Commitments and contingencies

12 Months Ended

Sep. 30, 2012

Commitments and Contingencies Disclosure [Text Block]

Note 13 – Commitments and contingencies

Deferred revenue

In 2004, we received $344,000, and recognized revenue of $154,500, pursuant to a development agreement with a customer to develop proof-of-concept fuel cell power source prototypes and, if elected by the customer, development of fuel cell power sources. Included in other liabilities at September 30, 2011 was deferred revenue of $189,500 pending confirmation of customer acceptance. In November 2011, customer acceptance was obtained and no unfulfilled obligations remain which resulted in the recognition of revenue of $189,500 in the year ending September 30, 2012. No additional cash proceeds were or will be received from this transaction.

Lease

Our corporate offices and laboratory facilities are leased under a lease agreement which we amended in November 2011. The amended expiration date of the lease is now October 31, 2013, and our monthly rent is $9,500 which we began paying November 1, 2011. In addition, we settled past due obligations owed under the lease through October 31, 2011, on the following terms:

· total past due obligations were agreed to be $350,000;

· we were released from the obligation to pay all past due balances in excess of $195,000; and

· we paid $35,000 and agreed to pay $160,000 in 24 equal monthly payments commencing in December 2011.

As a result of this settlement we recognized a gain on the settlement of $197,311 which was recognized in the year ended September 30, 2012.

Our rent expense for the years ended September 30, 2012 and 2011 was $141,643 and $260,000, respectively. As of September 30, 2012, future monthly minimum rental payments, including estimated operating costs, total $140,000 for the fiscal year ending September 30, 2013, and $12,000 for the year ended September 30, 2014.

Under terms of the agreement, the landlord has executed and filed with the Snohomish County, Washington full satisfaction of the prior outstanding judgments entered in favor of the landlord. To secure performance of our obligations under the lease and payment of the remaining past due balance, we executed an confession of judgment in favor of the landlord in the amount of $350,000, such confession of judgment is to be held and may be filed to be enforced in the event we default under the lease. Once we pay in full the remaining $160,000 of the past due balance, the confession of judgment will be cancelled and delivered back to us.

Litigation

Abramowitz v. Neah Power Systems. On January 20, 2010, our former Chief Executive Officer, Paul Abramowitz, 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 Abramowitz sued for breach of his employment contract in the amount of $275,000, plus interest, for willful failure to pay wages. On March 7, 2012, we consummated settlement terms with Abramowitz whereby we settled outstanding claims and counter-claims under litigation. The parties agreed to a mutual release whereby Abramowitz released us and the other defendants from any and all claims pertaining to the litigation, and we released Abramowitz from any and all counter-claims pertaining to the litigation. Under the terms of the Settlement, we agreed to pay Abramowitz an aggregate of $128,000, of which $45,000 was paid by our D&O liability insurance and the remaining amount was paid by us in full as of September 30, 2012. During the year ended September 30, 2012, we recorded a gain on settlement of this liability of $ 231,000.

Smith and McGovern litigation. In connection with the Abramowitz lawsuit, our former directors, James Smith and Robert McGovern, made a claim for indemnification for their defense of the Abramowitz action, which was granted by the Court. On May 11, 2012, we agreed to settlement terms with James Smith, the former chairman of our board of directors and Robert J. McGovern, a former director, whereby we entered into a Settlement Agreement and Release for outstanding claims for indemnification in their defense of the Abramowitz litigation. Under the terms of the Settlement Agreement and Release, we agreed to pay an aggregate of $67,000, which was paid in full as of September 30, 2012.

Senita Investments Ltd. In December 2011, Senita Investments Ltd. filed a lawsuit alleging breach of contract for failing to meet contractual obligations under certain outstanding debentures. In February 2012, we entered into a settlement agreement with Senita, pursuant to which Senita assigned the debentures to another investor, and Senita dismissed its lawsuit against us.

Disputes with various vendors and lenders

Certain of our vendors and lenders have brought suits and/or obtained judgments in their favor regarding past due balances owed them by us. We have recorded these past due balances in liabilities in our consolidated balance sheets at September 30, 2012 and 2011. We do not believe any loss in excess of amounts recorded that could arise would be material. We have not recorded any liabilities for finance charges or legal fees that could be applied by the vendors or lenders to these debts, as we do not believe any amount that we may end up having to pay would be material.