UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___ until ___
Commission File Number 000-22573
AXION POWER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 65-0774638 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation organization) | Identification No.) | |
| 3601 Clover Lane | ||
| New Castle, Pennsylvania | 16105 | |
| (Address of principal executive offices) | (Zip Code) | |
| Registrant’s telephone number, including area code | (724) 654-9300 | |
Securities Registered under Section 12(b) of the Act
None
Securities Registered under Section 12(g) of the Act
Common Stock, par value $.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 ¨ |
Non-accelerated filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The aggregate market value of the 8,361,836 shares of voting stock held by non-affiliates of the registrant based on the closing price on the Over the Counter Bulletin Board on June 30, 2008 was $14,884,068.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| Shares Outstanding | |
| Title of Class | March 24, 2009 |
| Common Stock | 26,417,437 |
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
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Cautionary Note Regarding Forward-Looking Information
This Report on Form 10-K, in particular Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain “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”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the electrical storage device industry, all of which were subject to various risks and uncertainties.
When used in this Report on Form 10- K and other reports, statements, and information we have filed with the Securities and Exchange Commission (the “Commission” or “SEC”), in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, such factors as the following. With regard to the risks the Company may face, we advise you to carefully consider the following risks and uncertainties:
· | we have incurred net losses since inception, and we may not be able to generate sufficient revenue and gross margin in the future to achieve or sustain profitability; |
· | our planned level of operations depends upon increased revenues or additional financing; |
· | we may be unable to enforce or defend our ownership of proprietary technology; |
· | we have never manufactured carbon electrode assemblies in large commercial quantities; |
· | we may be unable to develop a cost effective alternative to conventional lead electrodes; |
· | our technology may be rendered obsolete as a result of technological changes in the battery industry or other storage technologies; |
· | we may not be able to establish reliable supply channels for the raw materials and components that will be used in our commercial proprietary lead/carbon (“PbC®”) batteries; |
· | other manufacturers may not be able to modify established lead-acid battery manufacturing processes to replicate our processes to accommodate differences between their products and our commercial PbC™ battery technology; |
· | we will have limited market opportunities based on our anticipated manufacturing capacity; |
· | our shareholders may suffer significant dilution in the event that our outstanding convertible securities, warrants and options are ever exercised; |
· | we depend on key personnel and our business may be severely disrupted if we lose the services of our key executives and employees; |
· | our revenues may suffer if general economic conditions worsen, remain in the current adverse state and/or do not improve in a timely manner; and |
· | we are subject to stringent environmental regulation. |
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Our Corporate History
Axion Power Corporation (APC) was formed in September 2003 to acquire and develop certain innovative battery technology. Since inception, APC has been engaged in Research and Development (R&D) of the new technology for the production of PbC batteries. On December 31, 2003, APC engaged in a reverse acquisition with Tamboril Cigar Company, a public shell company, whereby APC became a wholly-owned subsidiary of Tamboril and the shareholders of Axion obtained a 95% ownership in the surviving entity. Tamboril was originally incorporated in Delaware in January 1997, operated a wholesale cigar business until December 1998 and was an inactive public shell thereafter until December 2003. Tamboril changed its name to Axion Power International, Inc. (API) following the reverse acquisition.
Since inception, our operations have been financed by a small group of individuals with little to no revenue generated from operations. As a result, trading in our common stock has been sporadic, volumes have been low, and the market price has been volatile. We believe that a successful transition from R&D to manufacturing, and therefore marketing and selling our proprietary products, will improve our cash balances and market profile and may result in a more active trading market for our stock. However, we can provide no guarantees that our transition efforts will be successful.
The Battery Industry
There are two principal types of lead acid batteries; flooded batteries and valve regulated lead acid (“VRLA”). The choice of battery depends mainly on the specific application that the battery serves. Typical standby or stationary applications use VRLA batteries due to their inherent advantages including spill proof design, low maintenance, compact form, low self-discharge and high performance. On the other hand, applications like industrial equipment, traction and railroad applications are better served by the flooded lead acid battery types due to their superior performance in continuous deep discharge applications and at high operating temperatures, among other features. Technology within the lead-acid battery industry has remained relatively stable for the last 30 years, and an industry-wide lack of innovation has generally restrained growth into new applications and emerging markets.
Alternative energy applications like wind and solar power require an energy storage solution that combines low cost and long deep discharge cycle life. Lead-acid batteries are currently one of the gold standards in large-scale power storage applications, but the short cycle-life of lead acid chemistry at deep discharge levels is a primary inhibitor to growth. Due primarily to the cycle-life limitations of lead acid batteries, a number of battery manufacturers are experimenting with alternative battery technologies that are far more expensive to implement, but offer substantial cycle-life advantages.
The North American lead acid battery industry is mature with a few leading vendors that have a global presence and a larger number of smaller regional and local vendors that cater to the needs of the North American market. The first tier companies that have a global presence include EnerSys, Exide Technologies, Johnson Controls and FIAMM. The second tier companies that cater mainly to the North American Markets include, among others, East Penn Manufacturing, C&D Technologies, GS Batteries, Crown Batteries, Trojan Battery and Eagle Picher Technologies. The user segments that rely on lead acid batteries include automotive applications, standby applications ranging from uninterruptible power supplies to telecommunication applications, limited power storage for wind and solar systems and motive power for heavy-duty equipment and railroad applications.
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Our Business
We are a development stage company that has invested five years and approximately $14.0 million in R&D expense to develop a patented energy storage device that uses carbon electrode assemblies to replace the lead-based negative electrodes found in conventional lead-acid batteries. Our PbC energy storage device is a battery-supercapacitor hybrid that combines the simplicity of lead-acid batteries with the fast recharge rate and longer cycle life of supercapacitors, resulting in a relatively low-cost device that has versatility of design that will allow differing iterations to deliver maximum power; maximum energy; or a range of balances between the two.
Our PbC™ technology is protected by six issued U.S. patents, nine pending U.S. patent applications and other proprietary features and structures. The resulting devices are technically sophisticated and yet simple in design. The carbon electrode assemblies are fabricated from readily available raw materials using, for the most part, standard industrial processes and techniques. The electrodes are then assembled into PbC batteries that can employ the same cases, covers, positive electrodes, separators and electrolyte as conventional lead-acid batteries, and can be assembled with the same equipment and manufacturing methods used throughout the world for manufacturing conventional lead-acid batteries. PbC batteries use significantly less lead than standard lead-acid batteries with a comparable size, and the lead, plastics and acid employed are routinely and profitably recycled at existing recycling facilities around the world, which makes the PbC battery extremely environmentally friendly and far more so than most competing battery technologies.
In February 2007, our PbC technology received the Frost & Sullivan Technology Innovation Award for the best development in the field of lead acid batteries for 2006.
We believe that for large-scale deep-discharge energy storage systems (10 kWh or greater), our PbC devices may prove to offer the lowest total cost of ownership solution available in comparison to alternative battery storage technologies. As ongoing development work on our technologies progress, we believe that further cost reductions and performance gains will be likely.
We believe our advanced battery technologies are uniquely situated to answer the current challenges facing the conventional lead-acid battery and that industry as a whole. While we explore the various potential applications for our PbC technology, our battery manufacturing plant in New Castle, Pennsylvania provides us with both an excellent R&D facility and a near perfect pilot production plant in which to produce our advanced energy storage devices. This plant allows us to manufacture our PbC carbon electrodes in limited quantity and to assemble our new energy storage batteries for laboratory testing and for small scale demonstration projects. In manufacturing this battery assembly using conventional lead acid battery production equipment, we provide proof to our future PbC carbon negative electrode customers that our product is suitable to immediate use in their factories.
The PbC battery production is limited at this time by our inability to make the carbon electrodes in large numbers. As part of our plan to transition from pilot production of PbC electrodes to commercial manufacturing we entered into a letter agreement in the fourth quarter of 2008 for a sublease agreement for a second facility in New Castle, Pennsylvania that provides us with an additional 54,000 square feet of production, R&D and office space. It is anticipated that this facility will be used primarily to produce our PbC electrode assemblies. In addition, this transition will require that we:
· refine our planned fabrication methods for carbon electrode assemblies;
· demonstrate the feasibility of manufacturing our PbC device, and our other technologies, using standard techniques and equipment;
· demonstrate and document the performance of our products in key applications; and
· respond appropriately to anticipated and unanticipated technical and manufacturing challenges.
Our battery plant has a permitted manufacturing capacity of 3,000 lead-acid and or PbC batteries per day and so we currently have excess battery manufacturing capacity that we are able to dedicate to production of high margin specialty batteries that are required in relatively small numbers for direct sales and to also perform toll manufacturing for one of the largest lead-acid battery manufacturers in North America. We continue efforts to increase our sales of such batteries and have hired personnel to further that end.
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We plan to develop our lead carbon technology for use in a variety of applications including:
· | motive power applications; |
· | stationary power applications; |
· | hybrid electric vehicle applications; and |
· | military applications. |
We believe demand for cost-effective energy storage systems produced using our PbC™ technology will grow rapidly. We also believe our technologies can be among the leaders in the high performance battery market. We believe our competitive advantages will include:
· | Cost effectiveness: Due to an extended cycle life and relatively low production costs |
· | Ease of integration: Our planned carbon electrode assemblies will be designed to replace the standard lead negative electrodes in conventional lead-acid batteries. In some applications that require fixed voltage operations, voltage conversion may be needed; |
· | Superior flexibility: By changing the number, geometry and arrangement of the electrode assemblies, we expect to be able to configure our devices to favor either maximum energy storage or maximum power delivery; and |
· | Reduced lead content: Depending on the energy, power and cycling requirements of a particular application, our fully recyclable device will use substantially less lead than conventional lead acid batteries. |
We anticipate our ability to establish and maintain a competitive position will be dependent on several factors, including:
· | the availability of raw materials and key components; |
· | our ability to design and manufacture commercial carbon electrode assemblies; |
· | our ability to establish and operate facilities that can fabricate electrode assemblies and commercially manufacture our PbC device with consistent quality at a predictable cost; |
· | our ability to establish and expand a customer base; |
· | our ability to execute and perform on any future strategic distribution agreements with tier one and/or tier two battery manufacturers; |
· | our ability to compete against established and emerging battery and other storage technologies; | |
· | general worldwide economic conditions; |
· | the market for batteries in general; and |
· | our ability to retain key personnel. |
Our objective is to become an industry leader in low cost, high performance energy storage systems. We plan to achieve this objective by pursuing the following core strategies:
· | Platform technology business model. We plan to implement a platform technology business model where we will focus on developing and manufacturing carbon electrode assemblies that we can offer for sale to established battery manufacturers who want to use our PbC carbon electrode products in their batteries. |
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· | Leverage relationships with thought leaders. We are engaged in discussions with industry consortia, research institutions and other thought leaders in the fields of utility applications, hybrid electric vehicles and automotive fuel cell technology. As we develop our relationships in the field of energy research, we believe the opportunities for government funding and consortia participation will expand rapidly, and improve our access to potential suppliers and customers. |
· | Leverage relationships with battery manufacturers. Our business model is based on the premise that we can most effectively address the needs of the market by selling electrode assemblies to established lead-acid battery manufacturers who want to add advanced battery technology to their existing product lines. This business model should allow us to leverage the business abilities, manufacturing facilities and distribution networks of established manufacturers, in order to reduce our time to market and increase our potential market penetration. |
· | Build a recognized brand. We believe strong brand name recognition is important to increase product awareness and to effectively penetrate the mass market. We intend to differentiate our brand by emphasizing our combination of high performance and low total cost of ownership per storage cycle. |
· | Secondary focus on emerging markets. Emerging markets for hybrid electric vehicles and conventional utility applications are becoming increasingly attractive. We are actively evaluating the potential for using our lead carbon technology products in these emerging markets. |
· | Maintain our technical advantage and reduce manufacturing costs. We intend to maintain our technical advantage by continuing to invest in R&D to improve the performance of our PbC devices and other technologies and to continue to lower our manufacturing costs. |
The battery industry is mature, capital intensive, heavily regulated, highly competitive and averse to product performance risks associated with radical departures from established technology and, with the severe decline in worldwide automobile sales, currently experiencing unprecedented cutbacks. Additionally, due to the nature of the industry, we do not believe we will be able to make a credible entry into the battery market until we have proven the advantages of our PbC device technology in demonstration projects with end users. Therefore, our business plan contemplates two discrete phases: the Development Phase (including prototype and demonstration) and the Commercialization Phase.
Development Phase. During the Development Phase, we are focusing on producing small quantities of commercial prototypes in our own manufacturing facilities. These commercial prototypes will serve as the foundation for a series of paid demonstration projects with established end users. If the projects are successful and end user testing validates the advantages of our PbC device technology under real-world operating conditions, it will be easier to proceed to the full commercialization phase. In general, our development path in each identified target market will include the following:
· | Prototype manufacturing. We are finalizing design work and manufacturing methods for our commercial prototype PbC carbon electrodes. These electrode assemblies will be the key component in the on site manufacturing of our PbC batteries. |
· | Demonstration projects. When we have developed and bench tested our commercial prototype PbC devices for a particular target market, we will negotiate additional demonstration projects for each of the intended applications. In some of the larger projects we may partner with a larger battery manufacturer in order to provide the required quantity of PbC™ devices. Our goal is to document the superior performance of our products in real-world applications. |
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· | Commercial production. When we have developed sufficient data to support a decision to commence full scale production of a product or product line, we intend to use our New Castle Pennsylvania facility until we reach our maximum permitted capacity, after which we plan to pursue strategic relationships with other battery manufacturers that are willing to manufacture co-branded commercial PbC products. Those products will contain our proprietary negative electrode assembly, which we will continue to manufacture at our New Castle facility and build our brand recognition. |
Our planned demonstration projects are not expected to generate sufficient gross profit to offset our expected operating costs. Accordingly, we do not expect to attain profitability during the demonstration phase. If we enter into a commercialization relationship for a specific product or product line, we believe our margins may improve based on efficiencies of scale. However, there is no assurance that the commercialization of products for one or more market segments will generate sufficient revenue to offset our anticipated R&D and other operating expenses and yield a profit.
Commercialization Phase. During the commercialization phase, we intend to implement a platform technology business model where we will develop and manufacture the PbC carbon electrode assemblies that are unique to our PbC batteries. In addition to using these assemblies in our batteries, we eventually intend to sell our propriatary assemblies to other established battery manufacturers who are seeking to market more advanced batteries. We believe a platform technology business model will reduce our time to market, allow us to rely on the established business abilities of existing manufacturers and forge a strong brand identity for our PbC products, while allowing us to focus on a narrow band of value-added activities that should minimize our investment and maximize our profitability.
Until we complete our planned demonstration projects, our negotiation position with respect to manufacturing relationships with established battery manufacturers may be impaired. Even if our planned demonstration projects are successful, we may be unable to negotiate manufacturing relationships on terms acceptable to us. If we decide to manufacture and distribute a line of commercial battery products ourselves, rather than sell carbon electrode assemblies to established battery manufacturers, our time to market and our anticipated capital costs may increase dramatically.
We plan to initially focus on high-value market segments where the total cost of ownership is the primary determining factor in product selection. We believe our commercial PbC device will be most appealing where longer life, high performance, and low maintenance are fully valued.
Acquisition of Our PbC Device Technology
We incorporated APC in September 2003, for the purpose of acquiring rights to a lead carbon technology, that we have since named PbC, from C&T, the original owner of the patents. The founders of APC were passive stockholders of Mega-C Power Corp. (“Mega-C”), which from 2001 until mid 2003 held a limited, nonexclusive license to market products utilizing the lead carbon technology that we currently own and have since expanded upon. In February 2003, the Ontario Securities Commission began an investigation into Mega-C’s stock sales that terminated Mega-C’s ability to finance its operations and continue in business. The founders of APC had collectively invested approximately $3.9 million in Mega-C and were facing a total loss of this investment when Mega-C was unable to continue in business. In connection with the organization of APC, the founders invested approximately $1.4 million dollars.
In late December 2003, Tamboril had 1,875,000 shares outstanding. After evaluating the lead carbon technology and APC, Tamboril’s management negotiated a series of related transactions that included:
· | a reverse acquisition between Tamboril and APC; |
· | the establishment of the Mega-C Trust for the stated purpose of preserving the potential equitable rights of Mega-C’s creditors and stockholders while potentially insulating APC and Tamboril from the litigation risks associated with the activities of Mega-C and its promoters; and |
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· | a purchase of the PbC device technology from C&T. |
Of the 10,739,500 common shares that Tamboril issued for the outstanding securities of APC, 7,327,500 shares, or approximately 58% of our post-transaction capitalization, were deposited in the Mega-C Trust. The remaining 3,412,000 shares were distributed among APC’s stockholders. After the closing, APC’s stockholders, C&T’s stockholders and the Mega-C Trust owned 95% of our stock. For financial reporting purposes, APC was deemed to be the accounting acquirer of Tamboril, followed by a recapitalization.
Our Patents and Intellectual Property
We own six issued U.S. patents and have nine patent applications pending at the date of this report covering various aspects of our PbC technologies. There is no assurance that any of the pending patent applications will ultimately be granted. Our issued patents are:
· | U.S. Patent No. 6,466,429 (expires May 2021) - Electric double layer capacitor; |
· | U.S. Patent No. 6,628,504 (expires May 2021) - Electric double layer capacitor; |
· | U.S. Patent No. 6,706,079 (expires May 2022) - Method of formation and charge of the negative polarizable carbon electrode in an electric double layer capacitor; |
· | U.S. Patent No. 7,006,346 (expires April 2024) - Positive Electrode of an electric double layer capacitor; |
· | U.S. Patent No. 7,110,242 (expires February 2021) - Electrode for electric double layer capacitor and method of fabrication thereof; and |
· | U.S. Patent No. 7,119,047 (expires February 2021) - Modified activated carbon for carbon for capacitor electrodes and method of fabrication thereof. |
We have no duty to pay any royalties or license fees with respect to the commercialization of our PbC device technology, and we are not subject to any field of use restrictions. We believe our patents and patent applications, along with our trade secrets, know-how and other intellectual property, will be critical to our success.
Our ability to compete effectively with other companies will depend on our ability to maintain and protect the PbC device intellectual property and technology. We plan to file additional patent applications in the future. However, the degree of protection offered by our existing patents or the likelihood that our future applications will be granted is uncertain. Competitors in both the United States and foreign countries, many of which have substantially greater resources and have made substantial investment in competing technologies, may have, or may apply for and obtain patents that will prevent, limit or interfere with our ability to make and sell products based on our PbC device technology. Competitors may also intentionally infringe on our patents. The prosecution and defense of patent litigation is both costly and time-consuming, even if the outcome is favorable to us. An adverse outcome in the defense of a patent infringement suit could subject us to significant liabilities to third parties. Although third parties have not asserted any infringement claims against us, there is no assurance that third parties will not assert such claims in the future.
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We also rely on trade secrets, know-how and other unpatented technology, and there is no assurance that others will not independently develop the same or similar technology or obtain unauthorized access to our trade secrets, know-how and other unpatented technology. To protect our rights in these areas, we require all employees, consultants, advisors and collaborators to enter into strict confidentiality agreements. These agreements may not provide meaningful protection for our unpatented technology in the event of an unauthorized use, misappropriation or disclosure. While we have attempted to protect the unpatented proprietary technology that we develop or acquire, and will continue to attempt to protect future proprietary technology through patents, copyrights and trade secrets, we believe that our success will depend, to a large extent, upon continued innovation and technological expertise.
We may license technology from third parties. Our proposed products are still in the development stage, and we may need to license additional technologies to optimize the performance of our products. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies can be identified, licensed and integrated.
In general, the level of protection afforded by a patent is directly proportional to the ability of the patent owner to protect and enforce his rights through legal action. Since our financial resources are limited, and patent litigation can be both expensive and time consuming, there can be no assurance that we will be able to successfully prosecute an infringement claim in the event that a competitor develops a technology or introduces a product that infringes on one or more of our patents or patent applications. There can be no assurance that our competitors will not independently develop other technologies that render our proposed products obsolete. In general, we believe the best protection of our proprietary technology will come from market position, technical innovation, speed-to-market and product performance. There is no assurance that we will realize any benefit from our intellectual property rights.
Our Competition
We plan to compete with a number of established competitors in the battery and supercapacitor industry, including:
· Maxwell | · Enersys |
· Energy Conversion Devices | · Exide |
· Panasonic | · Japan Storage Battery |
· Nippon-Chemicon | · Ness |
In addition, many universities, research institutions and other companies are developing advanced energy storage technologies including:
· | symmetric supercapacitors; |
· | asymmetric supercapacitors with organic electrolytes; |
· | nickel metal hydride batteries; |
· | lithium ion batteries; and |
· | other advanced lead-acid devices and |
· | flow batteries |
Other business entities are developing advanced energy production technologies like fuel cells, solar cells and windmills which may use our products, or, in some cases, compete with our products. Since some of our competitors are developing technologies that may ultimately have costs similar to, or lower than, our projected costs, there can be no assurance we will be able to compete effectively.
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Most of our potential competitors have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of their products than we.
Our competitors with more diversified product offerings may be better positioned to withstand changing market conditions. Some of our competitors own, partner with, have longer term or stronger relationships with suppliers of raw materials and components, which could result in them being able to obtain raw materials on a more favorable basis than us. It is possible that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share, which would harm our business.
The development of technology, equipment and manufacturing techniques and the operation of a facility for the automated production of rechargeable batteries requires large capital expenditures. In order to minimize our capital investment in manufacturing facilities and establish strong brand name recognition for our products, our overall strategy is to negotiate strategic alliances and other production agreements with established battery manufacturers that want to add a high-performance co-branded products to their existing product lines. There can be no assurance, however, that our platform technology business model will succeed in the battery industry.
Raw Materials
During the research stage, we used readily available raw materials, off-the-shelf components manufactured by others and hand-made components fabricated by our staff. As we begin manufacturing in commercial quantities, we will need to establish reliable supply channels for commercial quantities of raw materials and components. We believe established suppliers of raw materials and components will be able to satisfy our requirements on a timely basis. However we do not have any long-term supply contracts and the unavailability of necessary raw materials or components could delay the production of our products and adversely impact our results of operations.
Lead is the primary raw material in lead-acid batteries and currently accounts for approximately 80% of our raw material and component costs in the specialty conventional lead-acid batteries we now manufacture. Lead prices have fluctuated dramatically over the last two years, similar to other industrial grade commodity metals. Our PbC technology will require substantially less lead than conventional batteries, providing a distinct competitive cost advantage if lead prices increase above historical averages.
Environmental Protection
Lead is a toxic material that is a primary raw material in our PbC batteries. We also use, generate and discharge other toxic, volatile and hazardous chemicals and wastes in our research, development and manufacturing activities. We comply with federal, state and local laws and regulations regarding pollution control and environmental protection. Under some statutes and regulations, a government agency, or other parties, may seek to recover response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for such release or otherwise at fault. In addition, more stringent laws and regulations may be adopted in the future, and the costs of complying with those laws and regulations could be substantial. If we fail to control the use of, or to adequately restrict the discharge of, hazardous substances, we could be subject to significant monetary damages and fines, or forced to suspend certain operations. In January of 2009, our facility was tested and found to be in compliance with emission standards as established by new federal guidelines in accordance with the Clean Air Act – Title III.
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Our Research and Development
We engage in extensive R&D for the purpose of improving our PbC technology and our proposed products. Our goal is to increase efficiency and reduce costs in order to maximize our competitive advantage. Our R&D organization works closely with our engineering team, our suppliers and potential customers to improve our product design and lower manufacturing costs. During the years ended December 31, 2008 and 2007, we spent $4.0 million and $2.2 million respectively on R&D, and $14.0 million since inception. While our limited financial resources and short operating history make it difficult for us to estimate our future expenditures, we expect to incur R&D expenditures of consistent magnitude for the foreseeable future.
Our Employees
We presently employ a staff of 50, including an 11 member scientific and engineering team, and 26 people who are involved principally in manufacturing. We are not subject to any collective bargaining agreements, and we believe we have a good relationship with our employees.
Description of Properties
In April of 2008 we signed a new lease that added to our existing space at our manufacturing plant in New Castle, Pennsylvania. The new lease calls for a monthly payment of $16,142 with an initial term of two years which commenced in April 2008. The lease includes two successive five-year renewal options, with future rent to be negotiated at a commercially reasonable rate. The battery manufacturing facility includes approximately 70,438 square feet of floor space, including 7,859 square feet of office, locker, lab and lunch area, 46,931 square feet of manufacturing space, 1,488 square feet of dedicated lab space, 9,200 square feet of storage buildings and 5,000 square feet of basement area. In addition to the monthly rental, we are obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance, and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises. Our battery manufacturing operations at this facility are conducted through a wholly owned subsidiary named Axion Power Battery Manufacturing, Inc. Management believes our property is in good condition.
In December 2008, we signed a letter agreement to sublease from a current tenant, on a month-to-month basis, a building consisting of 54,000 square feet, also located in New Castle, Pennsylvania. This space provides 48,000 of combined manufacturing and warehouse space and 6,000 square feet of combined office and R&D space. This letter agreement is effective through December 31, 2010. We can enter into a sales agreement at any time during the sublease letter agreement. Rental for this space is $19,300 per month. In addition to the monthly rent, we are obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance, and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises. We intend to conduct our PbC carbon electrode manufacturing and R&D operations from this facility.
Risks related to our business
We are a development stage company and our business and prospects are extremely difficult to evaluate.
Since our inception in September 2003, the majority of our resources have been dedicated to our R&D efforts and we have only recently begun to transition into the very early stages of commercial PbC prototype production. We do not have a stable operating history that you can rely on in connection with your evaluation of our business and our future business prospects. Our business and prospects must be carefully considered in light of the limited history of PbC technology and the many business risks, uncertainties and difficulties that are typically encountered by development stage companies that have sporadic revenues and are committed to focusing on research, development and product testing for an indeterminate period of time. Some of the principal risks and difficulties we have and expect to continue to encounter include, but are not limited to, our ability to:
· | Raise the necessary capital to finance our business until we can sell products on a full-scale and profitable basis; |
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· | Maintain effective control over the cost of our research, development and product testing activities; |
· | Develop cost effective manufacturing methods for essential components of our proposed products; |
· | Improve the performance of our commercial prototype batteries; |
· | Successfully transition from our laboratory research and pilot production efforts to commercial manufacturing and sales of our battery technologies; |
· | Adapt and successfully execute our rapidly evolving and inherently unpredictable business plan; |
· | Implement and improve operational, financial and management control systems and processes; |
· | License complementary technologies if necessary and successfully defend our intellectual property rights against potential claims; |
· | Respond effectively to competitive developments and changing market conditions; |
· | Continue to attract, retain and motivate qualified personnel; and |
· | Manage each of the other risks set forth below. |
Because of our limited operating history and our relatively recent transition into the production of prototype PbC devices that we are relying on to become our core revenue generating products, we have limited insight into trends and conditions that may exist or might emerge and affect our business. There is no assurance that our business strategy will be successful or that we will successfully address the risks identified in this report.
We have incurred net losses from inception and do not expect to introduce our first commercial PbC products for 9 to 12 months.
From our inception we have incurred net losses and expect to continue to incur substantial and possibly increasing losses for the foreseeable future as we increase our spending to finance the development of and production methods for our PbC devices, our administrative activities, and the costs associated with being a public company. Our operating losses have had, and will continue to have, an adverse impact on our working capital, total assets and stockholders’ equity. For the year ended December 31, 2008, we had a net loss of approximately $10.6 million, a net loss of $14.3 million for the year ended December 31, 2007 and cumulative losses from inception (September 18, 2003) to December, 2008 of $49.1 million. Our PbC technology has not reached a point where we can mass produce batteries based on the technology, and we will not be in a position to commercialize such products until we complete the design development, manufacturing process development and pre-market testing activities. We believe the development and testing process will require a minimum of an additional 9 to 12 months. There can be no assurance that our development and testing activities will be successful or that our proposed products will achieve market acceptance or be sold in sufficient quantities and at prices necessary to make them commercially viable. If we do not realize sufficient revenue to achieve profitability, our business could be harmed.
Our revenues may suffer if general economic conditions continue to worsen.
Our revenues and our ability to generate earnings are affected by the general economic factors that are adversely impacting the global economy, such as lack of liquidity in the capital markets, reduced demand for consumer and industrial products, excessive inflation, currency fluctuations, increased commodity prices and employment levels, resulting in a temporary or longer-term overall decline in demand for our products. This trend has already commenced with excess supply beginning to build up in the industries in which we operate. Therefore, any prolonged significant downturn or recession in the United States or Canada is expected to have a material adverse effect on our business, results of operations and financial condition.
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Our business will not succeed if we are unable to raise additional capital.
Our management believes our current financial resources will support operations through 2009. We will not be able to continue our operations at planned levels of effort beyond that time frame without increased revenues, receipt of awarded grant proceeds or additional financing. We cannot assure you that any additional capital will be available to us on favorable terms, or at all. If we are unable to generate sufficient revenues or obtain additional capital when needed, our research, development and testing activities will be materially and adversely affected, and we may be unable to take advantage of future opportunities or respond to competitive pressures. Any inability to generate revenue or raise capital when we require it would seriously harm our business.
We are currently involved in litigation.
We are currently involved in other litigation as described in this Annual Report on Form 10-K. There are no assurances that we will prevail on any litigation to which we are a party and, if we do prevail, at what cost in terms of financial and personnel resources, as well as on what terms.
We are in breach of certain registration rights.
As of March 24, 2009, we have outstanding obligations to register approximately 3,755,500 shares of common stock held by the Mega-C Trust, and 750,000 shares held by the Mega-C liquidation trust, in addition we have outstanding obligations to register approximately 1,106,217 shares of common stock that may be issued upon conversion of our 8% Cumulative Convertible Senior Preferred Stock, 7,809,033 shares of common stock that may be issued upon conversion of our Series A Convertible Preferred Stock, and an additional 1,870,690 shares of common stock issuable upon the exercise of certain of our outstanding options, and an additional 14,228,772 shares of common stock issuable upon the exercise of certain of our outstanding warrants. We are still in breach of all of our obligations to register these shares. There are no liquidated damages stipulated for our failure to register such shares; however, the holders of these securities may still elect to pursue remedies against the Company for our failure to meet these registration obligations and, as a result, our business operations, or our ability to raise additional capital in the future, may be adversely affected.
As we sell our products, we may become the subject of product liability claims.
Due to the hazardous nature of many of the key materials used in the manufacturing of batteries, the producers of such products may be exposed to a greater number of product liability claims, including possible environmental claims. We currently have product liability insurance up to $1,000,000 per occurrence and $5,000,000 in the aggregate to protect us against the risk that in the future a product liability claim or product recall could materially and adversely affect our business operations. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our product. We cannot assure you that as we continue distribution of our products that we will be able to obtain or maintain adequate coverage on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. Even if we maintain adequate insurance, any successful claim could materially and adversely affect our reputation and prospects, and divert management’s time and attention. If we are sued for any injury allegedly caused by our future products our liability could exceed our total assets and our ability to pay such liability.
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Our products contain hazardous materials including lead.
Lead is a toxic material that is a primary raw material in our batteries. We also use, generate and discharge other toxic, volatile and hazardous chemicals and wastes in our research, development and manufacturing activities. We are required to comply with federal, state and local laws and regulations regarding pollution control and environmental protection. Under some statutes and regulations, a government agency, or other parties, may seek to recover response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for such release or otherwise at fault. In addition, more stringent laws and regulations may be adopted in the future, and the costs of complying with those laws and regulations could be substantial. If we fail to control the use of, or inadequately restrict the discharge of, hazardous substances, we could be subject to significant monetary damages and fines, or be forced to suspend certain operations. In January of 2009, our facility was tested and found to be in compliance with emission standards as established by new federal guidelines in accordance with the Clean Air Act – Title III.
We are subject to stringent environmental regulation.
We use or generate certain hazardous substances in our research and manufacturing facilities. We do not carry environmental impairment insurance. We believe that all permits and licenses required for the operation of our business are in place. Although we do not know of any material environmental, safety or health problems in our property or processes, there can be no assurance that problems will not develop in the future which could have a material adverse effect on our business, results of operation, or financial condition. In January of 2009, our facility was tested and found to be in compliance with emission standards as established by new federal guidelines in accordance with the Clean Air Act – Title III.
The growth we seek is substantial and challenging to achieve and maintain.
The realization of our business objectives will require substantial future growth. Even in the event we are able to complete the development of our prototypes, introduce our products to the market and grow our business, we expect that rapid growth will significantly challenge our managerial, operational and financial resources. We must continue to prepare for our growth, if any, through appropriate systems and controls. We must also establish, train and manage a much larger work force, which will again require advance planning. If we do not prepare for and manage the growth of our business effectively, our potential for success could be materially and adversely affected.
Being a public company increases our administrative costs significantly.
As a public company, we incur significant legal, accounting and other expenses that would not be incurred by a comparable private company. Commission rules and regulations have made some activities more time consuming and expensive and require us to implement corporate governance and internal control procedures that are not typical for development stage companies. We also incur a variety of internal and external costs associated with the preparation, filing and distribution of the periodic public reports and proxy statements required by the Securities Exchange Act of 1934, as amended. During the year ended December 31, 2008, we spent approximately $930,000 for public accounting and compliance. Of this amount, approximately $455,000 was incurred in relation to prior years filing requirements, approximately $105,000 for legal opinions and other SEC related matters, and approximately $370,000 for 2008 filings including the S-1 registration statement. We do not anticipate these costs to be at these same levels for 2009. We expect Commission rules and regulations to continue to make it more difficult and expensive for us to attract and retain qualified directors and executive officers.
We depend on key personnel, and our business may be severely disrupted if we lose the services of our key executives and employees.
Our business is dependent upon the knowledge and experience of our key scientists, engineers and executive officers. Given the competitive nature of our industry, there is the risk that one or more of our key scientists or engineers will resign their positions, which could have a disruptive impact on our operations. If any of our key scientists, engineers or executive officers do not continue in their present positions, we may not be able to easily replace them and our business may be severely disrupted. If any of these individuals joins a competitor or forms a competing company, we could lose important know-how and experience and incur substantial expense to recruit and train suitable replacements. Currently, all of our key employees have employment contracts which have remaining terms of at least 12 months and non-compete provisions that extend an additional 24 months.
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Our certificate of incorporation and by-laws provide for indemnification and exculpation of our officers and directors.
Our certificate of incorporation provides for indemnification of our officers, directors and employees to the fullest extent permitted by Delaware law. It also provides exculpation of our directors for monetary damages arising from breach of their fiduciary duties in cases that do not involve fraud or willful misconduct. The Commission has advised that it believes that indemnification for liabilities arising under the securities laws is against public policy as expressed in the securities laws and is therefore unenforceable.
We have limited manufacturing experience which may translate into substantial cost overruns in manufacturing and marketing our products.
As we transition into the commercial production of our prototype devices, we may experience substantial cost overruns in manufacturing and marketing our PbC technologies, and may not have sufficient capital in the future to successfully complete such tasks. In addition, we may not be able to manufacture or market our products because of industry conditions, general economic conditions, and/or competition from potential manufacturers and distributors. Either of these inabilities could cause us to abandon our current business plan and may cause our operations to eventually fail.
Risks related to our PbC™ technology
We need to improve the performance of our commercial prototypes to achieve large scale production.
Our commercial prototypes do not satisfy all of our performance expectations, and we need to continue to improve various aspects of our PbC technology as we move forward with larger scale production of our commercial prototypes. There is no assurance that we will be able to resolve the known technical issues. Future testing of our prototypes may reveal additional technical issues that are not currently recognized as obstacles. If we cannot improve the performance of our prototypes in a timely manner, we may be forced to redesign or delay the large scale production of commercial prototypes or possibly cause us to abandon our product development efforts altogether.
We cannot begin full-scale commercial production of our PbC technology for 9 to 12 months.
We will not be able to begin full commercial production of our PbC energy storage devices until we complete our current testing operations, our planned application evaluation and our planned product development. We believe our commercialization path will require a minimum of 9 to 12 months. Even if our prototype development operations are successful, there can be no assurance that we will be able to establish and maintain our facilities and relationships for the manufacturing, distribution and sale of our PbC batteries and other technologies or that any future products will achieve market acceptance and be sold in sufficient quantities and at prices necessary to make them commercially successful. Even if our proposed products are commercially successful, there can be no assurance that we will realize enough revenue and gross margin from the sale of products to achieve profitability.
We do not have any long term vendor contracts.
We currently purchase the raw materials for our carbon electrodes and a variety of other components from third parties. We then fabricate our carbon electrodes and build our prototypes in-house. We do not have any long-term contracts with suppliers of raw materials and components, and our current suppliers may be unable to satisfy our future requirements on a timely basis. Moreover, the price of purchased raw materials and components could fluctuate significantly due to circumstances beyond our control. If our current suppliers are unable to satisfy our long-term requirements on a timely basis, we may be required to seek alternative sources for necessary materials and components or redesign our proposed products to accommodate available substitutes.
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We do not have extensive manufacturing experience.
We do not have extensive manufacturing experience with respect to manufacturing our commercial prototypes in quantities required to achieve our operational goals, and there is no assurance that we will be able to retain a qualified manufacturing staff or effectively manage the manufacturing of our proposed products when we are ready to do so.
We will be a small player in an intensely competitive market and may be unable to compete.
The lead-acid battery industry is large, intensely competitive and resistant to technological change. If our product development efforts are successful, we will have to compete or enter into strategic relationships with well-established companies that are much larger and have greater financial capital and other resources than we do. We may be unable to convince end users that products based on our PbC technology are superior to available alternatives. Moreover, if competitors introduce similar products, they may have a greater ability to withstand price competition and finance their marketing programs. There is no assurance that we will be able to compete effectively.
To the extent we enter into strategic relationships, we will be dependent upon our partners.
Some of our products are not intended for direct sale to end users and our business strategy will likely require us to enter into strategic relationships with manufacturers of other power industry equipment that use batteries and other energy storage devices as important components of their finished products. The agreements governing any future strategic relationships are unlikely to provide us with control over the activities of any strategic relationship we negotiate and our future partners, if any, could retain the right to terminate the strategic relationship at their option. Our future partners will have significant discretion in determining the efforts and level of resources that they dedicate to our products and may be unwilling or unable to fulfill their obligations to us. In addition, our future partners may develop and commercialize, either alone or with others, products that are similar to or competitive with the products that we intend to produce.
Risks relating to our intellectual property
We may rely on licenses for our PbC technology, which may affect our continued operations with respect thereto.
Although this is a remote possibility, as we develop our PbC technology, we may need to license additional technologies to optimize the performance of our products. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies can be identified, licensed and integrated. The inability to obtain any necessary third-party licenses could cause us to abandon a particular development path, which could seriously harm our business, financial position and results of our operations.
If we are unable to protect our proprietary technology and preserve our trade secrets, we will increase our vulnerability to competitors which could materially adversely impact our ability to remain in business.
Our ability to successfully commercialize our products will depend, in large measure, on our ability to protect those products and our technology with domestic and foreign patents. We will also need to continue to preserve our trade secrets. The issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. The patent positions of technology companies, including us, are uncertain and involve complex legal and factual issues.
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We cannot assure you that our patents will prevent other companies from developing similar products or products which produce benefits substantially the same as our products, or that other companies will not be issued patents that may prevent the sale of our products or require us to pay significant licensing fees in order to market our products. Accordingly, if our patent applications are not approved or, even if approved, if such patents are circumvented or not upheld in a court of law, our ability to competitively exploit our patented products and technologies may be significantly reduced. Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued.
From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties in order to develop, manufacture and market our products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may be inhibited or prevented. Additionally, we cannot assure investors that any of our products or technology will be patentable or that any future patents we obtain will give us an exclusive position in the subject matter claimed by those patents. Furthermore, we cannot assure investors that our pending patent applications will result in issued patents, that patent protection will be secured for any particular technology, or that our issued patents will be valid or enforceable or provide us with meaningful protection.
If we are required to engage in expensive and lengthy litigation to enforce our intellectual property rights, the costs of such litigation could be material to our results of operations, financial condition and liquidity and, if we are unsuccessful, the results of such litigation could materially adversely impact our entire business.
We may find it necessary to initiate litigation to enforce our patent rights, to protect our trade secrets or know-how or to determine the scope and validity of the proprietary rights of others. We plan to aggressively defend our proprietary technology and any issued patents if funding is available to do so. Litigation concerning patents, trademarks, copyrights and proprietary technologies can often be time-consuming and expensive and, as with litigation generally, the outcome is inherently uncertain.
Although we have entered into invention assignment agreements with our employees and with certain advisors, if those employees or advisors develop inventions or processes independently which may relate to products or technology under development by us, disputes may also arise about the ownership of those inventions or processes. Time-consuming and costly litigation could be necessary to enforce and determine the scope of our rights under these agreements.
We also rely on confidentiality agreements with our strategic partners, customers, suppliers, employees and consultants to protect our trade secrets and proprietary know-how. We may be required to commence litigation to enforce such agreements, and it is certainly possible that we will not have adequate remedies for breaches of our confidentiality agreements.
Other companies may claim that our technology infringes on their intellectual property or proprietary rights and commence legal proceedings against us which could be time-consuming and expensive and could result in our being prohibited from developing, marketing, selling or distributing our products.
Because of the complex and difficult legal and factual questions that relate to patent positions in our industry, we cannot assure you that our products or technology will not be found to infringe upon the intellectual property or proprietary rights of others. Third parties may claim that our products or technology infringe on their patents, copyrights, trademarks or other proprietary rights and demand that we cease development or marketing of those products or technology or pay license fees. We may not be able to avoid costly patent infringement litigation, which will divert the attention of management away from the development of new products and the operation of our business. We cannot assure investors that we would prevail in any such litigation. If we are found to have infringed on a third party's intellectual property rights, we may be liable for money damages, encounter significant delays in bringing products to market or be precluded from manufacturing particular products or using particular technology.
Other parties may challenge certain of our foreign patent applications. If such parties are successful in opposing our foreign patent applications, we may not gain the protection afforded by those patent applications in particular jurisdictions and may face additional proceedings with respect to similar patents in other jurisdictions, as well as related patents. The loss of patent protection in one jurisdiction may influence our ability to maintain patent protection for the same technology in another jurisdiction.
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New technology may lead to our competitors developing superior products which would reduce demand for our products.
Research into the electrochemical applications for carbon nanotechnology and other storage technologies is proceeding at a rapid pace, and many private and public companies and research institutions are actively engaged in the development of new battery technologies based on carbon nanotubes, nanostructured carbon materials and other non-carbon materials. These new technologies may, if successfully developed, offer significant performance or price advantages when compared with our technologies. There is no assurance that our existing patents or our pending and proposed patent applications will offer meaningful protection if a competitor develops a novel product based on a new technology.
Risks relating to our common stock
The number of shares of common stock we are obligated to register could depress our stock price.
Effective August 5, 2008, we registered 2,782,837 shares of our common stock for resale by certain Selling Stockholders. These shares represent approximately 7.1% of our capitalization assuming the exercise of certain warrants and options and conversion of preferred stock. The sale of a significant number of these shares may cause the market price of our common stock to decline.
We have issued a large number of convertible securities, warrants and options that may increase, perhaps significantly, the number of common shares outstanding.
We had 26,417,437 shares of common stock outstanding at December 31, 2008, and (a) our Series A Convertible Preferred Stock is presently convertible into 7,809,033 shares of common stock, (b) our shares of Cumulative Convertible Senior Preferred Stock are presently convertible into 1,106,217 shares of common stock, (c) we have warrants outstanding that, if exercised, would generate proceeds of $41,715,303 and cause us to issue up to an additional 14,228,772 shares of common stock and (d) we have options to purchase common stock that, if exercised, would generate proceeds of $11,221,886 and result in the issuance of an additional 2,819,940 shares of common stock.
We have provided and intend to continue offering compensation packages to our management and employees that emphasize equity-based compensation.
As a key component of our growth strategy, we have provided and intend to continue offering compensation packages to our management and employees that emphasize equity-based compensation. In particular:
· | Our incentive stock plan authorized incentive awards for up to 2,000,000 shares of our common stock; we have issued incentive awards for an aggregate of 782,950 shares at the date of this report; and we have the power to issue incentive awards for an additional 1,217,050 shares without stockholder approval; |
· | Our independent directors’ stock option plan authorized options for up to 500,000 shares of our common stock; we have issued options for an aggregate of 349,155 shares at the date of this report; and have the power to issue options for an additional 150,845 shares without stockholder approval; |
· | We have issued contractual options for an aggregate of 1,943,000 shares of our common stock, of which 1,503,000 are currently outstanding, to executive officers under the terms of their employment agreements with us ; and |
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· | We have issued contractual options for an aggregate of 1,144,700 shares of our common stock, of which 945,400 are currently outstanding, to certain employees, attorneys and consultants under the terms of their agreements with us. |
We will be required to account for the fair market value of equity compensation awards as operating expenses. As our business matures and expands, we expect to incur increasing amounts of non-cash compensation expense, which may materially and adversely affect our future operating results.
We may issue stock to finance acquisitions.
We may wish to acquire complementary technologies, additional facilities and other assets. Whenever possible, we will try to use our stock as an acquisition currency in order to conserve our available cash for operations, but use of stock as an acquisition currency will also dilute the ownership of then current existing stockholders. Future acquisitions may give rise to substantial charges for the impairment of goodwill and other intangible assets that would materially and adversely affect our reported operating results. Any future acquisitions will involve numerous business and financial risks, including:
· | difficulties in integrating new operations, technologies, products and staff; |
· | diversion of management attention from other business concerns; and |
· | cost and availability of acquisition financing. |
We will need to be able to successfully integrate any businesses we may acquire in the future, and the failure to do so could have a material adverse effect on our business, results of operations and financial condition.
Because of factors unique to us, the market price of our common stock is likely to be volatile.
Because of the relatively small number of shares currently available for resale, the large number of shares that we have registered and will register in the future on behalf of Quercus Trust, the development stage of our business and numerous other factors, the trading price of our common stock has been and is likely to continue to be highly volatile. In addition, actual or anticipated variations in our quarterly operating results; the introduction of new products by competitors; changes in competitive conditions or trends in the battery industry; changes in governmental regulation and changes in securities analysts’ estimates of our future performance or that of our competitors or our industry in general, could adversely affect our future stock price. Investors should not purchase our shares if they are unable to suffer a complete loss of their investment.
Our stock price may not stabilize at current levels.
Our stock is quoted on the OTCBB. Since trading in our common stock began in January 2004, trading has been sporadic, trading volumes have been low and the market price has been volatile. The closing price reported as of March 24, 2009 [the latest practicable date] was $0.90 per share. Current quotations are not necessarily a reliable indicator of value and there is no assurance that the market price of our stock will stabilize at or near current levels.
Our common stock is subject to the “penny stock” rules.
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as amended, defines a “penny stock” as any equity security that is not listed on a national securities exchange or the Nasdaq system and has a bid price of less than $5 per share. We presently are subject to the penny stock rules. Our market price has been highly volatile since trading in our common stock began in January 2004 and there is no assurance that the penny stock rules will not continue to apply to our shares for an indefinite period of time. Before effecting a transaction that is subject to the penny stock rules, a broker-dealer must make a decision respecting the suitability of the purchaser; deliver certain disclosure materials to the purchaser and receive the purchaser’s written approval of the transaction. Because of these restrictions, most broker-dealers refrain from effecting transactions in penny stocks and many actively discourage their clients from purchasing penny stocks. Therefore, both the ability of broker-dealers to recommend our common stock and the ability of our stockholders to sell their shares in the secondary market could be adversely affected by the penny stock rules.
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In April of 2008, we signed a new lease that added to our existing space at our manufacturing plant in New Castle, Pennsylvania. The new lease calls for a monthly payment of $16,142 with an initial term of two years beginning April 2008. The lease includes two successive five-year renewal options, with future rent to be negotiated at a commercially reasonable rate. The battery manufacturing facility includes approximately 70,438 square feet of floor space, including 7,859 square feet of office, locker, lab and lunch area, 46,931 square feet of manufacturing space, 1,488 square feet of dedicated lab space, 9,200 square feet of storage buildings and 5,000 square feet of basement area. In addition to the monthly rental, we are obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance, and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises. Our battery manufacturing operations at this facility are conducted through a wholly owned subsidiary named Axion Power Battery Manufacturing, Inc. Our management believes our property is in good condition.
In December 2008, we signed a letter agreement to sublease from a current tenant on a month-to-month basis a building consisting of 54,000 square feet in New Castle, Pennsylvania. This space provides 48,000 of combined manufacturing and warehouse space and 6,000 square feet of combined office and R&D space. This letter agreement is effective through December 31, 2010. We can enter into a sales agreement at any time during the sublease letter agreement. The rent is $19,300 on a monthly basis. In addition to the monthly rent, we are obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance, and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises. We intend to conduct our PbC and R&D operations from this facility.
Taylor Litigation
On February 10, 2004, Lewis “Chip” Taylor, Chip Taylor in Trust, Jared Taylor, Elgin Investments, Inc. and Mega-C Technologies, Inc. (collectively the “Taylor Group”) filed a lawsuit in the Ontario Superior Court of Justice Commercial List (Case No. 04-CL-5317) that named Tamboril, APC, and others as defendants (the “Taylor Litigation”). As discussed more fully below, by virtue of an order entered on February 11, 2008 by the Bankruptcy Court in the Mega-C bankruptcy case, this action against us is subject to the permanent injunction of the confirmed Chapter 11 Plan of Mega-C.
In February 2005, the Bankruptcy Court stayed the Taylor Litigation pending resolution of Mega-C’s Chapter 11 bankruptcy case. On December 12, 2005, we entered into a settlement agreement with Mega-C, through its Chapter 11 Trustee, and various others that was approved by an order entered in the bankruptcy case on February 1, 2006 and which became fully effective when the Court confirmed Mega-C’s Chapter 11 Plan of Reorganization in an order entered on November 8, 2006. The details of the settlement agreement and the current state of the Taylor Group's litigation are discussed below.
Bankruptcy Court Litigation
In April 2004, we filed an involuntary Chapter 11 petition against Mega-C in the U.S. Bankruptcy Court for the District of Nevada (Case No. 04-50962-gwz). In March 2005, the Bankruptcy Court appointed William M. Noall (“Noall”) to serve as Chapter 11 Trustee for the Mega-C case. On June 7, 2005, the Chapter 11 Trustee commenced an adversary proceeding against Sally Fonner (“Fonner”), the trustee of the Mega-C Trust (Adversary Proceeding No. 05-05042-gwz), demanding, among other things, the turnover of at least 7,327,500 shares held by the Mega-C Trust as property of the bankruptcy estate. On July 27, 2005, we commenced an adversary proceeding against Noall and Fonner (Adversary Proceeding No. 05-05082-gwz).
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Settlement Agreement
On December 12, 2005, we entered into the Settlement Agreement with Mega-C, represented by Chapter 11 Trustee Noall, and the Mega-C Trust, represented by its trustee Fonner.
The Settlement Agreement was approved by the Bankruptcy Court after a hearing in an order dated February 1, 2006. Certain terms were subject to confirmation and effectiveness of Mega-C’s Chapter 11 plan of reorganization. On November 8, 2006, the Bankruptcy Court entered an order confirming the Chapter 11 plan. The confirmed Chapter 11 plan was subsequently substantially consummated on November 21, 2006. The Settlement Agreement was fully incorporated in the confirmed Chapter 11 plan. The plan is fully effective and substantially consummated. Accordingly, all pending and potential disputes between the parties have been resolved.
The litigation settlement and releases provided by the Chapter 11 plan are now binding on Mega-C, the Chapter 11 trustee, the Taylor Group and all other parties described in the plan of reorganization. In an order entered on February 11, 2008, the Bankruptcy Court granted our motion for partial summary judgment, holding that the alleged “oral” agreement creating rights or interests in the Technology in favor of the Taylor Group never existed and, even if it had, the Taylor Group transferred any such rights to the Debtor which were then transferred to us by the confirmed Chapter 11 plan. The Bankruptcy Court held that the Taylor Group has no interest in or rights to the Technology. The Bankruptcy Court held that the only rights the Taylor Group has are as putative creditors or Stockholders of Mega-C and that any attempts to claim an interest in or contest our title to the technology are contrary to the permanent injunction of the Chapter 11 plan. The Bankruptcy Court held that the Taylor Litigation against us is barred by the permanent injunction of the confirmed Chapter 11 plan.
In orders entered on June 9, 2008, the Bankruptcy Court mandated that the Taylor Group litigation against us be dismissed. On June 18, 2008, the Taylor Group filed a notice of appeal from these orders. The Taylor Group signed a pleading consenting to dismiss us from the Taylor Group litigation in Canada. On June 27, 2008, we filed a notice of cross-appeal from the Bankruptcy Court’s orders denying our request for sanctions and our request to hold the Taylors in contempt of court for their failure to comply with the permanent injunction of the confirmed chapter 11 plan. The Taylors’ appeal and our cross-appeal are have been dismissed as interlocutory by the Bankruptcy Appellate Panel for lack of jurisdiction. On February 10, 2009, the Taylors filed a second motion to vacate the February 11, 2008 order granting summary judgment in our favor. We believe this second motion lacks any basis in the facts or the law and we intend to vigorously oppose that motion, which is currently set for hearing in April 2009 in Bankruptcy Court.
In connection with a related adversary proceeding in the Bankruptcy Court, the Liquidation Trustee and the Taylors entered into a settlement agreement whereby, among other things, the Taylors agreed to withdraw virtually all of their claims in the Mega C bankruptcy case, dismiss their appeals from the confirmation order and dismiss their appeal from the settlement agreement. The Taylors’ appeals from the confirmation order and from the settlement agreement have now been dismissed. The Ninth Circuit recently dismissed the appeal from the Settlement Agreement by a group identifying themselves as the “Unaffiliated Shareholders,.” The Ninth Circuit awarded double costs on appeal to the Company. The Unaffiliated Shareholders’ appeal from the Confirmation Order was also recently dismissed. As a result, all appeals from the Settlement Agreement and the Confirmation Order have been resolved in the Company’s favor.
By virtue of the confirmed Chapter 11 plan, all of the Mega-C’s right, title and interest, if any, in the technology was transferred to us. By virtue of the February 11, 2008 orders of the Bankruptcy Court, the Taylor Group has no interest in or rights to the technology.
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Contingent Shares
We agreed to sell 1,000,000 shares of common stock to a foreign partnership, Mercatus & Partners Limited at a price of $2.50 per share as part of a group of comparable transactions where the purchaser planned to contribute a portfolio of small public company securities to a pair of offshore funds in exchange for fund units, and then use the fund units as security for bank financing that would be used to pay for the underlying securities. Contrary to the terms and conditions of our agreement, the foreign partnership was in possession of a stock certificate representing these 1,000,000 shares; however, completion of the transaction was contingent upon receipt of the proceeds from the foreign partnership, which were not received. The 1,000,000 shares were recovered on December 4, 2007 and forwarded to Continental Stock Transfer Agency for cancellation, which took place that same month.
In connection with the offering described above, four holders of warrants to purchase shares of our common stock agreed to exercise their warrants to purchase, in the aggregate, 301,700 shares of common stock (the “Incompletely Exercised Warrant Shares”) for the purpose of selling them to the foreign partnership in a transaction that was substantially similar to the one we entered into with the same foreign partnership. These shares were to be issued to the foreign partnership upon receipt of payment, which was in turn contingent upon the foreign partnership tendering the payment of the purchase price for these shares. Contrary to the terms and conditions of their agreements, the foreign partnership transferred the shares to two of its creditors who both hold the shares as holders-in-due-course. We are pursuing the partnership and the custodians of the stock for the monetary value of the stock. We retained counsel to cause the parties who have possession of the Incompletely Exercised Warrant shares to return the shares absent payment and commenced litigation soon thereafter.
On or about March 24, 2009, we were awarded judgment by default against the partnership and an individual defendant for $1,499,100 plus accrued and unpaid interest thereon. The net result to the Company will be a cash infusion of approximately $1,000,000. Like most judgments, there is no guarantee the Company will be able to fully collect on this amount.
Peter Roston Litigation
A prior Chief Financial Officer, Mr. Peter Roston, filed a lawsuit to recover the full amount of compensation and benefits that would have been paid to him through the initial term of his employment for alleged breaches in his employment agreement after he was discharged for cause by us in December 2006. We determined the range of potential loss to be CAD $250,000 to CAD $275,000. Arbitration proceedings for this matter began in April 2008 and a settlement was reached in October 2008. By agreement, the terms of the settlement are confidential, although the settlement amount is substantially below the range of potential losses and are not material to Axion’s financial position.
Cypress Avenue Partners, LLC
On May 8, 2008, Cypress Avenue Partners, LLC (“Cypress”), filed a complaint against us and several others in the United States District Court for the Northern District of California. The complaint alleges, among other things, that Cypress entered into a contract with us under which Cypress was to act as a finder and was entitled to certain remuneration which it was not paid. Cypress claims it is entitled to purchase 200,000 shares of our common stock and is owed $900,000, representing a five percent placement fee on the amount of $18 million which reflects the closing of all rounds of Quercus financing. We denied any obligation to pay the cash placement fee to Cypress under the terms of an October 2006 letter agreement between us and Cypress. We filed a Motion to Dismiss the Complaint on June 30, 2008. The Motion to Dismiss was granted by Order dated August 4, 2008, and Defendant’s Motion by Plaintiff to reconsider was denied on August 11, 2008. The Cypress Avenue Partners, LLC litigation was settled on November 7, 2008, with the exchange of general releases and certain consideration, which is not deemed to be material.
On November 12, 2008, we held an Annual Meeting of Shareholders. At the Annual Meeting, the following matters were put forth to a vote of our shareholders, and passed with the following numbers of shares voted for, against or withheld as set forth:
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After review and tabulation by class of stock, the ballots and proxies cast for and against the reelection of each of the five current directors of the Company, who were candidates for reelection:
Holders of common stock and our Series A Preferred Stock, voting together as a class (on an as-converted basis), were entitled to elect four members of our board at the 2008 Annual Meeting.
Dr. Igor Filipenko, M.D.:
| For: | 31,983,028 | |||
| Against: | 5,579 | |||
| Abstain: | 50,200 |
Robert G. Averill:
| For: | 31,988,207 | |||
| Against: | 400 | |||
| Abstain: | 50,200 |
Thomas Granville:
| For: | 31,988,207 | |||
| Against: | 50,400 | |||
| Abstain: | 200 |
Michael Kishinevsky:
| For: | 31,983,928 | |||
| Against: | 4,679 | |||
| Abstain: | 50,200 |
Holders of our Senior Preferred Stock were entitled to elect one member of our board.
Dr. Howard K. Schmidt, Ph.D.:
| For: | 757,520 | |||
| Against: | - | |||
| Abstain: | - |
Furthermore, the following director’s terms of office as a director continued after the meeting: Glenn Patterson, Stanley A. Hirschman and Walker Wainwright.
A majority of the shares entitled to vote at the shareholder meeting were voted by general proxy in favor of ratification of Rotenberg & Co., LLP as the Corporation’s independent auditors.
After review and tabulation, the ballots and proxies cast for and against the amendment to the Corporation’s Certificate of Incorporation to increase authorized shares:
| For: | 31,352,000 | |||
| Against: | 761,466 | |||
| Abstain: | 682,859 |
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Market information
At the start of the year ended December 31, 2007, our stock was trading on the OTC Pink Sheets under the symbol AXPW.PK. On July 3, 2008, our stock resumed trading on the OTCBB under the symbol “AXPW”.Trading in our stock has historically been sporadic, trading volumes have been low, and the market price has been volatile.
The following table shows the range of high and low bid prices for our common stock as reported by the OTC Pink Sheets and the OTC Bulletin Board, as the case may be, for each quarter since the beginning of 2007. The quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.
| Period | High | Low | ||||||
| First Quarter 2007 | $ | 4.05 | $ | 2.25 | ||||
| Second Quarter 2007 | $ | 3.30 | $ | 2.50 | ||||
| Third Quarter 2007 | $ | 3.10 | $ | 2.20 | ||||
| Fourth Quarter 2007 | $ | 2.50 | $ | 2.00 | ||||
| First Quarter 2008 | $ | 2.74 | $ | 1.85 | ||||
| Second Quarter 2008 | $ | 2.50 | $ | 1.15 | ||||
| Third Quarter 2008 | $ | 2.05 | $ | 1.30 | ||||
| Fourth Quarter 2008 | $ | 1.72 | $ | 1.01 | ||||
On March 24, 2009, the sale price for our common stock as reported on the OTCBB was $0.90 per share.
Securities outstanding and holders of record
On March 24, 2009 there were approximately 395 record holders of our common stock.
Dividend Policy
We have not paid and do not expect to pay dividends on our common stock. Any future decision to pay dividends on our common stock will be at the discretion of our board and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.
Information respecting equity compensation plans
Summary Equity Compensation Plan Information The following table provides summary information on our equity compensation plans as of December 31, 2008.
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| Plan category: | Number of shares issuable on exercise of outstanding options | Weighted average exercise price of outstanding options | Number of shares available for future issuance under equity compensation plans | ||||
| Equity compensation plans approved by stockholders | |||||||
| 2004 Incentive Stock Plan | 51,950 | $ | 3.48 | 1,217,050 | |||
| 2004 Directors’ Option Plan | 319,590 | $ | 2.05 | 150,845 | |||
| Equity compensation plans not approved by stockholders | |||||||
| Contract options held by officers | 1,503,000 | $ | 4.26 | ||||
| Contract options held by employees, consultants and attorneys | 945,955 | $ | 4.22 | ||||
| Total equity awards | 2,819,940 | $ | 3.98 | ||||
The Company has two stockholder approved equity compensation plans and occasionally enters into employment and other contracts that provide for equity compensation arrangements other than those contemplated by the stockholder approved plans. The following sections summarize the Company’s equity compensation arrangements.
Equity Incentives Plans Not Approved by Stockholders: The Company issued 629,300, 228,000 and 789,500 stock purchase options in the fiscal years ended December 31, 2006, 2007 and 2008, respectively, to officers, employees, attorneys and consultants in connection with contractual agreements that do not reduce the shares available under the shareholder’s approved plans. The following paragraphs summarize these contractual stock options.
In January 2004, members of the law firm of Fefer, Petersen & Cie, general corporate counsel (of which one member was a director of the Company at the time) were granted two-year contractual options to purchase 189,300 shares of common stock at a price of $2.00 per share as partial compensation for services rendered, valued at $68,296. These members also received 116,700 warrants as consideration of pre-merger Tamboril debt). In August 2004, $1.00 of the exercise price of the total 306,000 options and warrants owned by these members was considered paid in advance in consideration of unbilled legal services provided by the firm. The Company recorded $306,000 related to this reduction. All of the warrants and options were exercised in the fourth quarter of 2005, however, $306,000 of the amount is included in stock subscription receivable as of December 31, 2005 and was received in 2006.
In July 2004, the President and Chief Operating Officer of the Company, Charles Mazzacato, was granted a contractual option to purchase 240,000 shares of common stock at a price of $4.00 per share. This option vests on a monthly basis at the rate of 60,000 shares per year commencing July 31, 2005 and is exercisable for five years after each vesting date. The market value of the Company stock at the date of grant was greater than the exercise price which resulted in a total intrinsic value of $180,000. In accordance with APB 25 the Company expensed the intrinsic value over the vesting period which resulted in expense of $18,750 and $45,000 during the years ended December 31, 2004 and 2005, respectively. On January 1, 2006, the Company adopted the provisions of FASB 123R as discussed below and recorded compensation of $124,364 during the year ended December 31, 2006. During the year ended December 31, 2006 the options were forfeited as a result of his termination of employment from the Company in 2006.
In July 2004, the Chief Financial Officer of the Company, Peter Roston, was granted a contractual option to purchase 200,000 shares of common stock at a price of $4.00 per share. This option will vest on a monthly basis at the rate of 50,000 shares per year commencing July 31, 2005 and is exercisable for five years after each vesting date. The market value of the Company stock at the date of grant was greater than the exercise price which resulted in a total intrinsic value of $150,000. In accordance with APB 25 the Company has expensed the intrinsic value over the vesting period which resulted in expense of $15,625 and $37,500 during the years ended December 31, 2004 and 2005, respectively. On January 1, 2006, the Company adopted the provisions of FASB 123R as discussed below and recorded compensation of $138,182 during the year ended December 31, 2006. During the year ended December 31, 2006 the options were forfeited as a result of his termination of employment from the Company in 2006.
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In April 2005, the Chief Executive Officer of the Company, Thomas Granville, was granted a contractual option to purchase 180,000 shares of common stock at a price of $2.50 per share. This option vests at the rate of 7,500 shares per month commencing May 1, 2005 and is exercisable for five years after each vesting date. The market value of the Company stock at the date of grant was less than the exercise price which resulted in no intrinsic value in accordance with APB 25. On January 1, 2006, the Company adopted the provisions of FASB 123R as discussed below and recorded compensation of $112,500 during the year ended December 31, 2006.
In April 2005, a European financial advisor was granted a contractual option to purchase 30,000 shares of common stock at a price of $2.50 per share. Options for an aggregate of 20,000 shares vested during the year ended December 31, 2005 and will be exercisable for five years. On December 31, 2005, a total of 10,000 unvested options were forfeited when the advisory agreement was terminated. The options were valued at $35,998 using the Black-Scholes-Merton option pricing model and included as expense in 2005.
In September 2005, the Chief Technical Officer of the Company, Edward Buiel, was granted a contractual option to purchase 90,000 shares of common stock at a price of $4.00 per share. This option vests at the rate of 2,500 shares per month commencing October 2005 and is exercisable for five years after each vesting date. The market value of the Company stock at the date of grant was less than the exercise price which resulted in no intrinsic value in accordance with APB 25. On January 1, 2006, the Company adopted the provisions of FASB 123R as discussed below and recorded compensation of $68,100 during the year ended December 31, 2006.
In February 2006, the Chief Executive Officer of the Company, Thomas Granville, was granted an option to purchase 500,000 shares of common stock at an exercise price of $6.00. Of this total 300,000 options vested immediately and the balance is expected to vest, subject to the attainment of certain specified objectives, over the next one to three years. These options are valued at $300,187 utilizing the Black-Scholes-Merton option pricing model with $259,027 of compensation recorded in 2006.
In February 2006, the Chief Technical Officer of the Company, Edward Buiel, was granted an option to purchase 35,000 shares of common stock at an exercise price of $6.00. Of this total 10,000 options vested immediately and the balance is expected to vest, subject to the attainment of certain specified objectives, over the next two to three years. These options are valued at $20,994 utilizing the Black-Scholes-Merton option pricing model with $13,330 of compensation recorded in 2006.
In February 2006, members and affiliates of the law firm of Fefer, Petersen & Cie, general corporate counsel (of which one member was a director of the Company at the time) were granted an option to purchase 360,000 shares of common stock at an exercise price of $6.00. Of this total 240,000 options vested immediately and the balance will vest at the rate of 10,000 shares per month during the year ended December 31, 2006. These options are valued at $193,449 utilizing the Black-Scholes-Merton option pricing model and are recorded as legal expense in 2006.
In February 2006, the external bankruptcy counsel of the Company, Cecilia Rosenauer, was granted an option to purchase 15,000 shares of common stock at an exercise price of $6.00. The options vested on the effective date of Mega-C’s Chapter 11 plan of reorganization, which took place in November 2006. These options are valued at $2,483 utilizing the Black-Scholes-Merton option pricing model and are recorded as legal expense in 2006.
In March 2006, two employees were granted options to purchase a total of 24,000 shares of common stock at an exercise price of $4.00 and $6.00. The options vest at a rate of 2,500 per month over the first 6 months and 1,500 per month thereafter. The options are exercisable through March 2009. These options are valued at $28,257 utilizing the Black-Scholes-Merton option pricing model with $24,408 of compensation recorded in 2006.
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In December 2006, the Chief Technical Officer of the Company, Edward Buiel, was granted a contractual option to purchase an additional 100,000 shares of our common stock at a price of $3.75 per share. A total of 50,000 options will vest on December 29, 2009 and the remaining 50,000 will vest on December 29, 2010. The options will be exercisable for a period of six years from the vesting date. These options are valued at $267,372, utilizing the Black-Scholes-Merton option pricing model with $6,481 of compensation recorded in 2006.
In February 2006, a consultant, Trey Fecteau, was granted an option to purchase 97,000 shares of common stock at an exercise price of $4.00. The options vested upon completion of contractual services in December 2006. The options are exercisable through December 2009. These options are valued at $150,702 utilizing the Black-Scholes-Merton option pricing model. This amount reduced the proceeds of the Series A Preferred Stock offering in 2006.
In January 2007, Walker Wainwright, a director of the Company, was granted an option to purchase 40,000 shares of common stock at an exercise price of $5.00 as compensation for services related to due diligence, negotiation and sale of the 2006 Series A Preferred Stock offering. These three-year options were immediately vested on the date of grant, and are valued at $52,230 utilizing the Black-Scholes-Merton option pricing model and are recorded as offering costs in 2007.
In August 2007, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was granted a contractual option to purchase 80,000 shares of common stock at an exercise price of $4.50. 20,000 vest immediately upon contract inception and the remainder vest at a rate of 10,000 per month over the life of his six-month employment contract. These two-year options are valued at $37,356 utilizing the Black-Scholes-Merton option pricing model with $24,904 recorded as compensation in 2007.
In December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert Nelson, was granted a contractual option to purchase 108,000 shares of common stock at an exercise price of $5.00. The options vest at a rate of 3,000 per month over a three year period, but are being amortized over the term of his two year employment contract. These five-year options are valued at $108,504 utilizing the Black-Scholes-Merton option pricing model with $4,521 recorded as compensation in 2007.
In March 2008, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was granted a contractual option to purchase 30,000 shares of common stock at an exercise price of $4.50. 10,000 options vested immediately upon grant and are exercisable through December 2009, and the remaining 20,000 options vested in May 2008 and are exercisable through May 2010.These options are valued at $15,600 utilizing the Black-Scholes-Merton option pricing model with $15,600 recorded as compensation in 2008.
In June 2008, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was granted a contractual option to purchase 10,000 shares of common stock at an exercise price of $4.50. These options vested in June 2008. These options are valued at $5,200 utilizing the Black-Scholes-Merton option pricing model and recorded as compensation in 2008.
In June 2008, the following Equity Awards were issued as part of a restructuring of key employee contracts that was designed to provide for the long term stability of the Company:
(i) Our Chief Executive Officer, Thomas Granville, was granted a contractual option to purchase an additional 90,000 shares of our common stock at a price of $2.50 per share. The options vest prorated over the 24-month term of his contract, and are exercisable for a period of five years from the vesting date. These options are valued at $79,872, utilizing the Black-Scholes-Merton option pricing model with $23,296 of compensation recorded in 2008.
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(ii) Our Chief Technical Officer, Edward Buiel, was granted a contractual option to purchase an additional 100,000 shares of our common stock at a price of $2.50 per share. The options cliff vest on May 31, 2011, and are exercisable for a period of five years from the vesting date. These options are valued at $95,436, utilizing the Black-Scholes-Merton option pricing model with $18,557 of compensation recorded in 2008.
(iii) Our Chief Financial Officer, Donald Hillier, was granted an option to purchase 180,000 shares of our common stock. The exercise price of the option is $2.50 per share, and the option vests at the rate of 5,000 shares per month through the term of the Employment Agreement and are exercisable for a period of 5 years from the vesting date. These options are valued at $179,244, utilizing the Black-Scholes-Merton option pricing model with $34,853 of compensation recorded in 2008.
Three employees were granted contractual options to purchase an additional 200,000 shares of our common stock at a price of $2.50 per share. 5,000 of these options vested in June upon execution of the employment contracts, with the balance cliff vesting on June 15, 2011, and are exercisable for a period of three years from the vesting date. These options are valued at $165,041, utilizing the Black-Scholes-Merton option pricing model with $34,222 of compensation recorded in 2008.
Seven employees were granted contractual options to purchase an additional 179,500 shares of our common stock at a price of $2.50 per share. 43,500 of these options vested in December upon execution of the employment contracts, with the balance vesting through the term of the employment agreement and are exercisable for a period of three years from the vesting date. These options are valued at $36,171, utilizing the Black-Scholes-Merton option pricing model with $5,330 of compensation recorded in 2008.
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that are set forth in our financial statements elsewhere in this annual report.
Overview
We are a development stage company that was formed in September 2003 to acquire and develop certain innovative battery technology. Since inception, APC has been engaged in R&D of the new technology for the production of lead-acid-carbon energy storage devices that we refer to as our proprietary lead/carbon (“PbC”) devices. As of December 31, 2003, APC engaged in a reverse acquisition with Tamboril, a public shell company. Tamboril was originally incorporated in Delaware in January 1997, operated a wholesale cigar business until December 1998 and was an inactive public shell thereafter until December 2003. The information presented herein relates to the operations of APC, the accounting acquirer. Tamboril, the legal acquirer, changed its name to Axion Power International, Inc. We formed a new corporation, Axion Power Battery Manufacturing Inc., which purchased the foreclosed assets of a failed battery manufacturing plant and now conducts our manufacture of specialty batteries.
At December 31, 2008, we have incurred cumulative net losses of approximately $49.1 million applicable to the common shareholder. This includes approximately $2.1 million in interest of which $1.3 million relates to discount on notes. We have an additional $13.6 million in accumulated preferred stock dividends. We had approximately $6.9 million in current assets and $1.5 million in current liabilities at December 31, 2008, which left a net working capital surplus of approximately $5.4 million. As discussed below, we received an aggregate amount of $16.5 million, net of offering costs, in long term equity financing on January 14, 2008, April 7, 2008, and June 30, 2008 from Quercus Trust. Management believes those funds will support operations through 2009.
On July 3, 2008 we moved from the Pink Sheets back to the OTCBB. We lost our OTCBB listing and moved to the Pink Sheets in October of 2006 when our filings became delinquent due to the restatements of our financial statements for the years 2003, 2004 and 2005. Our financial reporting became current at the beginning of the second quarter of 2008, and it is our intention to remain current on a going forward basis.
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During the third quarter of 2008, we fabricated several different types of lead acid batteries to prepare for the testing of those products by another company under a purchase order. At the end of September 2008, we were released to begin production on three of eleven items covered by the order. On November 3, 2008, the Company received the first purchase order in what will be a series of "confirming purchase orders and delivery releases" pursuant to the original agreement. We have devoted time and financial resources to upgrading, and where necessary replacing, existing battery manufacturing equipment as part of our long range business plan. In the future, a large portion of this upgraded equipment will be used to manufacture our proprietary PbC lead carbon product. The Quercus Trust investment of $4 million in April allowed us to move this upgrade forward. Likewise the Quercus $10 million investment that we received on June 30th has allowed us to continue to pursue automated fabrication equipment, which will be used in the manufacture of the PbC carbon electrode device in commercialization quantities.
Key Performance Indicators
Because of our early stage of development the usual financial measures are not particularly relevant or helpful in the assessment of company operations.
We do not use non-financial measures to evaluate our performance other than the degree of success of our R&D and demonstration projects. Our demonstration projects entail extended periods of time to assess our energy devices over multiple charge and deep discharge cycles. Further, the results of our demonstration projects do not lend themselves to simple measurement and presentation.
The single most significant financial metric for us is the adequacy of working capital in order to continue to fund our research and development efforts. Capital is also necessary to fund the equipment and methods required to progress from demonstration projects to a state of prepared readiness for commercial deployment. We believe we can maintain operations and fund R&D through 2009 without further capital infusions.
We believe we need to continue to characterize and perfect our products in house and through a limited number of demonstration projects before moving into mass production. While the results of this work are promising to date, we cannot assure you that the products will be successful in their present design or that further research and development will not be needed. The successful completion of present and future characterization and demonstration projects are critical to the development and acceptance of our technology.
We must devise methodologies to manufacture our energy storage devices in commercial quantities. While we have assembled an engineering team that we believe can accomplish this goal, and are adding to it as we go forward, there is no assurance that we will be able to successfully mass produce our product.
If we successfully complete our characterization and demonstration projects, we must present sufficiently compelling evidence to prospective users of energy storage devices in order to persuade them to purchase our technology.
Material Trends and Uncertainties
We will continue to require substantial funds for R&D. Even with adequate funding there is no assurance our new technology can be successfully commercialized. While we intend to continue to manufacture specialty batteries and commence contract manufacturing there is no assurance of profits or whether those profits will be sufficient to sustain us as we continue to develop our new technology.
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Recent Financing Activities
Bridge Loan Financing In November of 2007 we structured short term secured bridge loan arrangements in increments of $100,000 (the "Bridge Loans") with certain of our directors, officers and significant investors, such loans to bear interest at the rate of 14% and were secured by all of our assets, including our intellectual property and all of the equipment and inventory assets of our wholly-owned subsidiary, Axion Power Battery Manufacturing Inc. Total funding received under the Bridge Loans was approximately $2,640,000, of which $100,000 was received in 2008.
The Bridge Loans had an original maturity date of March 31, 2008, with three extensions of the maturity date at the option of the Company, with higher interest rates to apply to each such extension. On March 31, 2008, we sent notice to the investors of our intention to extend the loan until April 30, 2008. In accordance with the option terms contained in the loan agreement, three of the investors chose to convert a total of $328,984 into equity under the same terms offered to Quercus. One of these investors later rescinded his election, opting for repayment. This resulted in a net conversion of $276,484 into equity under the same terms offered to Quercus. The extension entitled the remaining investors to earn an additional 1% extension fee based on the original loan amount and interest at the annual rate of 15%. On April 29, 2008, we sent notice to the investors of our intention to extend the loan until May 31, 2008. The extension entitled investors to earn an additional 1% extension fee based on the original loan amount and interest at the annual rate of 16%. On May 29, 2008, a related party converted $4,200 of his Bridge Loan into equity under the same terms offered to Quercus, with the balance repaid under the terms of the note for the Bridge Loan. On May 30, 2008, we sent notice to the remaining investors of our intention to extend the Loans until June 30, 2008. The interest rate during the extension period increased to 18% with an extension fee equal to 2% of the original loan and an extension fee of 2% of the original loan was paid to the holders of the Bridge Loans. A loan origination fee was paid equal to 8% of the original principal amount of the Loan. The origination fee decreased by one-half percent each week after December 15, 2007 until the loan closed on January 7, 2008. Warrants exercisable at $2.35 until December 31, 2012 are included. For each $100,000 increment of the Bridge Loan, the investors were issued warrants as follows: 3,405 warrants upon occurrence of the secured bridge loan: 851 additional warrants upon the extension of the loan to April 30, 2008; 1,276 additional warrants upon extension of the loan to May 31, 2008 and 2,128 additional warrants upon extension of the loan to June 30, 2008. Typical anti-dilution provisions apply to the warrants as do piggyback registration rights.
On June 30, 2008, a director, exercising his rights to convert under the same terms converted $800,000 of indebtedness under the Bridge Loans into 380,952 shares of common stock and warrants to purchase 380,952 shares of common stock at an exercise price of $2.60 per share, such warrants will expire on June 29, 2013. The remaining balance due, $1,235,028, of indebtedness from the Bridge Loans was repaid as of July 1, 2008 with a portion of the proceeds from the Final Quercus Investment (as described below). The Bridge Loans have been fully repaid or converted, and there is no remaining indebtedness under these instruments.
The Quercus Investment On January 14, 2008, we entered into the Securities Purchase Agreement with Quercus, pursuant to which we agreed to issue to Quercus up to 8,571,429 shares of our common stock, together with a five year common stock purchase warrants that will entitle the holder to purchase up to 10,000,000 additional shares of our common stock.
At the initial closing on January 14, 2008, Quercus invested $4.0 million in exchange for 1,904,762 shares and warrants to purchase an additional 2,857,143 shares at an exercise price of $2.60 per share. At the second closing on April 17, 2008, Quercus invested an additional $4.0 million in exchange for 1,904,762 shares of our common stock and warrant to purchase an additional 2,380,953 shares of at an exercise price of $2.60 per share.
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On June 30, 2008, the Company completed the third and final tranche of the Quercus investment, whereby Quercus invested $10.0 million in exchange for 4,761,905 shares of our common stock and warrants to purchase an additional 4,761,905 shares of stock at an exercise price of $2.60 per share. All of the warrants issued to Quercus expire by June 29, 2013. A portion of the proceeds of the June 30, 2008 financing were used to retire the remainder of the $2,640,000 December 2007 Bridge Loan that the Company had previously entered into. By June 30, certain of the bridge lenders had converted $1,080,684 into 514,611 shares of common stock and warrants to purchase 580,940 shares of common stock at an exercise price of $2.60 per share. The warrant expires on June 29, 2013 and the entire conversion was under the same terms as the Quercus investment. As a result of conversion and repayment, the December 2007 Bridge Loans have been completely retired, extinguishing all indebtedness under those instruments as of July 1, 2008
The warrants contain conventional full ratchet anti-dilution provisions for adjustment of the exercise price in the event we issue additional shares of our common stock or securities convertible into common stock (subject to certain specified exclusions) at a price less than $1.00 per share.
Grant Activities
On October 6, 2008, the Company received notice that it was the recipient of a federal grant for the development of new lightweight, high-powered batteries for use in vehicles operated by the U.S. Marine Corps. The first year, of an anticipated ongoing three year grant, provides $1,200,000 to us for the project. In December of 2006 and January of 2007, the Company presented its unique technology to branches of the Armed Forces. In February of 2007, after receiving a letter of support from the Office of Naval Research, the Company submitted a proposal to the Department of Defense. The proposal to further study the applicability of the Company’s PbC technology for use in military assault vehicles was sponsored by a U.S. Congressman. The grant was not approved in the 2008 federal budget, but was resubmitted and approved in the 2009 budget, and the Company received formal notice on October 6, 2008. The potential three year $5,000,000 grant has an initial year funding of $1,200,000 expected to be received in 2009. Under the grant program, the Company and the Navy and Marine Corps will study the feasibility of utilizing one of the Company's PbC products in their assault and silent watch vehicles. The next phase is the joint development and testing of the product, which is expected to be lighter in weight and more powerful in discharge than some of the existing products in use.
On February 5, 2009, the Company received a pair of grants from the Advanced Lead-Acid Battery Consortium, the leading industry association made up in part by the largest companies supplying the world’s battery market. The pair of grants totals approximately $380,000 and will help support research into two key areas. (1) The first grant seeks to identify the mechanism by which the optimum specification of carbon, when included in the negative active material of a valve-regulated lead-acid battery, provides protection against accumulation of lead sulfate during high-rate partial-state-of-charge operation. (2) The second grant seeks simply to characterize Axion’s proprietary PbC™ battery in hybrid electric vehicle (HEV) type duty-cycle testing. The grants are administered through the Durham, NC-based International Lead Zinc Research Organization acting on behalf of the ALABC. The research work is expected to be completed in 2009.
On February 9, 2009, the Company received notice that it is the recipient a grant from the Pennsylvania Alternative Fuels Incentive Grant program. The $800,000 first-year grant, which was announced by Governor Edward Rendell on January 29th, is part of Pennsylvania’s overall effort to invest in businesses that are creating important and innovative clean energy and bio-fuels technologies. The award proceeds will be used to demonstrate the advantages the Axion proprietary PbC battery technology provides in a variety of electric vehicle types including: hybrids (HEVs), such as the popular Toyota Prius; “plug-ins” (PHEVs) used in commuter, delivery and other vehicles; and in electric vehicles (EV’s) and converted (from combustion engine operation) EV’s. The grant proceeds are expected to be received in 2009.
A summary of awarded grants expected to be received in 2009 are summarized as follows:
| DOD Office of Naval Research | $ | 1,200,000 | ||
| ALABC | 380,000 | |||
| PA Alternative Fuels Incentive Grant Program | 800,000 | |||
| $ | 2,380,000 |
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Results of Operations
The comparative data below presents our results of operations for the year ended December 31, 2007 and 2008. While certain of the data is not strictly comparable because some line items are positive and some negative, the provided percentages demonstrate the relative significance of the individual line items and also the relative changes from year to year.
| · | Our primary operations in our current development stage consist of research and development efforts for advanced battery applications and PbC carbon electrode devices. Revenues are for specialty collector and racing car, uninterruptable power supply (UPS) and flooded batteries sold to customers. Cost of goods sold represent the raw materials, components, labor and manufacturing overhead absorbed in producing batteries sold to customers. |
| · | Selling, general and administrative expenses include substantial non-recurring legal, auditing, accounting and other costs associated with becoming current with our public filings, investor and public relations, registration and litigation costs and also one time employee costs in relation to restructuring of employment agreements. |
| · | Research & development expenses are incurred to design, develop and test advanced batteries and an energy storage product based on our patented lead carbon technology (PbC). These costs include engineering and research and development employee labor and expenses, materials and components consumed in production for pilot products, demonstration projects, testing and prototypes. These costs also include manufacturing costs incurred for research and development activities including the creation, testing and improvement of plant production processes needed for production of our proprietary technologies. |
| · | Interest expense was incurred for the bridge loan financing offered during the fourth quarter of 2007. The bridge loans were retired as of July 1, 2008. |
| Years Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Statements of Operations | 2008 | % of net loss | 2007 | % of net loss | ||||||||||||
| Revenues | $ | 679,559 | $ | 533,911 | ||||||||||||
| Cost of goods sold | 368,922 | 283,357 | ||||||||||||||
| Gross profit | 310,637 | -2.9 | % | 250,554 | -1.7 | % | ||||||||||
| Expenses | ||||||||||||||||
| Selling, general & administrative | 4,846,189 | 45.6 | % | 3,720,632 | 26.0 | % | ||||||||||
| Research & development | 3,960,909 | 37.3 | % | 2,155,873 | 15.1 | % | ||||||||||
| Interest expense - related party | 1,137,436 | 10.7 | % | 276,651 | 1.9 | % | ||||||||||
| Derivative revaluation | (2,844 | ) | 0.0 | % | (72,236 | ) | -0.5 | % | ||||||||
| Interest & other income, net | (57,224 | ) | -0.5 | % | (47,708 | ) | -0.3 | % | ||||||||
| Net loss before income taxes | (9,573,829 | ) | 90.2 | % | (5,782,658 | ) | 40.5 | % | ||||||||
| Income Taxes Expense (Benefit) | (79,170 | ) | -0.7 | % | 83,469 | 0.6 | % | |||||||||
| Deficit accumulated during development stage | (9,494,659 | ) | 89.5 | % | (5,886,127 | ) | 41.1 | % | ||||||||
| Less preferred stock dividends and beneficial conversion feature | (1,117,699 | ) | 10.5 | % | (8,417,955 | ) | 58.9 | % | ||||||||
| Net loss applicable to common shareholders | $ | (10,612,358 | ) | 100.0 | % | $ | (14,284,082 | ) | 100.0 | % | ||||||
| Basic and diluted net loss per share | $ | (0.46 | ) | $ | (0.88 | ) | ||||||||||
| Weighted average common shares outstanding | 22,826,187 | 16,247,299 | ||||||||||||||
32
Summary of Consolidated Results for the Year Ended December 31, 2008 compared with the Year Ended December 31, 2007
Revenue
Revenues for year ended December 31, 2008 were approximately $0.7 million compared to revenues of approximately $0.5 million for the same period in 2007. This represents an increase of 27% in revenues reported during 2008 over the same period in 2007. This increase is primarily due to another year of exposure, especially in the race car and classic car industries, increased sales of uninterruptable power supply (UPS) batteries and the sale of flooded lead-acid batteries to a large battery manufacturer under our manufacturing subcontract agreement. We have one customer that accounted for approximately 10% of revenue or the year ended December 31, 2008 and another customer accounted for 12.5% of revenue for the same period in 2007. Our relatively low revenue is indicative of our predominant development stage activities.
Cost of Goods Sold
Costs of goods sold represent costs for batteries sold to customers and include various raw materials with lead being the most prominent and costly. We also use components such as plastic battery cases and covers as well as separators and acid. The cost of lead during 2008 decreased from the historical highs of 2007 similar to other industrial-grade metals partially as a result of the global economic slowdown. We also incur manufacturing labor and overhead costs as well as costs for packaging and shipping. Costs of goods sold increased by approximately $.10 million for the year ended December 31, 2008, as compared to the same time period last year. 2008 costs are 30% higher than that the 2007 respective period consistent with our increase in revenue.
Selling, General & Administrative Expenses
Selling, general and administrative expenses include compensation for employees and contractors, legal and accounting fees, and costs incurred for investor relations and activities associated with fund raising and shareholder awareness. Selling, general and administrative costs for year ended December 31, 2008 were approximately $4.8 million compared to $3.7 million, respectively, for the same period in 2007. This represents a 30% increase in spending over the same period during 2007. Cost increases are primarily due to substantial non-recurring legal, auditing, accounting and other costs associated with becoming current with our public filings, investor and public relations, registration and litigation costs and also one-time employee costs with respect to restructuring of employment agreements.
33
Research & Development Expenses
Research and development expenses include compensation for employees and contractors, as well as small test equipment, supplies and overhead. These costs also include manufacturing employee compensation, manufacturing facility and overhead costs attributed to research and development activities. Research and development also includes prototype production and testing costs. Research and development expenses for the year ended December 31, 2008 were approximately $4.0 million compared to $2.2 million for the same periods in 2007, representing an increase in spending of 46% as compared to the same period in 2007. The increase is due to increased costs associated with additional efforts incurred to design, develop and test advanced batteries and energy storage products based on our patented lead carbon battery (PbC) including manufacturing activities to prepare the plant for future PbC production, pilot product production and demonstration project production activities. In 2008, we increased our R&D staff by approximately 50% and signed them to long term contracts. We also restructured existing R&D employment contracts to ensure long term continuity. The expense of all of these measures is reflected in the increased R&D expenditures for 2008.
Interest Expense - Related Party
Interest expense – related party represents interest costs incurred primarily for the bridge loan financing offered during the fourth quarter of 2007. Related party interest expense includes the coupon value of interest on debt, as well as the debt discount on detachable warrants and origination fees. Expenses incurred during the year ended December 31, 2008 were approximately $1.14 million as compared to $.28 million, for the same period in 2007. Whereas 2007 financing was sustained through the issuance of the Series A preferred offering, 2007 did not have a comparable level of interest expense as was recognized during 2008. The 2007 bridge loans were completely retired as of July 1, 2008.
Derivative Revaluation
Derivative revaluations are recognized whenever the Company incurs a liability to issue an equity instrument. The instrument is revalued quarterly until the point in time that the liability is settled. Derivative revaluation expense for the year ended December 31, 2008 resulted in a credit of $(.003) million compared with a credit of $(.072) million for the same period ended in 2007. During 2007, the Company funded its capital needs with debt that offered detachable warrants. These warrants were not settled until March 2008, at which point the Company’s stock values were lower, giving rise to the nominal credit in 2008. There are no new obligations as of December 31, 2008.
Net Loss
For the fiscal year ended December 31, 2008, our net loss before income taxes increased $3.8 million, or 65%, to $9.6 million on revenue of $.7 million, from an operating loss of approximately $5.8 million on revenue of $.6million for the fiscal year ended December 31, 2007. As discussed above, the factors primarily affecting this increase in operating loss were increased selling, general and administrative costs, increased research and development costs and increased interest expense of related party debt.
The net loss applicable to common shareholders of $10.6 million for the year ended December 31, 2008 compared to a loss of $14.3 million for the year ended December 31, 2007 reflects a decrease of approximately 26%. The loss includes non-cash charges related to preferred stock dividends and beneficial conversion feature of $1.1 million in 2008 compared with $8.4 million in 2007.
34
Liquidity and Capital Resources
Our primary source of liquidity has historically been cash generated from issuances of our equity or debt securities. From inception through fiscal year ended December 31, 2008, we generated insignificant revenue from operations. We believe we had sufficient funds on December 31, 2008 to conduct our operations through 2009, which were primarily the result of the closings of financing with the Quercus Trust. If we do not significantly increase our revenues, obtain additional government grants or raise more money through sale of equity during 2009 we will likely be unable to implement our business plan, fund our liquidity needs or even continue our operations after this period. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, most likely will result in dilution to our stockholders.
Cash, Cash Equivalents, Short Term Investments and Working Capital
At December 31, 2008, we had approximately $3.1 million of cash and cash equivalents compared to approximately $0.7 million at December 31, 2007. At December 31, 2008 working capital was $5.4 million compared to a working capital deficit of $(2.9) million at December 31, 2007. Cash equivalents consist of short-term liquid investments with original maturities of no more than three months and are readily convertible into cash and consisted of the following at December 31, 2008:
Coupon / Yield | Maturity | December 31, 2008 | |||||||
| United States Treasury Bills | Feb-09 | $ | 999,840 | ||||||
| Fidelity Institutional Money Market | 2.08 | % | n/a | $ | 1,756,105 | ||||
At December 31, 2008, we had the following short term investments of $2,193,920 consisting of short-term liquid investments with original maturities that exceed three months at December 31, 2008:
Coupon / Yield | Maturity | ||||||||
| Certificate of Deposit, Pacific Capital | 2.9 | % | Mar-09 | $ | 97,000 | ||||
| Certificate of Deposit, Wachovia MTG FSB | 2.9 | % | Mar-09 | $ | 97,000 | ||||
| United States Treasury Bills | Feb -09 | $ | 1,999,920 | ||||||
Cash Flows from Operating Activities
Net cash used in operations for the year ended December 31, 2008 was $(8.9) million. Cash used in operations for this same period ended December 31, 2007 was approximately $(3.7) million. The use of cash in operations is reflective of the net loss before income taxes at this developmental stage of the business. The cash used in operations for the year ended December 31, 2008 is also reflective of the growth of inventories.
35
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2008 was $(3.6) million compared to $(1.2) million for the same period ended December 31, 2007. Cash used by investing activities for the year ended December 31, 2008 was used to purchase short-term investments and for the purchase of equipment for both production and research and development for both years ended December 31, 2008 and 2007.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2008 was approximately $15.0 million compared to $2.0 million for the same period ended December 31, 2007. Financing activities for the year ended December 31, 2008 consisted of $16.5 million from the issuance of common stock and the repayment of $1.5 million for retirement of the 2007 bridge loans during 2008. Financing activities for the year ended December 31, 2007 consisted of $1.6 million received from the bridge loan financing and $.4 million from the issuance of preferred stock.
Significant Financing Arrangements
December 2007 Secured Bridge Loan Transaction: In December 2007, we offered certain of our directors, officers, and significant investors the opportunity to participate in a short term bridge loan arrangement in increments of $100,000, each such loan to bear interest at 14% and to be secured by all of our assets, including our intellectual property assets and the assets of Axion Power Battery Manufacturing Inc. Total funding received under the secured bridge loan as of December 31, 2007 amounted to $2,540,000, with additional funding of $100,000 received in January of 2008. $516,000 was repaid through June 2008 along with $60,000 of interest; the balance of the proceeds was used to fund ongoing operations. As of July 1, 2008, the Bridge Loans have been fully repaid or converted, and there is no remaining indebtedness under these instruments.
The Quercus Investment: On January 14, 2008, we entered into the Securities Purchase Agreement with Quercus Trust, pursuant to which we agreed to issue to Quercus up to 8,571,429 shares of our common stock, together with a five-year common stock purchase warrants that will entitle the holder to purchase up to 10,000,000 additional shares of our common stock.
At the initial closing on January 14, 2008, Quercus invested $4.0 million in exchange for 1,904,762 shares and warrants to purchase an additional 2,857,143 shares at an exercise price of $2.60 per share. At the second closing on April 17, 2008, Quercus invested an additional $4.0 million in exchange for 1,904,762 shares of our common stock and warrant to purchase an additional 2,380,953 shares of at an exercise price of $2.60 per share.
On June 30, 2008, the Company completed the third and final tranche of the Quercus investment, whereby Quercus invested $10.0 million in exchange for 4,761,905 shares of our common stock and warrants to purchase an additional 4,761,905 shares of stock at an exercise price of $2.60 per share. All of the warrants issued to Quercus expire by June 29, 2013. A portion of the proceeds of the June 30, 2008 financing were used to retire the remainder of the $2,640,000 December 2007 Bridge Loan that the Company had previously entered into. Prior to June 30, certain of the bridge lenders had converted $280,684 into 133,659 shares of common stock and warrants to purchase 199,988 shares of common stock at an exercise price of $2.60 per share. On June 30, 2008, one of the Company’s directors converted $800,000 of Bridge Loan indebtedness into 380,952 shares of common stock and a warrant to purchase 380,952 shares at an exercise price of $2.60 per share. The warrant expires on June 29, 2013 and the entire conversion was under the same terms as the Quercus investment. As a result of conversion and repayment, the December 2007 Bridge Loans have been completely retired, extinguishing all indebtedness under those instruments.
36
The warrants contain conventional anti-dilution provisions for adjustment of the exercise price in the event we issue additional shares of our common stock or securities convertible into common stock (subject to certain specified exclusions) at a price less than $1.00 per share.
Critical Accounting Policies, Judgments and Estimates
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this annual report discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. On an ongoing basis, management evaluates its estimates and judgment, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation. Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, Axion Power Battery Manufacturing, Inc., APC and C&T. All significant inter-company balances and transactions have been eliminated in consolidation.
Revenue Recognition: The Company recognizes revenue upon transfer of title at the time of shipment (F.O.B. shipping point), when all significant contractual obligations have been satisfied, the price is fixed or determinable and collection is reasonably assured.
Stock-Based Compensation: Prior to January 1, 2006, the Company accounted for stock option awards in accordance with the recognition and measurement provisions of APB 25 and related interpretations, as permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”). Under APB 25, compensation cost for stock options issued to employees was measured as the excess, if any, of the fair value of the Company’s stock at the date of grant over the exercise price of the option granted. Compensation cost was recognized for stock options, if any, ratably over the vesting period. As permitted by SFAS 123, the Company reported pro-forma disclosures presenting results and earnings as if the Company had used the fair value recognition provisions of SFAS 123 in the Notes to the Consolidated Financial Statements.
Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective transition method. See footnote captioned “Equity Compensation” for further detail on the impact of SFAS 123R to the Company’s consolidated financial statements.
Stock-based compensation related to non-employees is recognized as compensation expense in the accompanying consolidated statements of operations and is based on the fair value of the services received or the fair value of the equity instruments issued, whichever is more readily determinable. The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments granted to Other Than Employees.” The measurement date for the fair value of the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
37
Research and Development: R&D costs are recorded in accordance with FASB No. 2, “Accounting for Research and Development Costs,” which requires that costs incurred in R&D activities covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses be expensed as incurred. The policy of expensing the costs of R&D activities relate to (1) in-house work conducted by the Company, (2) costs incurred in connection with contracts that outsource R&D to third party developers and (3) costs incurred in connection with the acquisition of intellectual property that is properly classified as in-process R&D. All R&D costs have been expensed.
Off Balance Sheet Arrangements. We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Axion Power International, Inc.
We have audited the accompanying consolidated balance sheets of Axion Power International, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, cash flows, and changes in stockholders’ equity and comprehensive income for the years then ended and for the period since inception (September 18, 2003) through December 31, 2008. Axion Power International Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Axion Power International, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended and for the period since inception (September 18, 2003) through December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
| /s/ Rotenberg & Co., LLP |
| Rotenberg & Co., LLP |
| Rochester, New York |
| March 24, 2009 |
38
AXION POWER INTERNATIONAL, INC
CONSOLIDATED BALANCE SHEETS
(A Development Stage Company)
| December 31, 2008 | December 31, 2007 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 3,124,168 | $ | 671,244 | ||||
| Short-term investments | 2,193,920 | - | ||||||
| Accounts receivable | 128,035 | 133,646 | ||||||
| Other receivables | 64,456 | 341,801 | ||||||
| Inventory | 1,269,515 | 375,635 | ||||||
| Prepaid expenses | 78,989 | 82,102 | ||||||
| Total current assets | 6,859,083 | 1,604,428 | ||||||
| Property & equipment, net | 3,274,183 | 2,119,252 | ||||||
| Other receivables, non-current | 28,388 | - | ||||||
| TOTAL ASSETS | $ | 10,161,654 | $ | 3,723,680 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,324,287 | $ | 1,573,436 | ||||
| Other current liabilities | 162,580 | 583,591 | ||||||
| Notes payable to related parties | - | 2,259,826 | ||||||
| Liability to issue equity instrument | - | 106,183 | ||||||
| Total current liabilities | 1,486,867 | 4,523,036 | ||||||
| Deferred revenue | 751,096 | 840,945 | ||||||
| Total liabilities | 2,237,963 | 5,363,981 | ||||||
| Stockholders' Equity: | ||||||||
| Convertible preferred stock-12,500,000 shares authorized | ||||||||
. Senior preferred – 1,000,000 shares designated . 137,500 issued and outstanding (137,500 in 2007) | 1,656,735 | 1,515,376 | ||||||
. Series A preferred – 2,000,000 shares designated . 718,997 shares issued and outstanding (822,997 in 2007) | 9,440,359 | 9,802,894 | ||||||
| Common stock-100,000,000 shares authorized $0.0001 par value 26,417,437 issued & outstanding (16,498,298 in 2007) | 2,641 | 1,625 | ||||||
| Additional paid in capital | 46,184,287 | 25,768,331 | ||||||
| Deficit accumulated during development stage | (49,111,062 | ) | (38,498,704 | ) | ||||
| Cumulative foreign currency translation adjustment | (249,269 | ) | (229,823 | ) | ||||
| Total Stockholders' Equity | 7,923,691 | (1,640,301 | ) | |||||
| TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | $ | 10,161,654 | $ | 3,723,680 | ||||
The Accompanying Notes are an Integral Part of the Financial Statements
39
AXION POWER INTERNATIONAL, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(A Development Stage Company)
| Years Ended | Inception | |||||||||||
| December 31, | (9/18/2003) to | |||||||||||
| 2008 | 2007 | December 31, 2008 | ||||||||||
| Revenues | $ | 679,559 | $ | 533,911 | $ | 1,488,847 | ||||||
| Costs of goods sold | 368,922 | 283,357 | 1,210,262 | |||||||||
| Gross profit | 310.637 | 250.554 | 278.585 | |||||||||
| Expenses | ||||||||||||
| Selling, general & administrative | 4,846,189 | 3,720,632 | 18,015,381 | |||||||||
| Research & development | 3,960,909 | 2,155,873 | 13,951,670 | |||||||||
| Impairment of assets | - | - | 1,391,485 | |||||||||
| Interest expense - related party | 1,137,436 | 276,651 | 2,151,923 | |||||||||
| Derivative revaluation | (2,844 | ) | (72,236 | ) | 362,508 | |||||||
| Mega C Trust Share Augmentation (Return) | - | - | 400,000 | |||||||||
| Interest & other income, net | (57,224 | ) | (47,708 | ) | (534,152 | ) | ||||||
| Net loss before income taxes | (9,573,829 | ) | (5,782,658 | ) | (35,460,230 | ) | ||||||
| Income Taxes Expense (Benefit) | (79,170 | ) | 83,469 | 4,299 | ||||||||
| Deficit accumulated during development stage | (9,494,659 | ) | (5,886,127 | ) | (35,464,529 | ) | ||||||
| Less preferred stock dividends and beneficial conversion feature | (1,117,699 | ) | (8,417,955 | ) | (13,646,533 | ) | ||||||
| Net loss applicable to common shareholders | $ | (10,612,358 | ) | $ | (14,284,082 | ) | $ | (49,111,062 | ) | |||
| Basic and diluted net loss per share | $ | (0.46 | ) | $ | (0.88 | ) | $ | (3.11 | ) | |||
| Weighted average common shares outstanding | 22,826,187 | 16,247,299 | 15,776,245 | |||||||||
The Accompanying Notes are an Integral Part of the Financial Statements
40
AXION POWER INTERNATIONAL, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(A Development Stage Company)
| Years Ended | Inception | |||||||||||
| December 31, | (9/18/2003) to | |||||||||||
| 2008 | 2007 | 12/31/2008 | ||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Deficit accumulated during development stage | $ | (9,494,659 | ) | $ | (5,866,127 | ) | $ | (35,464,529 | ) | |||
| Adjustments required to reconcile deficit accumulated during development stage to cash flows used by operating activities | ||||||||||||
| Depreciation | 189,804 | 176,196 | 543,286 | |||||||||
| Impairment of assets | - | - | 1,391,486 | |||||||||
| Non-cash interest expense | 868,211 | 224,536 | 1,830,583 | |||||||||
| Derivative revaluations | (2,844 | ) | (72,236 | ) | 362,508 | |||||||
| Equity instruments issued for services | 861,705 | 478,113 | 4,350,499 | |||||||||
| Mega C Trust Share Augmentation (Return) | - | - | 400,000 | |||||||||
| Changes in Operating Assets & Liabilities | ||||||||||||
| Accounts receivable | 5,612 | (88,639 | ) | (134,905 | ) | |||||||
| Other receivables | 277,345 | 87,233 | (42,496 | ) | ||||||||
| Prepaid expenses | 3,113 | 10,478 | (76,401 | ) | ||||||||
| Inventory | (893,879 | ) | (108,449 | ) | (1,269,514 | ) | ||||||
| Accounts payable | (249,149 | ) | 661,969 | 2,978,931 | ||||||||
| Other current liabilities | (421,009 | ) | (252,500 | ) | 183,712 | |||||||
| Deferred revenue and other | (2,370 | ) | 840,945 | 838,575 | ||||||||
| Liability to issue equity instruments | - | 178,419 | 178,419 | |||||||||
| Net cash used by operating activities | (8,858,120 | ) | (3,730,062 | ) | (23,929,846 | ) | ||||||
| Cash Flows from Investing Activities | ||||||||||||
| Short term investments | (2,193,920 | ) | - | (2,193,920 | ) | |||||||
| Long term notes, net | (28,388 | ) | - | (1,245,404 | ) | |||||||
| Purchase of property & equipment | (1,432,213 | ) | (1,250,643 | ) | (3,814,180 | ) | ||||||
| Investment in intangible assets | - | - | (167,888 | ) | ||||||||
| Net cash used by investing activities | (3,654,521 | ) | (1,250,643 | ) | (7,421,392 | ) | ||||||
| Cash Flow from Financing Activities | ||||||||||||
| Proceeds from related party debt, net | (1,483,485 | ) | 1,630,032 | 5,179,771 | ||||||||
| Proceeds from sale of common stock; net of costs | 16,468,500 | - | 20,185,905 | |||||||||
| Proceeds from exercise of warrants | - | - | 1,655,500 | |||||||||
| Proceeds from sale of preferred stock, net of costs | - | 390,500 | 7,472,181 | |||||||||
| Net cash provided by financing activities | 14,985,015 | 2,020,532 | 34,493,357 | |||||||||
| Net Change in Cash and Cash Equivalents | 2,472,374 | (2,960,173 | ) | 3,142,119 | ||||||||
| Effect of Exchange Rate on Cash | (19,450 | ) | 21,137 | (17,951 | ) | |||||||
| Cash and Cash Equivalents - Beginning | 671,244 | 3,610,280 | - | |||||||||
| Cash and Cash Equivalents - Ending | $ | 3,124,168 | $ | 671,244 | $ | 3,124,168 | ||||||
The Accompanying Notes are an Integral Part of the Financial Statements
41
Axion Power International, Inc.
Consolidated Statement of Stockholders' Equity (Deficit)
For Periods Ended December 31, 2003; 2004; 2005; 2006; 2007; 2008
(A Development Stage Company)
Preferred | Common | Deficit Accumulated During | Other Comprehensive Income Cumulative | Total Stockholders' | ||||||||||||||||||||||||||||||||||||
Shares | Senior Preferred | Series A Preferred | Shares | Common Stock Amount | Additional Paid- In Capital | Subscriptions Receivable | Development Stage | Translation Adjustments | Equity (Deficit) | |||||||||||||||||||||||||||||||
Inception September 18, 2003 | 0 | $ | 0 | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||||
| Shares to founders upon formulation of APC | 1,360,000 | 137 | (137 | ) | 0 | 0 | ||||||||||||||||||||||||||||||||||
| Stock based compensation | 170,000 | 17 | 48,936 | 48,953 | ||||||||||||||||||||||||||||||||||||
| Conversion of debt to equity | 1,108,335 | 111 | 1,449,889 | (350,000 | ) | 1,100,001 | ||||||||||||||||||||||||||||||||||
| Debt Discount from convertible debt | 86,402 | 86,402 | ||||||||||||||||||||||||||||||||||||||
| Unamortized discount on convertible debt | (77,188 | ) | (77,188 | ) | ||||||||||||||||||||||||||||||||||||
| Fair value of options issued as loan inducements | 15,574 | 15,574 | ||||||||||||||||||||||||||||||||||||||
| Shared issued during Recapitalization | ||||||||||||||||||||||||||||||||||||||||
| - Shares issued to Mega-C trust | 6,147,483 | 615 | (615 | ) | 0 | |||||||||||||||||||||||||||||||||||
| - Equity acquired in recapitalization | 1,875,000 | 188 | (188 | ) | 0 | |||||||||||||||||||||||||||||||||||
| Net Loss December 31, 2003 | (3,097,030 | ) | (3,097,030 | ) | ||||||||||||||||||||||||||||||||||||
| Other Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | (56,547 | ) | (56,547 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive loss | (3,153,577 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2003 | 0 | $ | 0 | 10,660,818 | $ | 1,067 | $ | 1,522,674 | $ | (350,000 | ) | $ | (3,097,030 | ) | $ | (56,547 | ) | $ | (1,979,836 | ) | ||||||||||||||||||||
| Shares issued to founders | 445,000 | 45 | (45 | ) | 0 | |||||||||||||||||||||||||||||||||||
| Augmentation shares issued to Mega-C trust | 180,000 | 18 | 0 | |||||||||||||||||||||||||||||||||||||
| Conversion of debt | 283,333 | 28 | 451,813 | 350,000 | 801,841 | |||||||||||||||||||||||||||||||||||
| Warrants in consideration for technology purchased | 563,872 | 563,872 | ||||||||||||||||||||||||||||||||||||||
| Common stock offering - net of cost | 823,800 | 81 | 1,607,053 | 1,607,134 | ||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of warrants | 475,200 | 48 | 867,972 | 868,020 | ||||||||||||||||||||||||||||||||||||
| Liability converted as partial prepayment on options | 306,000 | 306,000 | ||||||||||||||||||||||||||||||||||||||
| Stock based compensation | 45,000 | 5 | 191,738 | 191,742 | ||||||||||||||||||||||||||||||||||||
| Fraction Shares Issued Upon Reverse Spilt | 48,782 | 5 | (5 | ) | 0 | |||||||||||||||||||||||||||||||||||
| Net Loss December 31, 2004 | (3,653,637 | ) | (3,653,637 | ) | ||||||||||||||||||||||||||||||||||||
| Other Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | (74,245 | ) | (74,245 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive loss | (3,727,882 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2004 | 0 | $ | 0 | 12,961,933 | $ | 1,296 | $ | 5,511,054 | $ | 0 | $ | (6,750,667 | ) | $ | (130,792 | ) | $ | (1,369,109 | ) | |||||||||||||||||||||
| Proceeds From Exercise of Warrants & Options | 853,665 | 85 | 1,283,395 | (496,000 | ) | 787,480 | ||||||||||||||||||||||||||||||||||
| Common Stock Offering Proceeds | 600,000 | 60 | 1,171,310 | (200,000 | ) | 971,370 | ||||||||||||||||||||||||||||||||||
| Preferred Stock Offering proceeds | 385,000 | 3,754,110 | (25,000 | ) | 3,729,110 | |||||||||||||||||||||||||||||||||||
| Conversion of preferred to common | (245,000 | ) | (2,475,407 | ) | 1,470,000 | 147 | 2,475,260 | 0 | ||||||||||||||||||||||||||||||||
| Stock issued for services | 500,000 | 50 | 1,524,950 | 1,525,000 | ||||||||||||||||||||||||||||||||||||
| Fair Value of Options for Non-Employee Services | 237,568 | 237,568 | ||||||||||||||||||||||||||||||||||||||
| Employee incentive share grants | 219,000 | 22 | 647,480 | 647,502 | ||||||||||||||||||||||||||||||||||||
| Impact of beneficial conversion feature | 3,099,156 | (3,099,156 | ) | 0 | ||||||||||||||||||||||||||||||||||||
| Preferred Stock Dividends | 176,194 | (176,194 | ) | 0 | ||||||||||||||||||||||||||||||||||||
| Net Loss December 31, 2005 | (6,325,113 | ) | (6,325,113 | ) | ||||||||||||||||||||||||||||||||||||
42
| Other Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | (24,780 | ) | (24,780 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive loss | (6,349,893 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2005 | 140,000 | $ | 1,454,897 | 16,604,598 | $ | 1,661 | $ | 15,950,173 | $ | (721,000 | ) | $ | (16,351,130 | ) | $ | (155,572 | ) | $ | 179,028 | |||||||||||||||||||||
| Preferred Series A Proceeds | 782,997 | 7,571,768 | 7,571,768 | |||||||||||||||||||||||||||||||||||||
| Preferred - Dividends | 119,092 | 103,101 | (222,193 | ) | 0 | |||||||||||||||||||||||||||||||||||
| Senior Preferred Cancellation | (2,500 | ) | (25,000 | ) | 25,000 | 0 | ||||||||||||||||||||||||||||||||||
| Common Stock Offering Proceeds | 80,000 | 8 | 199,992 | 696,000 | 896,000 | |||||||||||||||||||||||||||||||||||
| Proceeds from exercise of warrants | 56,700 | 6 | 113,394 | 113,400 | ||||||||||||||||||||||||||||||||||||
| Employee incentive share grants | 6,000 | 1 | 23,999 | 24,000 | ||||||||||||||||||||||||||||||||||||
| Augmentation shares issued to Mega-C trust | (500,000 | ) | (50 | ) | (1,124,950 | ) | (1,125,000 | ) | ||||||||||||||||||||||||||||||||
| Stock based compensation | 1,241,231 | 1,241,231 | ||||||||||||||||||||||||||||||||||||||
| Fair value of warrants with related party debt | 885,126 | 885,126 | ||||||||||||||||||||||||||||||||||||||
| Modification of preexisting warrants | 392,811 | 392,811 | ||||||||||||||||||||||||||||||||||||||
| Fair value warrants issued for services | 86,848 | 86,848 | ||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on related party debt | 95,752 | 95,752 | ||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on Preferred Stock | (6,096,634 | ) | 6,709,970 | (613,336 | ) | 0 | ||||||||||||||||||||||||||||||||||
| Net Loss December 31, 2006 | (7,027,963 | ) | (7,027,963 | ) | ||||||||||||||||||||||||||||||||||||
| Other Comprehensive income (loss): | 0 | |||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | (95,387 | ) | (95,387 | ) | ||||||||||||||||||||||||||||||||||||
| Comprehensive loss | (7,123,350 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2006 | 920,497 | $ | 1,548,989 | $ | 1,578,235 | 16,247,298 | 1,625 | 24,574,346 | - | (24,214,622 | ) | (250,959 | ) | $ | 3,237,614 | |||||||||||||||||||||||||
| Preferred Series A Proceeds | 40,000 | 337,270 | 337,270 | |||||||||||||||||||||||||||||||||||||
| Preferred - Dividends | 130,566 | 1,790,755 | (1,921,321 | ) | 0 | |||||||||||||||||||||||||||||||||||
| Employee incentive share grants | 1,000 | 0 | 315,950 | 315,950 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation | 215,393 | 215,393 | ||||||||||||||||||||||||||||||||||||||
| Fair value of warrants with related party debt | 98,463 | 98,463 | ||||||||||||||||||||||||||||||||||||||
| Modification of preexisting warrants | (164,179 | ) | 164,179 | 0 | ||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on Preferred Stock | 6,096,634 | 400,000 | (6,496,634 | ) | 0 | |||||||||||||||||||||||||||||||||||
| Net Loss December 31, 2007 | (5,866,127 | ) | (5,866,127 | ) | ||||||||||||||||||||||||||||||||||||
| Other Comprehensive income (loss): | 0 | |||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | 21,136 | 21,136 | ||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | (5,844,991 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2007 | 960,497 | $ | 1,515,376 | $ | 9,802,894 | 16,248,298 | $ | 1,625 | $ | 25,768,331 | $ | 0 | $ | (38,498,704 | ) | $ | (229,823 | ) | $ | (1,640,301 | ) |
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| Preferred - Dividends | 141,359 | 976,340 | (1,117,699 | ) | 0 | |||||||||||||||||||||||||||||||||||
| Preferred Converted into Common Stock | (104,000 | ) | (1,338,875 | ) | 1,071,099 | 107 | 1,338,768 | 0 | ||||||||||||||||||||||||||||||||
| Bridge Loans Converted into Common Stock | 514,611 | 51 | 1,080,633 | 1,080,684 | ||||||||||||||||||||||||||||||||||||
| Proceeds from Quercus Trust-net of costs | 8,571,429 | 857 | 15,273,908 | 15,274,765 | ||||||||||||||||||||||||||||||||||||
| Employee incentive share grants | 12,000 | 1 | 435,725 | 435,726 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation | 425,979 | 425,979 | ||||||||||||||||||||||||||||||||||||||
| Fair value of warrants with related party debt | 667,208 | 667,208 | ||||||||||||||||||||||||||||||||||||||
| Fair value warrants issued for services | 1,193,735 | 1,193,735 | ||||||||||||||||||||||||||||||||||||||
| Net Loss December 31, 2008 | (9,494,659 | ) | (9,494,659 | ) | ||||||||||||||||||||||||||||||||||||
| Other Comprehensive income (loss): | 0 | |||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | (19,446 | ) | (19,446 | ) | ||||||||||||||||||||||||||||||||||||
| Comprehensive loss | (9,551,990 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2008 | 856,497 | $ | 1,656,735 | $ | 9,440,359 | 26,417,437 | $ | 2,641 | $ | 46,184,287 | $ | 0 | $ | (49,111,062 | ) | $ | (249,269 | ) | $ | 7,923,691 |
The Accompanying Notes are an Integral Part of the Financial Statements
44
AXION POWER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A DEVELOPMENT STAGE COMPANY)
Note 1 — Organization and Operations
These consolidated financial statements of Axion Power International, Inc., a Delaware corporation (API), include the operations of its wholly owned subsidiaries; Axion Power Battery Manufacturing, Inc (APB), Axion Power Corporation, a Canadian Federal corporation (“APC”), and C & T Co. Inc., an Ontario corporation (“C&T”) (collectively, the Company).
Axion is developing innovative battery/energy storage device technology. The Company continues its research and development and has entered the testing phase of its unique battery designs. Development activities, testing and prototype manufacturing is performed at the Company’s manufacturing facility. The Company also manufactures on a limited basis specialty batteries for resale.
Note 2 —Accounting Policies
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.
Principles of Consolidation: The consolidated financial statements include the accounts of Axion, and its wholly owned subsidiaries, APB, APC and C&T (collectively, the Company). All significant inter-company balances and transactions have been eliminated in consolidation.
Basis of Presentation: The financial statements have been presented in a “development stage” format in accordance with the provisions of Statement of Financial Accounting Standards (FASB) No. 7, Accounting and Reporting by Development Stage Enterprises. Since inception, the Company’s primary activities have been raising capital, obtaining financing, developing Axion’s energy storage technology and testing its proposed products.
Segment Reporting: Management has determined that the Company is organized, managed and internally reported as one business segment. Segments are determined based on differences in products, internal reporting and how operational decisions are made.
Foreign Currency Translation: The accounts of APC and C&T are measured using the Canadian dollar as the functional currency for all the periods presented in the financial statements. The translation from Canadian dollars to U.S. dollars is performed for the balance sheet accounts using current exchange rates in effect at each of the balance sheet dates, and for the revenue and expense accounts using the average rate in effect during the periods. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Gains or losses resulting from transactions denominated in currencies other than the functional currency are included in the results of operations as incurred. The gains or losses arising from the inter-company loan denominated in U.S. dollars are directly reflected in other comprehensive income, as the amounts are not expected to be repaid in the foreseeable future.
Comprehensive Income: The Company follows FASB No. 130, “Reporting Comprehensive Income.” Comprehensive income, as defined by Statement 130, is the change in equity of a business enterprise during a reporting period from transactions and other events and circumstances from non-owner sources. In addition to the Company’s net loss, the change in equity components under comprehensive income include the foreign currency translation adjustment.
45
Fair Value of Financial Instruments: FASB No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about certain financial instruments, including, but not limited to, cash and cash equivalents, accounts receivable, refundable tax credits, prepaid expenses, accounts payable, accrued expenses, notes payable to related parties and convertible debt-related securities. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2008 and 2007. The carrying value of the balance sheet financial instruments included in the Company’s consolidated financial statements approximated their fair values.
On January 1, 2008, the Company adopted FASB Statement No. 157, “Fair Value Measurements” (SFAS No. 157) which defines fair value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. The criterion that is set forth in SFAS No. 157 is applicable to fair value measurement where it is permitted or required under other accounting pronouncements.
SFAS No. 157 defines fair value as the exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on inputs of observable and unobservable market data that a market participant would use in pricing the asset or liability. The use of observable inputs is maximized where available and the use of unobservable inputs is minimized for fair value measurement. As a means to illustrate the inputs used, SFAS No. 157 establishes a three-tier fair value hierarchy that prioritizes inputs to valuation techniques used for fair value measurement.
| · | Level 1 consists of observable market data in an active market for identical assets or liabilities. |
| · | Level 2 consists of observable market data, other than that included in Level 1, that is either directly or indirectly observable. |
| · | Level 3 consists of unobservable market data. The input may reflect the assumptions of the Company of what a market participant would use in pricing an asset or liability. If there is little available market data, then the Company’s own assumptions are the best available information. |
In the case of multiple inputs being used in a fair value measurement, the lowest level input that is significant to the fair value measurement represents the level in the fair value hierarchy in which the fair value measurement is reported.
Cash and Cash Equivalents: For financial statement presentation purposes, the Company considers those short-term, highly liquid investments with original maturities of three months or less to be cash or cash equivalents.
Concentration of Credit Risk: The Company’s cash and cash equivalents are on deposit with banks. Only a portion of the cash and cash equivalents would be covered by deposit insurance and the uninsured balances are substantially greater than the insured amounts. Although cash and cash equivalent balances exceed insured deposit amounts, management does not anticipate non-performance by the banks.
Accounts Receivable: The Company records its accounts receivable at the original invoice amount less an allowance for doubtful accounts. An account receivable is considered to be past due if any portion of the receivable balance is outstanding beyond its scheduled due date. On a quarterly basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts and established an allowance for doubtful accounts for specific accounts that are considered at risk as to collection. When a customer account is considered to be uncollectible it is written off against the related allowance. . No interest is accrued on past due accounts receivable.
Inventory: Inventory is recorded at the lower of cost or market value, and adjusted as appropriate for decreases in valuation and obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected sales activity, inventory costs and inventory balances to determine appropriate reserve levels. As of December 31, 2008, no reserve for obsolescence was deemed necessary. Cost is determined using the first-in first-out (FIFO) method. Many components and raw materials we purchase have minimum order quantities. As of December 31, 2008, inventory costs of $1,270,000 consisted of $354,000 of finished goods, $344,000 of work-in-process and $572,000 of raw materials. These amounts include $535,000 of finished batteries, work-in-process and raw materials for our manufacturing subcontract. As of December 31, 2007 inventory costs of $376,000 consisted of $302,000 of raw materials, $55,000 of work-in-process and $19,000 of finished goods.
46
Property and Equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight line method over the estimated useful lives of the assets, ranging from 3 to 22 years.
Expenditures for renewals and betterments are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place.
Impairment or Disposal of Long-Lived Assets: The Company adopted the provisions of FASB No. 144 (FASB 144), “Accounting for the Impairment or Disposal of Long-lived Assets.” This standard requires, among other things, that long-lived assets be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these expected cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The primary measure of fair value is based on discounted cash flows. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations. There were no impairments recognized for years ended December 31, 2008 and 2007.
Revenue Recognition: The Company recognizes revenue upon transfer of title at the time of shipment (F.O.B. shipping point), when all significant contractual obligations have been satisfied, the price is fixed or determinable, and collectability is reasonably assured.
Shipping and Handling Costs: All shipping and handling costs charged to customers are recorded as Net Sales and all related expenses are included in Cost of Sales. Shipping and handling costs not billed to customers are included in selling, general and administrative expense.
Stock-Based Compensation: Prior to January 1, 2006, the Company accounted for stock option awards in accordance with the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees, (APB 25)” and related interpretations, as permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation”, (SFAS 123). Under APB 25, compensation cost for stock options issued to employees was measured as the excess, if any, of the fair value of the Company’s stock at the date of grant over the exercise price of the option granted. Compensation cost was recognized for stock options, if any, ratably over the vesting period. As permitted by SFAS 123, the Company reported pro-forma disclosures presenting results and earnings as if the Company had used the fair value recognition provisions of SFAS 123 in the Notes to the Consolidated Financial Statements.
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (SFAS 123(R)) using the modified prospective transition method. See footnote captioned “Equity Compensation” for further detail on the impact of SFAS 123(R) to the Company’s consolidated financial statements.
Stock-based compensation related to non-employees is recognized as compensation expense in the accompanying consolidated statements of operations and is based on the fair value of the services received or the fair value of the equity instruments issued, whichever is more readily determinable. The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments granted to Other Than Employees.” The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
47
Research and Development: Research and development costs are recorded in accordance with FASB No, 2, “Accounting for Research and Development Costs,” which requires that costs incurred in research and development activities covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses be expensed as incurred. The policy of expensing the costs of research and development activities relate to (i) in-house work conducted by the Company; (ii) costs incurred in connection with contracts that outsource research and development to third party developers; and (iii) costs incurred in connection with the acquisition of intellectual property that is properly classified as in-process research and development. All research and development costs have been expensed.
Income Taxes: Deferred income taxes are recorded in accordance with FASB No. 109, “Accounting for Income Taxes,” or FASB 109, and deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. FASB 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not to occur. Realization of net deferred tax assets is dependent upon generating sufficient taxable income in future years in appropriate tax jurisdictions to realize benefit from the reversal of temporary differences and from net operating loss, or NOL, carryforwards. The Company has determined it more likely than not that the deferred tax asset resulting from these timing differences will not materialize and have provided a valuation allowance against the entire net deferred tax asset. Management will continue to evaluate the realizability of the deferred tax asset and its related valuation allowance. If the assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which the determination is made. The tax rate may also vary based on actual results and the mix of income or loss in domestic and foreign tax jurisdictions in which operations take place.
Refundable tax credits are recorded, to the extent receipt is assured, in the year that they are earned and included in other income.
The provision for taxes represents corporate-level franchise taxes which may be based on assets, equity, capital stock or a variation thereof.
Recent Accounting Pronouncements:
In February 2007, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115,” (FASB 159), was issued. This standard allows a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The provisions of this standard are effective as of the beginning of our fiscal year 2008, with early adoption permitted. The adoption of FASB No. 159 did not have a material impact on the Company’s consolidated financial position, results of operation, or cash flows.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51. These new standards will significantly change the accounting for and reporting of business combinations and non-controlling (minority) interests in consolidated financial statements. Statement Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact of adopting SFAS Nos. 141(R) and SFAS 160 on its consolidated financial statements.
48
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 161, "Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS 161 on its consolidated financial statements but does not expect it to have a material effect.
In May 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 162, "The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is currently evaluating the impact of SFAS 162 on its consolidated financial statements but does not expect it to have a material effect.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 163, "Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60" (“SFAS 163”). SFAS 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS 163 on its consolidated financial statements but does not expect it to have a material effect.
Reclassifications
Certain reclassifications have been made to the 2007 financial statement presentation to correspond to the current year’s presentation. Total equity and net income are unchanged due to these reclassifications.
Note 3 - Grant Revenue
Grants from Commonwealth of Pennsylvania: On April 30, 2007, the Company was awarded a series of retroactive grants from the Commonwealth of Pennsylvania with an aggregate value of $1.2 million. Grants for $900,000 were specifically designated for equipment purchases and the remaining $300,000 for job training and tax credits. The $150,000 Opportunity Grant Program grant requires the Company to hire 86 full-time employees by March 31, 2009, spend a total of $6,492,300 of non-public funds as part of the company’s operating expenses and equipment purchases by March 31, 2009 and maintain an operation in Neshannock Township through March 31, 2011. Failure to meet these goals could result in a partial return of the $150,000 grant allocation. During the year ended December 31, 2007, the Company recognized amounts related to these grants for the purchase of equipment. The Company records equipment grants as other receivables and deferred revenue based on qualifying equipment purchases that are billed to the Commonwealth for reimbursement at a rate of 75% of the amount paid by the Company. Deferred revenue is amortized into income over the estimated useful life of the related equipment. As of December 31, 2008, deferred revenue was $751,096. During the year 2008, $89,849 of income was recorded for the amortization of deferred revenue. As of December 31, 2007, other receivables included $239,861 and deferred revenue of $840,945 was recorded for equipment grants. During the year ended December 31, 2007, $662,000 of cash was received and $60,916 of income was recorded for the amortization of the deferred revenue.
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Note 4 - - Fair Value Measures
The Company has determined the fair value of certain assets through application of SFAS No. 157, Fair Value Measurements.
Fair value of assets and liabilities measured at December 31, 2008 are as follows:
Fair Value Measurements at Reporting Date Using:
Quoted Prices In Active Markets for | ||||||||
| Fair Value | Identical Assets/Liabilities (Level 1) | |||||||
| December 31, 2008: | ||||||||
| Available-for-sale securities | ||||||||
| Certificates of Deposit | $ | 194,000 | $ | 194,000 | ||||
| United States Treasury Bills | $ | 1,999,920 | $ | 1,999,920 | ||||
The Company did not hold any securities for the year ended December 31, 2007.
There were no gains or losses (realized and unrealized) included in earnings for the periods reported in investment income.
Financial assets and liabilities valued using level 1 inputs are based on unadjusted quoted market prices within active market.
Note 5 — Property and Equipment
A summary of property and equipment at December 31, 2008 and 2007is as follows:
Estimated useful | ||||||||||||
| life | 2008 | 2007 | ||||||||||
| Asset deposit | $ | - | $ | - | ||||||||
| Leasehold improvements | 10 | 105,888 | 92,525 | |||||||||
| Machinery & equipment | 3-22 years | 3,801,600 | 2,382,749 | |||||||||
| Less accumulated depreciation | 633,305 | 356,022 | ||||||||||
| Net | $ | 3,274,183 | $ | 2,119,252 | ||||||||
Note 6 - Related Party Debt Financing
2007 Activity:
The Company issued a total of 270,000 warrants against the 2006 loan agreement executed with Mr. Averill during 2006 and has an obligation to issue an additional 230,000 warrants from these loans through the November 2007 date of extinguishment. In November 2007, the 2006 loan was subsequently extinguished in exchange for the security provided under the Secured Bridge Loan program offered during the fourth quarter of 2007. (See discussion of this loan under the caption “Secured Bridge Loan Financing” below).
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In August 2007, Mr. Averill loaned the Company an additional $460,000 earning interest at a coupon rate of 12% per annum. The debt matures in two parts, with the $230,000 payable no later than September 30, 2007 and the final balance to be paid no later than December 31, 2007. As additional consideration for this loan, Mr. Averill is to receive a 3-year warrant to purchase 30,000 shares of common stock upon loan inception, an additional 2,000 warrants for each business day between the loan inception date and first repayment date, with the number of warrants pegged to the first repayment not to exceed 42,000 warrants, and an additional 1,000 warrants for each business day between the date of first repayment and second repayment date, with the number of warrants pegged to the second repayment not to exceed 64,000 warrants. The Company repaid Mr. Averill $115,000 on September 28, 2007, from which he is to receive the maximum number of warrants pegged to the first repayment date. On November 27, 2007 this loan was subsequently extinguished in exchange for the security provided under the Secured Bridge Loan program offered during the fourth quarter of 2007. The Company has an obligation to issue an additional 64,000 warrants from these loans through the November 27, 2007 extinguishment date. (See discussion of this loan under the caption “Secured Bridge Loan Financing” below).
On November 1, 2007, the Company borrowed an additional $267,900 from Robert Averill. This amount was invested in anticipation of the Secured Bridge Loan discussed below, earning interest at 14% per annum.
On November 27, 2007, Mr. Averill and the Company entered into an agreement to convert all outstanding debt obligations due and owing to Mr. Averill, into obligations under the Secured Bridge Loan discussed below, extinguishing the security interest Mr. Averill had in all of the assets of Axion Power Battery, Inc. in exchange for the security provided under the Secured Bridge Loan. At the time this indebtedness was converted, the Company owed Mr. Averill outstanding principal plus interest amounting to $1,111,910 together with new borrowings of $544,090 and $144,000 of loan origination fees recognized as a note discount, resulting in Mr. Averill holding a note for $1,800,000 under the Secured Bridge Loan financing. The loan has an original maturity of March 31, 2008, bears an initial interest rate of 14% per annum, and is jointly secured, along with all other investors in the Secured Bridge Loan, by all the assets including intellectual property assets of the Company and its subsidiaries. As additional consideration for this loan, Mr. Averill is to receive a warrant to purchase 61,290 shares of common stock. The warrants are exercisable for a period of five years from loan inception at a price of $2.35 per share.
Mr. Averill’s loan obligations specifically state that the warrant will be dated three years from date of issue. Whereas none of these warrants were issued during 2007, the expiration date on his warrants relating to both the 2006 carryover and the 2007 was not determined until 2008. In conjunction with this loan obligation carried over from 2007, the Company satisfied the remainder of its obligation to issue 366,000 warrants to Mr. Averill. Because of the delay in processing, these 3 year warrants, exercisable at a price of $6.00, were issued with an expiration date of March 31, 2011. Due to lower stock prices at the time of modification, the modification of these instruments resulted in a net decrease in fair value of these instruments.
In October 2007, Igor Filipenko, a member of the Board of Directors, loaned the Company $115,000 under substantially the same agreement as Mr. Averill’s loan agreement of August 2007. Mr. Filipenko earns interest at a coupon rate of 12% per annum with a scheduled maturity of December 31, 2007. As additional consideration for this loan, Mr. Filipenko is to receive a 3-year warrant to purchase 5,250 shares of common stock upon loan inception, and an additional 500 warrants for each business day between the loan inception date and repayment date. The number of warrants pegged to repayment is not to exceed 26,500 warrants. At the end of 2007, the Company had an obligation to issue an additional 31,750 warrants from this loan upon extinguishment on December 17, 2007. In conjunction with this loan obligation carried over from 2007, the Company satisfied the remainder of its obligation to issue 31,750 warrants to Mr. Filipenko. Because of the delay in processing, these 3 year warrants, exercisable at a price of $6.00, were issued with an expiration date of March 31, 2011. Due to lower stock prices at the time of modification, the modification of these instruments resulted in a net decrease in fair value of these instruments. (See discussion of this loan under the caption “Secured Bridge Loan Financing” below). (See discussion of this loan under the caption “Secured Bridge Loan Financing” below).
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In December 2007, Mr. Filipenko elected to participate in the fourth quarter short-term bridge loan arrangement whereby he converted his October loan of $115,000, contributed an additional $92,000 in cash, and received a note discount of $18,000 reflecting loan origination fees, resulting in Mr. Filipenko holding a note for $225,000 under the Secured Bridge Loan. The loan has an original maturity of March 31, 2008, bears an initial interest rate of 14% per annum, and is jointly secured, along with all other investors in the Secured Bridge Loan, by all the assets including intellectual property assets of the Company and its subsidiaries. As additional consideration for this loan, Mr. Filipenko is to receive a warrant to purchase 7,661 shares of common stock. The warrants are exercisable for a period of five years from loan inception at a price of $2.35 per share. (See discussion of this loan under the caption “Secured Bridge Loan Financing” below).
In December 2007, Glenn Patterson (HAP), a member of the Board of Directors, contributed $92,000 in cash and received a note discount of $8,000 reflecting loan origination fees by participating in the fourth quarter short-term bridge loan arrangement offered by the Company. The loan has an original maturity of March 31, 2008, bears an initial interest rate of 14% per annum, and is jointly secured, along with all other investors in the Secured Bridge Loan, by all the assets including intellectual property assets of the Company and its subsidiaries. As additional consideration for this loan, Mr. Patterson is to receive a warrant to purchase 3,405 shares of common stock. The warrants are exercisable for a period of five years from loan inception at a price of $2.35 per share. (See discussion of this loan under the caption “Secured Bridge Loan Financing” below).
2008 Activity:
The 2007 Bridge Loans had an original maturity date of March 31, 2008, with three extensions of the maturity date at the option of the Company, with higher interest rates to apply to each such extension.
On May 29, 2008, Glenn Patterson (HAP) converted $4,200 of his Bridge Loan into equity under the same terms offered to Quercus discussed in Item 7 “Recent Financing Activities” , with the $95,800 in principal repaid under the terms of the note for the Bridge Loan. Mr. Patterson received 4,627 warrants valued at $3,990 utilizing the Black-Scholes-Merton option pricing model.
On June 30, 2008, Igor Filipenko was repaid $225,000 in principal under the terms of the note for the Bridge Loan. Mr. Filipenko received 9,148 warrants valued at $9,768 utilizing the Black-Scholes-Merton option pricing model.
On June 30, 2008, Robert Averill, converted $800,000 under the same terms offered to Quercus discussed in Item 7 “Recent Financing Activities”, with the $1,000,000 in principal repaid on July 1, 2008 under the terms of the note for the Bridge Loan. Mr. Averill received 457,542 warrants valued at $342,748 utilizing the Black-Scholes-Merton option pricing model.
Options and Warrants: The loan agreements disclosed above provided for the aggregate issuance of 484,278 common stock purchase warrants, with only 86,528 having been issued as of December 31, 2007. We satisfied our obligation to issue the remainder of 397,750 warrants in March 2008 by issue to two of our directors. As of December 31, 2007, the warrants due under these agreements had been valued at 276,882 and recorded as a note discount. Note discount of $154,201 had been amortized during the year ended December 31, 2007, of which $152,884 relates to the warrant obligations under these 2007 loans. $289,075 of unamortized debt discount relating to the 2007 obligations was amortized during the 1st quarter of 2008. Because of the delay in processing, these 3 year warrants, exercisable at a price of $6.00, the settlement warrants were issued with an expiration date of March 31, 2011. Due to lower stock prices at the time of modification, the modification of these instruments resulted in a net decrease in fair value of these instruments. Decreases in fair value of embedded options resulting from a modification should not be recognized and accordingly are not reflected on the Company’s financial statements.
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Secured Bridge Loan Financing: In December 2007 the Company offered certain of its directors, officers, and significant investors the opportunity to participate in a short-term bridge loan arrangement in increments of $100,000, each such loan to bear interest at 14% and to be secured by all of the assets, including the intellectual property assets of Axion Power International and Axion Power Battery Manufacturing Inc. (the “Secured Bridge Loan”). Elections to participate must have been made no later than January 7, 2008, and if fully subscribed, the Secured Bridge Loan could result in up to $3,000,000 in short-term funding for the Company.
Total funding received under the Secured Bridge Loan as of December 31, 2007 amounted to $2,541,216, with additional funding of $100,000 in January of 2008. $2,125,000 was funded by three members of the Board of Directors, with the balance funded by four accredited investors.
The Bridge Loans had an original maturity date of March 31, 2008, with three extensions of the maturity date at the option of the Company, with higher interest rates to apply to each such extension. On March 31, 2008, we sent notice to the investors of our intention to extend the loan until April 30, 2008. In accordance with the option terms contained in the loan agreement, three of the investors chose to convert a total of $328,984 into equity under the same terms offered to Quercus. One of these investors later rescinded his election, opting for repayment. This resulted in a net conversion of $276,484 into equity under the same terms offered to Quercus. The extension entitled the remaining investors to earn an additional 1% extension fee based on the original loan amount and interest at the annual rate of 15%. On April 29, 2008, we sent notice to the investors of our intention to extend the loan until May 31, 2008. The extension entitles investors to earn an additional 1% extension fee based on the original loan amount and interest at the annual rate of 16%. On May 29, 2008, a related party converted $4,200 of his Bridge Loan into equity under the same terms offered to Quercus, with the balance repaid under the terms of the note for the Bridge Loan. On May 30, 2008, we sent notice to the remaining investors of our intentions to extend the loan until June 30, 2008. The interest rate during the extension period increased to 18% with an extension fee equal to 2% of the original loan and an extension fee of 2% of the original loan was paid to the holders of the Bridge Loans. A loan origination fee was paid equal to 8% of the original loan. The origination fee decreased by one-half percent each week after December 15, 2007 until the loan closed on January 7, 2008. Warrants exercisable at $2.35 until December 31, 2012 are included. For each $100,000 increment of the Bridge Loan, the investors were issued warrants as follows: 3,405 warrants upon occurrence of the secured bridge loan: 851 additional warrants upon the extension of the loan to April 30, 2008; 1,276 additional warrants upon extension of the loan to May 31, 2008 and 2,128 additional warrants upon extension of the loan to June 30, 2008. Typical anti-dilution provisions apply to the warrants as do piggyback registration rights.
On June 30, 2008, a director, exercising his rights to convert under the same terms converted $800,000 of indebtedness under the Bridge Loans into 380,952 shares of common stock and warrants to purchase 380,952 shares of common stock at an exercise price of $2.60 per share, such warrants will expire on June 29, 2013. The remaining balance due, $1,235,028, of indebtedness from the Bridge Loans was repaid on July 1, 2008 with a portion of the proceeds from the Final Quercus Investment (as described below). The Bridge Loans have been fully repaid or converted, and there is no remaining indebtedness under these instruments.
Interest Expense: Interest expense recognized for the year ended December 31, 2008 in connection with certain notes payable to related parties amounted to $1,137,485. Of this total $277,045 relates to the interest coupon and $860,443 to the amortization of note discount associated with loan origination fees and detachable warrants. The amounts reported as interest expense-related party on the income statement include payments to four accredited investors with certain associations to related parties. Interest expense recognized for the year ended December 31, 2007 in connection with these notes and related liabilities amounted to $276,651, of which $117,058 relates to the amortization of the note discount for warrants granted, $37,143 relates to the amortization of note discount reflected by the Secured Bridge Loan’s origination fees, and the remainder relates to the stated interest rate on the outstanding balance. In December 2007, loan origination fees of $202,216 were recognized as note discounts related to funding received in the fourth quarter on the Secured Bridge Loan. In January 2008, $7,500 in origination fees were recognized as a note discount in connection with an additional $92,500 of cash received for these notes. These note discounts are being amortized as interest expense over the life of the respective notes.
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Note 7— Stockholders' Equity
Authorized Capitalization: The Company’s authorized capitalization includes 100,000,000 shares of common stock and 12,500,000 shares of preferred stock. This represents an increase in the number of authorized common shares from 50,000,000 pursuant to the Shareholder meeting vote on November 12, 2008.
Common Stock: At December 31, 2008, 26,417,437 shares of common stock were issued and outstanding. The holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Holders of common stock are entitled to receive dividends when and if declared by the board out of funds legally available. In the event of liquidation, dissolution or winding up, the common stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock. The common stockholders have no conversion, preemptive or other subscription rights and there are no redemption provisions applicable to the common stock. All of the outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock: The Company’s certificate of incorporation authorizes the issuance of 12,500,000 shares of blank check preferred stock. The Company’s board of directors has the power to establish the designation, rights and preferences of any preferred stock. Accordingly, the board of directors has the power, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock.
At December 31, 2008, 137,500 shares of 8% Cumulative Convertible Senior Preferred stock were issued and outstanding, and 718,997 shares of Series A Convertible Preferred stock were issued and outstanding.
Equity Transactions –period ended December 31, 2003
APC and Tamboril Cigar Company (Tamboril, now Axion) reverse acquisition: In December 2003 Tamboril entered into a reverse acquisition agreement with APC. Under the terms of the agreement, all outstanding securities of APC were acquired by Tamboril in exchange for newly issued stock. Upon consummation of the transaction, the former stockholders of APC owned the majority of Tamboril’s outstanding shares and controlled Tamboril’s Board of Directors. Accordingly, the acquisition of APC by Tamboril was structured as a reverse acquisition under which Tamboril was the legal acquirer in the transaction and APC was the accounting acquirer. The transaction was treated as a recapitalization of APC for accounting purposes. Tamboril had no material assets or liabilities and 1,875,000 common shares outstanding on December 31, 2003 when it entered into a reverse acquisition with shareholders of APC. The historical financial statements presented prior to December 31, 2003 represent those of APC since its inception on September 18, 2003. The transactions of Tamboril are included beginning January 1, 2004. Subsequently, Tamboril changed its name to Axion Power International, Inc.
Prior to the reverse acquisition, APC issued rights to its founders for 1,360,000 shares of APC common stock as additional shares for money contributed through the purchase of convertible debt. Accordingly, there was no expense recorded related to these issuances of these shares. However, there was one founder that did not contribute funds in which APC valued the 170,000 shares issued as expense for services rendered during the period ending December 31, 2003 amounting to $48,953 based on the value of the shares received for the funds contributed by the other founders. The founders purchased convertible debt from APC for $1,450,000 of which $350,000 was not collected until 2004 which is included as a subscription receivable as of December 31, 2003. These convertible debt instruments were converted prior to the merger in which 1,108,335 shares of APC common stock were issued as consideration for $1,450,000 of convertible debt and $92,761 in unamortized debt discount attributable to detachable warrants.
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The following transactions were completed in conjunction with the original closings:
· | Tamboril had 1,875,000 shares of common stock outstanding at December 31, 2003 which is reflected as equity acquired in the recapitalization. |
· | Tamboril settled $484,123 in pre-merger accrued related party compensation debt through the issuance of 233,400 warrants. No corresponding expense was recorded on the Company’s records because the debt was included on the legal acquirer’s (Tamboril’s) records prior to the reverse acquisition. |
· | Tamboril issued 9,785,818 common shares (prior to the return of 1,000,000 shares from The Trust for the Benefit of the Shareholders of Mega-C Power Corp in the fiscal year ended December 31, 2006, as disclosed in the note captioned “Subsequent Events”) and 608,600 warrants to APC’s stockholders in exchange for a substantial controlling interest in APC. This includes the common shares issued to the founders, common shares and warrants issued in conjunction with the convertible notes, and shares issued to the Mega C Trust. |
· | As part of the above described transaction, APC shareholders, who had rights to the stock agreed to have 7,147,483 shares of Tamboril shares to be issued to the Trust and APC shareholders retained the remaining shares. As a result of the November 21, 2006 Mega C Chapter 11 plan of reorganization, the Trust was required to return 1,000,000 shares of the common stock distributed to the Trust noted above for cancellation by the Company. The Company retroactively adjusted the return of the shares against the shares issued to the Trust resulting in 6,147,483 net shares issued to the Trust at December 31, 2003. |
· | The original reverse acquisition was amended on January 9, 2004. See discussion of the amendment under the explanation of the equity 2004 below. |
Equity Transactions –period ended December 31, 2004
APC and Tamboril Cigar Company (Tamboril, now Axion) reverse acquisition: Prior to the second part of the reverse acquisition on January 9, 2004, the Company adjusted the original shares issued to the founders by issuing rights to an additional 445,000 shares to the founders and 180,000 shares to the Trust. Since there was no additional service or money contributed there was no expense recorded related to the additional shares issued. Also, the Company issued 45,000 shares to the CEO which amounted to $72,000 valued at the pink sheet bid price on the date of grant. Certain related parties purchased convertible debt from APC for $400,000. The $400,000 of convertible debt purchased during 2004 and the remaining $50,000 of convertible debt outstanding at December 31, 2003 was converted into 283,333 shares of APC common stock during 2004.
2004 Private Placements: During the year ended December 31, 2004, the Company sold 823,800 shares of common stock and 463,100 warrants for net cash proceeds of $1,607,134. The Company also received $868,020 in cash proceeds from the exercise of 475,200 outstanding common stock purchase warrants. The Company issued 48,782 shares of common stock for rounding purposes in conjunction with the 2004 one-for-sixteen reverse stock split.
Equity Transactions –Year ended December 31, 2005
Augmentation of Trust and Trust Settlement: In February 2005, the Company issued 500,000 shares of common stock to The Trust for the Benefit of the Shareholders of Mega-C Power Corp. For accounting and financial reporting purposes, the stock issuance transaction was valued at $1,525,000, which represents the value of the shares on the date of issuance. This amount was charged to operating expenses during the year ended December 31, 2005. There were 500,000 shares returned to the Company for cancellation in November 2006 in connection with the bankruptcy court confirmation of the settlement (see note captioned “Mega-C Power Corp (Mega-C), Mega-C Trust (the Trust), The Taylor Litigation”). Those shares were effectively the return of the 500,000 shares issued to the Trust in February, 2005. The return of those shares was recorded as a reversal of the expense at fair value on the date of return in 2006 in the amount of $1,125,000 and has been subsequently cancelled. In addition, under the bankruptcy court confirmation of the settlement, the Trust corpus was reduced another 1,000,000 shares, which were returned to the Company and cancelled. The return in 2006 was the result of a negotiated settlement and there are no contingencies surrounding the Trust shares in 2005. This cancellation was considered a retroactive adjustment to the shares issued in the 2003 reverse acquisition.
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2005 Private Placement of Senior Preferred: In February 2005, the board of directors designated 1,000,000 shares of preferred stock as 8% Cumulative Convertible Senior Preferred Stock (the “senior preferred”). The Company sold 385,000 shares of senior preferred at a price of $10 per share. The net proceeds of the offering included $2,754,110 in cash and $1,000,000 in liability conversion (see Note captioned “Transactions with a Related Party (C&T)”). At December 31, 2005, $25,000 of this amount was included in stock subscription receivable that was subsequently reversed in 2006 when the amount was deemed uncollectible. The senior preferred offering originally required the sale of a minimum of 500,000 shares ($5,000,000) before the offering proceeds would be available to the Company. The purchasers of the senior preferred ultimately waived this minimum offering condition. The preferred stock has liquidation preference equal to the stated value on the payment date before any payment or distribution is made to the holders of common stock.
So long as any senior preferred shares are outstanding, the Company cannot (i) issue any series of stock having rights senior to or on parity with the senior preferred (ii) amend, alter or repeal any provision of its Certificate of Incorporation or bylaws to adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the senior preferred, or (iii) effect a reclassification of the senior preferred without the consent of the holders of a two-thirds majority of the outstanding shares. The Company is not authorized to issue any additional shares of senior preferred.
To provide for immediate cash needs during the offering period, the Company agreed to issue warrants to any purchaser of senior preferred who agreed to loan the Company the amount of the share proceeds until the $5 million minimum subscription was reached. In connection therewith, the purchasers of $565,000 of senior preferred agreed to release their subscription payments notwithstanding the minimum subscription and other restrictions in the associated private placement memorandum. As a result, the Company issued 282,500 warrants to those purchasers. By March 2005, the $5 million minimum was still not met and the Company agreed to issue 228,500 additional warrants to the purchasers of $2,285,000 of senior preferred who agreed to waive the minimum subscription requirement. The foregoing warrants are exercisable at a price of $2 per share, and were to expire on March 21, 2007. Because the warrants were detachable, granted in connection with the offering, immediately vested, and exercisable at a price that was less than the reported fair market value of the underlying common stock on the date of grant, the proceeds of the offering were allocated between the senior preferred and the warrants based on the relative fair value of each instrument. The assumed value of the senior preferred was determined based on the fair value of the underlying common shares and the fair value of the warrants was valued using the Black-Scholes-Merton option pricing model. The proceeds allocated to the senior preferred amounted to $3,440,268. The effective conversion price of the senior preferred was at a price lower than the market price of the common stock at the date of the issuance, resulting in a non-cash beneficial conversion feature of $2,315,482. This beneficial conversion feature was immediately recognized as additional non-cash dividends. On March 9, 2007 the Board of Directors unanimously agreed to extend the life 476,000 $2.00 warrants issued in March 2005 to purchasers who subscribed to the Senior Preferred private placement offering.
Holders of senior preferred have the right to convert their shares into common stock at any time, at an original conversion price of $2.00. The Company was required to register the underlying shares by April 30, 2005. The shares were not registered until June 2005 and as a result the conversion price was reduced to $1.86 per share. This reduction in the conversion price resulted in an additional beneficial conversion feature, valued at the fair value of the additional common shares issuable as a result of the reduced conversion price, amounting to $433,228.
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Holders of senior preferred are entitled to anti-dilution protection for certain subsequent events, including the issuance of equity or debt securities that may be converted into common stock at a conversion price that is less than the conversion price of the senior preferred. As discussed in the note captioned “Subsequent Events,” the Company sold approximately 823,000 shares of Series A Preferred Stock that is convertible at a price of $1.25 per share. This stock sale triggered the anti-dilution provisions of the senior preferred stock and giving effect to all required adjustments, the adjusted conversion price of the senior preferred is now $1.68 per share as of December 31, 2006.
In September 2005, the Company offered all holders of preferred stock an early conversion incentive that was approximately equivalent to one year’s anticipated dividends on the preferred stock. While each share of senior preferred was convertible into 5.5 shares of common stock when the Company offered the early conversion incentive, 6 shares of common stock were issued for each share of senior preferred converted during the incentive period. A total of 245,000 shares were converted. The fair value of the additional common shares issued as a result of this inducement was recorded as a preferred dividend, amounting to $350,446.
The total of the beneficial conversion feature and conversion inducement for the year ended December 31, 2005 that is included in preferred dividends on the accompanying statement of operations amounted to $3,099,156. The Company analyzed the embedded derivative conversion feature and the free standing warrants issued in connection with the senior preferred and determined that the instruments are equity instruments and accordingly, are not accounted for as derivatives, requiring fair value accounting at each reporting period.
Holders of senior preferred are entitled to receive dividends at the annual rate of 8%. Dividends are payable quarterly on the last day of March, June, September and December of each year. Dividends are cumulative from the date of issuance and payable to holders of record. In order to conserve available resources, the Company did not pay cash dividends on the senior preferred in any quarter where the Company reported a net loss. Any accrued dividends that are not paid in cash will be added to the stated value of the senior preferred. Dividends accrued and added to the stated value of the senior preferred during the year ended December 31, 2006 and 2005 amounted to $119,092 and $176,194, respectively.
The senior preferred is redeemable by the Company under certain conditions unless the holders elect to exercise their conversion rights prior to the redemption date. Twenty percent of the senior preferred will become redeemable when the market price of the Company’s common stock exceeds $6.00 per share for at least 30 trading days within any period of 45 consecutive trading days. Thereafter, an additional twenty percent of the senior preferred will become redeemable for each $1.00 increase in the stabilized market price of the Company’s common stock. In connection with any proposed redemption of senior preferred, the Company will give each holder not less than 30 days notice of its intention to redeem a portion of the shares.
2005 Private Placement of Common Stock: Common stock private placement activities during the year ended December 31, 2005 were as follows:
· | The Company sold 600,000 units, each consisting of one share of common stock and a two-year warrant exercisable at $4.00 for a purchase price of $2.00 per unit, or $1,200,000, before offering costs. As of December 31, 2005, $200,000 is included in stock subscriptions receivable, which was received in 2006. |
· | A director exercised 446,000 - $1 warrants/options and 25,000 - $2 options with a total exercise price of $496,000. The stock was issued and included in stock subscriptions receivable as of December 31, 2005. As of June 19, 2006, the full amount has been settled. |
· | Other holders exercised 382,665 options & warrants with an aggregate exercise price of $787,395. |
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Equity Transactions –Year ended December 31, 2006
Augmentation of Trust and Trust Settlement: See above 2005 transactions and the discussion in the note captioned “Mega-C Power Corp (Mega-C), Mega-C Trust (the Trust), The Taylor Litigation” for disclosures about shares issued to the Trust, returned from the Trust in November 2006 and the accounting for those shares.
Senior Preferred: During 2006, a subscription for senior preferred shares was cancelled, reducing the balance by 2,500 shares or $25,000. The senior preferred had an initial stated value of $10.00 per share. Accrued dividends that are not paid in cash within 10 days of a payment date will automatically be added to the stated value and the stated value, as adjusted, will be used for all future dividend and conversion calculations. The following table summarizes the earnings through 2008 and the expected future stated value of the senior preferred at the end of each quarter through December 31, 2009.
Quarter Ended | Adjusted Stated Value | Quarter Ended | Adjusted Stated Value | ||||||
| 31-Mar-08 | $ | 12.72 | 31-Mar-09 | $ | 13.77 | ||||
| 30-Jun-08 | $ | 12.97 | 30-Jun-09 | $ | 14.04 | ||||
| 30-Sep-08 | $ | 13.23 | 30-Sep-09 | $ | 14.32 | ||||
| 31-Dec-08 | $ | 13.50 | 31-Dec-09 | $ | 14.61 | ||||
2006 Private Placement of Series A Preferred Stock: On October 18, 2006, the Company’s board of directors designated, from the Company’s total authorized 12,500,000 shares, a new series of preferred stock consisting of up to 2,000,000 shares designated Series A Convertible Preferred Stock (the “series A preferred”). During the fourth quarter of 2006, the Company sold an aggregate of 782,997 shares of series A preferred at a price of $10 per share for net proceeds of $7,722,470 including $4,352,500 in cash and $3,369,970 in liability conversion. In connection with the private placement, the Company incurred total offering expenses of $258,202, of which $107,500 was paid in cash, while the remainder was paid through the issuance of options to acquire shares of the Company’s common stock.
Under the terms of this new series of preferred stock, no more than 1,000,000 shares may be sold for cash and the remaining shares must be reserved for (i) issuance upon exercise of the conversion rights of holders of secured and unsecured short-term debt and (ii) to pay in-kind dividends on the series A preferred. So long as any series A preferred shares are outstanding, the Company cannot (i) issue any series of stock having rights senior to or on parity with the series A preferred (ii) amend, alter or repeal any provision of its Certificate of Incorporation or bylaws to adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the series A preferred (iii) effect a reclassification of the series A preferred or (iv) issue any additional shares of series A preferred, each without the consent of the holders of a two-thirds majority of the outstanding shares. The holders of series A preferred have no pre-emptive rights with respect to any other securities of the Company and a liquidation preference equal to the stated value on the payment date before any payment or distribution is made to the holders of common stock.
Beginning on April 23, 2007, the shares of series A preferred shall be convertible at the option of the holders of record at an initial conversion price of $1.25 per share. Holders of series A preferred are entitled to anti-dilution protection for certain subsequent events, including the issuance of equity or debt securities that may be converted into common stock at a conversion price that is less than the conversion price of the series A preferred resulting in a reduction in the conversion price of the series A preferred. No such other securities have been issued through the date of this report which would require the reduction of the conversion price of the series A preferred. In addition, the effective conversion price of the series A preferred was at a price lower than the market price of the common stock at the respective dates of issuance in the fourth quarter of 2006, resulting in an aggregate non-cash beneficial conversion feature of $6,709,970 recognized as additional non-cash dividends on a straight line basis, which did not differ materially from the effective interest method, from the respective dates of issuance of the series A preferred in the fourth quarter of 2006 through the first date these shares are convertible on April 23, 2007. As a result, $613,336 was recognized as additional non-cash dividends in the fourth quarter of 2006 with the remaining amount recognized in 2007. In addition, if all holders of the series A preferred were to have exercised their conversion rights at their respective dates of subscription, these holders would have received an additional $5,597,970 in fair value in excess of the proceeds paid for their subscriptions to the series A preferred. The Company further analyzed the embedded conversion feature and determined that it is properly classified as an equity instrument and accordingly, is not accounted for as a derivative, requiring fair value accounting at each reporting period.
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Holders of the shares of series A preferred shall receive dividends at the annual rate of 10% of the stated value of the series A preferred so long as the Company is current with respect to its reporting obligations under the Securities Exchange Act of 1934 on any dividend payment date. Dividends are payable quarterly on the last day of March, June, September and December in each year. Dividends are cumulative from the date of issuance and payable to holders of record. Any accrued dividends that are not paid in cash will be added to the stated value of the series A preferred.
Because the Company was not current with respect to its reporting obligations through December 31, 2007, the series A preferred annual dividend rate increased to 20% of the stated value. All but one of the series A preferred shareholders elected to reinvest their preferred dividends back into series A preferred shares. As of December 31, 2006, $103,101 of dividends has been accrued, including $97,896 in non-cash and $5,205 in cash dividends. No cash dividends have been paid with respect to the series A preferred shares. Non-cash dividends have increased the value of the series A preferred shares by $0.13 to a stated value of $10.13 as of December 31, 2006.
The series A preferred had an initial stated value of $10.00 per share. Non-cash dividends are automatically added to the stated value and the stated value, as adjusted, will be used for all future dividend and conversion calculations. The following table summarizes the earnings through 2008 and the expected future stated value of the series A preferred at the end of each quarter through December 31, 2009.
Quarter Ended | Adjusted Stated Value | Quarter Ended | Adjusted Stated Value | ||||||
| 31-Mar-08 | $ | 12.61 | 31-Mar-09 | $ | 13.92 | ||||
| 30-Jun-08 | $ | 12.93 | 30-Jun-09 | $ | 14.26 | ||||
| 30-Sep-08 | $ | 13.25 | 30-Sep-09 | $ | 14.62 | ||||
| 31-Dec-08 | $ | 13.58 | 31-Dec-09 | $ | 14.99 | ||||
The series A preferred is redeemable by the Company under certain conditions unless the holders elect to exercise their conversion rights prior to the redemption date. Twenty percent of the series A preferred will become redeemable when the market price of the Company’s common stock exceeds $5.00 per share for at least 30 trading days within any period of 45 consecutive trading days. Thereafter, an additional twenty percent of the series A preferred will become redeemable for each $2.50 increase in the stabilized market price of the Company’s common stock. In connection with any proposed redemption of series A preferred, the Company will give each holder not less than 30 days notice of its intention to redeem a portion of the shares.
Common Stock & Private Placements. The common stock transactions during the year ended December 31, 2006 are as follow:
· | Two unaffiliated individual accredited investors purchased a total of 80,000 units for a purchase price of $2.50 per unit or $200,000. Each unit consists of one share of common stock and one common stock purchase warrant with an exercise price of $4.00 per share. The warrants are exercisable up until the first anniversary of the effective date of the common stock registration statement and were valued at $26,354 on the date of issuance |
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· | The Company’s chief executive officer exercised his $2.00 warrants to purchase 56,700 shares for $113,400 |
· | The Company’s Chief Technical Officer received 6,000 unrestricted shares, valued at $24,000, pursuant to his 2005 employment contract and an additional 250,000 restricted shares, valued at $937,500, pursuant to his 2006 employment contract. The 250,000 shares will become fully vested on December 28, 2009. The expense related to these shares will be recognized over this three-year requisite service period and the shares will be considered issued and outstanding upon vesting. |
Subscriptions Receivable: The balance sheet as of December 31, 2005 reflected $721,000 in subscriptions receivable. During the year ended December 31, 2006, the Company received subscription payments of $588,900, settled $107,100 against open invoices for legal services, and cancelled the unsettled balance of the subscription receivable for preferred stock amounting to $25,000,
Warrants: 741,613 warrants were issued to related parties in conjunction with the financing of debt issued during 2006. See the “Related Party” footnote within ‘Debt Financing “above. In April, 2006, the Company’s chief executive officer exercised his $2.00 warrants to purchase 56,700 shares for $113,400. In October 2006, 200,000 3-year warrants were issued in payment for consulting services. These $3.00 warrants valued at $74,437 are scheduled to expire in October 2009. In December 2006, a former director of the Company received 9,000 $6.00 warrants valued at $12,411, and are scheduled to expire December 29, 2010. Additionally, 80,000 warrants were issued to accredited investors in connection with a private placement of units comprised of one share of the Company’s common stock and one stock purchase warrant, as discussed above.
On June 9, 2006 the Board of Directors extended the life of 1,562,900 warrants issued to the original shareholders of C&T along with 91,700 capital warrants issued to Sally Fonner in recognition of the Company’s difficulty in establishing a public trading market for its common stock. These $2 warrants scheduled to expire in 2006 and early 2007 were modified to a December 31, 2007 expiration. The warrants, valued at $521,642 prior to the extension, were revalued at the date of modification using the Black-Scholes-Merton option-pricing model. The incremental expense in 2006 resulting from the revaluations was recorded into R&D ($342,131) and SG&A ($50,680).
Equity Transactions –Year ended December 31, 2007
Senior Preferred: At December 31, 2007, 137,500 shares of 8% Cumulative Convertible Senior Preferred stock were issued and outstanding. As of December 31, 2007 $425,852 in dividends has been accrued to cover the Company’s obligations with regard to the 8% Cumulative Convertible Senior Preferred stock. No cash dividends have been paid with respect to these shares. Non-cash dividends have increased the value of the Senior Preferred shares by $2.72 to a stated value of $12.72 per share.
Series A Preferred: 782,997 shares of Series A Preferred were issued during 2006. In January 2007, the Company sold 40,000 additional shares of Series A Preferred to accredited investors for gross cash proceeds of $400,000. On the date of issuance, the effective conversion price of the Series A Preferred was at a price lower than the market price of the common stock resulting in a non-cash beneficial conversion feature of $400,000 recognized as additional non-cash dividends on a straight line basis through the first date these shares are convertible, being April 23, 2007. This straight line calculation did not differ materially from the effective yield method. With the 2007 subscription, the aggregate non-cash beneficial conversion feature attributable to the Series A Preferred shares is valued at $7,109,970. $613,336 was recognized as additional non-cash dividends in the fourth quarter of 2006, with the remaining balance of $6,496,634 recognized as additional non-cash dividends during the year ending December 31, 2007. Beginning on April 23, 2007, the shares of Series A Preferred became convertible at the option of the holders of record at an initial conversion of $1.25 per share. The conversion price is subject to adjustment if Axion issues any shares less than the then existing conversion price.
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The holders of the shares of Series A Preferred receive dividends at the annual rate of 20% of the Stated Value of the Series A Preferred so long as the Company is behind with respect to its reporting obligations under the Securities Exchange Act of 1934 on any dividend payment date. Once the company is current with respect to these reporting obligations, the dividend rate will be reduced to an annual rate of 10% of the Stated Value. As of December 31, 2007, $1,893,855 in dividends has been accrued. No cash dividends have been paid with respect to the Series A Preferred shares. Non-cash dividends have increased the value of Series A Preferred shares by $3.46 to a stated value of $13.46 per share. As of December 31, 2007, 822,997 shares of Series A Convertible Preferred stock were issued and outstanding.
Equity Transactions –Year ended December 31, 2008
Senior Preferred: At December 31, 2008, 137,500 shares of 8% Cumulative Convertible Senior Preferred stock were issued and outstanding. As of December 31, 2008, $567,181 in dividends has been accrued to cover the Company’s obligations with regard to the 8% Cumulative Convertible Senior Preferred stock. No cash dividends have been paid with respect to these shares. Non-cash dividends have increased the value of the Senior Preferred shares by $3.50 to a stated value of $13.50 per share.
Series A Preferred: With the Company becoming current with respect to its reporting obligations under the Securities Exchange Act of 1934, the dividend rate on its Series A Preferred reduced to an annual rate of 10% of the Stated Value. During the year ended December 31, 2008, 104,000 Series A Preferred shares along with accrued dividends of $298,875 were converted into 1,071,099 common shares. As of December 31, 2008, $2,571,321in dividends have been accrued. No cash dividends have been paid with respect to the Series A Preferred shares. Non-cash dividends have increased the value of Series A Preferred shares by $3.58 to a stated value of $13.58 per share. As of December 31, 2008, 718,997 shares of Series A Convertible Preferred stock were issued and outstanding.
Common Stock Issuances: The following table represents per share issuances of common stock from inception through December 31, 2008, pursuant to FASB No. 7, “Development Stage Enterprises”:
| 2003 | ||||||||||||
| Description: | Date | Shares | Per share valuation | Business reason: | ||||||||
| Shares issued to founders | 9/18/2003 | 1,360,000 | $ | 0.00 | original capitalization-no contributed capital | |||||||
| APC Founder | 9/18/2003 | 170,000 | $ | 0.29 | services rendered with respect to formation | |||||||
| Seed debt financing | 12/31/2003 | 500,000 | $ | 1.00 | conversion of debt and accrued interest to common stock | |||||||
| Series I convertible debt | 12/31/2003 | 533,334 | $ | 1.50 | conversion of debt and accrued interest to common stock | |||||||
| Series II convertible debt | 12/31/2003 | 75,000 | $ | 2.00 | conversion of debt and accrued interest to common stock | |||||||
| Mega-C Trust | 12/31/2003 | 6,147,484 | $ | 0.00 | In lieu of shares issuable to founders | |||||||
| Tamboril shareholders | 12/31/2003 | 1,875,000 | $ | 0.00 | recapitalization measured at fair market value of Tamboril assets | |||||||
| 2003 Totals | 10,660,818 | $ | 0.14 | |||||||||
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| 2004 | ||||||||||||
| Description: | Date | Shares | Per share valuation | Business reason: | ||||||||
| Shares issued to founders | 1/9/2004 | 445,000 | $ | 0.00 | In lieu of shares issuable to founders | |||||||
| Mega-C Trust | 1/9/2004 | 180,000 | $ | 0.00 | adjustment is shares issuable to founders | |||||||
| Officer | 1/9/2004 | 45,000 | $ | 1.60 | services rendered by former officer | |||||||
| Series I convertible debt-Igor Filipenko | 1/9/2004 | 50,000 | $ | 1.00 | conversion of debt and accrued interest to common stock | |||||||
| Series II convertible debt-Turitella | 1/9/2004 | 133,333 | $ | 1.50 | conversion of debt and accrued interest to common stock | |||||||
| Series III convertible debt-Turitella | 1/9/2004 | 100,000 | $ | 2.00 | conversion of debt and accrued interest to common stock | |||||||
| Series II common stock offering | 2/1/2004 | 175,000 | $ | 2.00 | common stock & warrants issued for cash | |||||||
| Series III common stock offering | 3/31/2004 | 288,100 | $ | 3.00 | common stock & warrants issued for cash | |||||||
| Exercise of Series I warrants | various | 316,700 | $ | 1.50 | warrants exercised pursuant to original terms | |||||||
| Exercise of Series II warrants | various | 125,000 | $ | 2.28 | warrants exercised pursuant to original terms | |||||||
| Exercise of Series II warrants | various | 33,500 | $ | 3.23 | warrants exercised pursuant to original terms | |||||||
| November emergency funding | 11/1/2004 | 314,000 | $ | 1.50 | common stock & warrants issued for cash | |||||||
| December emergency funding | 12/1/2004 | 46,700 | $ | 1.50 | common stock & warrants issued for cash | |||||||
| Fractional shareholders | 12/31/2004 | 48,782 | $ | 0.00 | shares issued due to reverse split rounding formula | |||||||
| 2004 Totals | 2,301,115 | $ | 1.37 | |||||||||
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| 2005 | ||||||||||||
| Description: | Date | Shares | Per share valuation | Business reason: | ||||||||
| Mega-C Trust | 2/28/2005 | 500,000 | $ | 3.05 | Trust augmentation | |||||||
| Banca di Unionale | 3/18/2005 | 30,000 | $ | 2.00 | conversion of Preferred and accrued dividends | |||||||
| Banca di Unionale | 4/20/2005 | 20,000 | $ | 2.00 | conversion of Preferred and accrued dividends | |||||||
| C&T employees | 4/1/2005 | 219,000 | $ | 2.50 | employee incentive share grants | |||||||
| 7 individuals | 6/10/2005 | 29,565 | $ | 3.57 | Exercise of Director options | |||||||
| 3 individuals | 7/11/2005 | 190,000 | $ | 1.58 | conversion of Preferred and accrued dividends | |||||||
| Banca di Unionale | 7/11/2005 | 10,000 | $ | 1.60 | exercise of preferred warrants | |||||||
| 3 individuals | 8/28/2005 | 150,000 | $ | 1.67 | conversion of Preferred and accrued dividends | |||||||
| James Smith | 9/7/2005 | 30,000 | $ | 1.67 | conversion of Preferred and accrued dividends | |||||||
| 2 individuals | 9/28/2005 | 1,050,000 | $ | 1.69 | conversion of Preferred and accrued dividends | |||||||
| 2 individuals | various | 226,900 | $ | 1.79 | exercise of Series I warrants | |||||||
| 3 individuals | various | 91,200 | $ | 2.40 | exercise of Series III warrants | |||||||
| 2 individuals | various | 25,000 | $ | 1.60 | exercise of Preferred warrants | |||||||
| Officer | 10/20/2005 | 446,000 | $ | 1.00 | exercise of warrants and options | |||||||
| Officer | 10/20/2005 | 25,000 | $ | 2.00 | exercise of warrants | |||||||
| 6 individuals | 12/1/2005 | 600,000 | $ | 2.00 | common stock and warrants | |||||||
| 2005 Totals | 3,642,665 | $ | 1.94 | |||||||||
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| 2006 | ||||||||||||
| 2 individuals | 4/21/06 | 80,000 | 2.50 | Common stock and warrants issued for cash | ||||||||
| Officer | 4/21/06 | 56,700 | 2.00 | Exercise of non-plan incentive option granted to CEO | ||||||||
| Officer | 4/21/06 | 6,000 | 4.00 | Unrestricted share grant to CTO | ||||||||
| Mega-C Trust | 11/28/06 | (500,000 | ) | 2.25 | Return of shares per settlement agreement | |||||||
| 2006 Totals | (357,300 | ) | $ | 2.20 | ||||||||
| 2007 | ||||||||||||
| Officer | 12/01/07 | 1,000 | 2.30 | Unrestricted share grant to VP Mfg Engineering | ||||||||
| 2007 Totals | 1,000 | $ | 2.30 | |||||||||
2008
| Officer | 01/01/08-12/01/08 | 12,000 | 1.85 | Unrestricted share grant to VP Mfg Engineering | ||||||||
| Quercus Trust | 1/14/08 | 1,904,762 | 2.15 | Common stock and warrants issued for cash | ||||||||
| Individual | 3/31/08 | 106,659 | 2.30 | Conversion of bridge loan and accrued interest | ||||||||
| Quercus Trust | 4/08/08 | 1,904,762 | 2.25 | Common stock and warrants issued for cash | ||||||||
| Individual | 4/21/08 | 25,000 | 2.30 | Conversion of bridge loan and accrued interest | ||||||||
| Individual | 5/06/08 | 508,512 | 2.10 | Conversion of Series A Preferred Shares and accrued dividends | ||||||||
| Director | 5/29/08 | 2,000 | 2.10 | Conversion of bridge loan and accrued interest | ||||||||
| Quercus Trust | 6/30/08 | 4,761,905 | 1.78 | Common stock and warrants issued for cash | ||||||||
| Director | 6/30/08 | 380,952 | 1.78 | Conversion of bridge loan and accrued interest | ||||||||
| Individual | 8/20/08 | 520,787 | 1.79 | Conversion of Series A Preferred Shares and accrued dividends | ||||||||
| Individual | 9/11/08 | 41,800 | 1.75 | Conversion of Series A Preferred Shares and accrued dividends | ||||||||
| 2008 Totals | 10,169,139 | $ | 1.94 |
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Warrants: The following table provides summary information on warrants outstanding as of December 31, 2008.. The table provides summary information on the various warrants issued by the Company in private placement transactions; the warrants exercised to date; the warrants that are presently exercisable and the current exercise prices of such warrants.
| 2008 | 2007 | |||||||||||||||
| Shares | Weighted Average Exercise price | Shares | Weighted Average Exercise price | |||||||||||||
| Warrants outstanding January 1 | 2,588,391 | $ | 4.39 | 3,761,213 | $ | 3.21 | ||||||||||
| Granted during year | 12,163,881 | 2.6 | 484,278 | $ | 5.35 | |||||||||||
| Exercised | - | 0.00 | - | 0.00 | ||||||||||||
| Lapsed | (473,500 | ) | 2.00 | (1,657,100 | ) | $ | 2.00 | |||||||||
| Outstanding at December 31 | 14,278,772 | $ | 2.94 | 2,588,391 | $ | 4.39 | ||||||||||
| Weighted average years remaining | 3.9 | 2.10 | ||||||||||||||
On March 9, 2007 the Board of Directors unanimously agreed to extend the life 476,000 $2.00 warrants issued in March 2005 to purchasers who subscribed to the Senior Preferred private placement offering. These warrants, originally scheduled to expire on March 17, 2007 were modified to March 17, 2008, so that the holders of these warrants would have a reasonable opportunity to realize the benefit of their original bargain. The warrants, valued at $381,832 prior to the extension, were revalued at the date of modification using the Black-Scholes-Merton option-pricing model. The incremental expense resulting from the revaluations was recorded as preferred dividends during the first quarter of 2007 in the amount of $164,179.
Registration Rights
General: The Company filed a resale registration statement for the shares of common stock held by the Mega-C Trust. See the discussion in the note titled “Mega-C Power (Mega-C), Mega-C Trust (the Trust), The Taylor Litigation.”
Senior Preferred: The Company registered the resale of the shares of common stock issuable upon conversion of the senior preferred and was required to maintain an effective registration statement until September 18, 2006, the 18-month anniversary of the closing date of the preferred stock offering. In the event that the current registration statement was subsequently terminated, withdrawn or suspended for a period of more than 10 days, then the conversion price of the senior preferred was to be decreased by an initial delay adjustment of three percent (3%), plus an additional delay adjustment of two percent (2%) for every thirty day period (or portion thereof) that the underlying common stock is not subject to and included in an effective registration statement. The holders of senior preferred, or common stock issued upon conversion thereof, also have certain piggy-back registration rights with respect to future offerings. The registration statement included Axion’s Financial Statements for the period ended June 30, 2005 and the financial statements became out of date. Axion did not terminate, withdraw or suspend the registration statement. The Company believes that the financial statements going out of date is not enough to reactivate the registration delay provisions of the Senior Preferred Stock.
Series A Preferred: The Company is required to file a registration statement within 180 days after the initial closing of the offering and use its best efforts to maintain its effectiveness for two years subsequent to the date it is declared effective. If, at any time after the issuance of the series A preferred, the Company files a registration statement for a proposed public offering of common stock, then holders of the series A preferred will be able to participate in that offering as selling shareholders.
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Warrants: The Company has registered the resale of the shares of common stock issuable upon exercise of all warrants that were issued and outstanding in June 2005 and is required to maintain an effective registration statement until the expiration dates of the warrants. It is also obligated to file a resale registration statement for the warrants issued after June 2005. The recently issued warrants generally provide that they will be exercisable for terms of two to three years after the effective date of the required registration statements. However there are no cash penalties or exercise price adjustments associated with registration delays.
During 2006 and 2007, as a response to substantial unanticipated registration delays, the Company extended the expiration dates of certain warrants that were issued in 2003, 2004 and 2005. Under the extensions, which presently expire in December 2007 and March 2008, the Company has retained the right to redeem the warrants at a price of $.01 per warrant if the underlying stock has been included in an effective registration statement under the Securities Act and has traded at an average bid price of $4 per share or more for at least 30 days before the call for redemption. The accounting treatment for the modifications is discussed above.
Note 8 - Equity Compensation
In December 2004, the Financial Accounting Standards Board issued FASB 123R, “Share-Based Payment” (FASB 123R). FASB 123R supersedes FASB 123, “Accounting for Stock Based Compensation,” and Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (APB 25) and its related implementation guidance. On January 1, 2006, the Company adopted the provisions of FASB 123R using the modified prospective transition method. Under this method, compensation expense is recorded for all stock based awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the adoption. Prior periods have not been restated for the effects of FASB 123R. Under FASB 123R, employee-compensation expense related to stock based payments are recorded over the requisite service period based on the grant date fair value of the awards.
Prior to the adoption of FASB 123R, the Company accounted for employee stock options using the intrinsic value method in accordance with APB 25. Accordingly, no compensation expense was recognized for stock options issued to employees as long as the exercise price was greater than or equal to the market value of the common stock at the date of grant. In accordance with FASB 123, the Company disclosed the summary of pro forma effects to reported net loss as if the Company had elected to recognize compensation costs based on the fair value of the awards at the grant date.
The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18 “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees.” The measurement date for fair value of the equity instruments is determined by the earlier of (i) the date at which commitment for performance by the vendor or consultant is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
The compensation cost that has been charged against income for options granted under the plans was $425,979 for the year ended December 31, 2008. The impact of these expenses to basic and diluted loss per share was approximately $0.02 per share during the year. For stock options issued as non-qualified stock options, a tax deduction is not allowed until the options are exercised. The amount of this deduction will be the difference between the fair value of the Company’s common stock and the exercise price at the date of exercise. Accordingly, there is a deferred tax asset recorded for the tax effect of the financial statement expense recorded. The tax effect of the income tax deduction in excess of the financial statement expense will be recorded as an increase to additional paid-in capital. Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future to utilize the tax benefits of the options granted, the Company has recorded a valuation allowance to reduce gross deferred tax assets to zero. As a result, for the year ended December 31, 2008, there is no income tax expense impact from recording the fair value of options granted. There is no tax deduction allowed by the Company for incentive stock options.
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The Company has two stockholder approved equity compensation plans and occasionally enters into employment and other contracts that provide for equity compensation arrangements other than those contemplated by the stockholder approved plans. The following sections summarize the Company’s equity compensation arrangements.
Incentive Stock Plan Approved by Stockholders: The Company’s stockholders have adopted an incentive stock plan for the benefit of its employees, consultants and advisors. Under the terms of the original plan, the Company was authorized to grant incentive awards for up to 1,000,000 shares of common stock. At the Company’s 2005 annual meeting, its shareholders increased the authorization under the incentive stock plan to 2,000,000 shares.
The incentive stock plan authorizes a variety of awards including incentive stock options, non-qualified stock options, shares of restricted stock, shares of phantom stock and stock bonuses. In addition, the plan authorizes the payment of cash bonuses when a participant is required to recognize income for federal income tax purposes because of the vesting of shares of restricted stock or the grant of a stock bonus.
The plan authorizes the grant of incentive awards to full-time employees of the Company who are not eligible to receive awards under the terms of their employment contract or another specialty plan. The plan also authorizes the grant of incentive awards to directors who are not eligible to participate in the Company’s outside directors’ stock option plan, independent agents, consultants and advisors who have contributed to the Company’s success.
The compensation committee administers the plan. The committee has absolute discretion to decide which employees, consultants and advisors will receive incentive awards, the type of award to be granted and the number of shares covered by the award. The committee also determines the exercise prices, expiration dates and other features of awards.
The exercise price of incentive stock options must be equal to the fair market value of such shares on the date of the grant or, in the case of incentive stock options granted to the holder of more than 10% of the Company’s common stock, at least 110% of the fair market value of such shares on the date of the grant. The maximum exercise period for incentive stock options is ten years from the date of grant, or five years in the case of an individual who owns more than 10% of the Company’s common stock. The aggregate fair market value determined at the date of the option grant, of shares with respect to which incentive stock options are exercisable for the first time by the holder of the option during any calendar year, shall not exceed $100,000.
The following awards have been granted under the Plan since its inception:
In February 2004, Igor Filipenko, a Director of the Company, was granted options to purchase 6,300 shares of common stock at a price of $3.20 per share. In June 2004, Mr. Filipenko was granted options to purchase 10,800 shares of common stock at a price of $5.60 per share. The options are fully vested and may be exercised at any time during the five-year period commencing one year after the date of grant. The market value of the Company stock at the date of grant was less than the exercise price; therefore there was no intrinsic value in accordance with APB 25. Options for 7,200 shares were cancelled in April 2005 after Mr. Filipenko was issued additional options in March 2005 as part of the offering to the former employees of C&T discussed below.
In February 2004, John Petersen, a Director of the Company (and general corporate counsel), and Kirk Tierney, each were granted options to purchase 6,300 shares of common stock at a price of $3.20 per share. In June 2004, Messrs. Petersen and Tierney were each granted options to purchase 3,600 shares of common stock at a price of $5.60 per share. The options are fully vested and may be exercised at any time during the five-year period commencing one year after the date of grant. The market value of the Company stock at the date of grants was less than the exercise price; therefore there was no intrinsic value in accordance with APB 25.
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In February 2004, an advisor to the board was granted an option to purchase 6,300 shares of common stock at a price of $3.20 per share as compensation for services. In June 2004, Mr. the advisor was granted options to purchase 3,600 shares of common stock at a price of $5.60 per share. The options are fully vested and may be exercised at any time during the five-year period commencing one year after the date of grant. The options were valued at $17,067 using the Black-Scholes-Merton option pricing model and were included as expense in 2004.
In November 2004, the Company’s President and Chief Operating Officer, Charles Mazacatto, was granted options to purchase 6,250 shares of common stock at an exercise price of $3.20. This option vested in 2004 and is exercisable until November 2010. The market value of the Company stock at the date of grant was less than the exercise price; therefore there was no intrinsic value in accordance with APB 25.
In March 2005, the compensation committee authorized stock bonuses to the former employees of C&T for an aggregate of 219,000 shares of common stock. These stock grants are fully vested and unrestricted, subject to compliance with the Company’s insider trading policies. The fair value of these shares, as determined by the Company’s stock price on the date of grant, amounted to $565,202 and was recorded as compensation during the year ended December 31, 2005.
In April 2005, the former employees of C&T were granted options to purchase an aggregate of 744,500 shares of common stock at an exercise price of $2.50. These options vest at a rate of 20% per year beginning in April 2006. The market value of the Company stock at the date of grant was less than the exercise price which resulted in no intrinsic value in accordance with APB 25. On January 1, 2006, the Company adopted the provisions of FASB 123R as noted above which resulted in the Company recording compensation expense of $86,954 during the year ended December 31, 2006. Various options lapsed when several individuals terminated their employment with the Company in 2005 and 2006. During the years ended December 31, 2005 and 2006, an aggregate of 157,700 and 454,000 options, respectively, forfeited unvested as a result of these terminations.
In September 2005, the compensation committee awarded 6,000 shares of restricted common stock to the Company’s Chief Technical Officer, Edward Buiel, pursuant to his 2005 employment agreement, which were valued at $24,000 on the date of grant and became fully vested in April 2006. The Company recorded $8,000 and $16,000 of compensation in 2005 and 2006, respectively, related to this award.
In December 2006, the Company issued 250,000 shares of restricted common stock to the Company’s Chief Technical Officer, Edward Buiel, pursuant to his 2006 employment agreement, which were valued at $937,500 on the date of grant and will become fully vested on December 2009. The Company will recognize this as compensation over the requisite service period. No compensation expense was recorded for the year ended December 31, 2006.
In December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert Nelson, was granted 36,000 shares of restricted common stock pursuant to his 2007 employment agreement which were valued at $82,800 on the date of grant. The shares vest at a rate of 1,000 shares per month, with provision for immediate vesting based on significant changes in the relative ownership of the company. The Company will recognize this as compensation over the 2 year employment contract, with $3,450 of compensation expense recorded for the year ended December 31, 2007.
In June 2008, the Company issued 80,000 shares of restricted common stock to the Company’s Chief Technical Officer, Edward Buiel, pursuant to his 2008 employment agreement, which were valued at $143,500 on the date of grant. 30,000 will vest on December 29, 2009, and 50,000 will vest on May 31, 2011. The Company will recognize this as compensation over the requisite service period. $35,063 in compensation expense was recorded for the year ended December 31, 2008.
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In June 2008, the Company issued 90,000 shares of restricted common stock to the Company’s Chief Financial Officer, Donald Hillier, pursuant to his 2008 employment agreement, which were valued at $166,500 on the date of grant, which will vest in equal 30,000 share amounts on June 16 of each of 2009, 2010 and 2011. The Company will recognize this as compensation over the requisite service period. $30,062 in compensation expense was recorded for the year ended December 31, 2008.
In June 2008, the Company issued 50,000 shares of restricted common stock to an employee, pursuant to his 2008 employment agreement, which were valued at $92.500 on the date of grant, which cliff vest on June 15, 2011. The Company will recognize this as compensation over the requisite service period. $16,701 in compensation expense was recorded for the year ended December 31, 2008.
Outside Directors' Stock Option Plan Approved by Stockholders: The Company’s stockholders have adopted an outside directors' stock option plan for the benefit of its non-employee directors in order to encourage their continued service as directors. Under the terms of the original plan, the Company was authorized to grant incentive awards for up to 125,000 shares of common stock. At the 2005 annual meeting, the Company’s shareholders increased the authorization under the incentive stock plan to 500,000 shares.
Each eligible director who is, on or after the effective date, appointed to fill a vacancy on the Board or elected to serve as a member of the Board may participate in the plan. Each eligible director shall automatically be granted an option to purchase the maximum number of shares having an aggregate fair market value on the date of grant of twenty thousand dollars ($20,000). The option price of the stock subject to each option is required to be the fair market value of the stock on its date of grant. Options generally expire on the fifth anniversary of the date of grant. Any option granted under the plan shall become exercisable in full on the first anniversary of the date of grant, provided that the eligible director has not voluntarily resigned or been removed "for cause" as a member of the Board of Directors on or prior to the first anniversary of the date of grant (qualified option). Any qualified option shall remain exercisable after its first anniversary regardless of whether the optionee continues to serve as a member of the Board.
The following awards have been granted under the Plan since its inception:
During the year ended December 31, 2004, the Company issued 54,000 5-year options to four of its directors vesting in one year from the date of issuance. The market value of the Company stock at the date of grant was less than the exercise price which resulted in no intrinsic value in accordance with APB 25. During the year ended December 31, 2005, these directors waived an aggregate of $105,542 in accrued compensation as full payment of the exercise price of 29,565 options. An additional 14,400 options were forfeited in 2005.
During the year ended December 31, 2005, the Company issued 70,000 5-year options to five of its directors vesting 1/3 per year over three years from the date of grant. The market value of the Company stock at the date of grant was less than the exercise price which resulted in no intrinsic value in accordance with APB 25. On January 1, 2006, the Company adopted the provisions of FASB 123R as noted above and recorded compensation of $41,024 during the year ended December 31, 2006.
During the year ended December 31, 2006, the Company issued 60,000 5-year options to two of its directors vesting 1/3 per year over the next three years. These options are exercisable at a price of $2 per share, expiring five years from vest date and are valued at $71,680 utilizing the Black-Scholes-Merton option pricing model, of which $20,230 was expensed in 2006.
During the year ended December 31, 2008, the Company issued 179,555 5-year options to five of its directors. Of this amount 5,555 with an exercise price of $3.60 per share vested in November 2008 and the remainder vest 1/3 per year over the next three years. These options are exercisable at a price of $1.38 per share, expiring five years from vest date and are valued at $130,150 utilizing the Black-Scholes-Merton option pricing model, of which $16,230 was expensed in 2008.
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Non-plan Equity Incentives Not Approved by Stockholders: The Company has issued 789,500, 228,000, 1,131,000, 300,000 and 629,300 stock purchase options in the fiscal years ended December 31, 2008, 2007, 2006, 2005 and 2004, respectively, to officers, employees, attorneys and consultants in connection with contractual agreements that do not reduce the shares available under the shareholder’s approved plans. The following paragraphs summarize these contractual stock options.
In January 2004, members of the law firm of Fefer, Petersen & Cie, general corporate counsel (of which one member was a director of the Company at the time) were granted two-year contractual options to purchase 189,300 shares of common stock at a price of $2.00 per share as partial compensation for services rendered, valued at $68,296. As represented in the note captioned “Stockholder’s Equity”, these members also received 116,700 warrants as consideration of pre-merger Tamboril debt (the amount cited in “Stockholder’s Equity” is actually 233,400 because another party received the same number of warrants for a total of 233,400 warrants). In August 2004, $1.00 of the exercise price of the total 306,000 options and warrants owned by these members was considered paid in advance in consideration of unbilled legal services provided by the firm. The Company recorded $306,000 related to this reduction. All of the warrants and options were exercised in the fourth quarter of 2005, however; $306,000 of the amount is included in stock subscription receivable as of December 31, 2005 and was received in 2006.
In July 2004, the Company’s President and Chief Operating Officer, Charles Mazzacato, was granted a contractual option to purchase 240,000 shares of common stock at a price of $4.00 per share. This option vests on a monthly basis at the rate of 60,000 shares per year commencing July 31, 2005 and is exercisable for five years after each vesting date. The market value of the Company stock at the date of grant was greater than the exercise price which resulted in a total intrinsic value of $180,000. In accordance with APB 25 the Company expensed the intrinsic value over the vesting period which resulted in expense of $18,750 and $45,000 during the years ended December 31, 2004 and 2005, respectively. On January 1, 2006, the Company adopted the provisions of FASB 123R as noted above and recorded compensation of $124,364 during the year ended December 31, 2006. During the year ended December 31, 2006 the options were forfeited as a result of his termination of employment from the Company in 2006.
In July 2004, the Company’s Chief Financial Officer, Peter Roston, was granted a contractual option to purchase 200,000 shares of common stock at a price of $4.00 per share. This option will vest on a monthly basis at the rate of 50,000 shares per year commencing July 31, 2005 and is exercisable for five years after each vesting date. The market value of the Company stock at the date of grant was greater than the exercise price which resulted in a total intrinsic value of $150,000. In accordance with APB 25 the Company has expensed the intrinsic value over the vesting period which resulted in expense of $15,625 and $37,500 during the years ended December 31, 2004 and 2005, respectively. On January 1, 2006, the Company adopted the provisions of FASB 123R as noted above and recorded compensation of $138,182 during the year ended December 31, 2006. During the year ended December 31, 2006 the options were forfeited as a result of his termination of employment from the Company in 2006.
In April 2005, the Company’s Chief Executive Officer, Thomas Granville, was granted a contractual option to purchase 180,000 shares of common stock at a price of $2.50 per share. This option vests at the rate of 7,500 shares per month commencing May 1, 2005 and is exercisable for five years after each vesting date. The market value of the Company stock at the date of grant was less than the exercise price which resulted in no intrinsic value in accordance with APB 25. On January 1, 2006, the Company adopted the provisions of FASB 123R as noted above and recorded compensation of $112,500 during the year ended December 31, 2006.
In April 2005, a European financial advisor was granted a contractual option to purchase 30,000 shares of common stock at a price of $2.50 per share. Options for an aggregate of 20,000 shares vested during the year ended December 31, 2005 and will be exercisable for two years. On December 31, 2005, a total of 10,000 unvested options were forfeited when the advisory agreement was terminated. The options were valued at $35,998 using the Black-Scholes-Merton option pricing model and included as expense in 2005.
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In September 2005, the Company’s Chief Technical Officer, Edward Buiel, was granted a contractual option to purchase 90,000 shares of common stock at a price of $4.00 per share. This option vests at the rate of 2,500 shares per month commencing October 2005 and is exercisable for five years after each vesting date. The market value of the Company stock at the date of grant was less than the exercise price which resulted in no intrinsic value in accordance with APB 25. On January 1, 2006, the Company adopted the provisions of FASB 123R as noted above and recorded compensation of $68,100 during the year ended December 31, 2006.
In February 2006, the Company’s Chief Executive Officer, Thomas Granville, was granted an option to purchase 500,000 shares of common stock at an exercise price of $6.00. Of this total 300,000 options vested immediately and the balance is expected to vest, subject to the attainment of certain specified objectives, over the next one to three years. These options are valued at $300,187 utilizing the Black-Scholes-Merton option pricing model with $259,027 of compensation recorded in 2006.
In February 2006, the Company’s, Chief Technical Officer, Edward Buiel, was granted an option to purchase 35,000 shares of common stock at an exercise price of $6.00. Of this total 10,000 options vested immediately and the balance is expected to vest, subject to the attainment of certain specified objectives, over the next two to three years. These options are valued at $20,994 utilizing the Black-Scholes-Merton option pricing model with $13,330 of compensation recorded in 2006.
In February 2006, members and affiliates of the law firm of Fefer, Petersen & Cie, general corporate counsel (of which one member was a director of the Company at the time) were granted an option to purchase 360,000 shares of common stock at an exercise price of $6.00. Of this total 240,000 options vested immediately and the balance will vest at the rate of 10,000 shares per month during the year ended December 31, 2006. These options are valued at $193,449 utilizing the Black-Scholes-Merton option pricing model and are recorded as legal expense in 2006.
In February 2006, the Company’s external bankruptcy counsel, Cecilia Rosenauer, was granted an option to purchase 15,000 shares of common stock at an exercise price of $6.00. The options vested on the effective date of Mega-C’s Chapter 11 plan of reorganization, which took place in November 2006. These options are valued at $2,483 utilizing the Black-Scholes-Merton option pricing model and are recorded as legal expense in 2006.
In March 2006, two employees were granted options to purchase a total of 24,000 shares of common stock at an exercise price of $4.00 and $6.00. The options vest at a rate of 2,500 per month over the first 6 months and 1,500 per month thereafter. These options are valued at $28,257 utilizing the Black-Scholes-Merton option pricing model with $24,408 of compensation recorded in 2006.
In December 2006, the Company’s Chief Technical Officer, Edward Buiel, was granted a contractual option to purchase an additional 100,000 shares of our common stock at a price of $3.75 per share. A total of 50,000 options will vest on December 29, 2009 and the remaining 50,000 will vest on December 29, 2010. The options will be exercisable for a period of six years from the vesting date. These options are valued at $267,372, utilizing the Black-Scholes-Merton option pricing model with $6,481 of compensation recorded in 2006.
In February 2006, a consultant, Trey Fecteau, was granted an option to purchase 97,000 shares of common stock at an exercise price of $4.00. The options vested upon completion of contractual services in December 2006. These options are valued at $150,702 utilizing the Black-Scholes-Merton option pricing model. This amount reduced the proceeds of the Series A Preferred Stock offering in 2006.
In January 2007, Walker Wainwright, a director of the Company, was granted an option to purchase 40,000 shares of common stock at an exercise price of $5.00 as compensation for services related to due diligence, negotiation and sale of the 2006 Series A Preferred Stock offering. These three-year options were immediately vested on the date of grant, and are valued at $52,230 utilizing the Black-Scholes-Merton option pricing model and are recorded as offering costs in 2007.
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In August 2007, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was granted a contractual option to purchase 80,000 shares of common stock at an exercise price of $4.50. 20,000 vested immediately upon contract inception and the remainder vest at a rate of 10,000 per month over the life of his six-month employment contract. These two-year options are valued at $37,356 utilizing the Black-Scholes-Merton option pricing model with $24,904 recorded as compensation in 2007.
In December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert Nelson, was granted a contractual option to purchase 108,000 shares of common stock at an exercise price of $5.00. The options vest at a rate of 3,000 per month over a three year period, but are being amortized over the term of his two year employment contract. These five-year options are valued at $108,504 utilizing the Black-Scholes-Merton option pricing model with $4,521 recorded as compensation in 2007.
In March and June 2008, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was granted a contractual option to purchase 40,000 shares of common stock at an exercise price of $4.50. All of these options were vested by June 2008. These options are valued at $20,625 utilizing the Black-Scholes-Merton option pricing model with $20,625 recorded as compensation in 2008.
Our Chief Executive Officer, Thomas Granville, was granted a contractual option to purchase an additional 90,000 shares of our common stock at a price of $2.50 per share. The options vest prorated over the 24-month term of his contract, and are exercisable for a period of five years from the vesting date. These options are valued at $79,872, utilizing the Black-Scholes-Merton option pricing model with $23,296 of compensation expected to be recorded in 2008.
Our Chief Technical Officer, Edward Buiel, was granted a contractual option to purchase an additional 100,000 shares of our common stock at a price of $2.50 per share. The options cliff vest on May 31, 2011, and are exercisable for a period of five years from the vesting date. These options are valued at $95,436, utilizing the Black-Scholes-Merton option pricing model with $18,557 of compensation expected to be recorded in 2008.
Our Chief Financial Officer, Donald Hillier, was granted an option to purchase 180,000 shares of our common stock. The exercise price of the option is $2.50 per share and the option vests at the rate of 5,000 shares per month through the term of the Employment Agreement and are exercisable for a period of 5 years from the vesting date. These options are valued at $179,244, utilizing the Black-Scholes-Merton option pricing model with $34,853 of compensation expected to be recorded in 2008.
Three employees were granted contractual options to purchase an additional 200,000 shares of our common stock at a price of $2.50 per share. 5,000 of these options vested in June upon execution of the employment contracts, with the balance cliff vesting on June 15, 2011, and are exercisable for a period of three years from the vesting date. These options are valued at $165,041, utilizing the Black-Scholes-Merton option pricing model with $34,222 of compensation expected to be recorded in 2008.
Seven employees were granted contractual options to purchase an additional 179,500 shares of our common stock at a price of $2.50 per share. 43,500 of these options vested in December upon execution of the employment contracts, with the balance vesting over the life of these contracts and are exercisable for a period of three years from the vesting date. These options are valued at $36,171, utilizing the Black-Scholes-Merton option pricing model with $5,330 of compensation recorded in 2008.
The Company uses the Black-Scholes-Merton Option Pricing Model to estimate the fair value of awards on the measurement date using the weighted average assumptions noted in the following table:
| Year | Interest Rate | Dividend Yield | Expected Volatility | Expected Life | ||||||
| 2004 | 3.8% | 0.0% | 59.1% | 60 months | ||||||
| 2005 | 4.0% | 0.0% | 52.0% | 100 months | ||||||
| 2006 | 4.7% | 0.0% | 53.6% | 45 months | ||||||
| 2007 | 3.9% | 0.0% | 54.4% | 62 months | ||||||
| 2008 | 2.8% | 0.0% | 51.4% | 58 months | ||||||
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Expected volatilities are calculated based on the historical volatility of the Company’s stock since its listing on the public markets. Management has determined that it cannot reasonably estimate a forfeiture rate given the insufficient amount of time and activity of share option exercise and employee termination patterns. The expected life of options represents the period of time that options granted are expected to be outstanding was determined using the contractual term. The risk-free interest rate for periods within the expected life of the option is based on the interest rate for a similar time period of a U.S. Treasury note in effort on the date of the grant.
The following table provides consolidated summary information on the Company’s equity compensation plans for the years ended December 31 2004, 2005, 2006, 2007 and 2008.
| 2004 | |||||||||||||||||||||
| Weighted Average | |||||||||||||||||||||
All Plan & Non- Plan Compensatory Options | Number of Options | Exercise | Fair Value | Remaining Life (years) | Aggregate Intrinsic Value | ||||||||||||||||
| Options outstanding at December 31,2003 | - | $ | 0.00 | $ | $0.00 | ||||||||||||||||
| Granted | 736,350 | $ | 3.53 | $ | $2.87 | ||||||||||||||||
| Exercised | - | $ | 0.00 | $ | $0.00 | ||||||||||||||||
| Forfeited or lapsed | - | $ | 0.00 | $ | $0.00 | ||||||||||||||||
| Options outstanding at December 31,2004 | 736,350 | $ | 3.53 | $ | $2.87 | 6.34 | |||||||||||||||
| 2005 | |||||||||||||||||||||
| Weighted Average | |||||||||||||||||||||
All Plan & Non- Plan Compensatory Options | Number of Options | Exercise | Fair Value | Remaining Life (years) | Aggregate Intrinsic Value | ||||||||||||||||
| Options outstanding at December 31,2004 | 736,350 | $ | 3.53 | $ | $2.87 | ||||||||||||||||
| Granted | 1,254,500 | $ | 2.48 | $ | $1.34 | ||||||||||||||||
| Exercised | (358,865 | ) | $ | 1.65 | $ | $2.32 | |||||||||||||||
| Forfeited or lapsed | (182,100 | ) | $ | 3.04 | $ | $1.44 | |||||||||||||||
| Options outstanding at December 31,2005 | 1,449,885 | $ | 3.12 | $ | $1.86 | 7.73 | |||||||||||||||
| 2006 | ||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||
All Plan & Non- Plan Compensatory Options | Number of Options | Exercise | Fair Value | Remaining Life (years) | Aggregate Intrinsic Value | |||||||||||||||
| Options outstanding at December 31,2005 | 1,449,885 | $ | 3.12 | $ | 1.86 | |||||||||||||||
| Granted | 1,191,000 | $ | 5.42 | $ | 0.82 | |||||||||||||||
| Exercised | - | $ | 0.00 | $ | 0.00 | |||||||||||||||
| Forfeited or lapsed | (894,000 | ) | $ | 3.24 | $ | 1.94 | ||||||||||||||
| Options outstanding at December 31,2006 | 1,746,885 | $ | 4.62 | $ | 1.05 | 3.70 | $ | 634,903 | ||||||||||||
| Options exercisable at December 31,2006 | 1,192,385 | $ | 5.11 | $ | 0.97 | 2.90 | $ | 254,903 | ||||||||||||
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| 2007 | ||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||
All Plan & Non-Plan Compensatory Options | Number of Options | Exercise | Fair Value | Remaining Life (years) | Aggregate Intrinsic Value | |||||||||||||||
| Options outstanding at December 31,2006 | 1,746,885 | $ | 4.65 | $ | 1.03 | |||||||||||||||
| Granted | 228,000 | $ | 4.82 | $ | 0.87 | |||||||||||||||
| Exercised | - | $ | 0.00 | $ | 0.00 | |||||||||||||||
| Forfeited or lapsed | (124,000 | ) | $ | 2.50 | $ | 1.14 | ||||||||||||||
| Options outstanding at December 31,2007 | 1,850,885 | $ | 4.81 | $ | 1.00 | 1.5 | $ | 18,000 | ||||||||||||
| Options exercisable at December 31,2007 | 1,442,385 | $ | 4.88 | $ | 0.93 | 2.0 | $ | 6,000 | ||||||||||||
| 2008 | ||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||
All Plan & Non-Plan Compensatory Options | Number of Options | Exercise | Fair Value | Remaining Life (years) | Aggregate Intrinsic Value | |||||||||||||||
| Options outstanding at December 31,2007 | 1,850,885 | $ | 4.81 | $ | 1.00 | |||||||||||||||
| Granted | 969,055 | $ | 2.38 | $ | 0.73 | |||||||||||||||
| Exercised | - | $ | 0.00 | $ | 0.00 | |||||||||||||||
| Forfeited or lapsed | - | $ | 0.00 | $ | 0.00 | |||||||||||||||
| Options outstanding at December 31,2008 | 2,819,940 | $ | 3.98 | $ | 0.91 | 3.1 | $ | 0 | ||||||||||||
| Options exercisable at December 31,2008 | 1,831,690 | $ | 4.75 | $ | 0.90 | 1.4 | $ | 0 | ||||||||||||
The following table summarizes the status of the Company’s non-vested options under the stock option plans:
| All non-vested stock options as of December 31, 2008 | Shares | Fair Value | ||||||
| Options subject to future vesting at December 31,2007 | 408,500 | $ | 1.25 | |||||
| Options granted | 969,055 | $ | 0.73 | |||||
| Options forfeited or lapsed | - | $ | 0.00 | |||||
| Options vested | (389,305 | ) | $ | .77 | ||||
| Options subject to future vesting at December 31,2008 | 988,250 | $ | .93 | |||||
As of December 31, 2008, there was $714,192 of unrecognized compensation related to non-vested options granted under the plans. The Company expects to recognize the cost over a weighted average period of 1.6 years. The total fair value of options vested during the year ended December 31, 2008 was $300,061 ($236,054 during the year ended December 31, 2007).
Note 9—Earnings/Loss Per Share
Basic earnings per share is computed by dividing income available to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. Diluted earnings per share is computed by assuming that any dilutive convertible securities outstanding were converted, with related preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options for which market price exceeds the exercise price, less shares which could have been purchased by us with the related proceeds. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.
Had the Company recorded income applicable to common shareholders for the periods ended December 31, 2003, 2004, 2005, 2006,2007 and 2008, weighted-average number of common shares outstanding would have increased by 785,897, 1,386,612, 2,970,730, 2,135,938, 8,975,643 and 9,566,738, respectively, for the fiscal years, reflecting the addition of dilutive securities in the calculation of diluted earnings per share. The increase in weighted average common shares for the cumulative period (September 18, 2003 to December 31, 2008) is 4,542,647 shares.
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Note 10 — Income Taxes Expense (Benefit)
Following is a summary of the components giving rise to the income tax expense (benefit) for the periods ended December 31, 2008 and 2007.
| Currently payable: | 2008 | 2007 | ||||||
| Federal | $ | - | $ | - | ||||
| State | (79,170 | ) | $ | 83,469 | ||||
| Foreign | - | - | ||||||
| Total currently payable | (79,170 | ) | $ | 83,469 | ||||
| Deferred: | ||||||||
| Federal | 2,477,000 | 1,817,000- | ||||||
| State | 821,000 | 537,000 | ||||||
| Foreign | (404,000 | ) | 446,000 | |||||
| Total deferred | 2,894,000 | 2,800,000 | ||||||
| Less increase in allowance | (2,894,000 | ) | (2,800,000 | ) | ||||
| Net deferred | - | - | ||||||
| Total income tax expense (recovery) | $ | (79,170 | ) | $ | $83,469 | |||
Individual components giving rise to the deferred tax asset are as follows:
| 2008 | 2007 | |||||||
| Future tax benefit arising from net operating loss carry forwards | $ | 7,927,000 | $ | 5,977,000 | ||||
| Future tax benefit arising from available tax credits | 734,000 | 1,026,000 | ||||||
| Future tax benefit arising from options/warrants issued for Services | 775,000 | 602,000 | ||||||
| Other | 37,000 | 98,000 | ||||||
| Total | 9,473,000 | 7,703,000 | ||||||
| Less valuation allowance | (9,473,000 | ) | (7,703,000 | ) | ||||
| Net deferred | $ | - | $ | - | ||||
The components of pretax net loss are as follows:
| 2008 | 2007 | |||||||
| United States | $ | (9,538,115 | ) | $ | (5,776,191 | ) | ||
| Foreign | (35,714 | ) | (6,457 | ) | ||||
| $ | (9,573,829 | ) | $ | (5,782,658 | ) | |||
The Company has net operating loss carryforwards of approximately $17,725,000 and $2,800,000 available to reduce future income taxes in United States and Canada, respectively. The United States carryforwards expire at various dates between 2024 and 2028. The Canadian carryforwards expire at various dates between 2010 and 2028. The Company also has generated Canadian tax credits related to research and development activities. A portion of this credit, amounting to approximately $58,000 is refundable and has been presented as such in the accompanying balance sheet. The remaining credit, amounting to $734,000, is available to offset future taxable income in Canada and expires at various dates between 2024 and 2026. The Company has adopted FASB 109 which provides for the recognition of a deferred tax asset based upon the value certain items will have on future income taxes and management's estimate of the probability of the realization of these tax benefits. The Company has determined it more likely than not that these timing differences will not materialize and have provided a valuation allowance against the entire net deferred tax asset. The utilization of NOL and tax credit carryforwards from Tamboril prior to the reorganization may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. Accordingly, these amounts have not been included in the gross deferred tax asset number above. In addition, due to equity transactions that have occurred subsequent to the reorganization with Tamboril, the utilization of NOL carryforwards may be subject to further change in control limitations that generally restricts the utilization of the NOL per year.
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The reconciliation of the United States statutory federal income rate and the effective income tax rate in the accompanying consolidated statements of operations is as follows:
2008 | 2007 | |||||||
| Statutory U.S. federal income tax rate | (34.0 | )% | (34.0 | )% | ||||
| State taxes, net | (5.5 | )% | (6.4 | )% | ||||
| Equity based compensation | - | 1.0 | % | |||||
| Foreign tax credits | 1.9 | % | 0.0 | % | ||||
| Foreign currency fluctuation | 2.5 | % | 0.0 | % | ||||
| Other | 4.6 | % | 1.7 | % | ||||
| Change in valuation allowance | 30.5 | % | 37.7 | % | ||||
| Effective income tax rate | 0.0 | % | 0.0 | % | ||||
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2008. As the result of the implementation of the FASB interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, the Company recognized no material adjustments to unrecognized tax benefits. At the adoption date of January 1, 2008 and as of December 31, 2008, the Company has no unrecognized tax benefits.
By statute, tax years ending December 31, 2007 through 2004 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Note 11 — Related Party Transactions
Trust for the Benefit of the Shareholders of Mega-C Power Corp: The Trustee for The Trust for the Benefit of the Shareholders of Mega-C Power Corp. served as an officer of one of our consolidated companies in 2004. See discussion of the transactions with the trust in the note captioned “Mega-C Power Corp (Mega-C), Mega-C Trust (the Trust), The Taylor Litigation”
Transactions with C&T: A current board member of the Company is the former majority shareholder of C&T prior to the acquisition by the Company. See the note captioned “Transactions with Related (C&T)” for disclosure of transactions with C&T prior to and in connection with the acquisition.
Related party notes payable: During the years ending December 31, 2008 and December 31, 2007, the Company borrowed certain amounts from related parties; certain of these borrowings were extinguished through the issuance of the Company’s Series A Preferred Stock in 2006 and through the issuance of the Secured Bridge Financing during the fourth quarter of 2007. Refer to Notes captioned “Related Party Debt Financing” and “Stockholders’ Equity” for discussion on these matters.
Series A Preferred stock sales - The Company raised capital in a preferred stock offering during the year ended December 31, 2006, discussed further in the note captioned “Stockholder’s Equity,” of which $3,829,970 related to transactions with board members and their family members.
Legal fees: John Petersen was a director of the Company until January 15, 2007, and a partner in the law firm of Fefer, Petersen & Cie, which serves as the Company’s legal counsel. During the year ended December 31, 2006, fees incurred for services amounted to $287,463, including $49,352 related to the value of options vesting. This amount is offset by a credit of $64,943 for the change in value of equity instruments accrued in the fourth quarter of 2005 with a measurement date in the first quarter of 2006.
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Warrants: In January 2007, Walker Wainwright, a director of the Company, was granted an option to purchase 40,000 shares of common stock at an exercise price of $5.00 as compensation for services related to due diligence, negotiation and sale of the 2006 Series A Preferred Stock offering. These three-year options were immediately vested on the date of grant, and are valued at $52,230 utilizing the Black-Scholes-Merton option pricing model and are recorded as offering costs in 2007.
Note 12- Significant Non-Cash Transactions
The following table provides summary information on our significant non-cash investing and financing transactions during the twelve-month periods ended December 31, 2008 and 2007.
| 2008 | 2007 | |||||||
| Preferred Dividends attributable to warrant modifications | $ | - | $ | 164,179 | ||||
| Dividend accrued to preferred stock – Senior | $ | 141,359 | $ | 130,566 | ||||
| Dividend accrued to preferred stock – Series A | $ | 976,341 | $ | 1,790,755 | ||||
| Beneficial conversion feature on preferred stock | $ | - | $ | 6,496,634 | ||||
| Preferred converted to common stock | $ | 1,338,875 | $ | |||||
| Warrants issued for commission on sale of stock | $ | 1,193,735 | $ | |||||
| Interest converted to common stock | $ | 7,768 | $ | |||||
| Origination fees issued with related party note | $ | 7,500 | $ | |||||
| Notes payable converted to common stock | $ | 1,072,916 | $ | |||||
| Conversion of Interest and fees into debt instrument | $ | - | $ | 74,573 | ||||
| Satisfaction of 2005 Liability to issue stock | $ | 103,340 | $ | |||||
| Warrants issued for commission on sale of preferred | $ | - | $ | 53,230 | ||||
| Fair value of warrants issued with related party note | $ | 563,868 | $ | 276,882 | ||||
Cash payments for interest during the year ended 2008 were $269.274. There were only minor cash payments for interest in 2007 and no payments of income taxes during the years ended 2008 and 2007.
Note 13 — Mega-C Power Corp (Mega-C), Mega-C Trust (the Trust), The Taylor Litigation
Mega-C Power Corp Business and Trust rationale: Mega-C Power Corporation was a Nevada corporation that previously held limited and non-exclusive license rights to the technology that APC licensed from C&T and that the Company purchased from C&T [as discussed in the note captioned “Transactions with a related party (C&T]. Mega-C had ceased substantive operations as a result of the investigation of the promoters and management by the Ontario Securities Commission (OSC) in the spring of 2003 and was placed into an involuntary bankruptcy in April, 2004, as further described below.
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Trust Creation: The Trust was created on December 31, 2003, in connection with a reverse acquisition between APC and the Company, through its public shell then known as Tamboril Cigar Company, in response to the potential perceived equities of the Mega-C shareholders and risks of the situation. APC’s founders believed that the investors in Mega-C might be able to assert a variety of equitable claims to the energy storage technology the Company acquired from C&T. The Trust document required that when the Trust made its distribution, the beneficiary released any claims against all parties. Therefore, while Axion had no control over the Trust, its mandates were believed to be an effective way to eliminate conflicting claims to the technology. The Company’s founders were also shareholders in Mega-C for the most part.
Trust corpus: The original corpus of the Trust was 7,327,500 shares of the common stock that APC’s shareholders had rights to in connection with the reverse acquisition on December 31, 2003. In connection with the execution of the Amended and Restated Trust Agreement in February 2005, which formally recognized the jurisdiction of the bankruptcy court on all matters, Axion issued 500,000 additional shares to the Trust. There was no contingency surrounding the issuance of these shares at that time. This issuance was intended to be Axion’s contribution to the Trust to obtain clear title to the technology and resolve all related matters and was charged to operating expense during the year ended December 31, 2005. The stock issuance transaction was valued at $1,525,000, which was the value of the shares on the date of issuance.
As a result of the bankruptcy court’s confirmation of a Chapter 11 Plan and the substantial consummation of the confirmed plan in November 2006 the settlement disclosed below became effective and 1,500,000 shares were returned to the Company for cancellation in 2006, of which 1,000,000 represented a retroactive adjustment to the shares issued in the reverse acquisition in December 31, 2003 and 500,000 shares represented a return of the 2005 augmentation. The return in 2006 was the result of a negotiated settlement and there were no contingencies surrounding the Trust shares in 2005 or 2006. The 500,000 shares recovered were recorded as a reversal of the expense at fair value on the date of return in 2006 amounting to $1,125,000 and were promptly cancelled as were the 1,000,000 shares.
Trust Operations: The Trust did not conduct any substantive operations because, as described below, Mega-C was placed into involuntary bankruptcy shortly after the Trust’s inception. As a result of the confirmation of Mega-C’s plan of reorganization by an order entered on November 8, 2008 and the substantial consummation of the confirmed plan on November 21, 2006, as described below, the Trust is now governed by a court appointed Trustee along with a court appointed Board from the Trust’s beneficiaries.
The Trust for the Benefit of the Shareholders of Mega-C Power Corp. Analysis of Consolidation: Under FASB Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities an interpretation of ARB No. 51, (FIN 46R), reporting companies are required to consolidate a related variable interest entity (“VIE”) when the reporting company is the “primary beneficiary” of that entity and holds a variable interest in the VIE. The determination of whether a reporting company is the primary beneficiary of a VIE ultimately stems from whether the reporting entity will absorb a majority of the VIE’s anticipated losses or receive a majority of the VIE’s anticipated gains.
Variable Interest Entity: The Trust may be a variable interest entity because it has required outside infusions of cash over its existence.
Variable Interest: The Company analyzed its transactions with and relationship to the Trust and concluded that it may have had a very small variable interest in the Trust based on its obligation to perform the acts necessary to have the SEC declare a registration statement effective. Further, Axion appeared to have had a limited variable interest based on its obligation, pursuant to the requirements in the Trust instrument that Axion pay Trust expenses until the required registration statement was declared effective. However, in reality, Axion never paid any significant Trust expenses for three reasons: (1) while the Trust included a provision for payment of expenses, no significant expenses were ever paid, (2) the Trust suspended operations on April 4, 2004 when Mega-C Power Corp. entered bankruptcy; and (3) the explicit obligation the Company had to pay certain expenses of the Trust ended on January 7, 2005 when the required registration statement was declared effective. The Company’s relationship to and transactions with the Trust, based on actual transactions, constituted a very small variable interest, if any, compared to other entities who provided much larger amounts of support to the Trust, for which the Company had no responsibility. Further no shares were expected to be returned to Axion at the time these assessments were made. The relative size of the variable interest is relevant to the determination of the primary beneficiary, as discussed below.
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Primary Beneficiary: Axion did not and will not absorb a majority of the Trust’s anticipated losses or derive the benefit of a majority of the Trust’s gains, if any, at any time. The primary beneficiary, at the time of assessment, based on an assessment of what entity (entities) absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, was the creditors and shareholders of Mega-C Power Corp, as a group. These were the entities, as groups, who would be affected by increases and decreases in the Trust’s primary asset, the Axion stock. These two groups will also suffer a diminution in assets available for distribution to them because of the expenses the Trust incurs. The increases and decreases in the value of the Axion stock in the Trust will have no effect on Axion. Axion may have had a very limited obligation in the first quarter of 2004 but few, if any, expenses were incurred by the Trust in that quarter. In the second quarter, Mega-C Power Corp. entered bankruptcy and the Trust became dormant and, effectively, under the jurisdiction of the Bankruptcy Court. Upon registration of the Trust shares in January 2005 Axion’s obligation to the Trust ended except as described below relative to possible registration of shares.
Based on the above, Axion was not the primary beneficiary and accordingly, Axion is not required to consolidate the Trust. Axion’s relationship with the Trust ended when the Bankruptcy Court in Reno confirmed the bankruptcy plan in 2006 except as described below relative to possible registration of shares. (See “Settlement Agreement” below)
Trust Registration Rights: The Company registered 7,327,500 shares of common stock held by the Mega-C Trust by a registration statement the SEC declared effective January 7, 2005. Pursuant to the confirmed Chapter 11 Plan (See footnote captioned “Subsequent Events”), as referenced above, the Company may be required to register 5,700,000 of those shares (the "Plan Funding Shares") which fund the Chapter 11 Plan. The Company filed a post-effective amendment relating to the resale or other disposition of 1,627,500 shares, of which, 1 million represent a portion of the Plan Funding Shares and 627,500 represent shares to pay expenses of the Trust. In paragraph 1(d) of the Settlement Agreement, the Company further agreed to file such additional registration statements or post-effective amendments as may be necessary or desirable to facilitate or accommodate the sale or distribution of 4,700,000 of those shares. The Settlement Agreement was incorporated and approved in its entirety in paragraph 6.1 of the Second Amended Plan, which further provided in paragraph 6.12 that the Second Amended Shareholder Trustee and the Liquidation Trustee have the right and power to request that the Company file such amendments to the registration statement for the Plan Funding Shares.
Taylor Litigation: On February 10, 2004, Lewis “Chip” Taylor, Chip Taylor in Trust, Jared Taylor, Elgin Investments, Inc. and Mega-C Technologies, Inc. (collectively the “Taylor Group”) filed a lawsuit in the Ontario Superior Court of Justice Commercial List (Case No. 04-CL-5317) that named Tamboril, APC, Rene Pardo, Marvin Winick, Kirk Tierney, Joseph Piccirilli, Ronald Bibace, Robert Averill, James Smith, James Eagan, Thomas Granville, Joseph Souccar, Glenn W. Patterson, Canadian Consultants Bureau Inc., Robert Appel, Harold Rosen, Igor Filipenko, Valeri Shtemberg, Yuri Volfkovich, Pavel Shmatko, Michael Kishinevsky, Mega-C Power Corporation (Nevada), Mega-C Power Corporation (Ontario), C&T, Turitella Corporation, Gary Bouchard, Fogler Rubinoff LLP, Netprofitetc Inc., 503124 Ontario Ltd., HAP Investments LLC, Infinity Group LLC, James Keim, Benjamin Rubin and John Doe Corporation as defendants. Although the complaint alleges a number of complex and intersecting causes of action, it appears that with respect to the Company and certain of its directors, officers and stockholders, the lawsuit alleged a conspiracy to damage the value of the Taylor Group’s investment in Mega-C and deprive the Taylor Group of its alleged interests in the technology based on an alleged “oral” agreement, as well as damages of $250,000,000.
Based on orders entered in the Bankruptcy Court on February 11, 2008, management believes that this litigation against the Company is resolved, as set forth more fully in the section entitled “Settlement Agreement and Confirmed Chapter 11 Plan.”
Mega-C Bankruptcy Court Litigation: As described above, shortly after the formation of the Trust, Lewis “Chip” Taylor, Chip Taylor in Trust, Elgin Investments, Jared Taylor and Mega-C Technologies filed suit against Axion and APC’s founders (the “Taylor Litigation”). The Company, APC and Thomas Granville filed an involuntary Chapter 11 petition against Mega-C in the U.S. Bankruptcy Court for the District of Nevada (Case No. BK-N-04-50962-gwz).
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In February 2005, the Bankruptcy Court stayed the Taylor Litigation pending resolution of Mega-C’s Chapter 11 bankruptcy case. In March 2005, the Bankruptcy Court appointed William M. Noall to serve as Chapter 11 Trustee for the Mega-C case. On June 7, 2005, the Chapter 11 Trustee commenced an adversary proceeding against Sally Fonner, the trustee of the Trust (Adversary Proceeding No. 05-05042-gwz), demanding, among other things, the turnover of at least 7,327,500 shares of the Company’s stock held by the Trust as property of the bankruptcy estate.
On July 27, 2005, the Company commenced an adversary proceeding against the Chapter 11 Trustee and Ms. Fonner (Adversary Proceeding No. 05-05082-gwz) for the purpose of obtaining a judicial determination that as of the petition date:
· | Mega-C's license to commercialize the technology was terminated; | |
· | Mega-C does not have any interest in the technology; | |
· | Mega-C did not transfer any property to the Company with the intent to damage or defraud any entity; | |
· | Mega-C did not transfer any property to the Company for less than reasonably equivalent value; and |
· | If the court ultimately decides that Mega-C has a valid legal interest in the technology, then the Company is entitled to terminate the Trust. Further, Axion amended its complaint in September 2005 to assert its legal right to have the Trustee of the Mega-C Trust hold the assets of the Trust for the benefit of the Company in the event the bankruptcy court were to grant the Chapter 11 Trustee's request for turnover of the Trust assets and to set aside the Trust. Among other things these theories made it necessary to name Sally A. Fonner as a defendant in the lawsuit. |
Settlement Agreement and Confirmed Chapter 11 Plan: On December 12, 2005, the Company entered into a settlement agreement with Mega-C, represented by its Chapter 11 Trustee William M. Noall ("Noall"), and the Trust, represented by its trustee Sally A. Fonner ("Fonner"). Additional signatories to the settlement agreement include: (a) the Company's subsidiaries APC and C&T; (b) Fonner in both her capacity as Mega-C's sole officer and director and as trustee of the Trust; (c) certain former stockholders of APC including Robert Averill, Joe Piccirilli, Canadian Consultants Bureau Inc., James Smith, James Eagan, Tom Granville, Joe Souccar, HAP Investments, LLC, Glenn Patterson, Igor Filipenko, Ron Bibace, Kirk Tierney, Infinity Group, LLC, James Keim and Turitella Corporation; (d) Paul Bancroft, and (e) certain former stockholders of C&T including, Yuri Volkovich, Pavel Shmatko, Albert Shtemberg, Edward Shtemberg, C&T Co., Inc. in Trust, Oksana Fylypenko, Andriy Malitskiy, Valeri Shtemberg, Yuri Shtemberg, Victor Eshkenazi, Miraslav E. Royz, and Rimma Shtemberg.
The settlement agreement was approved by the Bankruptcy Court after a hearing in an order dated February 1, 2006. Certain terms were subject to confirmation and effectiveness of Mega-C's Chapter 11 plan of reorganization. On November 8, 2006, the Bankruptcy Court entered an order confirming the plan which was subsequently substantially consummated on November 21, 2006. The settlement agreement was fully incorporated in the confirmed Chapter 11 plan. At the date of these financial statements, the plan is fully effective and substantially consummated. Accordingly, all pending and potential disputes between the parties to the Settlement Agreement have been resolved. In summary, the following steps have been accomplished:
· | The Company has compromised and withdrawn its notes receivable from Mega-C to an allowed unsecured claim of $100; | |
· | Mega-C has assigned all of its right, title and interest, if any, in the technology and any and all tangible and intangible personal property in the Company's possession to the Company; |
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· | The Trust has been restated and retained 4,700,000 shares that will be sold to pay creditor claims that remain unsatisfied from the Liquidation Trust described below, with the balance to be proportionately distributed to the holders of allowed equity interests in Mega-C in connection with the implementation of Mega-C's Chapter 11 plan. It is also the owner of 685,002 share certificates which serve as collateral for loans paid to the newly created Liquidation Trust in the amount of $2,055,000; | |
· | A newly created Liquidation Trust received the proceeds of loans in the amount of $2,055,000, secured by 685,002 shares and has legal title to 314,998 shares that will be sold to pay creditor claims and Liquidation Trust expenses. | |
· | The former trustee of the Trust has received 627,500 shares as compensation by the Trust through the effective date of Mega-C's plan; and | |
· | The Trust surrendered 1,500,000 shares to the Company which were promptly cancelled as discussed under “Trust corpus” above. |
The litigation settlement and releases provided by the plan, which are as broad as the law allows, are now binding on Mega-C, the Chapter 11 trustee, the Taylor Group and all other parties described in the plan of reorganization. The plan requires the Liquidation Trustee or the Second Amended Shareholders Trustee to seek dismissals of the Taylor litigation to the extent the litigation asserts derivative or other causes of action that belong to the Chapter 11 estate of Mega-C.
While certain aspects of the litigation discussed above are on appeal to the Ninth Circuit Court of Appeals and to the United States District Court for the District of Nevada, management believes the possibility of any adverse decision to the Company to be remote.
In orders entered on February 11, 2008, the Bankruptcy Court held that the alleged “oral” agreement creating rights or interests in the Technology in favor of the Taylor Group never existed and, even if it had, the Taylor Group transferred any such rights to the Debtor which were then transferred to the Company by the confirmed Chapter 11 Plan. The Bankruptcy Court held that the Taylor Group has no interest in or rights to the Technology. The Bankruptcy Court held that the only rights the Taylor Group has are as putative creditors or shareholders of Mega-C and that any attempts to claim an interest in or contest the Company’s title to the Technology are contrary to the permanent injunction of the Chapter 11 Plan.
Future Litigation Costs: No amounts have been accrued in the accompanying balance sheet related to future litigation costs. Protracted litigation or higher than anticipated costs could significantly reduce available working capital and have a material adverse impact on the company’s financial condition.
Notes Receivable-Mega-C: The Company advanced funds to Mega-C over the years from 2003 to 2005. The Company considered these notes impaired, by recording an allowance for doubtful accounts, in an amount equal to the aggregate of the advances, net of certain repayments, against the Mega-C advances as the advances were made.
Because of the uncollectibility of the Mega-C receivable, as confirmed by the above described transactions and events, the Company recorded a recovery of notes receivable previously written off in November of 2006 in the amount of $100 as well as other assets received from Mega-C Power Corp. The other assets received, primarily miscellaneous fixed assets, have been determined to be negligible in value and no attempt has been made to secure an appraisal or record any amounts for these assets. Most importantly, the confirmation of the plan of reorganization conveyed all of Mega C’s right, title and interest, if any, in the technology to the Company, thereby resolving a significant challenge to the Company’s ownership of the technology.
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Note 14 — Commitments and Contingencies and Significant Contracts
Facilities During 2006 the Company closed the facilities in Woodbridge, Ontario and moved to New Castle, Pennsylvania. The agreement provided for an initial term of two years with two renewal terms of five years each. The monthly rent payable for the initial term of the agreement was $10,000. During the two extension terms, the rent was to be based on market rates as determined by negotiation between the parties, or if the parties are unable to reach a mutually agreed rental rate, by an independent appraisal process. In April of 2008, the company signed a new lease that also added to our existing space at our manufacturing plant in New Castle, Pennsylvania. The new lease calls for a monthly payment of $16,142 with an initial term of two (2) years beginning April 2008. In addition to the monthly rental, APB is obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance in the amount of $1 million, and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises. Rent expense for this plant amounted to approximately $202,000 and $135,800 for the years ended December 31, 2008 and 2007, respectively. Future commitments under the term of this lease amount to $194,000 for 2009 and $48,000 in 2010.
In December 2008, we signed a letter agreement to sublease from a current tenant on a month-to-month basis a building consisting of 54,000 square feet in New Castle, Pennsylvania. Monthly rental for this space is $19,300 on a monthly basis, subject to an annual inflation adjustment in January of each year. In addition to the monthly rental, we are obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance, and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises. Rent expense for this facility amounted to $53,000 for the year ended December 31, 2008. This month-to-month rental agreement continues until the earlier of (1) purchase of the building by the Company or a third party; (2) termination of the letter agreement by either party; or (3) December 31, 2010.
Employment Agreements: We have entered into executive employment agreements with Thomas Granville, Edward Buiel, Andrew Carr Conway, Jr., Robert Nelson and Donald T. Hillier, however our agreement with Mr. Conway terminated on July 4, 2008. These agreements generally require each executive to devote substantially all of his business time to our affairs, establish standards of conduct, prohibit competition with our company during their term, affirm our rights respecting the ownership and disclosure of patents, trade secrets and other confidential information, provide for the acts and events that would give rise to termination of such agreements and provide express remedies for a breach of the agreement. Each of our executives will participate, without cost, in our standard employee benefit programs, including medical/hospitalization insurance and group life insurance, as in effect from time to time. Each of the covered executives will generally receive an automobile allowance and reimbursement for all reasonable business expenses incurred by him on behalf of the Company in the performance of his duties. The provisions of the individual agreements set forth in the following table:
| Name | Position | Date | Term | Salary | Options | Price | Vesting | Stock | ||||||||||||
| Thomas Granville (1) | CEO | 6/23/08 | 2-year | $ | 324,000 | 90,000 | $ | 2.50 | Monthly | 0 | ||||||||||
| Donald T. Hillier (2) | CFO | 6/18/08 | 3-year | $ | 150,000 | 180,000 | $ | 2.50 | Monthly | 90,000 | ||||||||||
| Dr. Edward Buiel (3) | VP and CTO | 6/23/08 | 2-year | $ | 180,000 | 100,000 | $ | 2.50 | 05/31/10 | 80,000 | ||||||||||
| Andrew Carr Conway, Jr. (4) | Former CFO | 8/31/07 | 6 months | $ | 180,000 | 120,000 | $ | 4.50 | Monthly | 0 | ||||||||||
| Dr. Robert Nelson (5) | VP Mfg. Eng. | 12/1/07 | 2-year | $ | 132,000 | 108,000 | $ | 5.00 | Monthly | 36,000 | ||||||||||
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| 1. | Thomas Granville. On June 23, 2008, we entered into an Executive Employment Agreement with Thomas Granville as Chief Executive Officer. Pursuant to this agreement, Mr. Granville receives a monthly base salary of $27,000 for the period commencing June 1, 2008, and terminating May 31, 2010. Mr. Granville’s base salary is subject to annual review, and such salary is subject to renegotiation on the basis of Mr. Granville’s and the Company’s performance. In addition, Mr. Granville received a signing bonus of $250,000, paid 50% within ten (10) days of the execution of the agreement and 50% upon receipt of the final $10,000,000 investment from the Quercus Trust. The Company also granted Mr. Granville an option to purchase 90,000 shares of our common stock at a price of $2.50 per share at a vesting rate of 3,750 shares per month through the term of the agreement. Mr. Granville is eligible to participate in any executive compensation plans adopted by the shareholders of the Company and the Company's standard employee benefit programs. |
| 2. | Donald T. Hillier. On June 18, 2008, we entered into an Executive Employment Agreement with Donald T. Hillier as Chief Financial Officer. Pursuant to this agreement, Mr. Hillier receives a monthly base salary of $12,500 for the period commencing June 16, 2008, and terminating June 15, 2011. Mr. Hillier's base salary is subject to review after six (6) months and then on an annual basis thereafter, and such salary is subject to renegotiation on the basis of Mr. Hillier's and the Company's performance. The Company also granted to Mr. Hillier 90,000 shares of common stock which will vest in equal 30,000 share amounts on June 16 of each of 2009, 2010 and 2011. In addition, Mr. Hillier was granted an option to purchase 180,000 shares of common stock at a price of $2.50 per share at a vesting rate of 5,000 shares per month through the term of the agreement. Mr. Hillier is eligible to participate in any executive compensation plans adopted by the shareholders of the Company and the Company's standard employee benefit programs. |
| 3. | Edward Buiel, Ph.D. On June 23, 2008, we entered into an Executive Employment Agreement with Dr. Edward Buiel as Vice President and Chief Technology Officer. Pursuant to this agreement, Dr. Buiel receives a monthly salary of $15,000 for the period commencing June 1, 2008 and terminating May 31, 2010. Dr. Buiel’s base salary is subject to annual review, and such salary is subject to renegotiation on the basis of Dr. Buiel’s and the Company’s performance. In addition, Dr. Buiel received a signing bonus of $110,000, paid 90% within ten (10) days of the execution of the agreement and 10% upon the receipt of the final $10,000,000 investment from the Quercus Trust. Also, if Dr. Buiel is still employed with the Company on June 1, 2011, he will receive a bonus of $50,000, notwithstanding any other bonus arrangement. The Company also reconfirmed Dr. Buiel’s option to purchase 100,000 shares of our common stock, which had been previously granted in his prior Executive Employment Agreement dated December 29, 2006. These existing options remain exercisable at a price of $3.75 per share and shall vest 50% on December 29, 2009 and 50% on December 29, 2010 assuming Dr. Buiel is still employed by the company on each of those respective dates. In addition, Dr. Buiel was granted an option to purchase 100,000 shares of our common stock in recognition of the opportunity cost associated with the one year extension of his new Executive Employment Agreement. These options are exercisable at a price of $2.50 per share and shall vest on May 31, 2011. Dr Buiel was also granted 80,000shares of common stock, of which 30,000 vests on December 29, 2009, and 50,000 will vest on May 31, 2011. Dr. Buiel is eligible to participate in any executive compensation plans adopted by the shareholders of the Company and the Company's standard employee benefit programs. Certain of these equity awards were awarded under Dr. Buiel’s 2006 employment agreement and the terms of such awards have been incorporated into his new Executive Employment Agreement. |
| 4. | Andrew C. Conway, Jr. Under the terms of his employment agreement effective August 2007, which had an original term of six months, Mr. Conway received an annualized salary of $180,000, bonuses as determined by the compensation committee and an option to purchase 10,000 shares of our common stock at a price of $4.50 per share for each month of service. 30,000 options vested with the execution of the contract, and the balance vest periodically over the remainder of the contract. The contract automatically renewed for an additional six month term ending August 31, 2008. A total of 120,000 options were awarded under the extended contract. Mr. Conway served as the Company’s CFO through June 2008, and his employment agreement terminated, as mutually agreed, on July 4, 2008. |
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| 5. | Dr. Robert F. Nelson. Under the terms of his employment agreement effective December 2007, which has a term of two years, Dr. Nelson receives an annual salary of $132,000 and bonuses as determined by the compensation committee. In addition, Dr. Nelson receives an option to purchase 108,000 shares of our common stock at a price of $5.00 per share and 36,000 shares of restricted common stock, each that vest over three years from the effective date of his employment agreement. |
We have no retirement plans or other similar arrangements for any directors, executive officers or employees.
Purchase Orders
On November 3, 2008, the Company received the first purchase order for toll contract manufacturing of standard flooded lead acid batteries for a large North American lead acid battery company. The initial three types of batteries covered in this purchase order have successfully completed customer testing, and shipment was expected to begin late in the fourth quarter. The initial purchase order calls for the shipment of 92,250 batteries, spread fairly equally over 11 months, with a total aggregate base purchase price of $6,400,000. Raw materials will have an agreed upon base price with regular adjustments (not less than monthly) to account for market price fluctuations, which could cause fluctuations in the final purchase invoice. Due to economic conditions caused by the steep downturn in the economy, our customer was unable to accept product based on their original delivery schedule, resulting in only 1,500 batteries being shipped before the end of 2008. The Company, however, continued to make product and store it at our facility. The customer has informed the Company that it intends to honor its purchase order commitment, but in view of the current economic conditions there is no guarantee it will be able to do so. In early March 2009, the customer began taking delivery of the manufactured product and has set up a schedule to accept all of the remaining manufactured inventory, (approximately 13,500 batteries), by the end of April 2009. All existing production, and future production, will take place on an ancillary "flooded battery line" so the production will not reduce capacity from the Company’s development of its proprietary PbC technologies, which will utilize the primary "AGM battery line" for production.
Note 15 — Subsequent Events
On February 5, 2009, the Company received a pair of grants from the Advanced Lead-Acid Battery Consortium, the leading industry association made up in part by the largest companies supplying the world’s battery market. The pair of grants total approximately $380,000, and will help support research into two key areas: (1) to identify the mechanism by which the optimum specification of carbon, when included in the negative active material of a valve-regulated lead-acid battery, provides protection against accumulation of lead sulfate during high-rate partial-state-of-charge operation; and (2) the second grant seeks simply to characterize Axion’s proprietary PbC™ battery in hybrid electric vehicle (HEV) type duty-cycle testing. The grants are administered through the Durham, NC-based International Lead Zinc Research Organization acting on behalf of the ALABC. The research work is expected to be completed in 2009.
On February 9, 2009, the Company received notice that is the recipient a grant from the Pennsylvania Alternative Fuels Incentive Grant program. The $800,000 first-year grant, which was announced by Governor Edward Rendell on January 29th, is part of the State’s overall effort to invest in businesses that are creating important and innovative clean energy and bio-fuels technologies. The award proceeds will be used to demonstrate the advantages the Axion proprietary PbC™ battery technology provides in a variety of electric vehicle types including: hybrids (HEVs), such as the popular Toyota Prius; “plug-ins” (PHEVs) used in commuter, delivery and other vehicles; and in electric vehicles (EV’s) and converted (from combustion engine operation) EV’s. The grant proceeds are expected to be received in 2009.
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| Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
| Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of December 31, 2008, management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation and the identification of the material weaknesses in our internal control over financial reporting described below, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2008, our disclosure controls and procedures were not effective.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is 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.
Management has conducted, with the participation of our Chief Executive Officer and our Chief Financial Officer, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of December 31, 2008. Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with our management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified the following material weaknesses in our internal control over financial reporting as of December 31, 2008:
| · | We do not have documented job descriptions for each position in the Company. Performance appraisals have not been performed consistently on an annual basis and, as a result, our employees may not have a clear understanding of their responsibilities or performance compared to these responsibilities |
| · | We have not maintained sufficient segregation of duties as evidenced by: |
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| · | Our Sales Manager approves the credit worthiness of new customers and also has the ability and responsibility for entering sales orders into our accounting system. Credit limit approval for new customers and sales order entry should not be performed by sales personnel. | |
| · | Some of our employees have the ability to purchase and receive goods. The receipt of goods should be kept separate from the purchasing functions. |
| · | Our accounting staff employees with payable responsibilities also have access to vendor maintenance controls. Access to vendor accounts should be kept separate from the accounts payable functions. |
| · | We have concluded that there were not effective financial reporting controls in the following areas that could lead to inaccurate financial reporting: |
| · | All financial personnel have the ability to change account structures without approval. | |
| · | General Ledger journal entries are not always approved prior to entry. |
| · | Documented processes do not exist for several key processes such as a closing checklist, budget-to-actual analyses, balance sheet variation analysis, pro forma financial statements, and the usage of key spreadsheets. |
| · | We have identified weaknesses in our inventory controls: |
| · | Documented processes do not exist for several key inventory control processes including inventory adjustments, reserves for excess, defective and obsolete inventory, product shipments and the tracking and recording of in-transit inventory. | |
| · | Inventory valuation processes are lacking or do not exist including costs to be expensed versus inventoried, standard cost changes, actual versus standard cost analysis and the accurate accumulation of total production costs. |
| · | We do not have a closed loop monitoring process in place, to ensure that issues, improvement and other directed actions have been completed in a timely manner. |
| · | We do not do criminal background checks on the board of directors and employees. |
| o | Per the KPMG, Fraud Risk Management White Paper, “U.S. sentencing guidelines (amended, November 2004) for organizational defendants establish minimum compliance and ethics program requirements for organizations seeking to mitigate penalties for corporate misconduct. Specifically, the amended guidelines call on organizations to: (1) promote a culture that encourages ethical conduct and a commitment to compliance with the law (2) establish standards and procedures to prevent and detect criminal misconduct and (3) Use reasonable efforts and exercise due diligence to exclude individuals from positions of substantial authority who have engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.” |
| · | We have key financial, sales order processing, shipping and receiving processes that are used to operate our business on a daily basis that are not formally documented. |
| · | We do not have formal guidelines for creating properly authorized levels for entering into agreements (i.e. purchase orders, non-disclosure agreements, sales and other contracts) or distributing cash (signing checks, creating authorizing wire transfers). |
Because of the material weaknesses noted above, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2008, based on Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by COSO.
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Remediation of Material Weaknesses in Internal Control over Financial Reporting
We are in the process of implementing remediation efforts with respect to the material weaknesses noted above as follows:
| · | We hired during March 2009 an experienced manager of Human Resources who will conduct employee training sessions and have all employees acknowledge key policies and sign the Code of Conduct. |
| · | We have documented job descriptions for most of our positions and we will conduct performance appraisals for each employee as required by their employment agreements. |
| · | We have put in place a credit policy and assigned the accounting manager, who has extensive prior credit experience as being responsible for verifying the credit worthiness of new customers. Additionally, with the implementation of our new ERP system, sales order entry will be approved by a person outside sales before a shop order is processed. . |
| · | We have hired an experienced purchasing manager and along with the implementation of our ERP system we are developing processes and procedures to separating purchasing from receipt of goods functions and restrict system access accordingly. |
| · | We are implementing a new Enterprise Resource Planning (ERP) system and accounting system that will restrict access and add needed layers of approvals and internal audit processes. With this implementation employees with accounts payable responsibilities will not be able to unilaterally add, delete or change vendor accounts. |
| · | We are improving our financial reporting controls by: |
| o | Establishing procedures for changing and maintaining account structures and system access accordingly. | |
| o | Implemented a process to review all journal entries prior to entry into the General Ledger. | |
| o | Documenting all key financial reporting processes. | |
| o | Establishing an effective document control and retention procedure. | |
| o | Establishing budgets and examining on a month to month basis budget versus actual variances. | |
| o | Generation of detailed monthly Board of Director financial reports and discussion with the Board financial results. |
| · | We are documenting along with the implementation of our ERP system all key inventory control processes, bills of materials, measurement and valuation processes, purchasing and production forecasts and inventory management. |
| · | We are establishing a closed loop monitoring process. This process will include the documentation of outstanding actions, the responsible individuals, expected completion dates and the status of the progress of these actions. The document will be reviewed and updated on an ongoing basis. |
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| · | We are evaluating the use of criminal background checks for all new members of the board of directors, prior to their appointment. We are also evaluating the use of criminal background checks for all potential new hires. |
| · | We will implement a process to document key business processes and procedures and make them accessible to all appropriate personnel. |
| · | We are have documented authorization levels stating who is allowed to approve key transactions and at what level of spending. |
We believe the foregoing efforts will enable us to improve our internal control over financial reporting. Management is committed to continuing efforts aimed at improving the design adequacy and operational effectiveness of its system of internal controls. The remediation efforts noted above will be subject to our internal control assessment, testing and evaluation process.
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Commission that permit the company to provide only management's report in this quarterly report.
Information with respect to our executive officers and directors and disclosure of delinquent Form 3, 4 or 5 filers required by this item will be contained in the Definitive Proxy Statement relating to our 2009 Annual Meeting of Stockholders; said information is incorporated herein by reference.
Code of business conduct and ethics
Our Board of Directors has adopted a Code of Business Conduct and Ethics, which has been distributed to all directors, officers, and employees and is given to new employees at the time of hire. The Code of Business Conduct and Ethics contains a number of provisions that apply principally to our President, Chief Financial Officer and other key accounting and financial personnel. A copy of our Code of Business Conduct and Ethics can be found under the “Investor Information” section of our website at www.axionpower.com. We intend to disclose any amendments or waivers of our Code of Business Conduct and Ethics on our website.
A description of the compensation of our executive officers will be contained in the Definitive Proxy Statement relating to our 2009 Annual Meeting of Stockholders; said information is incorporated herein by reference.
A description of the security ownership of certain beneficial owners and management will be contained in the Definitive Proxy Statement relating to our 2009 Annual Meeting of Stockholders; said information is incorporated herein by reference.
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A description of certain relationships and related transactions with management will be contained in the Definitive Proxy Statement relating to our 2009 Annual Meeting of Stockholders; said information is incorporated herein by reference.
A description of principal accounting fees and services will be contained in the Definitive Proxy Statement relating to our 2009 Annual Meeting of Stockholders; said information is incorporated herein by reference.
| 2.1 | Reorganization Agreement (without exhibits) between Tamboril Cigar Company, Axion Power Corporation and certain stockholders of Axion Power Corporation dated December 31, 2003. | (1) | ||
| 2.2 | First Addendum to the Reorganization Agreement between Tamboril Cigar Company, Axion Power Corporation and certain stockholders of Axion Power Corporation dated January 9, 2004. | (1) | ||
| 3.1 | Amended and Restated Certificate of Incorporation of Tamboril Cigar Company dated February 13, 2001. | (2) | ||
| 3.3 | Amendment to the Certificate of Incorporation of Tamboril Cigar Company dated June 4, 2004. | (3) | ||
| 3.4 | Amendment to the Certificate of Incorporation of Axion Power International, Inc. dated June 4, 2004. | (3) | ||
| 3.5 | Amended By-laws of Axion Power International, Inc. dated June 4, 2004. | (3) | ||
| 4.1 | Specimen Certificate for shares of Company’s $0.00001 par value common stock. | (9) | ||
| 4.2 | Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation dated December 31, 2003. | (1) | ||
| 4.3 | Succession Agreement Pursuant to the Provisions of the Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation dated March 25, 2004. | (4) | ||
| 4.4 | Form of Warrant Agreement for 1,796,300 capital warrants. | (9) | ||
| 4.5 | Form of Warrant Agreement for 667,000 Series I investor warrants. | (9) | ||
| 4.6 | Form of Warrant Agreement for 350,000 Series II investor warrants. | (9) | ||
| 4.7 | Form of Warrant Agreement for 313,100 Series III investor warrants. | (9) | ||
| 4.8 | Form of 8% Cumulative Convertible Senior Preferred Stock Certificate | (D) | ||
| 4.9 | First Amended and Restated Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation dated February 28, 2005. | (11) | ||
| 4.10 | Second Amendment and Restated Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation dated November 21, 2006 | (19) |
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| 4.11 | Certificate of Powers, Designations, Preferences and Rights of the 8% Convertible Senior Preferred Stock of Axion Power International, Inc. dated March 17, 2005. | (12) | ||
| 4.12 | Certificate of Powers, Designations, Preferences and Rights of the Series A Convertible Preferred Stock, Par Value $0.0001 Per Share, of Axion Power International, Inc. dated October 23, 2006. | (13) | ||
| 4.13 | Amended Certificate of Powers, Designations, Preferences and Rights of the Series A Convertible Preferred Stock, Par Value $0.0001 Per Share, of Axion Power International, Inc. dated October 26, 2006. | (13) | ||
| 9.1 | Agreement respecting the voting of certain shares beneficially owned by the Trust for the Benefit of the Shareholders of Mega-C Power Corporation. | Included in Exhibit 4.2 | ||
| 10.1 | Development and License Agreement between Axion Power Corporation and C and T Co. Incorporated dated November 15, 2003. | (1) | ||
| 10.2 | Letter Amendment to Development and License Agreement between Axion Power Corporation and C and T Co. Incorporated dated November 17, 2003. | (1) | ||
| 10.3 | Tamboril Cigar Co. Incentive Stock Plan dated January 8, 2004 | (A) | ||
| 10.4 | Tamboril Cigar co. Outside Directors Stock Option Plan dated February 2, 2004 | (A) | ||
| 10.5 | Stock Purchase & Investment Representation Letter among John L. Petersen, Sally A. Fonner and C and T Co. Incorporated dated January 9, 2004 | (1) | ||
| 10.6 | Letter Amendment to Development and License Agreement between Axion Power Corporation and C and T Co. Incorporated dated January 9, 2004. | (1) | ||
| 10.7 | First Amendment to Development and License Agreement between Axion Power Corporation and C and T Co. Incorporated dated as of January 9, 2004. | (5) | ||
| 10.8 | Definitive Incentive Stock Plan of Axion Power International, Inc. dated June 4, 2004. | (3) | ||
| 10.9 | Definitive Outside Directors’ Stock Option Plan of Axion Power International, Inc. dated June 4, 2004. | (3) | ||
| 10.10 | Executive Employment Agreement of Charles Mazzacato. | (9) | ||
10.11 10.12 | Executive Employment Agreement of Peter Roston. Amended Retainer Agreement between the law firm of Fefer, Petersen & Cie dated March 31, 2005 | (9) (C) | ||
| 10.13 | Retainer Agreement dated January 2, 2004 between the law firm of Fefer, Petersen & Cie and Tamboril Cigar Company. | (10) | ||
| 10.14 | Bankruptcy Settlement Agreement Between Axion Power International, Inc. and Mega-C Power Corporation dated December, 2005 | (E) | ||
| 10.15 | Second Amendment to Development and License Agreement between Axion Power International, Inc. and C and T Co. Incorporated dated as of March 18, 2005. | (12) |
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| 10.16 | Executive Employment Agreement of Thomas Granville dated June 23, 2008. | (20) | ||
| 10.17 | Loan agreement dated January 31, 2006 between Axion Battery Products, Inc. as borrower, Axion Power International, Inc. as accommodation party and Robert Averill as lender respecting a $1,000,000 purchase money and working capital loan. | (14) | ||
| 10.18 | Security agreement dated January 31, 2006 between Axion Battery Products, Inc. as debtor and Robert Averill as secured party. | (14) | ||
| 10.19 | Security agreement dated January 31, 2006 between Axion Power International, Inc. as debtor and Robert Averill as secured party. | (14) | ||
| 10.20 | Promissory Note dated February 14, 2006 between Axion Battery Products, Inc. as maker and Robert Averill as payee. | (14) | ||
| 10.21 | Form of Warrant Agreement between Axion Power International, Inc. and Robert Averill. | (14) | ||
| 10.22 | Commercial Lease Agreement dated February 14, 2006 between Axion Battery Products, Inc. as lessee and Steven F. Hoye and Steven C. Warner as lessors. | (14) | ||
| 10.23 | Asset Purchase Agreement dated February 10, 2006 between Axion Battery Products, Inc. as buyer and National City Bank of Pennsylvania as seller. | (14) | ||
| 10.24 | Escrow Agreement dated February 14, 2006 between Axion Battery Products, Inc. and National City Bank of Pennsylvania as parties in interest and William E. Kelleher, Jr. and James D. Newell as escrow agents. | (14) | ||
| 1.25 | Executive Employment Agreement of Edward Buiel dated June 23, 2008. | (21) | ||
| 10.26 | Consulting Agreement, dated as of September 27, 2007, by and between Axion Power International, Inc. and Andrew Carr Conway, Jr. | (16) | ||
| 10.27 | Amendment No. 1 to Consulting Agreement, dated as of October 31, 2007, by and between Axion Power International, Inc. and Andrew Carr Conway, Jr. | (16) | ||
| 10.28 | Securities Purchase Agreement dated as of January 14, 2008, by and between Axion Power International, Inc. and Quercus Trust. | (17) | ||
| 10.29 | Common Stock Purchase Warrant dated January 14, 2008, executed by Axion Power International, Inc. | (17) | ||
| 10.30 | Executive Employment Agreement of Donald T. Hillier dated June 18, 2008. | (19) | ||
| 14.1 | Code of Business Conduct and Ethics | (6) | ||
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). | |||
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). | |||
| 32.1 | Statement of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the United States Code. | |||
| 32.2 | Statement of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the United States Code. |
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| (1) | Incorporated by reference from our Current Report on Form 8-K dated January 15, 2004. |
| (2) | Incorporated by reference from our Current Report on Form 8-K dated February 5, 2003. |
| (3) | Incorporated by reference from our Current Report on Form 8-K dated June 7, 2004. |
| (4) | Incorporated by reference from our Current Report on Form 8-K dated April 13, 2004. |
| (5) | Incorporated by reference from our Form S-3 registration statement dated May 20, 2004. |
| (6) | Incorporated by reference from our Annual Report on Form 10-KSB dated March 30, 2004 |
| (7) | Incorporated by reference from our Current Report on Form 8-K dated April 13, 2003. |
| (8) | Incorporated by reference from our Current Report on Form 8-K dated February 16, 2004. |
| (9) | Incorporated by reference from our Form S-1 registration statement dated September 2, 2004. |
| (10) | Incorporated by reference from our Form S-1 registration statement dated December 17, 2004. |
| (11) | Incorporated by reference from our Current Report on Form 8-K dated February 28, 2005. |
| (12) | Incorporated by reference from our Current Report on Form 8-K dated March 21, 2005. |
| (13) | Incorporated by reference from our Current Report on Form 8-K dated November 8, 2006. |
| (14) | Incorporated by reference from our Current Report on Form 8-K dated February 16, 2006. |
| (15) | Incorporated by reference from our Current Report on Form 8-K dated January 3, 2007. |
| (16) | Incorporated by reference from our Current Report on Form 8-K dated November 6, 2007. |
| (17) | Incorporated by reference from our Current Report on Form 8-K dated January 17, 2008. |
| (18) | Incorporated by reference from our Current Report on Form 8-K dated January 31, 2008. |
| (19) | Incorporated by reference from our Registration Statement on Form S-1 dated July 3, 2008. |
| (20) | Incorporated by reference from our Current Report on Form 8-K dated June 27, 2008. |
| (21) | Incorporated by reference from our Current Report on Form 8-K dated July 2, 2008. |
| (A) | Incorporated by reference from our Current Report on Form 8-K/A dated February 2, 2004. |
| (B) | Incorporated by reference from our Current Report on Form 8-K dated April 4, 2005. |
| (C) | Incorporated by reference from our Registration Statement on Form SB-2 dated April 26, 2005. |
| (D) | Incorporated by reference from our Current Report on Form 8-K dated December 13, 2005. |
Financial Statements
Consolidated Financial Statements for Axion Power International, Inc. for the fiscal years ended December 31, 2007 and 2008, respectively as set forth in Item 8 of this Annual Report on Form 10-K.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AXION POWER INTERNATIONAL, INC. | |
| By: | /s/ Thomas Granville |
Thomas Granville, Chief Executive Officer and Director | |
| Date: March 31, 2009 | |
| By: | /s/ Donald T. Hillier |
| Donald T. Hillier, Chief Financial Officer | |
Date: March 31, 2009 | |
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In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Stanley A. Hirschman | ||||
| Stanley A. Hirschman | Director | March 31, 2009 | ||
| /s/ Robert G. Averill | ||||
| Robert G. Averill | Director | March 31, 2009 | ||
| /s/ Glenn Patterson | ||||
| Glenn Patterson | Director | March 31, 2009 | ||
| /s/ Michael Kishinevsky | ||||
| Michael Kishinevsky | Director | March 31, 2009 | ||
| /s/ Igor Filipenko | ||||
| Igor Filipenko | Director | March 31, 2009 | ||
| /s/ Howard K. Schmidt | ||||
| Howard K. Schmidt | Director | March 31, 2009 | ||
| /s/ D. Walker Wainwright | ||||
| D. Walker Wainwright | Director | March 31, 2009 |
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