiscal year of the type and amount that is disclosed below.

·         During the year ended September 30,2015, due to limited financial resources, the Board of Directors and Management was offered the ability to convert their accrued wages or accrued fees for services rendered into warrants for a period of 180 days beginning August 26, 2015 with the number of warrants and their strike price to be determined as follows: The board member or management outstanding accrued fees/wages multiplied by two (2) and divided by the Strike Price which would be the trailing average 10-day closing bid. As of the date of this report, no Board Member has exercised this offer to convert their accrued wages or accrued fees. It was also determined that in order to entice continued accrual of fees earned, that the expiring warrants in connection with a previous conversion of accrued fees would be re-issued to the existing board members with the strike price determined as above; the trailing average 10-day closing bid. Pursuant to this clause, the following warrants were re-issued at a strike price of $0.0031: Jeffrey B. Sakaguchi, Chairman of the Board, was issued 28,707,742 shares having a Black-Scholes-Merton value of $97,578, Jon Garfield, Board Member, was issued 54,213,548 shares having a Black-Scholes-Merton value of $184,272, Gerald C D’Couto, CEO and Board Member, was issued 187,341,935 shares having a Black-Scholes-Merton value of $636,776.

·         During the years ended September 30, 2016 and 2015, we recorded consulting expense in the amount of $66,000 and $132,000, respectively, with Advanced Materials Advisory, LLC (“Advanced Materials”) for services by David Schmidt as Acting Principal Financial Officer. Advanced Materials is owned by David Schmidt, who is also a Member of Neah's Board of Directors. The Company has an account balance with Advanced Materials of $224,900 and $170,139 at September 30, 2016 and 2015, respectively. Mr. Schmidt resigned from the board and as the Acting Principal Financial Officer in April 2016.

·         During the years ended September 30, 2016, we recorded accounting expense in the amount of $55,000 Jeffrey A. May PC for services by Jeffrey May as Chief Financial Officer and Principal Financial Officer. The Company has an account balance with Jeffrey A. May PC of $60,500 at September 30, 2016. Mr. May resigned as Chief Financial Officer and Principal Financial Officer in September 2017.

Director Independence

The Board has adopted the listing standards of The NASDAQ Stock Market for determining the independence of our directors. The Board has determined that Paul Sidlo and Jon M. Garfield qualify as independent directors in accordance with Nasdaq Marketplace Rule 5605(a)(2). In addition, our Board made a subjective determination as to each of the foregoing individuals that no relationships exist that, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out their responsibilities as a director.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Selection of Independent Registered Public Accounting Firm

Our board of directors approved the continued engagement of Peterson Sullivan LLP as our independent registered public accounting firm for our fiscal year ending September 30, 2016. Peterson Sullivan was also ratified by our voters in the Company’s Proxy of 2015. Peterson Sullivan LLP has been our principal accountant since 2006 and audited our Consolidated Financial Statements for the fiscal years ended September 30, 2016 and 2015.

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Audit and Related Fees for Fiscal 2016 and 2015

The following table sets forth the aggregate fees billed by Peterson Sullivan LLP, our independent registered public accounting firm, for professional services rendered to us during the fiscal years ended September 30, 2016 and 2015. The audit committee has considered these fees and services and has determined that the provision of these services is compatible with maintaining the independence of each firm.

(1)     “Audit Fees” represent fees and expenses for professional services rendered for the audits of our annual financial statements for the applicable year and for the review of the financial statements included in our quarterly reports on Form 10-Q for the applicable year.

(2)     “Audit Related Fees” consist of fees billed for assurance and related services that are related to the performance of the audit or review of our financial statements and registration filings with the SEC and are not reported as audit fees.

(3)     “Tax Fees” consist of preparation of our federal and state tax returns, review of quarterly estimated payments, and consultation concerning tax compliance issues. We did not engage Peterson Sullivan LLP for tax services during fiscal 2016 or 2015, and instead we use a third-party consulting firm.

Audit Committee Pre-Approval Policies and Procedures

The policy of the Audit Committee is to pre-approve all audit and permissible non-audit services provided by our independent auditors. All of the services rendered to us by Peterson Sullivan LLP for the periods ended September 30, 2016 and 2015 were pre-approved by the Audit Committee at the time of the engagement of Peterson Sullivan LLP.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements.

The financial statements listed in the Index to Financial Statements are filed as part of this Annual Report on Form 10-K.

(a)(2) Financial Statement Schedules

                None required.

(a)(3) Exhibits.

The exhibits required by this Item are set forth on the Exhibit Index attached hereto.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Neah Power Systems, Inc., the registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of Neah Power Systems, Inc., in the capacities and on the dates indicated.

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Exhibit Index

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