Note 9 – Preferred stock and common stock

Preferred Stock

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

Series B Preferred Stock

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

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

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

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

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

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

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

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

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

Common Stock

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

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

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

Common stock issued in connection with fees associated with notes payable

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

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

Common stock issued for services

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

Long-term incentive compensation Plan

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

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

	Options Outstanding	Weighted Average Exercise Price
Outstanding at September 30, 2014	236,096,007	$	0.0065
Granted	4,600,000		0.0088
Forfeited	(8,250,000)		0.0153
Cancelled	-		-
Expired	-		-
Outstanding at September 30, 2015	232,446,007	$	0.0067
Granted	-		-
Forfeited	(68,506,703)		0.00697
Cancelled	-		-
Expired	(7,500)		6.6667
Outstanding at September 30, 2016	163,931,804	$	0.0057
Exercisable at September 30, 2016	163,931,804	$	0.0057

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

Warrants

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

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

	Warrants Outstanding
Outstanding at September 30, 2014	368,585,978
Granted	443,756,376
Exercised	-
Expired	(334,799,868)
Cancelled	-
Outstanding at September 30, 2015	477,542,486
Granted	28,200,000
Exercised	--
Expired	(13,168,362)
Cancelled	--
Outstanding at September 30, 2016	492,574,124

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

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

NEAH POWER SYSTEMS, INC. 10-K