NEITHER THE ISSUANCE NOR SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.  THE
HOLDER AND ANY ASSIGNEE, BY ACCEPTANCE OF THIS NOTE, ACKNOWLEDGE AND AGREE THAT,
BY REASON OF THE PROVISIONS OF SECTION 1.4(b) OF THIS NOTE, FOLLOWING CONVERSION
OF A PORTION OF THIS NOTE, THE UNPAID AND UNCONVERTED PRINCIPAL AMOUNT OF THIS
NOTE REPRESENTED BY THIS NOTE MAY BE LESS THAN THE AMOUNT STATED ON THE FACE
HEREOF.

 

Principal Amount: $400,000

Issue Date: December 18, 2014

 

 

 

SIX-MONTH CONVERTIBLE PROMISSORY NOTE

 

FOR VALUE RECEIVED, Neah Power Systems, Inc., a Nevada corporation (hereinafter
called the “Borrower”), hereby promises to pay to the order of Rich Niemiec, or
his registered assigns (the “Holder”) the sum of FOUR HUNDRED THOUSAND
($400,000.00) Dollars and No Cents, on June 18, 2015, (the “Maturity Date”), and
to pay interest on the unpaid principal balance hereof at the rate of ten
percent (10%) (the“Interest Rate”) per annum from the date hereof (the “Issue
Date”) until the same becomes due and payable, whether at maturity or upon
acceleration or by prepayment or otherwise, and shall be payable “in
kind”.  Interest shall commence accruing on the Issue Date, shall be computed on
the basis of a 365-day year and the actual number of days elapsed and shall be
payable to the Holder on the Maturity Date.  This Note is free from all taxes,
liens, claims and encumbrances with respect to the issue thereof and shall not
be subject to preemptive rights or other similar rights of shareholders of the
Borrower and will not impose personal liability upon the holder thereof. 

 

The following terms shall apply to this Note: 

 

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ARTICLE I. CONVERSION RIGHTS

 

1.1       Conversion Right.  The Holder shall have the right, from time to time,
commencing upon the Issue Date to convert all or any part of the outstanding and
unpaid principal amount of this Note into fully paid and non-assessable shares
of Common Stock, as such Common Stock exists on the Issue Date, or any shares of
capital stock or other securities of the Borrower into which such Common Stock
shall hereafter be changed or reclassified at the conversion price  (the
“Conversion Price”) as provided herein (a “Conversion”).  The number of shares
of Common Stock to be issued upon each conversion of this Note shall be
determined by dividing the Conversion Amount (as defined below) by the
Conversion Price on the date specified in the notice of conversion, in the form
attached hereto as Exhibit A (the “Notice of Conversion”), delivered to the
Borrower by the Holder in accordance with Section 1.6 below; provided that the
Notice of Conversion is submitted by facsimile (or by other means resulting in,
or reasonably expected to result in, notice) to the Borrower before 5:00 p.m.,
New York, New York time on such conversion date (the “Conversion Date”).  The
term “Conversion Amount” means, with respect to any conversion of this Note, the
sum of (1) the principal amount of this Note to be converted in such conversion
plus  (2) at the Holder’s option, accrued and unpaid interest, if any, on such
principal amount at the interest rates provided in this Note to the Conversion
Date, plus  (3) at the Holder’s option, Default Interest, if any, on the amounts
referred to in the immediately preceding clauses (1) and/or (2).

 

1.2       Conversion Price.  The conversion price per share of Common Stock (the
“Conversion Price”) shall be the lower of (A) the 10-day trailing volume
weighted average bid price of the Borrower’s Common Stock, calculated at time of
conversion, or (B) $0.008 (the “Fixed Price Component”) (subject to equitable
adjustments for stock splits, stock dividends or rights offerings by the
Borrower relating to the Borrower’s securities or the securities of any
subsidiary of the Borrower, combinations, recapitalization, reclassifications,
extraordinary distributions and similar events and issuances of securities at
specified lower prices).

 

1.3       Conversion Price Adjustment.  The Fixed Price Component of the
Conversion Price will be subject to adjustments during the period that the Note
is outstanding. Each adjustment shall be at the Holder’s election, using the
10-day trailing volume weighted average bid price of the Borrower’s Common Stock
at the time of such election (the “New Reference Price”). If the New Reference
Price is less than the existing Fixed Price Component of the Conversion Price,
then the New Reference Price shall be used as the new Fixed Price Component of
the Conversion Price subject to a floor of $0.003 per share. The Holder shall
exercise its election to adjust the Conversion Price under this Section 1.3 by
delivering  written notice to the Borrower (a “Conversion Price Adjustment
Notice”)  in each such case and the Borrower shall acknowledge such  election by
the Holder to adjust the Conversion Price in writing to the  Holder within ten
(10) Business Days’ receipt of each such Holder’s Conversion Price Adjustment
Notice.

 

                        1.4       Conversion Price Protection.  The Conversion
Price shall be subject to adjustment to prevent dilution in the event that the
Borrower, during the time that the Notes are outstanding, issues additional
shares of its Common Stock or any right or option to purchase its Common Stock
or any other security convertible into its Common Stock (other than shares
issued to employees, consultants or directors under a Borrower stock plan) at a
purchase price less than the then applicable Conversion Price.  In such an
event, the Fixed Component of the Conversion Price shall be reduced,
concurrently with such issuance, on a full ratchet basis.  This protection does
not apply if the Convertible Notes are prepaid at the time of such issuance. 

 

1.5       Authorized Shares.  The Borrower covenants that during the period the
conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full conversion of
this Note issued pursuant to the Merger Agreement.  

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If, at any time the Borrower does not maintain the Reserved Amount it will be
considered an Event of Default under this Note.

 

1.6       Method of Conversion. 

 

                                    (a)        Mechanics of Conversion.  Subject
to Section 1.1, this Note may be converted by the Holder in whole or in part at
any time from time to time after the Issue Date, by: (A) submitting to the
Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable means
of communication dispatched on the Conversion Date prior to 5:00 p.m., New York,
New York time) and (B) subject to Section 1.6(b), surrendering this Note at the
principal office of the Borrower.

 

                                    (b)        Surrender of Note Upon
Conversion.  Notwithstanding anything to the contrary set forth herein, upon
conversion of this Note in accordance with the terms hereof, the Holder shall
not be required to physically surrender this Note to the Borrower unless the
entire unpaid principal amount of this Note is so converted.  The Holder and the
Borrower shall maintain records showing the principal amount so converted and
the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Borrower, so as not to require physical
surrender of this Note upon each such conversion.  In the event of any dispute
or discrepancy, such records of the Borrower shall, prima   facie,  be
controlling and determinative in the absence of manifest error.  Notwithstanding
the foregoing, if any portion of this Note is converted as aforesaid, the Holder
may not transfer this Note unless the Holder first physically surrenders this
Note to the Borrower, whereupon the Borrower will forthwith issue and deliver
upon the order of the Holder a new Note of like tenor, registered as the Holder
(upon payment by the Holder of any applicable transfer taxes) may request,
representing in the aggregate the remaining unpaid principal amount of this
Note.  The Holder and any assignee, by acceptance of this Note, acknowledge and
agree that, by reason of the provisions of this paragraph, following conversion
of a portion of this Note, the unpaid and unconverted principal amount of this
Note represented by this Note may be less than the amount stated on the face
hereof.

 

(c)        Payment of Taxes.  The Borrower shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock or other securities or property on conversion
of this Note in a name other than that of the Holder (or in street name), and
the Borrower shall not be required to issue or deliver any such shares or other
securities or property unless and until the person or persons (other than the
Holder or the custodian in whose street name such shares are to be held for the
Holder’s account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.

 

(d)       Delivery of Common Stock upon Conversion.  Upon receipt by the
Borrower from the Holder of a facsimile transmission or e-mail (or other
reasonable means of communication) of a Notice of Conversion meeting the
requirements for conversion as provided in this Section 1.6, the Borrower shall
issue and deliver or cause to be issued and delivered to or upon the order of
the Holder certificates for the Common Stock issuable upon such conversion
within five  (5) business days after such receipt (the “Deadline”) in accordance
with the terms hereof.

 

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(e)        Obligation of Borrower to Deliver Common Stock.  Upon receipt by the
Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder
of record of the Common Stock issuable upon such conversion, the outstanding
principal amount and the amount of accrued and unpaid interest on this Note
shall be reduced to reflect such conversion, and, unless the Borrower defaults
on its obligations under this Article I, all rights with respect to the portion
of this Note being so converted shall forthwith terminate except the right to
receive the Common Stock or other securities, cash or other assets, as herein
provided, on such conversion.  If the Holder shall have given a Notice of
Conversion as provided herein, the Borrower’s obligation to issue and deliver
the certificates for Common Stock shall be absolute and unconditional,
irrespective of the absence of any action by the Holder to enforce the same, any
waiver or consent with respect to any provision thereof, the recovery of any
judgment against any person or any action to enforce the same, any failure or
delay in the enforcement of any other obligation of the Borrower to the holder
of record, or any setoff, counterclaim, recoupment, limitation or termination,
or any breach or alleged breach by the Holder of any obligation to the Borrower,
and irrespective of any other circumstance which might otherwise limit such
obligation of the Borrower to the Holder in connection with such
conversion.  The Conversion Date specified in the Notice of Conversion shall be
the Conversion Date so long as the Notice of Conversion is received by the
Borrower before 5:00 p.m., New York, New York time, on such date.

 

(f)        Delivery of Common Stock by Electronic Transfer.  In lieu of
delivering physical certificates representing the Common Stock issuable upon
conversion, provided the Borrower’s transfer agent is participating in the
Depository Trust Borrower (“DTC”) Fast Automated Securities Transfer (“FAST”)
program, upon request of the Holder and its compliance with the provisions
contained in Section 1.1 and in this Section 1.6, the Borrower shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Holder by crediting the account of
Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission
(“DWAC”) system.

  

(g)        Failure to Deliver Common Stock Prior to Deadline.  Without in any
way limiting the Holder’s right to pursue other remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of the
Common Stock issuable upon conversion of this Note is not delivered by the
Deadline the Borrower shall pay to the Holder $1,000 per day in cash, for each
day beyond the Deadline that the Borrower fails to deliver such Common
Stock.  Such cash amount shall be paid to Holder by the fifth day of the month
following the month in which it has accrued or, at the option of the Holder (by
written notice to the Borrower by the first day of the month following the month
in which it has accrued), shall be added to the principal amount of this Note,
in which event interest shall accrue thereon in accordance with the terms of
this Note and such additional principal amount shall be convertible into Common
Stock in accordance with the terms of this Note. The Borrower agrees that the
right to convert is a valuable right to the Holder. The damages resulting from a
failure, attempt to frustrate, interfere with such conversion right are
difficult if not impossible to qualify. Accordingly the parties acknowledge that
the liquidated damages provision contained in this Section 1.6(g) are justified.

 

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1.6          Concerning the Shares.  The shares of Common Stock issuable upon
conversion of this Note may not be sold or transferred unless  (i) such shares
are sold pursuant to an effective registration statement under the Act or (ii)
the Borrower or its transfer agent shall have been furnished with an opinion
of counsel (which opinion shall be in form, substance and scope customary for
opinions of counsel in comparable transactions) to the effect that the shares to
be sold or transferred may be sold or transferred pursuant to an exemption from
such registration or (iii) such shares are sold or transferred pursuant to Rule
144 under the Act (or a successor rule) (“Rule 144”) or (iv) such shares are
transferred to an “affiliate” (as defined in Rule 144) of the Borrower who
agrees to sell or otherwise transfer the shares only in accordance with this
Section 1.7 and who is an Accredited Investor (as defined in Rule 501 of
Regulation D). Subject to the removal provisions set forth below, until such
time as the shares of Common Stock issuable upon conversion of this Note have
been registered under the Act or otherwise may be sold pursuant to Rule 144
without any restriction as to the number of securities as of a particular date
that can then be immediately sold, each certificate for shares of Common Stock
issuable upon conversion of this Note that has not been so included in an
effective registration statement or that has not been sold pursuant to an
effective registration statement or an exemption that permits removal of the
legend, shall bear a legend substantially in the following form, as appropriate:

 

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”

 

The legend set forth above shall be removed and the Borrower shall issue to the
Holder a new certificate therefore free of any transfer legend if (i) the
Borrower or its transfer agent shall have received an opinion of counsel, in
form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Common Stock
may be made without registration under the Act, which opinion shall be accepted
by the Borrower so that the sale or transfer is effected or (ii) in the case of
the Common Stock issuable upon conversion of this Note, such security is
registered for sale by the Holder under an effective registration statement
filed under the Act or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then
be immediately sold. Any such opinion under Rule 144 shall be conditioned upon
the Holder’s understanding that no sales shall be made upon any date that the
Borrower is not current in its filings of Forms 10-K and 10-Q with the SEC. In
the event that the Borrower does not accept the opinion of counsel provided by
the Buyer with respect to the transfer of Securities pursuant to an exemption
from registration, such as Rule 144 or Regulations S, at the Deadline, it will
be considered an Event of Default pursuant to Article II of the Note.

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1.8       Effect of Certain Events. 

 

    (a)           Effect of Merger, Consolidation, Etc.  At the option of the
Holder, the sale, conveyance or disposition of all or substantially all of the
assets of the Borrower, the effectuation by the Borrower of a transaction or
series of related transactions in which more than 50% of the voting power of the
Borrower is disposed of, or the consolidation, merger or other business
combination of the Borrower with or into any other Person (as defined below) or
Persons when the Borrower is not the survivor shall either:  (i) be deemed to be
an Event of Default (as defined in Article II) pursuant to which the Borrower
shall be required to pay to the Holder upon the consummation of and as a
condition to such transaction an amount equal to the Default Amount (as defined
in Article II) or (ii) be treated pursuant to Section 1.8(b) hereof.  “Person”
shall mean any individual, corporation, limited liability Borrower, partnership,
association, trust or other entity or organization.

 

                                       (b)           Adjustment Due to Merger,
Consolidation, Etc.  If, at any time when this Note is issued and outstanding
and prior to conversion of all of the Notes, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Borrower shall
be changed into the same or a different number of shares of another class or
classes of stock or securities of the Borrower or another entity, or in case of
any sale or conveyance of all or substantially all of the assets of the Borrower
other than in connection with a plan of complete liquidation of the Borrower,
then the Holder of this Note shall thereafter have the right to receive upon
conversion of this Note, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately
theretofore issuable upon conversion, such stock, securities or assets which the
Holder would have been entitled to receive in such transaction had this Note
been converted in full immediately prior to such transaction (without regard to
any limitations on conversion set forth herein), and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the Holder of this Note to the end that the provisions hereof (including,
without limitation, provisions for adjustment of the Conversion Price and of the
number of shares issuable upon conversion of the Note) shall thereafter be
applicable, as nearly as may be practicable in relation to any securities or
assets thereafter deliverable upon the conversion hereof.  The Borrower shall
not affect any transaction described in this Section 1.8(b) unless (a) it first
gives, to the extent practicable, thirty (30) days prior written notice (but in
any event at least fifteen (15) days prior written notice) of the record date of
the special meeting of shareholders to approve, or if there is no such record
date, the consummation of, such merger, consolidation, exchange of shares,
recapitalization, reorganization or other similar event or sale of assets
(during which time the Holder shall be entitled to convert this Note) and (b)
the resulting successor or acquiring entity (if not the Borrower) assumes by
written instrument the obligations of this Section 1.8(b).  The above provisions
shall similarly apply to successive consolidations, mergers, sales, transfers or
share exchanges.

 

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                                    (c)       Adjustment Due to
Distribution.  If the Borrower shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as a
dividend, stock repurchase, by way of return of capital or otherwise (including
any dividend or distribution to the Borrower’s shareholders in cash or shares
(or rights to acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a “Distribution”), then the Holder of this Note shall be entitled,
upon any conversion of this Note after the date of record for determining
shareholders entitled to such Distribution, to receive the amount of such assets
which would have been payable to the Holder with respect to the shares of Common
Stock issuable upon such conversion had such Holder been the holder of such
shares of Common Stock on the record date for the determination of shareholders
entitled to such Distribution.

 

(d)      Intentionally Omitted

 

(e)       Purchase Rights.  If, at any time when this Note is issued and
outstanding, the Borrower issues any convertible securities or rights to
purchase stock, warrants, securities or other property (the “Purchase Rights”)
pro rata to the record holders of any class of Common Stock, then the Holder of
this Note will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

 

(f)       Notice of Adjustments.  Upon the occurrence of each adjustment or
readjustment of the Conversion Price as a result of the events described in this
Section 1.8, the Borrower, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder of a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based.  The Borrower
shall, upon the written request at any time of the Holder, furnish to such
Holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of the Note.

 

1.9       Status as Shareholder.  Upon submission of a Notice of Conversion by a
Holder, (i) the shares covered thereby shall be deemed converted into shares of
Common Stock and (ii) the Holder’s rights as a Holder of such converted portion
of this Note shall cease and terminate, excepting only the right to receive
certificates for such shares of Common Stock and to any remedies provided herein
or otherwise available at law or in equity to such Holder because of a failure
by the Borrower to comply with the terms  of this Note.  Notwithstanding the
foregoing, if a Holder has not received certificates for all shares of Common
Stock prior to the tenth (10th) business day after the expiration of the
Deadline with respect to a conversion of any portion of this Note for any
reason, then (unless the Holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Borrower) the Holder shall regain the
rights of a Holder of this Note with respect to such unconverted portions of
this Note and the Borrower shall, as soon as practicable, return such
unconverted Note to the Holder or, if the Note has not been surrendered, adjust
its records to reflect that such portion of this Note has not been converted.

 

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1.10        Prepayment.   Commencing 90 days after its Issue Date, the Borrower
shall have the right, subject to the Holder’s rights of conversion set forth in
Section 1.6 above, exercisable on not less than ten (10) days prior written
notice to the Holder of the Note, to prepay the outstanding Note (principal and
accrued interest), in full, plus a ten (10%) percent prepayment premium, in
accordance with this Section 1.10. Any notice of prepayment hereunder (an
“Optional Prepayment Notice”) shall be delivered to the Holder of the Note at
its registered address and shall state: (1) that the Borrower is exercising its
right to prepay the Note, and (2) the date of prepayment which shall be not more
than ten (10) days  from the date of the Optional Prepayment Notice. On the date
fixed for prepayment (the “Optional Prepayment Date”), the Borrower shall make
payment of the Optional Prepayment Amount (as defined below) to or upon the
order of the Holder as specified by the Holder in writing to the Borrower at
least one (1) business day prior to the Optional Prepayment Date. If the
Borrower exercises its right to prepay the Note, the Borrower shall make payment
to the Holder of an amount in cash (the “Optional Prepayment Amount”) equal to
the sum of: (x) the then outstanding principal amount of this Note plus  (y)
accrued and unpaid interest on the unpaid principal amount of this Note plus 
(z) an amount equal to ten (10%) percent of (x) and (y), above, to the Optional
Prepayment Date. If the Borrower delivers and Optional Prepayment Notice and
fails to pay the Optional Prepayment Amount due to the Holder of the Note within
five (5) business days following the Optional Prepayment Date, the Borrower
shall forever forfeit its right to prepay the Note pursuant to this Section
1.10.

 

1.11     Seniority. This Note shall be senior to all existing debt of the
Borrower and shall be subordinate to any future line of credit backed by the
Borrower’s accounts receivable and inventory.

 

1.12     Security.  The Notes shall be secured by the assets of the Borrower. 
Such security interest will be effected upon an Event of Default.   

                         

ARTICLE II.   EVENTS OF DEFAULT

 

Except in the case of Section 2.2, if any of the following events of default
(each, an “Event of Default”) shall continue to exist following a 45-day cure
period, commenced upon Borrower’s receipt of written notice thereof:

 

2.1                   Failure to Pay Principal or Interest.  The Borrower fails
to pay the principal hereof or interest thereon when due on this Note, whether
at maturity, upon acceleration or otherwise;

 

2.2       Conversion and the Shares.  The Borrower fails: to issue the “Penalty
Warrant” within the time period required under Section 2.15, or shares of Common
Stock to the Holder (or announces or threatens in writing that it will not honor
its obligation to do so) upon exercise by the Holder of the conversion rights of
the Holder in accordance with the terms of this Note, fails to transfer or cause
its transfer agent to transfer or issue (electronically or in certificated form)
any certificate for shares of Common Stock issued to the Holder upon conversion
of or otherwise pursuant to this Note as and when required by this Note, the
Borrower directs its transfer agent not to transfer or delays, impairs, and/or
hinders its transfer agent in transferring (or issuing (electronically or in
certificated form) any certificate for shares of Common Stock to be issued to
the Holder upon conversion of or otherwise pursuant to this Note as and when
required by this Note, or fails to remove (or directs its transfer agent not to
remove or impairs, delays, and/or hinders its transfer agent from removing) any
restrictive legend (or to withdraw any stop transfer instructions in respect
thereof) on any certificate for any shares of Common Stock issued to the Holder
upon conversion of or otherwise pursuant to this Note as and when required by
this Note (or makes any written announcement, statement or threat that it does
not intend to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any written announcement, statement or threat
not to honor its obligations shall not be rescinded in writing) for three (3)
business days after the Holder shall have delivered a Notice of Conversion. 

 

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2.3       Breach of Covenants.  The Borrower breaches any material covenant or
other material term or condition contained in this Note and or in any of the
Other Agreements;

 

2.4       Breach of Representations and Warranties.  Any representation or
warranty of the Borrower made herein or in any of the Other Agreements given in
writing pursuant hereto or in connection herewith (including, without
limitation, the Merger Agreement), shall be false or misleading in any material
respect when made and the breach of which has (or with the passage of time will
have) a material adverse effect on the rights of the Holder with respect to this
Note or the Merger Agreement;

 

2.5       Bankruptcy, Receiver or Trustee.  The Borrower or any subsidiary of
the Borrower shall commence, or there shall be commenced against the Borrower or
any subsidiary of the Borrower under any applicable bankruptcy or insolvency
laws as now or hereafter in effect or any successor thereto, or the Borrower or
any subsidiary of the Borrower commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now or
hereafter in effect relating to the Borrower or any subsidiary of the Borrower
or there is commenced against the Borrower or any subsidiary of the Borrower any
such bankruptcy, insolvency or other proceeding which remains undismissed for a
period of 61 days; or the Borrower or any subsidiary of the Borrower is
adjudicated insolvent or bankrupt; or any order of relief or other order
approving any such case or proceeding is entered; or the Borrower or any
subsidiary of the Borrower suffers any appointment of any custodian, private or
court appointed receiver or the like for it or any substantial part of its
property which continues undischarged or unstayed for a period of sixty one (61)
days; or the Borrower or any subsidiary of the Borrower makes a general
assignment for the benefit of creditors; or the Borrower or any subsidiary of
the Borrower shall fail to pay, or shall state that it is unable to pay, or
shall be unable to pay, its debts generally as they become due; or the Borrower
or any subsidiary of the Borrower shall call a meeting of its creditors with a
view to arranging a composition, adjustment or restructuring of its debts; or
the Borrower or any subsidiary of the Borrower shall by any act or failure to
act expressly indicate its consent to, approval of or acquiescence in any of the
foregoing; or any corporate or other action is taken by the Borrower or any
subsidiary of the Borrower for the purpose of effecting any of the foregoing;

 

2.6       Judgments.  Any money judgment, writ or similar process shall be
entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other assets for more than $1,000,000, and shall remain
unvacated, unbonded or unstayed for a period of thirty (30) days unless
otherwise consented to by the Holder, which consent will not be unreasonably
withheld;

 

2.7       Indebtedness Default. The Borrower or any subsidiary of the Borrower
shall default in any of its obligations under any other Note or any mortgage,
credit agreement or other facility, indenture agreement, factoring agreement or
other instrument under which there may be issued, or by which there may be
secured or evidenced any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement of the Borrower or any subsidiary of
the Borrower whether such indebtedness now exists or shall hereafter be created
and such default shall result in such indebtedness becoming or being declared
due and payable prior to the date on which it would otherwise become due and
payable;

 

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2.8       Delisting of Common Stock; DTC Chill.  The Borrower shall fail to
maintain the listing of the Common Stock on at least one of the OTCBB, the OTC
Market Group, Inc. or an equivalent replacement exchange, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American
Stock Exchange or the Depository Trust Company places a chill on new deposits of
Common Stock, which is not removed within ten (10) trading days;

 

2.9       Failure to Comply with the Exchange Act.  The Borrower shall fail to
comply with the reporting requirements of the Exchange Act; and/or the Borrower
shall cease to be subject to the reporting requirements of the Exchange Act;

 

2.10     Liquidation. Any dissolution, liquidation, or winding up of Borrower or
any substantial portion of its business;

 

2.11     Cessation of Operations.  Any cessation of operations by Borrower or
Borrower admits it is otherwise generally unable to pay its debts as such debts
become due, provided, however, that any disclosure of the Borrower’s ability to
continue as a “going concern” shall not be an admission that the Borrower cannot
pay its debts as they become due;

 

2.12     Maintenance of Assets.  The failure by Borrower to maintain any
material intellectual property rights, personal, real property or other assets
which are necessary to conduct its business (whether now or in the future);

 

2.13     Financial Statement Restatement. The restatement of any financial
statements filed by the Borrower with the SEC for any date or period from two
years prior to the Issue Date of this Note and until this Note is no longer
outstanding, if the result of such restatement would, by comparison to the
unrestated financial statement, have constituted a material adverse effect on
the rights of the Holder with respect to this Note; or

 

2.14     Cross-Default. Notwithstanding anything to the contrary contained in
this Note or the other related or companion documents, a breach or default by
the Borrower of any covenant or other term or condition contained in any of the
Other Agreements, after the passage of all applicable notice and cure or grace
periods, shall, at the option of the Borrower, be considered a default under
this Note and the Other Agreements, in which event the Holder shall be entitled
(but in no event required) to apply all rights and remedies of the Holder under
the terms of this Note and the Other Agreements by reason of a default under
said Other Agreement or hereunder. “Other Agreements” means, collectively, the
Securities Purchase Agreement, dated the date hereof, between the Borrower, as
Seller, and the Holder, as Purchaser and the 7-year, common stock purchase
warrant, dated the date hereof, and issued by the Borrower to the Holder hereof.
 

 

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Then, upon the occurrence and during the continuation of any Event of Default
specified in this Article II, the Note shall become immediately due and payable
and the Borrower shall pay to the Holder all sums due hereunder.

 

2.15     Automatic Extension of Maturity Date, Payment of Penalty Warrant and
Interest Rate Increase. Notwithstanding anything set forth in this Note to the
contrary, in the event any portion of this Note remains unpaid or unconverted on
the Maturity Date, the applicable interest rate on the then outstanding
principal balance shall automatically increase from ten (10%) percent to
eighteen (18%) percent. In addition, the term of this Note shall be
automatically extended for an additional six months, to December 19, 2015,
provided, however, that the Borrower issues to the Holder within five (5)
Business Days following the Maturity Date, a new common stock purchase warrant
(the “Penalty Warrant”), providing the Holder with the right to purchase up to
an additional number of Common Shares equal to the quotient of: (A) the amount
of any then outstanding principal amount of this Note plus  (B) the amount of
any then accrued and unpaid interest on the unpaid principal amount of this
Note, as the numerator, divided by the Penalty Warrant exercise price of $0.008,
as the denominator. For example, if there is outstanding on the Maturity Date an
unpaid principal amount of $100,000 and an accrued and unpaid interest amount of
$10,000, the Penalty Warrant will permit the Holder to purchase up to an
additional 13,750,000 shares of Common Stock:

 

                                              $100,000+ $10,000 = $110,000 

                                                                                 
$0.008          = 13,750,000 Common Shares

 

ARTICLE III. MISCELLANEOUS

 

3.1       Failure or Delay Not a Waiver.  No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privileges.  All rights and remedies existing hereunder are
cumulative to, and not exclusive of, any rights or remedies otherwise available.

 

3.2       Notices.  All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice.  Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur.  The addresses for
such communications shall be:

 

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If to the Borrower, to:

 

Neah Power Systems, Inc.

22118 20th Avenue. SE, Suite 142

Bothell, Washington 98021

Facsimile: ____________________

Telephone: 425-424-3324

Attn: Chris D’Couto

Chief Executive Officer

 

             

                  If to the Holder:

                 

                  Rich Niemiec

                  5518 Reservation Road

                  Oswego, Illinois 60148

 

3.3       Amendments.  This Note and any provision hereof may only be amended by
an instrument in writing signed by the Borrower and the Holder.  The term “Note”
and all reference thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented.

 

3.4       Assignability.  This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to be the benefit of the Holder and its
successors and assigns.  Each transferee of this Note must be an “accredited
investor” (as defined in Rule 501(a) of the 1933 Act).  Notwithstanding anything
in this Note to the contrary, this Note may be pledged as collateral in
connection with a bona   fide  margin account or other lending arrangement.

 

3.5       Cost of Collection.  If default is made in the payment of this Note,
the Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys’ fees.

 

3.6       Other: Except for the interest payments in kind, all payments due
hereunder (to the extent not converted into Common Stock in accordance with the
terms hereof) shall be made in lawful money of the United States of
America.  All payments shall be made at such address as the Holder shall
hereafter give to the Borrower by written notice made in accordance with the
provisions of this Note.  Whenever any amount expressed to be due by the terms
of this Note is due on any day which is not a business day, the same shall
instead be due on the next succeeding day which is a business day and, in the
case of any interest payment date which is not the date on which this Note is
paid in full, the extension of the due date thereof shall not be taken into
account for purposes of determining the amount of interest due on such date.  As
used in this Note, the term “business day” shall mean any day other than a
Saturday, Sunday or a day on which commercial banks in the city of New York, New
York are authorized or required by law or executive order to remain closed.

 

 

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                         3.7       Governing Law.  This Note shall be governed
by and construed in accordance with the laws of the State of Nevada without
regard to principles of conflicts of laws.  Any action brought by either party
against the other concerning the transactions contemplated by this Note shall be
brought only in the Superior Court, King County, City of Seattle, State of
Washington or, if it has or can acquire jurisdiction, in the United States
District Court for the Western District of Washington.  The parties to this Note
hereby irrevocably waive any objection to jurisdiction and venue of any action
instituted hereunder and shall not assert any defense based on lack of
jurisdiction or venue or based upon forum non conveniens.  The Borrower and
Holder waive trial by jury.  The prevailing party shall be entitled to recover
from the other party its reasonable attorney's fees and costs.  In the event
that any provision of this Note or any other agreement delivered in connection
herewith is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law.  Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
of any agreement.   Each party hereby irrevocably waives personal service of
process and consents to process being served in any suit, action or proceeding
in connection with this Agreement or any other Transaction Document by mailing a
copy thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing contained herein
shall be deemed to limit in any way any right to serve process in any other
manner permitted by law.

 

3.7       Severability. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder shall violate
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Borrower covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Borrower from paying all or any portion of the
principal of or interest on this Note as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Borrower (to the extent it may lawfully
do so) hereby expressly waives all benefits or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impeded
the execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been enacted.

 

IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by
its duly authorized officer this December 18, 2014.

 

 

 

Neah Power Systems, Inc.

 

 

 

 

By:

 

  

 

Gerard D’Couto, Chief Executive Officer

 

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Exhibit A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert $________________ of the principal
amount of the Note (defined below) into Shares of Common Stock of  Neah Power
Systems, Inc., a Nevada Corporation (the “Borrower”)  according to the
conditions of the Convertible Promissory Note of the Borrower dated as of
December 18, 2014 (the “Note”). No fee will be charged to the Holder or Holder’s
Custodian for any conversion, except for transfer taxes, if any.

 

Box Checked as to applicable instructions:

 

 

¨

The Borrower shall electronically transmit the Common Stock issuable pursuant to
this Notice of Conversion to the account of the undersigned or its nominee with
DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”).

 

Name of DTC Prime Broker: ___________________________________________

 

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Account Number: ____________________________________________________

 

 

¨

The undersigned hereby requests that the Borrower issue a certificate or
certificates for the number of shares of Common Stock set forth below (which
numbers are based on the Holder’s calculation attached hereto) in the name(s)
specified immediately below:

 

Date of Conversion:

 

 

 

 

 

Conversion Price:  

 

 

 

 

 

Shares to Be Delivered:

 

 

 

 

 

Remaining Principal Balance Due After This Conversion:

 

 

 

 

 

Signature

 

 

 

 

 

Print Name:

______________________

 

 

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