Attached files
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EX-10.1 - NEAH POWER SYSTEMS, INC. | v195026_ex10-1.htm |
EX-10.2 - NEAH POWER SYSTEMS, INC. | v195026_ex10-2.htm |
EX-32.2 - NEAH POWER SYSTEMS, INC. | v195026_ex32-2.htm |
EX-31.1 - NEAH POWER SYSTEMS, INC. | v195026_ex31-1.htm |
EX-32.1 - NEAH POWER SYSTEMS, INC. | v195026_ex32-1.htm |
EX-31.2 - NEAH POWER SYSTEMS, INC. | v195026_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended June 30,
2010
Commission
file number 000-49962
NEAH
POWER SYSTEMS, INC.
(Exact
name of Registrant as specified in its charter)
Nevada
|
88-0418806
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification Number)
|
22118
20th Avenue SE, Suite 142
Bothell,
Washington 98021
(Address
of principal executive offices)
(425)
424-3324
(Issuer’s
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No x
(The
registrant is not yet required to submit Interactive Data.)
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer Accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do
not check if a smaller reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No þ
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
Outstanding
as of August 16, 2010
|
Common
Stock, $0.001 par value
|
51,808,102
|
NEAH
POWER SYSTEMS, INC.
TABLE OF
CONTENTS
PAGE
|
||
PART
I - FINANCIAL INFORMATION
|
||
Item
1. Financial Statements
|
|
|
Condensed
Consolidated Balance Sheets - June 30, 2010 and September 30,
2009
|
1
|
|
Condensed
Consolidated Statements of Operations for the three and nine months ended
June 30, 2010 and 2009
|
2
|
|
Condensed
Consolidated Statements of Cash Flows for the three and nine months ended
June 30, 2010 and 2009
|
3
|
|
Condensed
Consolidated Statement of Stockholders’ Equity (Deficit) for the nine
months ended June 30, 2010
|
4
|
|
Notes
to Condensed Consolidated Financial Statements
|
5-16
|
|
Item
2. Management’s Discussion and Analysis
|
17-23
|
|
Item
4T. Controls and Procedures
|
24
|
|
PART
II - OTHER INFORMATION
|
||
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
25
|
|
Item
3. Legal Proceedings
|
25
|
|
Item
6. Exhibits
|
25
|
|
Signatures
|
26
|
NEAH
POWER SYSTEMS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
June 30,
2010 and September 30, 2009
June
30,
|
September
30,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 2,702 | $ | 20,223 | ||||
Deferred
financing costs, net
|
— | 28,594 | ||||||
Prepaid
expenses and other current assets
|
28,672 | 63,956 | ||||||
Total
current assets
|
31,374 | 112,773 | ||||||
Property
and equipment, net
|
27,296 | 43,919 | ||||||
Intangible
assets, net
|
356,722 | 0 | ||||||
Total
assets
|
$ | 415,392 | $ | 156,692 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 1,805,855 | $ | 1,763,581 | ||||
Accrued
expenses and other liabilities
|
1,240,015 | 521,439 | ||||||
Notes
payable - related parties
|
302,416 | 102,416 | ||||||
Notes
payable, net of debt discount of $0 and $8,745,
respectively
|
1,136,781 | 1,776,299 | ||||||
Deferred
revenue
|
189,500 | 189,500 | ||||||
Total
current liabilities
|
4,674,567 | 4,353,235 | ||||||
Total
liabilities
|
4,674,567 | 4,353,235 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
equity (deficit)
|
||||||||
Common
stock and additional paid-in-capital
|
||||||||
$0.001
par value, 80,000,000 shares authorized, 57,911,563 and
34,833,598
|
||||||||
shares
issued and 51,568,102 and 34,377,890 outstanding,
respectively
|
49,297,440 | 44,077,472 | ||||||
Treasury
stock, 112,590 common shares, at no cost
|
||||||||
Accumulated
deficit
|
(53,556,615 | ) | (48,274,015 | ) | ||||
Total
stockholders' deficit
|
(4,259,175 | ) | (4,196,543 | ) | ||||
Total
liabilities and stockholders' equity (deficit)
|
$ | 415,392 | $ | 156,692 |
See Notes
to Condensed Consolidated Financial Statements
1
NEAH
POWER SYSTEMS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Three and Nine months Ended June 30, 2010 and 2009
For
the
|
For
the
|
For
the
|
For
the
|
|||||||||||||
Three
Months Ended
|
Three
Months Ended
|
Nine
Months Ended
|
Nine
Months Ended
|
|||||||||||||
June 30, 2010
|
June 30, 2009
|
June 30, 2010
|
June 30, 2009
|
|||||||||||||
Contract
Revenues
|
$ | — | $ | 161,349 | $ | — | $ | 1,106,976 | ||||||||
Operating
expenses
|
||||||||||||||||
Research
and development expense
|
158,052 | 194,342 | 531,754 | 1,118,874 | ||||||||||||
General
and administrative expense
|
827,572 | 176,979 | 3,823,571 | 743,648 | ||||||||||||
Total
operating expenses
|
985,624 | 371,321 | 4,355,325 | 1,862,522 | ||||||||||||
Loss
from operations
|
(985,624 | ) | (209,972 | ) | (4,355,325 | ) | (755,546 | ) | ||||||||
Other
expense
|
||||||||||||||||
Financing
costs
|
(2,117 | ) | (148,626 | ) | (127,189 | ) | (199,792 | ) | ||||||||
Interest
expense
|
(69,869 | ) | (376,792 | ) | (684,033 | ) | (1,148,878 | ) | ||||||||
Loss
on extinguishment of debt
|
(116,053 | ) | — | (116,053 | ) | — | ||||||||||
Net
Loss
|
$ | (1,173,663 | ) | $ | (735,390 | ) | $ | (5,282,600 | ) | $ | (2,104,216 | ) | ||||
Basic
and diluted loss per common share
|
$ | (0.03 | ) | $ | (0.07 | ) | $ | (0.14 | ) | $ | (0.24 | ) | ||||
Basic
and diluted weighted average common shares outstanding
|
43,285,814 | 10,644,585 | 38,894,694 | 8,602,322 |
See Notes
to Condensed Consolidated Financial Statements
2
NEAH
POWER SYSTEMS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
Nine months Ended June 30, 2010 and 2009
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (5,282,600 | ) | $ | (2,104,216 | ) | ||
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
||||||||
Depreciation
|
16,623 | 21,752 | ||||||
Amortization
of deferred financing costs
|
127,189 | 199,792 | ||||||
Amortization
of intangible assets
|
356,722 | - | ||||||
Share-based
payments included in operating expenses
|
2,351,305 | 71,952 | ||||||
Issuance
of note payable to related parties as consideration for consulting
services
|
300,000 | - | ||||||
Non-cash
forbearance fees on note payable
|
- | 567,000 | ||||||
Amortization
of debt discount
|
36,958 | 60,464 | ||||||
Interest
paid with common stock or warrants
|
286,026 | 410,951 | ||||||
Loss
on extinguishment of debt
|
116,053 | - | ||||||
Loss
on disposal of assets
|
- | 263 | ||||||
Changes
in operating assets and liabilities, net of effects of business
combination
|
||||||||
Contract
receivable
|
- | 39,718 | ||||||
Prepaid
expenses and other current assets
|
(5,266 | ) | (10,611 | ) | ||||
Accounts
payable
|
213,770 | (20,646 | ) | |||||
Accrued
expenses and other liabilities
|
342,432 | 169,902 | ||||||
Net
cash used by operating activities
|
(1,140,788 | ) | (593,679 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Issuance
of notes receivable
|
- | (16,000 | ) | |||||
Other
|
1,388 | - | ||||||
Net
cash provided by (used by) investing activities
|
1,388 | (16,000 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Net
proceeds from sale of common stock
|
937,586 | - | ||||||
Net
proceeds from notes payable
|
183,424 | 478,925 | ||||||
Proceeds
from warrant exercises
|
869 | - | ||||||
Proceeds
from sale of Series A convertible preferred stock
|
- | 147,620 | ||||||
Principal
payments on notes payable
|
- | (27,584 | ) | |||||
Net
cash provided by financing activities
|
1,121,879 | 598,961 | ||||||
Net
change in cash and cash equivalents
|
(17,521 | ) | (10,718 | ) | ||||
Cash
and cash equivalents, beginning of period
|
20,223 | 59,661 | ||||||
Cash
and cash equivalents, end of period
|
$ | 2,702 | $ | 48,943 | ||||
Supplemental
cash flow information
|
||||||||
Cash
paid for interest
|
$ | - | $ | - | ||||
Cash
paid for income taxes
|
$ | - | $ | - | ||||
Noncash
investing and financing activities
|
||||||||
Settlement
of notes payable with issuance of stock
|
$ | 1,121,120 | $ | — | ||||
Issuance
of shares for purchase of SolCool
|
$ | 245,148 | $ | - | ||||
Accounts
payable financed with Note Payable
|
$ | 141,047 | $ | — | ||||
Settlement
of accounts payable with issuance of stock
|
$ | 86,639 | $ | 20,000 | ||||
Deferred
financing costs paid with issuance of common stock
|
$ | 75,221 | $ | 241,904 | ||||
Original
issue discount on notes payable
|
$ | 28,123 | $ | 85,000 | ||||
Increase
in note payable due to forbearance fee
|
$ | - | $ | 567,000 | ||||
Shares
issued in partial payment of forebearance fee on note
payable
|
$ | - | $ | 327,000 |
See Notes
to Condensed Consolidated Financial Statements
3
NEAH
POWER SYSTEMS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
for the nine months ended June 30,
2010
Common
Stock and APIC
|
Treasury
Stock
|
Total
|
||||||||||||||||||||||
Number
of Shares
|
Number
|
Accumulated
|
Stockholders'
|
|||||||||||||||||||||
Outstanding
|
Amount
|
of
Shares
|
Amount
|
Deficit
|
(Deficit)
|
|||||||||||||||||||
Balances
at September 30, 2009
|
34,377,890 | $ | 44,077,472 | (112,590 | ) | $ | - | $ | (48,274,015 | ) | $ | (4,196,543 | ) | |||||||||||
Shares
issued in connection with settlement of liabilities
|
8,401,429 | 1,323,813 | 1,323,813 | |||||||||||||||||||||
Issuance
of common stock for cash, net of fees
|
5,871,636 | 937,586 | 937,586 | |||||||||||||||||||||
Exercise
of warrants
|
26,058 | 869 | 869 | |||||||||||||||||||||
Issuance
of common stock for Solcool acquisition
|
476,187 | 245,148 | 245,148 | |||||||||||||||||||||
Common
stock and warrants issued for services
|
1,808,176 | 2,136,483 | 2,136,483 | |||||||||||||||||||||
Compensation
related to stock options, net of cancellations and
forfeitures
|
214,822 | 214,822 | ||||||||||||||||||||||
Shares
issued for financing costs
|
191,880 | 75,221 | 75,221 | |||||||||||||||||||||
Shares
issued in payment of interest on notes payable
|
414,846 | 286,026 | 286,026 | |||||||||||||||||||||
Net
loss for the nine months ended June 30, 2010
|
(5,282,600 | ) | (5,282,600 | ) | ||||||||||||||||||||
Balances
at June 30, 2010
|
51,568,102 | $ | 49,297,440 | (112,590 | ) | $ | - | $ | (53,556,615 | ) | $ | (4,259,175 | ) |
See Notes
to Condensed Consolidated Financial Statements
4
Note
1. Business
We are
engaged in the development and sale of renewable energy solutions. Our fuel
cells are designed to replace existing rechargeable battery technology in mobile
electronic devices and small-scale transportation vehicles. Our long-lasting,
efficient and safe power solutions for these devices, such as notebook PCs,
military radios, and other power-hungry computer, entertainment and
communications products, use our patented, silicon-based design with higher
power densities to enable lighter-weight, smaller form-factors and potentially
lower costs.
On
September 19, 2009, we entered into a first amended and restated agreement and
plan of merger (the “Amended Merger Agreement”) with SolCool One, LLC
(“SolCool”). Under the terms of the Amended Merger Agreement, Neah Power
Acquisition Corp. (“Merger Sub”), our wholly-owned subsidiary, was merged into
SolCool (the “Merger”). On January 13, 2010, we effectively assumed control of
Solcool, subject to other customary closing conditions. See Note 4 for
additional discussion of the acquisition.
In July
2010, we received notice to exit the Amended Merger Agreement on basis that we
failed to fund SolCool on a timely basis under the terms of the Amended Merger
Agreement. We are not contesting this notice and have negotiated the termination
of the Amended Merger Agreement. As full and final termination of the agreement,
we will return to SolCool all membership units and SolCool will return all our
common shares issued to SolCool members (Note
4).
Note
2. Going Concern
We have
prepared our condensed consolidated financial statements assuming that we will
continue as a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. We had
approximately $3,000 in unrestricted cash on hand as of June 30, 2010. We had an
accumulated deficit as of June 30, 2010 of $53,557,000 and negative working
capital of $4,643,000. For the nine months ended June 30, 2010 and 2009, we had
negative cash flow from operating activities of $1,141,000 and $594,000,
respectively. We have limited capital resources and have sustained substantial
losses, which raise substantial doubt about our ability to continue as a going
concern. We must, therefore, raise sufficient capital to fund our overhead
burden and our continuing research and development efforts going forward.
Without this funding, our current cash balance is estimated to support our
operations through approximately September 15, 2010. No assurance can be given
that we will be successful in obtaining adequate capital on acceptable
conditions or at all. We have significantly reduced work hours, including the
implementation of furloughs, of various employees to reduce our operating cost,
while we focus on raising capital. Such reduced work hours and furloughs will
stay in place until we are better capitalized. Our operations are currently
focused on raising capital, sales, and business development.
We have
relied primarily on sales of securities and proceeds from borrowings for
operating capital. During the nine months ended June 30, 2010, we raised capital
by selling promissory notes for a total of $222,000 with net proceeds of
$183,000 received upon closing. We also raised capital by selling shares of our
common stock for a total, net of fees, of $938,000.
The
condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should we have to curtail
operations or be unable to continue in existence.
Note 3. Summary of Significant
Accounting Policies
Basis of
Presentation
The
accompanying unaudited condensed consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All material
intercompany balances and transactions have been eliminated. The interim
financial statements reflect all adjustments, consisting only of normal
recurring adjustments that, in the opinion of management, are necessary for a
fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year. The condensed consolidated financial
statements as of and for the three and nine months ended June 30, 2010 have been
derived from the unaudited financial statements at that date. However, they
do not include all of the information and notes required by accounting
principles generally accepted in the United States for complete financial
statements. The accompanying condensed consolidated financial statements should
be read in conjunction with the audited Consolidated Financial Statements for
the year ended September 30, 2009, included in the our Annual Report on Form
10-K filed with the Securities and Exchange Commission on January 13,
2010.
5
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’ equity (deficit).
Use of
Estimates
In
preparing financial statements conforming with accounting principles generally
accepted in the United States, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Cash and Cash
Equivalents
Cash and
cash equivalents consist of cash and short-term investments that are readily
convertible to cash and have original maturities of three months or less at the
time of acquisition. On occasion, we may maintain cash balances in excess of
federal insurance limits. We have not experienced any losses related to these
balances, and believe our credit risk is minimal.
Intangible
Assets
Intangible
assets are amortized over their estimated useful lives and are tested for
impairment when facts and circumstances indicate that the carrying values may
not be recoverable.
Fair Value of Financial
Instruments
We
consider the fair value of cash and cash equivalents, accounts payable, notes
payable and accrued expenses to not be materially different from their carrying
value. These financial instruments have short-term maturities. Effective October
1, 2008, we adopted the authoritative guidance for financial assets and
liabilities which defines fair value, provides guidance for measuring fair value
and requires certain disclosures. At June 30, 2010 and September 30, 2009, we
had no financial assets or liabilities subject to fair value
measurement.
Loss per
Share
Basic
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common stock shares outstanding
during the period. Diluted loss per share, which would include the effect of the
conversion of unexercised stock options, unexercised warrants to common stock,
preferred stock, and convertible debt, is not separately computed because
inclusion of such conversions is antidilutive due to our net losses.
Accordingly, basic and diluted loss per share is the same.
6
Basic
weighted average common shares outstanding, and the potentially dilutive
securities excluded from loss per share computations because they are
antidilutive, are as follows:
Three
Months Ended
June
30,
|
Nine
months Ended
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic
and diluted weighted average common Shares outstanding
|
43,285,814 | 10,644,585 | 38,894,694 | 8,602,322 | ||||||||||||
Potentially
dilutive securities excluded from loss per share
computations:
|
— | |||||||||||||||
Convertible
Series A Preferred Stock
|
0 | 19,126,392 | 0 | 19,126,392 | ||||||||||||
Convertible
debt
|
351,337 | 195,500 | 351,337 | 195,500 | ||||||||||||
Common
stock options
|
5,308,680 | 180,263 | 5,308,680 | 180,263 | ||||||||||||
Common
stock purchase warrants
|
1,012,774 | 463,874 | 1,012,774 | 463,874 |
Recent Accounting
Pronouncements
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued a new
accounting standard which provides guidance for arrangements with multiple
deliverables. Specifically, the new standard requires an entity to
allocate consideration at the inception of an arrangement to all of its
deliverables based on their relative selling prices. In the absence
of vendor-specific objective evidence or third-party evidence of the selling
prices, consideration must be allocated to the deliverables based on
management’s best estimate of the selling prices. In addition, the
new standard eliminates the use of the residual method of
allocation. In October 2009, the FASB also issued a new accounting
standard which changes revenue recognition for tangible products containing
software and hardware elements. Specifically tangible products
containing software and hardware that function together to deliver the tangible
products’ essential functionality are scoped out of the existing software
revenue recognition guidance and will be accounted for under the multiple
–element arrangements revenue recognition accounting guidance. We
adopted these new standards in the first quarter of 2010 using the prospective
method, and the adoption did not have a material impact on our condensed
consolidated financial statements.
In
January 2010, the FASB issued an amendment regarding improving disclosures about
fair value measurements. This new guidance requires some new disclosures and
clarifies some existing disclosure requirements about fair value measurement.
The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010 and for interim
periods within those fiscal years. The adoption of this guidance did not have a
material impact on our condensed consolidated financial statements.
Note
4. Solcool Acquisition
During
the nine months ended June 30, 2010, pursuant to terms of an Amended Merger
Agreement we acquired all outstanding member interests and obtained control of
SolCool, a leading supplier of direct current solar air-conditioning systems for
off-the-grid applications, in exchange for the issuance of 476,187 shares of our
common stock recorded at fair value of approximately $245,000, based on the
closing price of our common stock on the acquisition
date. Approximately 238,100 shares of stock were issued to escrow to
be released September 2011 (24 months from the date of the Amended Merger
Agreement) under certain conditions, including the continued employment and best
efforts of the SolCool founder and former majority interest holder.
The
acquisition of SolCool is accounted for pursuant to the acquisition method under
accounting guidance issued by the FASB with January 13, 2010 being the
acquisition date when we obtained control. This accounting guidance
requires, among other things, that assets acquired and liabilities assumed be
recognized at their fair values as of the acquisition date. Portions
of the purchase price have been allocated to intangible assets, which were
identified by management and have been valued on a number of factors based upon
preliminary estimates. Amounts recorded reflect management’s preliminary
estimates of fair values of assets acquired and liabilities assumed at the
acquisition date. These estimates are preliminary because management has not yet
obtained all of the information that it has arranged to obtain and that is known
to be available. Accordingly, purchase price allocations are
preliminary. Revisions to current estimates could be necessary as the
valuation process review is finalized, and such revisions may be materially
different from that presented. It is currently expected that the
process of determining fair value of the intangible assets acquired and
liabilities assumed will be completed within one year of acquisition
date.
7
Intangible
assets identified by management include SolCool’s distribution network and
customer relationships. The fair values of identifiable intangible
assets were determined using the income approach. Estimated lives of
intangible assets were determined to be one year and were based on factors
including, among others, the expected use of the assets, effects of demand,
competition and the level of funding required to obtain the expected future cash
flows from the assets. Amortization expense of intangible assets approximated
$179,000 and $357,000 for the three and nine months ended June 30, 2010, and
amortization expense of approximately $178,000 for each of the next two fiscal
quarters is expected.
A
preliminary allocation of the aggregate $275,000 purchase price, comprised of
$245,000 of common stock, and $30,000 of funds previously advanced to SolCool,
is summarized below (in thousands):
Assets:
|
Liabilities
and net assets acquired:
|
||||||||
Cash
and cash equivalents
|
$ | 1 |
Accounts
payable and accrued liabilities
|
$ | 439 | ||||
Identifiable
intangible assets
|
713 |
Net
assets acquired
|
275 | ||||||
$ | 714 | $ | 714 |
SolCool’s
operating results are included in our consolidated financial statements since
the acquisition date, and consisted of general and administrative expenses of
$366,000, including intangible asset amortization expense of $357,000. The
following table sets forth certain unaudited pro forma consolidated statements
of operations information for the nine months ended June 30, 2010 and 2009,
presented on the basis as if the acquisition was consummated on the same terms
at the beginning of the respective periods (in thousands, except earnings per
share):
Nine months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
$ | - | $ | 1,146 | ||||
Research
and development expense
|
(532 | ) | (1,119 | ) | ||||
General
and administrative expense
|
(4,041 | ) | (1,448 | ) | ||||
Provision
for asset impairment - SolCool
|
- | (648 | ) | |||||
Loss
from operations
|
(4,573 | ) | (2,069 | ) | ||||
Interest
expense
|
(811 | ) | (1,349 | ) | ||||
Loss
on extinguishment of debt - Neah Power
|
(116 | ) | ||||||
Gain
on settlement of liabilities – SolCool
|
- | 389 | ||||||
Net
loss
|
$ | (5,500 | ) | $ | (3,029 | ) | ||
Basic
pro forma net loss per share
|
$ | (0.14 | ) | $ | (0.33 | ) |
In July
2010, we received notice to exit the Amended Merger Agreement on basis that we
failed to fund SolCool on a timely basis under the terms of the Amended Merger
Agreement. We are not contesting this notice and have negotiated the termination
of the Amended Merger Agreement. As full and final termination of the agreement,
we will return to SolCool all membership units and SolCool will return all our
common shares issued to SolCool members
Note
5. Notes Payable
Agile Opportunity Fund, LLC
and Capitoline Advisors,
Inc. - In February 2009, we
entered into a Securities Purchase Agreement with each of Agile Opportunity
Fund, LLC (“Agile”) and Capitoline Advisors Inc. (“Capitoline”) under which we
were to receive funding through the issuance of Notes in the aggregate amount of
$1,050,000 and an aggregate purchase price of $900,000, with a maturity date of
August 12, 2009 and prepaid interest at the rate of 18% per annum. The Notes are
convertible into shares of our common stock at a conversion price of $3.33 per
share, at the discretion of the creditor, and were originally subject to
down-round adjustment to conversion price based on future common stock
issuances. In February 2010, the Notes were amended under the Omnibus Amendment
No. 1 such that effective September 30, 2009, the down-round adjustment
provision no longer exists. The Notes are also subject to mandatory redemption
in the event we enter into a going private transaction or we are sold. The Notes
are secured by all our assets and, upon conversion, have certain piggyback
registration rights. In October 2009, we entered into a 4th
Amendment to the Securities Purchase Agreement with Agile and Capitoline whereby
we issued 10,000,000 shares of our common stock to be held as additional
collateral for the Notes issued to these lenders. The value of all of the shares
of our common stock issued under the terms of the Securities Purchase Agreement
has been calculated using the market value of such stock on the date of
issuance.
8
On April 8, 2010, we received a letter
from Agile and Capitoline stating that we were in default under section 7 of the
Securities Purchase Agreement for having failed to pay the Notes when due and
for the notice of default that we recently received from CAMHZN Master LDC for
which we filed a Current Report on Form 8-K on March 22, 2010. Under the default
notice, Agile and Capitoline demanded payment of $1,427,049, which they believe
represented principal and interest due under the Notes as of that
date.
In
conjunction with the notice of default, Agile and Capitoline foreclosed on
4,502,306 shares of the 10,000,000 shares of our common stock held by Agile and
Capitoline as collateral to be applied against the principal of the Notes. On
April 22, 2010, the 4,502,306 shares, with a market value on that date of
$991,000, were released to Agile and Capitoline and have been applied against
the balance of the Notes.
In the
three and nine months ended June 30, 2010, we received funds from Capitoline in
aggregate face amounts of $0 and $169,000, respectively, with OIDs of $0 and
$28,000, respectively, and aggregate purchase price amounts of $0 and $197,000,
respectively. The OID was recorded as debt discount and has been amortized in
its entirety as interest expense as of June 30, 2010. In consideration for the
Notes issued during the nine months ended June 30, 2010, 91,000 common shares,
valued at $75,000 are issuable under the terms of the agreement. This has been
recorded as financing costs and is being amortized over the term of the Notes.
Under the terms of the agreement, 415,000 additional shares valued at $286,000
are also issuable and have been recorded as interest expense
As of
June 30, 2010 and September 30, 2009, we recorded $340,000 and $635,000,
respectively, in principal and interest due Agile and Capitoline. The stated
interest rate upon the event of default is the lower of 36% or the statutory
maximum. We have recorded interest expense effective from the maturity dates of
the notes at a rate of 25% which is the maximum rate that can be applied to
these loans under New York State law.
CAMHZN Master LDC - In
November 2007, we sold a $500,000 12% convertible secured promissory note,
amended in May 2008 to mature on September 29, 2008, to CAMHZN Master LDC
(“CAMHZN”) for net
proceeds of $465,000. In January 2009, we entered into an amended loan agreement
with CAMHZN, whereby effective December 31, 2008, CAMHZN agreed to forbear from
exercising any remedies available under its loan documents or applicable law
through March 2009 (the “December 31, 2008 Letter Agreement”). In exchange for
CAMHZN’s forbearance, we agreed to pay a fee of $567,000 which was added to the
principal balance of the loan and payable in cash or stock at our discretion. In
February 2009, we released to CAMHZN, recorded as partial payment of the fee,
1,635,000 shares valued at $327,000. These shares were formerly held by CAMHZN
as collateral shares under the amended note agreement.
On March
16, 2010, we received a letter from CAMHZN stating that we were in default on
the outstanding note. CAMHZN stated that we failed to make any payment to CAMHZN
under the note and also failed under the December 31, 2008 Letter Agreement to
(i) provide evidence of the increased principal amount of the note and (ii)
issue additional shares of our common stock for management fees and CAMHZN’s
legal expenses and as new collateral to secure our performance under the
December 31, 2008 Letter Agreement. We are contesting the default notice and are
disputing the validity of the December 31, 2008 Letter Agreement.
We are
currently disputing certain of the facts and circumstances regarding certain of
the demands set forth in CAMHZN’s notice of default, including obligations
related to the delivery of shares and the principal of amount of the outstanding
note. Specifically, we dispute the validity of the December 31, 2008 Letter
Agreement, which added $567,000 to the principal balance. We are also disputing
the treatment of the 1,650,000 shares as a reduction to this additional
principal. Management has not reflected any change to previous
accounting treatment for the transactions given the uncertainty regarding the
ultimate resolution of these matters. To the extent new facts become known or
ultimate settlement of this note occurs, the impact of the change will be
reflected in the financial statements at that time.
9
On August
3, 2010, we entered into an agreement with CAMHZN under which we agreed to issue
240,000 shares of our common stock to CAMHZN in addition to the 1,018,305 shares
of our common stock that it already owns. CAMHZN agreed to (i) limit the number
of shares of our common stock that it would sell to 5% of the average daily
volume of our common stock, at or above the daily market price of our common
stock traded on the OTCBB; (ii) return any excess shares after CAMHZN has
received the unpaid principal and accrued and unpaid interest due under the
convertible note issued; and (iii) rescind the notice of default CAMHZN
delivered to us on March 16, 2010 as reported in the Current Report on Form 8-K
dated March 22, 2010.
As of
June 30, 2010, we have recorded $740,000 as the note balance outstanding and
$308,000 in accrued interest due CAMHZN. The stated interest rate upon the event
of default is the lower of 36% or the statutory maximum. We have recorded
interest expense effective from the maturity dates of the notes at a rate of 25%
which is the maximum rate that can be applied to these loans under New York
State law.
Aspen Technologies - In July
2008, we entered into an agreement with Aspen Technologies (“Aspen”), our
vendor, whereby the accounts payable balances owed to Aspen would be converted
to a note payable up to a maximum of $100,000. Under the terms of the note
payable, we would pay Aspen eight equal payments of $12,500 per month beginning
in August 2008 until the outstanding principal balance was paid. In payment of
interest on the note, we issued five year warrants to purchase 9,000 shares of
our common stock at $1.00 per share. As of June 30, 2010 and September 30, 2009,
the principal balance was $89,000. As of the date of this report, no payments
have been made. We have no assurance that Aspen will refrain from taking actions
against us under the terms of the note.
Seyfarth Shaw - In February
2010, we entered into an agreement with Seyfarth Shaw LLP (“Seyfarth”), our
legal counsel, whereby the accounts payable balance of $141,047 owed to Seyfarth
was converted to a 6% note payable June 1, 2010. As of the date of this report,
the balance on the note remains unpaid. We have no assurance that Seyfarth will
refrain from taking actions against us under the terms of the note.
Related
Party Notes
In September and October 2009, we
received funds from Daisy Rodriguez, a private investor married to the primary
beneficiary of Summit Trading Limited (“Summit”), one of our investors, in the
aggregate face amounts of $100,000 and $25,000, respectively and accruing
interest at a 6% annual rate. In June 2010, we paid the notes and accrued
interest in full by the issuance of our common stock (see Note 6).
In June
2010, we entered into an advisory services agreement with Summit whereby Summit
will indentify, introduce, engage, and compensate investor relations and/or
public relations firms on our behalf. Under the terms of this agreement as
consideration for those services, we issued Summit a note for $300,000 payable
upon demand. The expense for this agreement was recorded in general and
administrative expense during the quarter ended June 30, 2010 as public
relations services. The principal balance is included in notes payable, related
parties on our condensed consolidated balance sheets at June 30,
2010.
In August
2008, we entered into a note agreement with our President and Chief Executive
Officer, Dr. Gerard C. D’Couto. Under the agreement, as amended, we borrowed
$30,000 with interest at 10% compounded monthly and a maturity date of March 29,
2009. As of June 30, 2010 and September 30, 2009, the remaining note balance was
$2,400. The principal balance is included in notes payable, related parties on
our condensed consolidated balance sheets.
10
Note
6. Stockholders’ Equity (Deficit)
Common Stock – Holders of our
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the holders of our common stock. Subject to the
rights of the holders of any class of our capital stock having any preference or
priority over our common stock, the holders of shares of our common stock are
entitled to receive dividends that are declared by our board of directors out of
legally available funds. In the event of our liquidation, dissolution or winding
up, the holders of our common stock are entitled to share ratably in our net
assets remaining after payment of liabilities, subject to prior rights of
preferred stock, if any, then outstanding. Our common stock has no preemptive
rights, conversion rights, redemption rights, or sinking fund provisions, and
there are no dividends in arrears or in default. All shares of our common stock
have equal distribution, liquidation and voting rights and have no preferences
or exchange rights.
Common Stock Splits – In July
2009, we effectuated the 200:1 reverse common stock split approved by
shareholders in August 2008. In August 2009, the Financial Industry Regulatory
Authority approved our request for a 6:1 forward stock split of our common
shares as approved by our board of directors. The record date for this split was
August 14, 2009. All common share and per share amounts included in these
condensed consolidated financial statements have been adjusted retroactively to
reflect the effects of these splits.
Upon the
implementation of the 200:1 reverse common stock split, the authorized shares of
common stock were reduced to 20 million shares from 500 million. In July 2009,
our board of directors approved the increase in authorized common stock from
20,000,000 shares to 80,000,000 shares.
Common Stock Issuances – In
January 2010, we entered into a Stock Purchase Agreement (the “Stock Purchase
Agreement”) with each of First Equity Trust, Inc. (“First Equity”), Amber
Capital Corporation (“Amber”), and Knightsbridge Law Co., Ltd
(“Knightsbridge”) (collectively, the “Investors”) under which each of the
Investors has committed to purchase up to $5 million of our common stock. Under
the terms of each Stock Purchase Agreement, from time to time until one year
from the date of the Stock Purchase Agreement and at our sole discretion, we may
present each of the Investors with a tranche notice to purchase such common
stock (the “Notice”). The Investors are obligated to purchase such common stock
by the tenth trading day after the Notice date (the “Tranche Closing”), subject
to satisfaction of certain closing conditions. The Investors will not be
obligated to purchase the common stock in the event the closing price of our
common stock during the nine trading days following delivery of a Notice falls
below 75% of the closing price on the trading day prior to the date such Notice
is delivered to the Investors. As financing fees, we will also issue to
Investors, at each Tranche Closing, common stock equal to 20% of the number of
common shares purchased at the Tranche Closing. In addition, we will pay to the
Investors from the proceeds at each Tranche closing a 2% Success Fee.
Notwithstanding any of the other provisions of this Agreement, and to provide
some initial capital, each of the Investors agreed to invest $250,000 in return
for which we shall issue 250,000 shares of Common Stock to the Investor at a
price of $1.00 per share.
During
the three and nine months ended June 30, 2010, we issued 2,368,406 shares of
common stock to First Equity and received $700,000 in net proceeds under the
Stock Purchase Agreement.
In June
2010, we entered into two Stock Purchase and Subscription Agreements (the
“Agreements”) with Amber under which we issued 2,986,667 shares of our common
stock for net proceeds of $112,000.
On April
22, 2010, Agile and Capitoline foreclosed on 4,502,306 shares of the 10,000,000
shares of our common stock held by Agile and Capitoline as collateral to be
applied against the principal of the Notes (see Note 5).
In
January 2010, we entered into a Reserve Equity Financing Agreement with AGS
Capital Group LLC (“AGS Capital”) under which AGS Capital agreed to purchase
pursuant to tranche notices up to $5,000,000 of our common stock under certain
conditions, including that a registration statement be effective for such shares
after the first 1,015,000 shares of our common stock are purchased by AGS
Capital. In addition, any advance amount shall be automatically reduced by 50%,
unless, if on any day during the five trading days after the advance notice, the
Volume Weighted Average Price (“VWAP”) for that day does not meet or exceed a
“Floor Price”, defined as the price equal to 85% of the VWAP of our common stock
for the five trading days prior to the advance notice date, or any other price
mutually agreed upon by us and AGS Capital in writing. In addition, the number
of shares of our common stock issuable to AGS Capital pursuant to an advance
cannot cause the aggregate number of shares of our common stock beneficially
owned by AGS Capital and its affiliates to exceed 9.99% of the then outstanding
shares of our common stock. Prior to the consummation of the agreement, which
occurred in January 2010, 960,000 restricted shares were issued as a deposit in
escrow for future common shares to be purchased by AGS Capital. These shares
were recorded as issued but not outstanding. During the nine months ended June
30, 2010, we sold 500,000 shares of our common stock to AGS, for cash proceeds,
net of financing fees, of $106,000, based on the closing prices of our stock on
the dates of issuance, which were applied against the balance of deposited
shares. In May 2010, we entered into an amended agreement with AGS Capital
whereby we agreed to issue an additional 1,545,000 unregistered shares of which
1,500,000 are to be used as credit towards shares for advance notices. In
addition, we agreed to pay a minimum of $6,000 in cash fees to be paid to AGS
from the proceeds. During the three and nine months ended June 30, 2010, we also
issued 45,000 and 100,000 shares, valued at $4,000 and $37,000, respectively,
based on the closing prices of our stock on the dates of issuance, in payment of
financing fees under the amended agreement.
11
In June
2010, pursuant to an Exchange Agreement dated June 17, 2010, we issued 3,333,000
shares of our common stock with a fair value of $243,000 to Daisy Rodriguez, a
private investor married to the primary beneficiary of Summit, for payment in
full against note payables and interest in the amount of $127,000 and recorded
$116,053 as a loss from the extinguishment of debt.
In May
2010, we issued 500,000 shares of our common stock, valued at $40,000 to Michael
Selsman, one of the members of our board of directors, in payment of an account
balance owing for past public relations services.
In May
2010, we issued 74,000 shares of our common stock, valued at $13,000, to Atlanta
Capital Partners LLC for public relations services.
In
February 2010, we issued 25,000 shares of our common stock, valued at $14,750 to
Cardinal Advisors LLC for consulting services.
In
December 2009, we sold 17,000 shares of our common stock to Green World Trust
and received $9,500 in proceeds.
Under the
terms of the Amended Merger Agreement with SolCool, we issued 476,000 shares of
our common stock valued at $245,000 to the owners of SolCool (see Note
4).
In
October 2009, we entered into an advisory services agreement with Summit whereby
Summit will identify, introduce, engage, and compensate investor relations
and/or public relations firms (“Firms”) on our behalf. Under the terms of this
agreement, we issued Summit 1,650,000 shares of our common stock, 95% of the
value of which is to represent compensation to be applied against services
provide by Firms. The shares were valued at $1,914,000 based on the market value
of the stock, and were recorded to general and administrative expense during the
first quarter of fiscal 2010 as public relations services.
During
the nine months ended June 30, 2010, we issued 53,000 shares of our common stock
valued at $32,000, based on the market value of the stock, for services and
payments in settlement of liabilities.
During
the nine months ended June 30, 2010, we issued 13,000 shares of our common
stock valued at $15,000, based on the market value of the stock, in payment of
accrued board of director expenses.
Share-Based Compensation - To
calculate the value of share-based compensation, we use the Black-Scholes fair
value option-pricing model with the following weighted average assumptions for
options and warrants granted during the three and nine months ended June 30,
2010:
Three
Months
|
Nine
Months
|
|||||||
Ended
June 30,
|
Ended
June 30,
|
|||||||
2010
|
2010
|
|||||||
Risk
free interest rate
|
2.2 | % | 2.2 | % | ||||
Expected
dividend yield
|
0 | % | 0 | % | ||||
Volatility
|
225.9 | % | 226.0 | % | ||||
Expected
life in years
|
5.0 | 4.8 |
12
In June
2010, we cancelled approximately 2,719,000 stock options previously issued to
employees having a weighted average exercise price of $1.28 and, in June 2010,
we issued these employees an aggregate of 4,856,000 new options having an
exercise price of $0.08 per share, which was equal to the fair value of our
common stock on the date of grant. As a result of these transactions, which are
being accounted for as a modification, the incremental value of the new options
in excess of the value of the old options, was $178,000 which is being
recognized over the vesting period of the new options. In the three months ended
June 30, 2010, $35,000 of this amount was recognized ad compensation expense, of
which $3,000 was recorded to R&D expense and $31,000 was recorded to G&A
expense.
There
were no warrants or stock options granted during the nine months ended June 30,
2009.
Share-based
payments recognized as operating expense are as follows for the three and nine
months ended June 30, 2010 and 2009:
Three Months Ended June 30,
|
Nine Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Common
stock options
|
$ | 103,508 | $ | 5,306 | $ | 214,822 | $ | 16,023 | ||||||||
Common
stock purchase warrants
|
41,374 | 0 | 143,513 | 13,329 | ||||||||||||
Issuance
of common stock
|
12,500 | 0 | 1,992,970 | 42,600 | ||||||||||||
Total
share based payments
|
$ | 157,382 | $ | 5,306 | $ | 2,351,305 | $ | 71,952 | ||||||||
Total
share based payments were recorded as follows:
|
||||||||||||||||
Research
and development expense
|
29,225 | 1,288 | 29,225 | 2,682 | ||||||||||||
General
and administrative expense
|
128,157 | 4,018 | 2,322,080 | 69,270 | ||||||||||||
$ | 157,382 | $ | 5,306 | $ | 2,351,305 | $ | 71,952 |
Warrants – At June 30, 2010,
there were warrants outstanding for the purchase of 1,013,000 shares of our
common stock at a weighted average exercise price of $16.03 per
share. During the nine months ended June 30, 2010, we issued to our
Strategic Advisory Board for services five-year warrants to purchase a total of
120,000 shares of common stock at an exercise price of $0.001 per share. Also
during the nine months ended June 30, 2010, we issued one to five year warrants
to purchase 282,000 shares of our common stock at a weighted average exercise
price of $0.79 for consulting services. Using the Black-Scholes model, the fair
value of the warrants issued in the nine months ended June 30, 2010 was
calculated as $206,000. We recorded $41,000 and $144,000 to General and
Administrative expense in the three and nine months ended June 30, 2010,
respectively, related to warrants.
During
the nine months ended June 30, 2010, we received $1,000 in proceeds and issued
26,000 shares of our common stock upon the exercise of warrants.
The
following summarizes warrant activity during the nine months ended June 30,
2010:
Warrants
Outstanding
|
||||
Outstanding
at September 30, 2009
|
636,832
|
|||
Grants
|
402,000
|
|||
Cancellations
|
-
|
|||
Exercised
|
(26,058
|
)
|
||
Outstanding
at June 30, 2010
|
1,012,774
|
13
Warrants
outstanding at June 30, 2010 expire at various dates from July 2010 to November
2014.
Long Term Incentive
Compensation - In August 2008, we amended our Long Term Incentive
Compensation Plan (“the Plan”) first adopted in March 2006. The amendment to the
Plan increased the total number of shares available for issuance under the Plan
from 10,000,000 shares of common stock to 6,000,000 shares of common stock. The
Plan is to continue for a term of ten years from the date of its adoption. The
Plan is administered by our board of directors. We have outstanding stock
options for 5,308,680 shares to employees, members of the Committee, the board
of directors, and advisors and consultants, and none of these options have as of
yet been exercised. Options are exercisable for ten years from date of grant.
Options granted in excess of 6,000,000 will require shareholder
approval. There were 5,287,230 and no stock options, issued under the
amended Plan during the nine months ended June 30, 2010 and 2009,
respectively,
The
following table summarizes stock option activity during the nine month period
ended June 30, 2010:
Options
Outstanding
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding
at September 30, 2009 (2,592,475 exercisable options)
|
2,862,745 | $ | 1.31 | |||||
Grants
during the nine months ended June 30, 2010
|
5,287,230 | .08 | ||||||
Forfeitures
|
(94,450 | ) | 1.34 | |||||
Cancellations
|
(2,746,845 | ) | 1.28 | |||||
Exercised
|
- | - | ||||||
Outstanding
at June 30, 2010 (3,125,483 exercisable options)
|
5,308,680 | $ | .09 |
The
weighted average remaining contractual lives of outstanding options was 9.9
years. For exercisable and vested options as of June 30, 2010, the weighted
average contractual term was 9.9 years.
The
aggregate intrinsic value of the options outstanding represents the total pretax
intrinsic value for all “in-the-money” options (i.e., the difference between our
closing stock price on the last trading day of June 30, 2010 and the
exercise price, multiplied by the number of shares) that would have been
received by the option holders had all option holders exercised their options on
June 30, 2010. At June 30, 2010, there were no options with exercise prices
below the closing price.
As of
June 30, 2010, we had approximately $183,000 of total unrecognized compensation
cost related to non-vested stock-based awards granted under all equity
compensation plans. Total unrecognized compensation cost will be adjusted for
any future changes in estimated forfeitures. We expect to recognize this cost
from 2010 through 2012.
Employee Stock Purchase Plan - In
August 2008, we adopted an Employee Stock Purchase Plan (the “Stock Purchase
Plan”). The number of shares of common stock that may be sold pursuant to the
Stock Purchase Plan shall not exceed, in the aggregate, 900,000 shares of Common
Stock. As of June 30, 2010, no shares have been purchased under the Stock
Purchase Plan.
Preferred Stock — Our board of directors has
the authority, without action by the stockholders, to designate and issue up to
5,000,000 shares of preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, any or all of which may be
greater than the rights of our common stock.
In June
2008, our board of directors approved the issuance of a minimum of 7,500,000
shares of Series A preferred stock (“Series A”) at a purchase price of $0.04 per
share, or a minimum of $300,000 in the aggregate, to investors under a Series A
Securities Purchase Agreement. In addition to certain other rights, preferences
and privileges, each share of Series A was convertible into .80 shares of common
stock. During the three and nine months ended June 30, 2009, we issued
approximately 375,000 and 3,691,000 shares, respectively, of Series A preferred
stock for gross proceeds of approximately $15,000 and $148,000, respectively. As
of September 30, 2009, all 24,992,600 outstanding shares of our Series A had
been converted into 19,994,394 shares of our common stock.
14
In July
2009, we entered into a Preferred Stock Purchase Agreement (the “Preferred Stock
Agreement”) with Optimus Capital Partners, LLC (“Optimus”), under which Optimus,
subject to certain conditions, has committed to purchase up to $10 million of
our Series B Preferred Stock. As of the date of this report, we have not
received any funds under this agreement.
Note
7. Contingencies
We
included an expense of $314,000 in our consolidated financial statements for the
year ended September 30, 2009 pertaining to severance obligations and related
costs related to our former Chairman, President and Chief Executive Officer,
Paul Abramowitz, who resigned as President and CEO in January 2008 and as a
director in April 2008. This amount is included in accounts payable at June 30,
2010 and September 30, 2009, however, we contest that any payment is due under
our agreements with Mr. Abramowitz and, if successful, will have minimal or no
liability for such amounts. Mr. Abramowitz has initiated a lawsuit against us in
the Superior Court for the State of Washington styled Abramowitz v. Neah Power
Systems, et al. (Case No.
10-2-3688-1 SEA) in which Mr. Abramowitz s sued for breach of contract in the
amount of $275,000, plus interest, and willful failure to pay wages for which he
seeks double damages or twice the amount of the wages allegedly withheld. We are
contesting this lawsuit.
On March
16, 2010, we received a letter from CAMHZN stating that we were in default on
our outstanding note CAMHZN. CAMHZN stated that we failed to make any payment to
CAMHZN under the note and also failed under the December 31, 2008 Letter
Agreement to (i) provide evidence of the increased principal amount of the note
and (ii) issue additional shares of our common stock for management fees and
CAMHZN’s legal expenses and as new collateral to secure our performance under
the December 31, 2008 Letter Agreement. We are contesting the default notice and
are disputing the validity of the December 31, 2008 Letter Agreement. In August
2010, we entered into an agreement with CAMHZN whereby the default notice was
rescinded (see Note 5).
On April
8, 2010, we received a letter from Agile and Capitoline stating that we were in
default under section 7 of the Securities Purchase Agreement for having failed
to pay the Notes when due and for the notice of default that we recently
received from CAMHZN Master LDC for which we filed a Current Report on Form 8-K
on March 22, 2010. In conjunction with the notice of default, Agile and
Capitoline foreclosed on 4,502,306 shares of the 10,000,000 shares of our common
stock held by Agile and Capitoline as collateral to be applied against the
principal of the Notes. On April 22, 2010, the 4,502,306 shares, with a market
value on that date of $990,507, were released to Agile and Capitoline and have
been applied against the balance of the Notes (see Note 5).
In May
2010, we received a notice from Optimus stating that Optimus was entitled to
fees of $500,000 pertaining to the Preferred Stock Agreement. We dispute this
claim and will defend our rights vigorously. However, there is no assurance that
we will prevail in this dispute. As of June 30, 2010, we have not recorded the
contested amount.
We are
subject to various legal proceedings and claims that arise in the ordinary
course of business. Our management currently believes that resolution of such
legal matters will not have a material adverse impact on our consolidated
financial position, results of operations or cash flows.
Note
8. Related Party Transactions
See
Note 5 regarding our related party note agreements.
15
See Note
6 regarding payment in our common stock to Daisy Rodriguez.
See Note
6 regarding payment in our common stock to Michael Selsman.
See Note
6 regarding our advisory services agreements with Summit.
In the
three months ended June of 2010, we recorded $22,000 in deferred salaries for
our Chief Executive Officer and Chief Financial Officer. As of June 30, 2010 and
September 30, 2009 there was $112,000 and $104,000, respectively, in deferred
officer salaries recorded in accrued expenses and other liabilities in the
condensed consolidated balance sheet.
Note 9. Subsequent
Events
AGS – In August 2010, we
received $105,000 under the Reserve Equity Financing Agreement with AGS Capital.
The
cash received was for the purchase of our common shares, the amount of which is
to be determined.
Investor Relations Services, Inc.
– In August 2010, we received $33,000 from Investor Relations Services,
Inc. as a note payable
In July 2010, we received notice to
exit the Amended Merger Agreement with SolCool on the basis that we failed to
fund SolCool on a timely basis under the terms of the Amended Merger Agreement.
We are not contesting this notice and have negotiated the termination of the
Amended Merger Agreement. As full and final termination of the agreement, we
will return to SolCool all membership units and SolCool will return all our
common shares issued to SolCool members (see Note 4).
Investor Relations Services, Inc.
– In August 2010, we received $33,000 from Investor Relations Services,
Inc. as a note payable.
On August
3, 2010, we entered into an agreement with CAMHZN under which we agreed to issue
240,000 shares of our common stock to CAMHZN in addition to the 1,018,305 shares
of our common stock that it already owns. CAMHZN agreed to (i) limit the number
of shares of our common stock that it would sell to 5% of the average daily
volume of our common stock, at or above the daily market price of our common
stock traded on the OTCBB; (ii) return any excess shares after CAMHZN has
received the unpaid principal and accrued and unpaid interest due under the
convertible note issued; and (iii) rescind the notice of default CAMHZN
delivered to us on March 16, 2010 as reported in the Current Report on Form 8-K
dated March 22, 2010.
Somyos Durongkadej - On
August 22, 2010, in accordance with our by-laws, the Board of
Directors voted to remove Somyos Durongkadej as a member of the Board effective
as of that date.
16
Item
2. Management’s Discussion and Analysis.
This
quarterly report on Form 10-Q contains a number of “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Specifically, all statements other than statements
of historical facts included in this quarterly report regarding our financial
position, business strategy and plans and objectives of management for future
operations are forward-looking statements. These forward-looking statements are
based on the beliefs of management, as well as assumptions made by and
information currently available to management. When used in this quarterly
report, the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,”
“continue” and “intend,” and words or phrases of similar import, as they relate
to our financial position, business strategy and plans, or objectives of
management, are intended to identify forward-looking statements. These
statements reflect our current view with respect to future events and are
subject to risks, uncertainties and assumptions related to various
factors.
You
should understand that the following important factors, in addition to those
discussed below the heading “Overview” and in our registration statements and
periodic reports filed with the SEC under the Securities Act and the Exchange
Act, could affect our future results and could cause those results to differ
materially from those expressed in such forward-looking statements:
|
·
|
general economic
conditions;
|
|
·
|
our future capital needs and the
ability to obtain financing;
|
|
·
|
our ability to obtain
governmental approvals, including product and patent
approvals;
|
|
·
|
the success or failure of our
research and development
programs;
|
|
·
|
our ability to develop and
commercialize our products before our competitors;
and
|
|
·
|
our limited operating
history.
|
These
factors are the important factors of which we are currently aware that could
cause actual results, performance or achievements to differ materially from
those expressed in any of our forward looking statements. We operate in a
continually changing business environment and new risk factors emerge from time
to time. Other unknown or unpredictable factors could have material adverse
effects on our future results, performance or achievements. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in
this report may not occur.
Overview
We are
engaged in the development and sale of renewable energy solutions. Our fuel
cells are designed to replace existing rechargeable battery technology in mobile
electronic devices and small-scale transportation vehicles. Our long-lasting,
efficient and safe power solutions for these devices, such as notebook PCs,
military radios, and other power-hungry computer, entertainment and
communications products, use our patented, silicon-based design with higher
power densities to enable lighter-weight, smaller form-factors and potentially
lower costs.
Based on
our research and testing, we believe our team of world-class engineers and
scientists can continue to develop a commercially viable fuel cell that will
outperform lithium ion batteries and other batteries in terms of run time,
recharge time, portability and other measures of battery performance. Our fuel
cell solution is particularly beneficial in applications currently requiring the
use of more than one battery, since the user will only need to carry a single
fuel cell with a supply of additional cartridges resulting in reduced burden. We
have developed what we believe is a potential breakthrough in the development of
a direct methanol micro fuel cell, which may serve as a replacement for
batteries in a variety of products. Based on our seven issued patents and four
additional U.S. patent filings, we believe our technology is proprietary and can
be protected.
17
In 2009,
we completed our fuel cell prototype and the subsequent completion of a system
not requiring the availability of oxygen from the environment (“closed loop
system”). We also demonstrated an air-breathing (“aerobic”) system. We expect
the prototype and the related technology to form the foundation for future fuel
cell products that we plan to further develop and sell to customers over the
next fiscal year.
During
the three and nine months ended June 30, 2009, we received payments of
approximately $204,000 and $1,147,000, respectively, from the Office of Naval
Research (“ONR”) pursuant to the terms of a grant providing expense
reimbursement for continuing research and development (“R&D”) having to do
with certain technology. This system was successfully developed and demonstrated
to the ONR in September 2009.
We have
announced customer relationships with EKO Vehicles of Bangalore (“EKO”) and
Hobie Cat Company (“Hobie Cat”) to develop early production devices that can be
evaluated by original equipment manufacturers (“OEM’s”) for the eventual
deployment of fuel cell products that we or potential licensees will use to
manufacture products for sale to our partners, distributors or OEM customers. We
also recently announced a collaboration agreement with a major US Defense
Supplier to deploy our fuel cells for a variety of applications. We also intend
to design and distribute the fuel cartridge that our fuel cells require for
refueling. We expect to generate future revenues from the sale and licensing of
both fuel cartridges and the completed fuel cells. Our current business plan
contemplates that we will subcontract to third parties substantially all of the
production and assembly. We expect to make our energy products commercially
available in fiscal 2011.
On
September 19, 2009, we entered into a first amended and restated agreement and
plan of merger (the “Amended Merger Agreement”) with SolCool One, LLC
(“SolCool”). Under the terms of the Amended Merger Agreement, Neah Power
Acquisition Corp. (“Merger Sub”), our wholly-owned subsidiary, was merged into
SolCool (the “Merger”). On January 13, 2010, we effectively assumed control of
Solcool, subject to other customary closing conditions.
In July
2010, we received notice to exit the Amended Merger Agreement on basis that we
failed to fund SolCool on a timely basis under the terms of the Amended Merger
Agreement. We are not contesting this notice and have negotiated the termination
of the Amended Merger Agreement. As full and final termination of the agreement,
we will return to SolCool all membership units and SolCool will return all our
common shares issued to SolCool members. While we are disappointed in the
termination of this relationship with SolCool, we believe that we can revisit a
distribution or partnership relationship with SolCool when we are appropriately
funded. We also intend to continue the development and sales of our remote area
power supplies (RAPS) systems through our relationship with EKO Vehicles, which
has generated interest in India. We believe our relationship with EKO Vehicles
will help with the deployment of our products in India, and we will continue to
evaluate other distribution and partnership opportunities with several potential
candidates, including SolCool.
Recent
Developments
CAMHZN Master LDC - In
November 2007, we sold a $500,000 12% convertible secured promissory note,
amended in May 2008 to mature on September 29, 2008, to CAMHZN Master LDC
(“CAMHZN”) for net
proceeds of $465,000. In January 2009, we entered into an amended loan agreement
with CAMHZN, whereby effective December 31, 2008, CAMHZN agreed to forbear from
exercising any remedies available under its loan documents or applicable law
through March 2009 (the “December 31, 2008 Letter Agreement”). In exchange for
CAMHZN’s forbearance, we agreed to pay a fee of $567,000 which was added to the
principal balance of the loan and payable in cash or stock at our discretion. In
February 2009, we released to CAMHZN, reported in our financial statements as
partial payment of the fee, 1,635,000 shares valued at $327,000. These shares
were formerly held by CAMHZN as collateral shares under the amended note
agreement.
On March
16, 2010, we received a letter from CAMHZN stating that we were in default on
the Notes. CAMHZN stated that we failed to make any payment to CAMHZN under the
Note and also failed under the December 31, 2008 Letter Agreement to (i) provide
evidence of the increased principal amount of the Note and (ii) issue additional
shares of our common stock for management fees and CAMHZN’s legal expenses and
as new collateral to secure our performance under the December 31, 2008 Letter
Agreement. We are contesting the default notice and are disputing the validity
of the December 31, 2008 Letter Agreement.
We are
currently disputing certain of the facts and circumstances regarding certain of
the demands set forth in CAMHZN’s notice of default, including obligations
related to the delivery of shares and the principal of amount of the Note.
Specifically, we dispute the validity of the December 31, 2008 Letter Agreement,
which added $567,000 to the principal balance. We are also disputing the
treatment of the 1,650,000 shares as a reduction to this additional
principal. Management has not reflected any change to previous
accounting treatment for the transactions given the uncertainty regarding the
ultimate resolution of these matters. To the extent new facts become known or
ultimate settlement of this Note occurs, the impact of the change will be
reflected in the financial statements at that time.
18
On August
3, 2010, we entered into an agreement with CAMHZN under which we agreed to issue
240,000 shares of our common stock to CAMHZN in addition to the 1,018,305 shares
of Neah Power's common stock that it already owns. CAMHZN agreed to (i) limit
the number of shares of our common stock that it would sell to 5% of the average
daily volume of our common stock, at or above the daily market price of our
common stock traded on the OTCBB; (ii) return any excess shares after CAMHZN has
received the unpaid principal and accrued and unpaid interest due under the
convertible note issued; and (iii) rescind the notice of default CAMHZN
delivered to us on March 16, 2010 as reported in the Current Report on Form 8-K
dated March 22, 2010.
As of
June 30, 2010, we have recorded $740,000 in our financial statements as the note
balance outstanding and $308,000 in accrued interest due CAMHZN. The stated
interest rate upon the event of default is the lower of 36% or the statutory
maximum. We have recorded interest expense effective from the maturity dates of
the notes at a rate of 25% which is the maximum rate that can be applied to
these loans under New York State law.
In June
2010, we entered into an advisory services agreement with Summit whereby Summit
will indentify, introduce, engage, and compensate investor relations and/or
public relations firms on our behalf. Under the terms of this agreement, we
issued Summit a note for $300,000 payable upon demand. The expense for this
agreement was recorded in general and administrative expense during the quarter
ended June 30, 2010 as public relations services.
Agile Opportunity Fund, LLC
and Capitoline Advisors,
Inc. - In February 2009, we
entered into a Securities Purchase Agreement with each of Agile Opportunity
Fund, LLC (“Agile”) and Capitoline Advisors Inc. (“Capitoline”) under which we
were to receive funding through the issuance of Notes in the aggregate amount of
$1,050,000 and an aggregate purchase price of $900,000, with a maturity date of
August 12, 2009 and prepaid interest at the rate of 18% per annum. The Notes are
convertible into shares of our common stock at a conversion price of $3.33 per
share, at the discretion of the creditor. The Notes are also subject to
mandatory redemption in the event we enter into a going private transaction or
we are sold. The Notes are secured by all our assets and, upon conversion, have
certain piggyback registration rights. In October 2009, we entered into a 4th
Amendment to the Securities Purchase Agreement with Agile and Capitoline whereby
we issued 10,000,000 shares of our common stock to be held as additional
collateral for the Notes issued to these lenders. The value of all of the shares
of our common stock issued under the terms of the Securities Purchase Agreement
has been calculated using the market value of such stock on the date of
issuance.
On April
8, 2010, we received a letter from Agile and Capitoline stating that we were in
default under section 7 of the Securities Purchase Agreement for having failed
to pay the Notes when due and for the notice of default that we recently
received from CAMHZN Master LDC for which we filed a Current Report on Form 8-K
on March 22, 2010. Under the default notice, Agile and Capitoline demanded
payment of $1,427,049, which they believe represented principal and interest due
under the Notes as of that date. As of June 30, 2010, we
have recorded $340,000 in principal and interest due Agile and Capitoline. The
stated interest rate upon the event of default is the lower of 36% or the
statutory maximum. We have recorded interest expense effective from the maturity
dates of the notes at a rate of 25% which is the maximum rate that can be
applied under New York State law.
In
conjunction with the notice of default, Agile and Capitoline foreclosed on
4,502,306 shares of the 10,000,000 shares of our common stock held by Agile and
Capitoline as collateral to be applied against the principal of the Notes. On
April 22, 2010, the 4,502,306 shares, with a market value on that date of
$990,507, were released to Agile and Capitoline and have been applied against
the balance of the Notes.
In the
nine months ended June 30, 2010, we received funds from Capitoline in aggregate
purchase price amount $197,000 with Original Issue Discounts of
$28,000.
Solcool LLC Acquisition - On
September 19, 2009, we entered into a first amended and restated agreement and
plan of merger (the “Amended Merger Agreement”) with SolCool One, LLC
(“SolCool”). Under the terms of the Amended Merger Agreement, Neah Power
Acquisition Corp. (“Merger Sub”), our wholly-owned subsidiary, was merged into
SolCool (the “Merger”). On January 13, 2010, we effectively assumed control of
Solcool, subject to other customary closing conditions.
19
In July
2010, we received notice to exit the Amended Merger Agreement on basis that we
failed to fund SolCool on a timely basis under the terms of the Amended Merger
Agreement. We are not contesting this notice and have negotiated the termination
of the Amended Merger Agreement. As full and final termination of the agreement,
we will return to SolCool all membership units and SolCool will return all our
common shares issued to SolCool members.
Summit Trading
Agreements -
In October 2009, we entered into an advisory services agreement with Summit
Trading Limited (“Summit”) whereby Summit will indentify, introduce, engage, and
compensate investor relations and/or public relations firms (“Firms”) on our
behalf. Under the terms of this agreement, we issued Summit 1,650,000 shares of
our common stock, 95% of the value of which is to represent compensation to be
applied against services provide by Firms. The shares were valued at $1,914,000
based on the market value of the stock, and were recorded to general and
administrative expense during the nine months ended June 30, 2010 as public
relations services. In June 2010, we entered into an advisory services agreement
with Summit whereby Summit will indentify, introduce, engage, and compensate
investor relations and/or public relations firms on our behalf. Under the terms
of this agreement, as consideration for the services, we issued Summit a note
for $300,000 payable upon demand. The expense for this agreement was recorded in
general and administrative expense during the quarter ended June 30, 2010 as
public relations services.
Liquidity,
Going Concern and Capital Resources
We have
prepared our condensed consolidated financial statements assuming that we will
continue as a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. We had
approximately $3,000 in unrestricted cash on hand as of June 30, 2010. We had an
accumulated deficit as of June 30, 2010 of $53,557,000 and negative working
capital of $4,643,000. For the nine months ended June 30, 2010 and 2009, we had
negative cash flow from operating activities of $1,141,000 and $594,000,
respectively. We have limited capital resources and have sustained substantial
losses, which raise substantial doubt about our ability to continue as a going
concern. We must, therefore, raise sufficient capital to fund our overhead
burden and our continuing research and development efforts going forward.
Without this funding, our current cash balance is estimated to support our
operations through approximately September 15, 2010. No assurance can be given
that we will be successful in obtaining adequate capital on acceptable
conditions or at all. We have significantly reduced work hours, including the
implementation of furloughs, of various employees to reduce our operating cost,
while we focus on raising capital. Such reduced work hours and furloughs will
stay in place until we are better capitalized. Our operations are currently
focused on raising capital, sales, and business development.
We have
relied primarily on sales of securities and proceeds from borrowings for
operating capital. During the nine months ended June 30, 2010, we raised capital
by selling promissory notes for a total of $222,000 with net proceeds of
$183,000 received upon closing. We also raised capital by selling shares of our
common stock for a total, net of fees, of $938,000.
Discussion
of Cash Flows
We used
cash of approximately $1,141,000 in our operating activities in the nine months
ended June 30, 2010, compared to $594,000 in the nine months ended June 30,
2009. Cash used in operating activities relates primarily to funding net losses
partially offset by changes in accounts payable and accrued expenses and other
liabilities, non-cash expenses related to stock based compensation issued for
services, forbearance fees, depreciation and amortization of intangibles. We
expect to use cash for operating activities in the foreseeable future as we
continue our operating activities.
Our
investing activities provided $1,000 in cash in the nine months ended June 30,
2010 compared with approximately $16,000 in cash used in the same period in
2009.
Our
financing activities provided cash of approximately $1,122,000 in the nine
months ended June 30, 2010 compared to $599,000 in the same period in 2009.
Changes in cash from financing activities are primarily due to proceeds from
sale of common stock and preferred stock, and net proceeds from notes payable,
less principal payments.
20
Recent
Financing Activities
In July
2009, we entered into a Preferred Stock Purchase Agreement (the “Preferred Stock
Agreement”) with Optimus Capital Partners, LLC (“Optimus”), under which Optimus,
subject to certain conditions, has committed to purchase up to $10 million of
our Series B Preferred Stock. As of the date of this report, we have not
received any funds under this agreement.
In
February 2009, we entered into a Securities Purchase Agreement with Agile and
Capitoline under which we issued Original Issue Discount Term Convertible Notes
(the “Notes”) secured by all of our assets. The Notes are convertible into
shares of our common stock at $3.33 per share. During the nine months ended June
30, 2010, we received proceeds net of Original Issue Discount (“OID”), prepaid
interest and financing costs paid in cash of $153,000 from three tranches in
aggregate note amounts totaling $197,000. On April 8, 2010, we received a letter
from Agile and Capitoline stating that we were in default on the
Notes.
In
January 2010, we entered into a Stock Purchase Agreement (the “Stock Purchase
Agreement”) with each of First Equity Trust, Inc., Amber Capital Corporation and
Knightsbridge Law Co., Ltd. (collectively, the “Investors”) under which each of
the Investors has committed to purchase up to $5 million of our common stock.
During the nine months ended June 30, 2010, we issued 2,368,406 shares of common
stock to First Equity and received $700,000 in net proceeds under the Stock
Purchase Agreement.
In June
2010, we entered into two Stock Purchase and Subscription Agreements (the
“Agreements”) with Amber under which we issued 2,986,667 shares of our common
stock for net proceeds of $112,000. The funds were initially received as
advances without a formal agreement and were included in accrued expenses and
other liabilities on the condensed consolidated balance sheet as of March 31,
2010 as reported in our Form 10Q filed May 24, 2010.
In
January 2010, we entered into a Reserve Equity Financing Agreement with AGS
Capital Group LLC (“AGS Capital”) under which AGS Capital agreed to purchase,
pursuant to tranche notices, up to $5 million of our common stock under certain
conditions, including that a registration statement be effective for such shares
after the first 1,015,000 shares of our common stock are purchased by AGS
Capital. During the nine months ended June 30, 2010, we received net proceeds of
$106,000 from AGS Capital for the issuance of common stock. In May 2010, we
entered into an amended agreement with AGS Capital whereby we agreed to issue an
additional 1,545,000 unregistered shares of which 1,500,000 are to be used as
credit towards shares for advance notices.
Summary
We are
dependent on existing cash resources and external sources of financing to meet
our working capital needs. The current cash balance, which includes
proceeds from our bridge funding, is estimated to support our budgeted and
anticipated working capital requirements through approximately September 15,
2010. To satisfy our working capital requirements from that point forward, we
are currently seeking financing from the sale of debt or equity instruments to
current investors and potential strategic investors. There is no assurance that
we will be successful in raising this capital on a timely basis, if at all. The
failure to obtain the necessary working capital would have a material adverse
effect on the development program and business prospects and, depending upon the
shortfall, we may have to curtail or cease our operations.
To attain
profitable operations and generate cash flow, management’s plan is to execute
its strategy of:
|
(i)
|
completing
production prototypes for EKO vehicles, Hobie Cat and other customers, and
qualifying the product for high volume market acceptance,
and
|
|
(ii)
|
Developing
and deploying RAPS systems, and other energy generation and storage
solutions.
|
We will
continue to be dependent on outside capital to fund our operations for the near
future. We have relied primarily on sales of securities and proceeds from
borrowings for operating capital. Any future financing we obtain may further
dilute or otherwise impair the ownership interest of our current stockholders.
If we fail to generate positive cash flows or obtain additional capital when
required, we could modify, delay or abandon some or all of our plans. These
factors, among others, raise substantial doubt about our ability to continue as
a going concern.
21
Comparison of Three and Nine months
Ended June 30, 2010 to the Three and Nine months Ended June 30,
2009
Percentage
comparisons have been omitted where they are not considered
meaningful.
NEAH
POWER SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
For
the three months ended
June
|
$
|
%
|
For
the nine months ended
June
|
$
|
%
|
|||||||||||||||||||||||||||
2010
|
2009
|
Change
|
Change
|
2010
|
2009
|
Change
|
Change
|
|||||||||||||||||||||||||
Contract
Revenues
|
$ | — | $ | 161,349 | (161,349 | ) | $ | — | $ | 1,106,976 |
(1,106,976
|
) | ||||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||||||
Research
and development expense
|
158,052 | 194,342 | (36,290 | ) | -19 | % | 531,754 | 1,118,874 | (587,120 | ) | -52 | % | ||||||||||||||||||||
General
and administrative expense
|
827,572 | 176,979 | 650,593 | 368 | % | 3,823,571 | 743,648 | 3,079,923 | ||||||||||||||||||||||||
Total
operating expenses
|
985,624 | 371,321 | 614,303 | 165 | % | 4,355,325 | 1,862,522 | 2,492,803 | ||||||||||||||||||||||||
Loss
from operations
|
(985,624 | ) | (209,972 | ) | (775,652 | ) | 369 | % | (4,355,325 | ) | (755,546 | ) | (3,599,779 | ) | ||||||||||||||||||
Other
expense
|
||||||||||||||||||||||||||||||||
Financing
costs
|
(2,117 | ) | (148,626 | ) | 146,509 | -99 | % | (127,189 | ) | (199,792 | ) | 72,603 | -36 | % | ||||||||||||||||||
Interest
expense
|
(69,869 | ) | (376,792 | ) | 306,923 | -81 | % | (684,033 | ) | (1,148,878 | ) | 464,845 | -40 | % | ||||||||||||||||||
Loss
on extinguishment of debt
|
(116,053 | ) | — | (116,053 | ) | (116,053 | ) | — | (116,053 | ) | ||||||||||||||||||||||
Net
Loss
|
$ | (1,173,663 | ) | $ | (735,390 | ) | (438,273 | ) | 60 | % | $ | (5,282,600 | ) | $ | (2,104,216 | ) | (3,178,384 | ) |
Revenue. There
were no revenues in the three and nine months ended June 30, 2010 due to the
winding up of activity under our September 2008 ONR contract in fiscal
2009.
Research and Development.
Research and development expenses (“R&D”) consist primarily of
salaries and other personnel-related expenses, consulting and other outside
services, laboratory supplies, facilities costs and other costs. We expense all
R&D costs as incurred. R&D expense for the three and nine months ended
2010 decreased as compared to the same periods in 2009, due to the
following:
|
·
|
R&D
salaries expense decreased by $38,000 to $53,000 from $91,000 recorded in
the prior year’s three month period and decreased by $462,000, to $255,000
from $717,000 recorded in the prior year’s nine month period due to the
streamlining of operations and reductions in head
count.
|
|
·
|
R&D
project and laboratory expenses, including direct expenditures relating to
the ONR contract, decreased by $23,000, to $7,000 from $30,000 recorded in
the prior year’s three month comparable period and decreased by $165,000,
to $37,000 from $202,000 recorded in the prior year’s nine month
comparable period.
|
|
·
|
There
was $29,000 in stock-based compensation expense incurred in the three and
nine months ended June 30, 2010 compared with $1,000 and $3,000 in stock
based compensation expense incurred in the prior year’s comparable
periods.
|
|
·
|
Facilities
expenses decreased by $4,000, to $63,000 from $67,000 recorded in the
prior year’s three month comparable period. Facilities expenses increased
by $19,000, to $194,000 from $175,000 recorded in the prior year’s nine
month comparable period, primarily due to an increase in the cost of
leased office space.
|
22
General and Administrative.
General and administrative expenses (“G&A”) consist primarily of salaries
and other personnel related expenses to support our R&D activities, non-cash
stock-based compensation for general and administrative personnel and
non-employee members of our board of directors, professional fees, such as
accounting and legal, corporate insurance and facilities costs. The significant
increase in G&A expense in the nine months ended 2010 as compared to the
same period 2009 was primarily due to increased public relations, marketing and
other administrative expenses. Public relations, marketing and other
administrative expenses, increased by $2,295,000 to $2,307,000 in the nine
months ended 2010, from $12,000 in the same period in 2009, primarily due to
non-cash expenses related to the shares pursuant to advisory services agreements
with Summit to indentify, introduce, engage, and compensate investor relations
and/or public relations firms on our behalf which we entered into in October
2009 and June of 2010. G&A expenses also increased due to the
following:
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·
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G&A
salaries expense for the three months ended June 30, 2010 increased by
$49,000, to $103,000 from $54,000 recorded in the prior year’s three month
period. G&A salaries expense for the nine months ended June 30, 2010
increased by $41,000, to $337,000 from $296,000 recorded in the prior
year’s nine month period. These increases were primarily due to furloughs
of staff in 2009.
|
|
·
|
Non-director
stock compensation for the three months ended June 30, 2010 increased by
$59,000, to $63,000 from $4,000 recorded in the prior year’s three month
period. Non-director stock compensation for the nine months ended June 30,
2010 increased by $125,000, to $152,000 from $27,000 recorded in the prior
year’s nine month period. These increases were due to stock options issued
to management and employees in September of 2009 to encourage retention
and to compensate for furloughs and salary reductions. In addition, we
recorded 41,000 and $48,000 in warrant compensation in the three and nine
months ended June 30, 2010 for warrants issued to Strategic Advisory Board
members in the first quarter of 2010, compared with nil in the same
periods of 2009. These increases were offset by a decrease in board of
directors compensation of $23,000, to nil in the three months ended June
30, 2010 from $23,000 in the same period of 2009 and by a decrease in
board of directors compensation of $134,000, to $33,000 in the nine months
ended June 30, 2010 from $167,000 in the same period of
2009.
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|
·
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Professional
services expenses for the three months ended June 30, 2010 decreased by
$16,000, to $62,000 from $78,000 recorded in the same period of 2009
primarily due to the decrease in legal expenditures. Professional services
expenses for the nine months ended June 30, 2010 increased by $321,000, to
$512,000 from $191,000 recorded in the same period of 2009. This increase
was primarily due to equity based compensation for consultants and
increased accounting services
expenditures.
|
|
·
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Amortization
of identifiable intangibles assets expense for the three and nine months
ended June 30, 2010 was $179,000 and $357,000, respectively, compared with
nil for the same periods in 2009. The increase in intangibles amortization
expenses pertained to intangible assets that arose due to the acquisition
of SolCool in January 2010.
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Financing costs. We incurred
financing costs and fees related to our outstanding loans. Financing costs
decreased for the three months ended June 30, 2010 $147,000 to $2,000 from
$149,000 in the prior year’s period and decreased for the nine months ended June
30, 2010 $73,000 to $127,000 from $200,000 in the prior year’s period. The
decreases in financing costs were primarily due to the higher non-interest
expenses and fees associated with the Agile loans in 2009.
Interest expense. We incurred
interest expense on our outstanding loans. Interest expense decreased for the
three months ended June 30, 2010 $307,000 to $70,000 from $377,000 in the prior
year’s period. This decrease was primarily from reduced interest on loan
balances to Agile and Capitoline . Interest expense decreased for the nine
months ended June 30, 2010 $465,000 to $684,000 from $1,149,000 in the prior
year’s period. This decrease in the nine months ended June 30, 2009 was
primarily due to the $567,000 of forbearance fees pertaining to the CAMHZN loan
charged to interest expense in 2009 and reduced interest on Agile and Capitoline
notes in the quarter ended June 30, 2010. These reductions were partially offset
by increased interest from increased loan balances on Agile and Capitoline note
balances in the earlier 2010 periods and the accrual of interest with loan
default interest rates in 2010.
Loss on extinguishment of
debt. We incurred a $116,053 loss on extinguishment of debt due to the
settlement a note payable by the issuance of our commons shares at a
discount.
Off-Balance
Sheet Arrangements
As of
June 30, 2010, we did not have any off-balance sheet
arrangements.
23
Item
4T. Controls and Procedures.
(a) Disclosure Controls and
Procedures. As of the end of the period covered by this Quarterly Report
on Form 10-Q, we carried out an evaluation, under the supervision and with the
participation of our senior management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective for gathering, analyzing and
disclosing the information that we are required to disclose in reports filed
under the Securities Exchange Act of 1934, as amended.
(b) Internal Control Over Financial
Reporting. There have been no changes in our internal controls over
financial reporting or in other factors during the fiscal quarter ended June 30,
2010, that materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
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.
24
PART II - OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
The
following sets forth certain information for all securities we sold during the
three months ended June 30, 2010 without registration under the Securities Act
of 1933, as amended, other than those sales previously reported in a Current
Report on Form 8-K, a Quarterly Report on Form 10-Q, or an Annual Report on Form
10K :
In May
2010, we issued 73,529 shares of our common stock at $0.17 per share in payment
of services.
In June
of 2010, we sold 2,368,406 shares of our common stock to First Equity Trust,
Inc. at $0.298 per share. In June, we also sold 2,986,667 shares of our common
stock to Amber Capital Corporation at $0.037 per share.
Item
3: Legal Proceedings.
Our
landlord has filed a claim for unpaid rent in the amount of $76,069 in a case
styled Teachers Insurance & Annuity v. Neah Power Systems, Inc. in the
Superior Court of the State of Washington, County of King, and was granted a
default judgment in December 2009 in the amount of $81,866. Pursuant to that
judgment, in January 2010 we received a notice of eviction from our landlord for
the unpaid rent. Since the notice, we have paid $70,000 against that balance and
the landlord has extended the date for eviction. We hope to avoid eviction by
negotiating a payment plan acceptable to the landlord.
A
consultant of the Company obtained a default judgment in December 2009 in the
amount of $62,524 in a case styled Novellus Systems, Inc. v. Neah Power Systems,
Inc. in the Superior Court of California, County of Santa Clara.
Our
former Chief Executive Officer, Paul Abramowitz, has initiated a lawsuit against
us in the Superior Court for the State of Washington styled Abramowitz v. Neah Power
Systems, et al. (Case No.
10-2-3688-1 SEA) in which Mr. Abramowitz s sued for breach of contract in the
amount of $275,000, plus interest, and willful failure to pay wages for which he
seeks double damages or twice the amount of the wages allegedly withheld. We are
contesting this lawsuit.
On March
3, 2010 a complaint was filed by the Chapter 7 Trustee of the law firm Dreier
Stein Kahan Browne Woods George LLP in the Superior Court of California, Los
Angeles Central District, Case No. BC432899, alleging breach of contract and
seeking $66,000 for legal services. We are discussing a
response to this complaint with counsel.
Item 6. Exhibits.
The exhibits required by this item are
set forth in the Exhibit Index attached hereto.
25
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
NEAH
POWER SYSTEMS, INC.
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|||
Dated:
August 23, 2010
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By:
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/s/ GERARD C. D’COUTO
|
|
Gerard
C. D’Couto
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|||
President
and Chief Executive Officer
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|||
(Principal
Executive Officer)
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|||
Dated:
August 23, 2010
|
By:
|
/s/ STEPHEN M. WILSON
|
|
Stephen
Wilson
|
|||
Chief
Financial Officer
|
|||
(Principal
Financial Officer)
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26
Exhibit
Index
No.
|
Description
|
|
10.1
|
Amendment
No. 1 to Reserve Equity Financing Agreement between AGS Capital Group, LLC
and Neah Power Systems
|
|
10.2
|
Exchange
Agreement dated June 17, 2010 between Daisy Rodriguez and Neah Power
Systems
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002
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27