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NEAH POWER SYSTEMS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

August 14, 2014

Overview and Background

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

We are engaged in the development and sale of renewable energy solutions using our direct methanol micro fuel cell technology. Our fuel cells are designed to replace existing rechargeable battery technology in a variety of applications and can run in either aerobic or anaerobic modes. We are developing solutions specifically targeted for the military, transportation vehicles, and portable electronics applications. Our long-lasting, efficient and safe power solutions include devices, such as notebook PCs, military radios, and other power-hungry computer, entertainment and communications products. We use a unique patented, silicon-based design for our micro fuel cells that create higher power densities and enables lighter-weight, smaller form-factors, and will potentially create more cost effective manufacturing and potentially lower product costs.

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

We have an intellectual property portfolio consisting of 12 issued patents, 4 patents pending, 2 Canadian patent applications and various trade secrets for our proprietary technology. We use a unique, patented and award winning, silicon-based design for our PowerChip™ micro fuel cells that enable higher power densities, lower cost and compact form-factors. The PowerChip™ technology has been recognized for both its innovativeness and its application potential from noted sources including the 2012 ZINO Green finalist, the 2010 WTIA finalist, 2010 Best of What's New Popular Science and other awards.

Our business model includes the potential to license the manufacturing of our fuel cells or to purchase product directly from the Company. We believe that our licensing strategy will be particularly attractive to customers who have access to their own computer chip manufacturing capacity, because our PowerChip™ products can be manufactured with existing equipment used in the semiconductor industry without significant capital outlays for new equipment.

We also intend to design and distribute the fuel cartridges that these fuel cells require for refueling. We anticipate that we will generate future revenues from the sale and licensing of both fuel cartridges and the completed fuel cells. Our business plan contemplates that we will subcontract to third parties substantially all of the production and assembly of the fuel cells and fuel cartridges.

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For the PowerChip™ technology, we are focusing our initial sales strategy on markets requiring anaerobic or low oxygen content environments, such as underwater, transportation, aerospace and military applications. Our product focus for fiscal 2014 will be directed to our business with the aforementioned US defense suppliers and the proposal to the commercial aviation provider, as well as fuel cell range extenders for electric and other recreational vehicles.

For the PowerChip™ and the BuzzBar™ products, we will also continue to pursue adoption in the consumer markets. While the size of the consumer markets is very significant, the adoption cycle can be much longer than the other markets that we are currently focused on. These longer adoption cycles are driven by longer lead times for product development, distribution, supply chain implementation, and consumer specific safety testing. We are in preliminary discussions with a large consumer Company for consumer applications, which, if successful, is expected to take 6 to 16 months for product placement on store shelves.

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

Liquidity, Going Concern and Capital Resources

Our Condensed Consolidated Financial Statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The report of our auditors on our Consolidated Financial Statements for our fiscal year ended September 30, 2013 indicates that there is substantial doubt about our ability to continue as a going concern based upon our balance sheet, cash flows and liquidity position. We cannot provide assurance that we will obtain sufficient funds from financing or operating activities to support continued operations or business deployment. Our financial statements for the nine months ended June 30, 2014 and 2013 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classifications of liabilities that may result from the outcome of this uncertainty.

Since our inception, we have reported net losses, including losses of $2,385,899 and $999,544 during the years ended September 30, 2013 and 2012, respectively. We have reported a net loss of $2,825,345 during the nine months ended June 30, 2014, and we expect losses to continue in the near future as we grow our operations. At June 30, 2014, we have a working capital deficit of $303,288 and an accumulated deficit of $61,361,167.

During the past several years, we have funded our operations through sales of our common and preferred stock, short-term borrowings, and settlement of accounts payable by issuance of common stock. During the nine months ended June 30, 2014, we have funded our operations through sales of our common and preferred stock and short-term borrowings. In this regard, during the nine months ended June 30, 2014, we raised net cash of $2,954,488 from our financing activities.

We require additional financing to execute our business strategy and to satisfy our near-term working capital requirements. Our operating expenses will use a significant amount of our cash resources. As of June 30, 2014, we had $697,065 in accounts payable. Our management seeks to raise additional financing to fund future operations and to provide additional working capital to fund our business. Without additional funding, our cash is estimated to support our operations through November 2014. We cannot provide assurance that we will obtain sufficient funds from financing or operating activities to support continued operations or business deployment Without the needed funding or adequate cash flow from operations, we may be forced to curtail our development or cease our operations altogether, which may include seeking protection under the bankruptcy laws.

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Table of Contents Recent Financing Activities



In April 2014, the Company sold 250,789 Series B preferred shares to Sierra Trading Corp, for the purchase price of $250,789 pursuant to the terms of a Securities Purchase Agreement..

In May 2014, the Company sold 229,816 Series B preferred shares to Summit Trading Ltd, for the purchase price of $229,816 pursuant to the terms of a Securities Purchase Agreement.

In May 2014, the Company signed a Convertible Promissory Note in the amount of $832,500 and received proceeds in the amount of $450,000 in the first tranche (see note 5)

In June 2014, the Company sold 85,994 Series B preferred shares to Summit Trading Ltd, for the purchase price of $85,994 pursuant to the terms of a Securities Purchase Agreement.

In June 2014, the Company sold 33,333,333 shares of common stock, together with two 3 year warrants to purchase 11,666,666 shares of common stock for proceeds of $500,000 pursuant to the terms of a Security Purchase Agreement.

Results of Operations



For the three and nine months ended June 30, 2014, compared to the three and nine months ended June 30, 2013

We recorded no revenues for the three and nine months ended June 30, 2014 and we recorded $103,887 and $149,179 in revenue for the three and nine months ended June 30, 2013, due to a development contract revenues recognized in 2013.

Research and development expenses ("R&D") consist primarily of salaries and other personnel-related expenses, facilities costs, and other laboratory and research related expenses. Total R&D costs for the three and nine months ended June 30, 2014 increased $70,000 to $316,000 from $246,000 and increased $91,000 to $598,000 from $507,000 respectively. The three month increase was primarily due to increases in salaries of $19,000, project expense of $63,000, and a decrease facility costs of $23,000, and the six month increase was primarily due to an increase in salaries of $15,000, facility cost of $23,000, and project expenses of $46,000.

General and administrative expenses ("G&A") consist primarily of salaries and related expenses for our management, finance and related personnel, as well as costs for marketing and sales expenses, professional fees, such as accounting and legal, corporate insurance and facilities costs, and non-employee members of our board of directors. G&A expenses increased $147,000 to $528,000 from $381,000 and increased $348,000 to $1,506,000 from $1,158,000 for the three and nine months ended June 30, 2014 compared to the same periods in 2013. The increase in G&A expense in the three and nine months ended June 30, 2014 was primarily due to the following:

† an increase in board compensation of $1,600 and $5,000 to $18,000 and $54,000 in the three and nine months ended June 30, 2014 compared with $16,400 and $49,000 in the same periods in 2013.

† an increase of $91,000 and $357,000 in stock option compensation to $105,000 and $371,000 in the three and nine months ended June 30, 2014 from $14,000 for the three and nine months ended June 30, 2013.

† an increase of $45,000 to $49,000 from $4,000 and an increase of $172,000 to $198,000 from $26,000 in marketing expenses for the three and nine months ended June 30, 2014 compared with the same periods in 2013.

† an decrease in salaries expense of $12,000 from $105,000 and $8,000 from $291,000 (including taxes and benefits) to $93,000 and $283,000 for the three and nine months ended June 30, 2014 compared to the same period in 2013.

† an increase in professional services of $7,000 to $231,000 and a decrease of $213,000 to $510,000 for the three and nine months ended June 30, 2014 compared with $224,000 and $723,000 recorded for the same periods in 2013.

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† a decrease in facility cost of $2,000 and an increase of $4,000 to $6,000 and $28,000 compared to $8,000 and $24,000 for the three and nine months ended June 30, 2014 compared with the same periods in 2013.

† an increase in other expenses of $7,000 to $17,000 and $23,000 to $54,000 for the three and nine months ended June 30, 2014 compared with $10,000 and $31,000 for the same periods in 2013.

During the three and nine months ended June 30, 2014, we recorded a gain on settlement of liabilities of $2,000 and a net loss on the settlement of liabilities of $403,000 compared with a net loss of $2,000 and $60,000 in the same periods in 2013.

Interest expense decreased by $30,000 to $14,000 and $43,000 to $69,000 for the three and nine months ended June 30, 2014 compared to $44,000 and $112,000 in the same periods in 2013. The decrease in the quarter ended June 30, 2014 compared with the same period in 2013 was primarily due to overall lower debt discount costs amortized to interest expense in 2014.

Financing costs increased $99,000 to $101,000 and $227,000 to $264,000 for the three and nine months ended June 30, 2014 from $2,000 and $37,000 in the same periods in fiscal 2013 due to costs of financing efforts in 2014.

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

Critical Accounting Policies and Estimates

We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. Our critical accounting policies include revenue recognition, accounting for research and development costs, accounting for contingencies, accounting for income taxes, and accounting for share-based compensation. For a more detailed discussion on our accounting policies, see Note 2 to our Consolidated Financial Statements included in our September 30, 2013, form 10-K.

Off-Balance Sheet Arrangements

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


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Source: Edgar Glimpses


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