UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2009
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 or organization) | | | | Identification No.) |
3601 Clover Lane | | | | |
New Castle, Pennsylvania | | | | 16105 |
(Address of principal executive offices) | | | | (Zip Code) |
| | (724) 654-9300 (Registrant’s telephone number, including area code) | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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. (Check one):
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of Each Class | | Outstanding Shares at October 30, 2009 |
Common Stock, $0.0001 par value | | 26,744,172 |
Cautionary Note Regarding Forward-Looking Information
This Report on Form 10-Q, in particular Part I Item 2 “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 are subject to various risks and uncertainties.
When used in this Report on Form 10-Q 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-Q 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 we 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 depend upon increased revenues, which may be difficult to generate given the current economic environment, and 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 unless we invest to significantly increase our 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 and evolving environmental regulation. |
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION | | 1 |
| | |
ITEM 1. | FINANCIAL STATEMENTS | | 1 |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | 14 |
ITEM 4T. | CONTROLS AND PROCEDURES | | 23 |
| | | |
PART II - OTHER INFORMATION | | 26 |
| | |
ITEM 1. | LEGAL PROCEEDINGS. | | 26 |
ITEM 1A. | RISK FACTORS | | 27 |
ITEM 6. | EXHIBITS. | | 29 |
PART I - FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
AXION POWER INTERNATIONAL, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(A Development Stage Company)
| | September 30, 2009 | | | December 31, 2008 | |
| | (Unaudited) | | | | |
ASSETS | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents | | $ | 784,756 | | | $ | 3,124,168 | |
Escrow deposits for foreign patent applications | | | 20,375 | | | | - | |
Short-term investments | | | - | | | | 2,193,920 | |
Accounts receivable | | | 763,863 | | | | 128,035 | |
Other receivables | | | 13,037 | | | | 64,456 | |
Prepaid expenses | | | 341,642 | | | | 78,989 | |
Inventory | | | 1,206,406 | | | | 1,269,515 | |
Total current assets | | | 3,130,079 | | | | 6,859,083 | |
| | | | | | | | |
Property & equipment, net | | | 3,964,068 | | | | 3,274,183 | |
Other receivables, non-current | | | 41,899 | | | | 28,388 | |
TOTAL ASSETS | | $ | 7,136,046 | | | $ | 10,161,654 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable | | $ | 1,910,550 | | | $ | 1,324,287 | |
Other current liabilities | | | 97,561 | | | | 162,580 | |
Notes payable, current | | | 92,630 | | | | | |
Notes payable to related parties | | | 746,228 | | | | - | |
Total current liabilities | | | 2,846,969 | | | | 1,486,867 | |
| | | | | | | | |
Deferred revenue | | | 688,054 | | | | 751,096 | |
Derivative liabilities | | | 16,043,259 | | | | - | |
Notes payable | | | 683,614 | | | | - | |
Total liabilities | | | 20,261,896 | | | | 2,237,963 | |
| | | | | | | | |
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 2008) | | | 1,770,387 | | | | 1,656,735 | |
Series A preferred – 2,000,000 shares designated 693,997 shares issued and outstanding (718,997 in 2008) | | | 9,829,340 | | | | 9,440,359 | |
| | | | | | | | |
Common stock-100,000,000 shares authorized $0.0001 par value 26,743,172 issued & outstanding (26,417,437 in 2008) | | | 2,674 | | | | 2,641 | |
| | | | | | | | |
Additional paid in capital | | | 41,281,221 | | | | 46,184,287 | |
| | | | | | | | |
Deficit accumulated during development stage | | | (65,757,396 | ) | | | (49,111,062 | ) |
| | | | | | | | |
Cumulative foreign currency translation adjustment | | | (252,076 | ) | | | (249,269 | ) |
Total Stockholders' Equity | | | (13,125,850 | ) | | | 7,923,691 | |
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | | $ | 7,136,046 | | | $ | 10,161,654 | |
The accompanying notes are an integral part of these condensed consolidated financial statements | |
AXION POWER INTERNATIONAL, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(A Development Stage Company)
UNAUDITED
| | Three Months Ended | | | Nine Months Ended | | | Inception | |
| | September 30, | | | September 30, | | | (9/18/2003) | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | | | to 9/30/2009 | |
| | | | | | | | | | | | | | | |
Revenues | | $ | 962,833 | | | $ | 149,441 | | | $ | 1,567,816 | | | $ | 541,248 | | | $ | 3,056,663 | |
Cost of goods sold | | | 981,273 | | | | 81,019 | | | | 1,380,923 | | | | 266,344 | | | | 2,591,185 | |
Gross profit (loss) | | | (18,440 | ) | | | 68,422 | | | | 186,893 | | | | 274,904 | | | | 465,478 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Research & development | | | 869,892 | | | | 1,033,961 | | | | 3,327,676 | | | | 2,438,345 | | | | 17,279,346 | |
Selling, general & administrative | | | 873,213 | | | | 993,479 | | | | 2,887,597 | | | | 4,172,675 | | | | 20,902,978 | |
Interest expense - related party | | | 44,881 | | | | (2,500 | ) | | | 44,881 | | | | 1,175,370 | | | | 2,196,804 | |
Impairment of assets | | | - | | | | - | | | | - | | | | - | | | | 1,391,485 | |
Derivative revaluation | | | 12,048,203 | | | | - | | | | 13,592,717 | | | | (2,844 | ) | | | 7,078,049 | |
Mega C Trust Share Augmentation (Return) | | | - | | | | - | | | | - | | | | - | | | | 400,000 | |
Interest & other income, net | | | (1,341 | ) | | | (42,961 | ) | | | (14,039 | ) | | | (34,524 | ) | | | (548,191 | ) |
Net loss before income taxes | | | (13,853,288 | ) | | | (1,913,557 | ) | | | (19,651,939 | ) | | | (7,474,118 | ) | | | (48,234,993 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income Taxes | | | - | | | | - | | | | - | | | | - | | | | 4,300 | |
Deficit accumulated during development stage | | | (13,853,288 | ) | | | (1,913,557 | ) | | | (19,651,939 | ) | | | (7,474,118 | ) | | | (48,239,293 | ) |
| | | | | | | | | | | | | | | | | | | | |
Less preferred stock dividends and beneficial conversion feature | | | (3,302,428 | ) | | | (270,944 | ) | | | (3,871,570 | ) | | | (843,230 | ) | | | ( 17,518,103 | ) |
Net loss applicable to common shareholders | | $ | (17,155,716 | ) | | $ | (2,184,501 | ) | | $ | (23,523,509 | ) | | $ | (8,317,348 | ) | | $ | ( 65,757,396 | ) |
| | | | | | | | | | | | | | | | | | | | |
Basic and diluted net loss per share | | $ | (0.64 | ) | | $ | (0.08 | ) | | $ | (0.89 | ) | | $ | (0.39 | ) | | $ | (3.84 | ) |
| | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | | | 26,676,678 | | | | 26,045,156 | | | | 26,508,643 | | | | 21,263,533 | | | | 17,105,621 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
AXION POWER INTERNATIONAL, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(A Development Stage Company)
UNAUDITED
| | Nine Months Ended | | | Inception | |
| | September 30, | | | (9/18/2003) to | |
| | 2009 | | | 2008 | | | 9/30/2009 | |
| | | | | | | | | |
Cash Flows from Operating Activities: | | | | | | | | | |
Deficit accumulated during development stage | | $ | (19,651,939 | ) | | $ | (7,474,118 | ) | | $ | (48,239,292 | ) |
Adjustments required to reconcile deficit accumulated during development stage to cash flows used by operating activities | | | | | | | | | | | | |
Depreciation | | | 306,906 | | | | 125,356 | | | | 850,192 | |
Non-cash interest expense | | | 30,536 | | | | 906,096 | | | | 1,861,119 | |
Impairment of assets | | | - | | | | - | | | | 1,391,486 | |
Derivative revaluations | | | 13,592,717 | | | | (2,844 | ) | | | 7,078,049 | |
Mega C Trust Share Augmentation (Return) | | | - | | | | - | | | | 400,000 | |
Share based compensation expense | | | 747,441 | | | | 626,937 | | | | 5,097,940 | |
Changes in Operating Assets & Liabilities | | | | | | | | | | | | |
Accounts receivable | | | (635,828 | ) | | | 46,203 | | | | (770,733 | ) |
Other receivables | | | 51,419 | | | | 271,022 | | | | 8,923 | |
Prepaid expenses | | | 25,347 | | | | 25,665 | | | | (51,054 | ) |
Inventory | | | 63,109 | | | | (734,601 | ) | | | (1,206,405 | ) |
Accounts payable | | | 586,263 | | | | (398,625 | ) | | | 3,565,194 | |
Other current liabilities | | | (65,019 | ) | | | 9,776 | | | | 118,693 | |
Liability to issue equity instruments | | | - | | | | - | | | | 178,419 | |
Deferred revenue and other | | | (63,043 | ) | | | (2,370 | ) | | | 775,532 | |
| | | | | | | | | | | | |
Net cash used by operating activities | | | (5,012,091 | ) | | | (6,601,503 | ) | | | (28,941,937 | ) |
| | | | | | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | | | | | |
Escrow deposits for foreign patent applications | | | (20,375 | ) | | | - | | | | (20,375 | ) |
Short term investments | | | 2,193,920 | | | | (38,389 | ) | | | - | |
Other receivables, non-current | | | (13,511 | ) | | | (1,049,359 | ) | | | (1,258,915 | ) |
Purchase of property & equipment | | | (996,792 | ) | | | - | | | | (4,810,972 | ) |
Investment in intangible assets | | | - | | | | - | | | | (167,888 | ) |
Net cash provided (used) by investing activities | | | 1,163,242 | | | | (1,087,748 | ) | | | (6,258,150 | ) |
| | | | | | | | | | | | |
Cash Flow from Financing Activities | | | | | | | | | | | | |
Proceeds from related party debt, net | | | 736,000 | | | | (1,483,485 | ) | | | 5,915,771 | |
Proceeds from notes payable, net | | | 776,244 | | | | - | | | | 776,244 | |
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 | | | - | | | | - | | | | 7,472,181 | |
Net cash provided by financing activities | | | 1,512,244 | | | | 14,985,015 | | | | 36,005,601 | |
| | | | | | | | | | | | |
Net Change in Cash and Cash Equivalents | | | (2,336,605 | ) | | | 7,295,764 | | | | 805,514 | |
Effect of Exchange Rate on Cash | | | (2,807 | ) | | | (4,251 | ) | | | (20,758 | ) |
Cash and Cash Equivalents – Beginning | | | 3,124,168 | | | | 671,244 | | | | - | |
Cash and Cash Equivalents – Ending | | $ | 784,756 | | | $ | 7,962,757 | | | $ | 784,756 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
AXION POWER INTERNATIONAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the information furnished in this Form 10-Q reflects all adjustments necessary for a fair statement of the financial position and results of operations and cash flows as of and for the three and nine month periods ended September 30, 2009 and 2008, as well as the cumulative period from inception through September 30, 2009. The condensed consolidated balance sheet as of September 30, 2009 has been derived from those unaudited condensed consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. Certain adjustments are of a normal, recurring nature. Operating results for the interim period are not necessarily indicative of results expected for the year ending December 31, 2009.
2. Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the fiscal year ended December 31, 2008, the Company raised a total of $15.0 million, net of offering expenses and fees, from investing activities and had revenues of $ 0.7 million. During the first nine months of 2009, the Company had revenues of $ 1.6 million. Gross margin from sales and financings in fiscal year 2008 and through September 30, 2009 will not continue to provide sufficient funds for the Company’s current operations. Subsequent financings will be required to fund the Company’s operations and pay other requirements. No assurances can be given that the Company will be successful in arranging the further financing needed to continue the execution of its business plan, which includes the development of new products. Failure to obtain such financing will require management to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might occur if the Company is unable to continue as a going concern.
3. | Recently Issued Accounting Pronouncements |
The Company adopted, as of July 1, 2009, the Financial Accounting Standards Board’s (“FASB’s”) Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied to nongovernmental entities in the preparation of financial statements in conformity with GAAP. The ASC does not change authoritative guidance. Accordingly, implementing the ASC did not change any of the Company’s accounting, and therefore, did not have an impact on the consolidated results of the Company. References to authoritative GAAP literature have been updated accordingly.
On January 1, 2009, the Company adopted the provisions of FASB ASC topic 820 Fair Value Measurements and Disclosures (formerly SFAS No. 157, Fair Value Measurements), with respect to non-financial assets and liabilities. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of ASC topic 820 did not have a material impact on the Company’s consolidated financial statements.
On January 1, 2009, the Company adopted FASB ASC topic 815-40 "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock" (formerly EITF 07-5). ASC topic 815-40 provides guidance on determining whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under prior authoritative literature FASB No. 133. “Accounting for Derivative Instruments and Hedging Activities” ASC 815-40 is effective for fiscal years beginning after December 15, 2008. The Company adopted ASC topic 815-40 on January 1, 2009 and as such some of the Company’s outstanding warrants that were previously classified in equity were reclassified to liabilities as of January 1, 2009 as these warrants contain down round provisions and were no longer deemed to be indexed to the Company’s own stock. See Note 5 for further discussion.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On January 1, 2009, the Company adopted the provisions of FASB ASC Topic 320-10-65 (formerly FSP FAS 107-1 and APB 28-1) “Interim Disclosures about Fair Value of Financial Instruments”. This update requires fair value disclosures for financial instruments that are not currently reflected on the balance sheet at fair value on a quarterly basis. The adoption of ASC Topic 320-10-65 did not have a material impact on the Company’s consolidated financial statements.
On January 1, 2009, the Company adopted the provisions of ASC 815-10 (formerly FASB Statement 161, "Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”). FASB ASC 815-10 requires enhanced disclosures about an entity’s derivative and hedging activities. FASB ASC 815-10 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. The adoption of this pronouncement did not have a material impact on the consolidated financial statements.
In May 2009, the Company adopted FASB ASC topic 855, “Subsequent Events” (formerly SFAS No. 165). This Statement sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of ASC topic 855 did not have a material impact on the Company’s consolidated financial statements. The Company has evaluated the period beginning October 1, 2009 through November 16, 2009, the date its financial statements were issued, and concluded there were no events or transactions occurring during this period that required recognition or disclosure in its financial statements.
In June 2009, the FASB issued ASC topic 105 “Generally Accepted Accounting Principles”, (formerly Statement of Financial Standards (SFAS) No. 168, The Hierarchy of Generally Accepted Accounting Principles). ASC topic 105 contains guidance which reduces the U.S. GAAP hierarchy to two levels, one that is authoritative and one that is not. This pronouncement is effective September 15, 2009. The adoption of this pronouncement did not have a material impact on the consolidated financial statements.
In September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-08, “Earnings Per Share” Amendments to Section 260-10-S99. This Codification Update represents technical corrections to Topic 260-10-S99, Earnings per Share, based on EITF Topic D-53, “Computation of Earnings Per Share for a Period that Includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock” and EITF Topic D-42, The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock goes into effect in the period that includes a redemption or induced conversion. Adoption of this new guidance did not have a material impact on the consolidated financial statements.
In October 2009, the FASB issued authoritative guidance on ASC 605-25 “Revenue Recognition - Multiple-Deliverable Revenue Arrangement “that will become effective beginning July 1, 2010, with earlier adoption permitted. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We believe adoption of this new guidance will not have a material impact on the consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 2008 financial statement presentation to correspond to the current year’s presentation. The total equity and net income are unchanged due to these reclassifications.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 September 30, 2009, reserves for valuation and obsolescence totaled $75,482. Cost is determined using the first-in first-out (FIFO) method. Many components and raw materials we purchase have minimum order quantities. As of September 30, 2009, inventory costs of $1,206,406 consisted of $352,726 of raw materials and $853,680 of finished goods and finished subassemblies.
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.
On June 30, 2008, we 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.
The warrants contain conventional anti-dilution and down round 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 $2.60 per share.
On January 1, 2009 the Company adopted ASC topic 815-40, and as a result the 10,000,000 outstanding warrants issued to the Quercus Trust and another 1,485,714 warrants issued as payment of services related to this offering, both containing exercise price down round reset provisions that were previously classified in equity, were reclassified to derivative liabilities. As of January 1, 2009, these warrants were no longer deemed to be indexed to the Company’s own stock. The fair value of these derivative liabilities as of January 1, 2009 was $2,450,542 and was reclassified from additional paid-in capital. The significant assumptions used in the January 1, 2009 valuation were: the exercise price of $2.60; the market value of the Company’s common stock on January 1, 2009, $1.15; expected volatility of 49.44%; risk free interest rate of 1.28%; and a remaining contract term of 4.27 years.
On September 22, 2009, we entered into an Amendment to Warrants and Securities Purchase Agreement with Quercus Trust, amending the January 14, 2008 Warrant and Securities Purchase Agreement. The material terms of the Amendment are as follows:
1. The exercise for warrants previously issued to Quercus by us is reset from $2.60 per share to $0.75 per share.
2. Any previously accrued liquidated damages under the Securities Purchase Agreement to the date of the Amendment are waived.
3. Axion and Quercus have agreed to elect three new directors on behalf of Quercus, each to serve a three year term.
4. Quercus has agreed to invest an additional $2,000,000 in connection with a minimum $10 million capital raise by us upon certain terms and conditions as set forth in the Amendment.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. Certain deadlines in the Agreement for filing of post effective amendments are extended from 7 business days and 30 calendar days are extended to 15 business days and 60 calendar days, respectively.
The Amendment provides us with a further financing commitment by Quercus as well as provision of the benefit of the experience and expertise of the three named individuals as new directors to us. The Amendment resolves certain milestones set forth in the Agreement which were not fully met due to the noncompletion of the Production Contract which was entered into by us on June 27, 2008.
The fair value of these derivative liabilities as of September 30, 2009 was $16,043,259. The Black-Scholes-Merton stock option valuation model was used to determine the fair values. The significant assumptions used in the September 30, 2009 valuation were: the exercise price of $0.75; the market value of the Company’s common stock on September 30, 2009, $2.08; expected volatility of 59.37%; risk free interest rate of 1.88%; and a remaining contract term of 3.52 years.
The increase in fair value of the Company’s derivative liabilities resulted in a loss of $12,048,203 and $13,592,717 for the three and nine months ended September 30, 2009, respectively and $7,078,049 since inception. The loss for the three and nine month periods includes an increase in the derivative liability in the amount of $7,211,049 resulting from the reset in the exercise price of the warrants previously issued to Quercus from $2.60 to $0.75 per share.
The following table provides summary information on warrants outstanding as of September 30, 2009. In August 2009, we issued 27,240 five-year warrants with an exercise price of $2.00 to certain of the Company’s directors and significant investors in conjunction with the financing of new debt, pursuant to the terms of the 2009 Bridge Loan Agreement as discussed in “Recent Financing Activities” below.
On September 22, 2009, we entered into an Amendment to Warrants and Securities Purchase Agreement with Quercus Trust, amending the January 14, 2008 Warrant and Securities Purchase Agreement. The Amendment resets the exercise price for warrants previously issued to Quercus from $2.60 per share to $0.75 per share. See Footnote 5 to these Condensed Consolidated Financial Statements for a further discussion of the reduction in the exercise price of the Quercus warrants.
| | Shares | | | Weighted average exercise price | | | Weighted average remaining contract term (years) | |
Warrants outstanding at December 31,2008 | | | 14,278,772 | | | $ | 2.94 | | | | 3.9 | |
Granted | | | 27,240 | | | | 2.00 | | | | 5.0 | |
Exercised | | | - | | | | - | | | | - | |
Forfeited or lapsed | | | (150,000) | | | $ | 6.00 | | | | - | |
Warrants outstanding at September 30, 2009 | | | 14,156,012 | | | $ | 1.60 | | | | 3.2 | |
The reset in the exercise price of the Quercus warrants decreased the weighted average exercise price for warrants outstanding at September 30, 2009 to $1.60 from $2.91 at June 30, 2009.
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At September 30, 2009, 137,500 shares of 8% Cumulative Convertible Senior Preferred stock were issued and outstanding. For the nine months ending September 30, 2009, $113,652 in dividends was accrued, bringing the stated value of that preferred stock to $14.32 per share.
During 2009, 25,000 shares of Series A Convertible Preferred Stock were converted to the Company’s common stock, par value $0.0001 per share. For the nine months ended September 30, 2009, 25,000 shares of Series A Convertible Preferred Stock were converted to the Company’s common stock, par value $0.0001 per share. A 20% annual dividend rate was accrued to the account of the shareholder through December 2007. Beginning in March 2008 (upon bringing our filing status current), the dividend accrual reduced to 10% per annum. At September 30, 2009, 693,997 shares of Series A Convertible Preferred stock were issued and outstanding. For the nine months ending September 30, 2009, $747,399 in dividends was accrued, bringing the stated value of that preferred stock to $14.63 per share.
On September 22, 2009, the Company entered into an Amendment to Warrants and Securities Purchase Agreement with Quercus Trust, amending the January 14, 2008 Warrant and Securities Purchase Agreement. Among the material terms of the Amendment, the Company agreed to reset the exercise price for warrants previously issued to Quercus from $2.60 per share to $0.75 per share. This triggered the anti-dilution provisions on the Company’s preferred stock. With the warrant modification, the effective conversion price of the Senior preferred shares was reduced from $1.68 to $1.43per share and the effective conversion price of the Series A preferred shares was reduced from $1.25 to $1.07 per share. This reduction in the conversion price resulted in an additional beneficial conversion feature, valued at the intrinsic value of the most beneficial number of common shares issuable for these instruments, net of prior beneficial conversions for each issue, and capped by the stated value at the time of reset, amounting to $3,010,517 for the three months ended September 30, 2009. This beneficial conversion feature is a non-cash charge against net loss applicable to common shareholders, analogous to a dividend, was recognized during September 2009.
In December 2004, FASB issued FASB123R, “Share-Based Payment (now ASC 718 “Compensation – Stock Compensation”) . On January 1, 2006, the Company adopted the provisions of FASB issued FASB123R, “Share-Based Payment (now ASC 718 “Compensation – Stock Compensation”) 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. Under ASC 718, employee-compensation expense related to stock based payments is recorded over the requisite service period based on the grant date fair value of the awards.
The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50 “Equity-Based Payments to Non-Employees” (formerly 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 Company has adopted an incentive stock option plan covering an aggregate of 2,000,000 shares of common stock that authorizes a variety of awards including incentive stock options, non-qualified stock options, shares of restricted stock, shares of phantom stock and stock bonuses. The Company has also adopted an outside directors’ stock option plan covering an aggregate of 500,000 shares of common stock which provides that each eligible director will automatically be granted an option to purchase shares having an aggregate fair market value on the date of grant of twenty thousand dollars ($20,000) for each year of his term in office. From time to time, based on the recommendations of the compensation committee of the board of directors, the Company enters into non-plan equity incentive agreements with officers, employees, attorneys and third party consultants.
During the nine months ended September 30, 2009, the Company granted a total of 36,000 contractual stock options to an employee at an exercise price of $2.50 per share. 6,000 of these options vested in January upon execution of the employment contract, with the balance vesting at a rate of 1,000 per month, and are exercisable for a period of five years from vesting date. These options are valued at $14,507, utilizing the Black-Scholes-Merton model with $4,835 expected to be recorded during 2009.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The assumptions noted in the following table were used for the options granted for the period ended September 30, 2009.
Risk-free interest rate | | | 1.6 | % |
Dividend yield | | $ | - | |
Expected volatility | | | 50.6 | % |
Expected term (in years) | | | 5.8 | |
The compensation cost that has been charged against income for options was $324,112 for the period ended September 30, 2009. The impact of this expense was to increase basic and diluted loss per share by $.012 for the period ended September 30, 2009.
A tax deduction is recognized for non-qualified stock options when the options are exercised. The amount of this deduction will be the excess of the fair value of the Company’s common stock over the exercise price at the date of exercise. Accordingly, there is a deferred tax asset recorded related 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 asset to zero. As a result for the period ended September 30, 2009, 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 held to term.
The following table provides summary information on all outstanding options as of September 30, 2009, based on the grant date for options.
| | Shares | | | Weighted average exercise price | | | Weighted average fair value | | | Weighted average remaining contract term (years) | | | Aggregate intrinsic value | |
Options outstanding at December 31,2008 | | | 2,819,940 | | | $ | 3.98 | | | $ | 0.91 | | | | 3.1 | | | | |
Granted | | | 36,000 | | | $ | 2.50 | | | $ | 0.40 | | | | 5.8 | | | | |
Exercised | | | - | | | $ | - | | | $ | - | | | | | | | | |
Forfeited or lapsed | | | (974,035 | ) | | $ | 5.91 | | | $ | 0.60 | | | | | | | | |
Options outstanding at September 30, 2009 | | | 1,881,905 | | | $ | 2.95 | | | $ | 1.06 | | | | 3.9 | | | $ | 126,600 | |
Options exercisable at September 30, 2009 | | | 1,071,405 | | | $ | 3.28 | | | $ | 1.16 | | | | 2.6 | | | $ | 45,400 | |
The weighted-average grant date fair value of options granted during the period ended September 30, 2008 was $0.89.
The following table provides summary information on all non-vested stock options as of September 30, 2009:
| | All Plan & Non-Plan Compensatory Options | |
| | Shares | | | Weighted average grant date fair value | |
Options subject to future vesting at December 31, 2008 | | | 988,250 | | | $ | 0.93 | |
Options granted | | | 36,000 | | | $ | 0.40 | |
Options forfeited or lapsed | | | - | | | | - | |
Options vested | | | (213,750 | ) | | $ | 0.86 | |
Options subject to future vesting at September 30, 2009 | | | 810,500 | | | $ | 0.92 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
As of September 30, 2009, there was $404,587 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 1.1 years. The total fair value of options which newly vested during the period ended September 30, 2009 was $183,118. ($185,182 during the comparable period ended September 30, 2008).
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 are 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 the 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.
If the Company had generated earnings during the period ended September 30, 2009, the Company would have added 14,959,426 common equivalent shares to the weighted average shares outstanding to compute the diluted weighted average shares outstanding. If the Company had generated earnings during the period ended September 30, 2008, the Company would have added 9,614,969 common equivalent shares to the weighted average shares outstanding to compute the diluted weighted average shares outstanding.
As of September 30, 2009, we had 26,743,172 common shares outstanding. Including the common stock equivalents of our outstanding preferred shares, warrants and stock options, the total common shares outstanding on a fully diluted basis would have been 53,659,012.
10. | Comprehensive Income and Significant Non-Cash Transactions |
FASB ASC 220, “Reporting Comprehensive Income,” establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources.
The components of comprehensive loss for the year-to-date periods ended September 30, 2009 and 2008 are as follows:
| | Nine Months Ended September 30, 2009 | | | Nine Months Ended September 30, 2008 | |
Net loss applicable to common shareholders | | $ | (23,523,509 | ) | | $ | (8,317,348 | ) |
Foreign currency translation adjustment | | $ | (2,807 | ) | | $ | (4,249 | ) |
Comprehensive Income/(loss) | | $ | (23,526,316 | ) | | $ | (8,321,597 | ) |
The following table provides summary information on our significant non-cash investing and financing transactions during the year-to-date periods ended September 30, 2009 and 2008.
| | Nine Months Ended September 30, 2009 | | | Nine Months Ended September 30, 2008 | |
Satisfaction of 2007 liability to issue equity instruments | | $ | - | | | $ | 103,339 | |
Beneficial conversion feature on preferred stock | | $ | 3,010,517 | | | $ | - | |
Dividend accrued to preferred stock – Senior | | $ | 113,652 | | | $ | 104,970 | |
Dividend accrued to preferred stock – Series A | | $ | 747,399 | | | $ | 738,260 | |
Warrants issued for commission on sale of stock | | $ | - | | | $ | 1,193,735 | |
Fair value of warrants issued with related party note | | $ | 20,308 | | | $ | 601,753 | |
Origination fees issued with related party note | | $ | 64,000 | | | $ | 7,500 | |
Notes payable to converted to common stock | | $ | - | | | $ | 1,072,916 | |
Interest converted to common stock | | $ | - | | | | 7,768 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. | Commitments and Contingencies |
Employment Agreements:
The Company has entered into executive employment agreements with Thomas Granville, Edward Buiel, Jr., Robert Nelson and Donald T. Hillier. These agreements generally require each executive to devote substantially all of his business time to the Company’s 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 the executives is allowed to participate, without cost, in our standard employee benefit programs, including medical/hospitalization 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 | |
Dr. Robert Nelson (4) | VP MfgEng. | 12/1/07 | 2-year | | $ | 132,000 | | 108,000 | | $ | 5.00 | | Monthly | | | 36,000 | |
1. | Thomas Granville. On June 23, 2008, the Company 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, the Company 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, the Company 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 80,000 shares 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. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. | 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. |
The Company has no retirement plans or other similar arrangements for any directors, executive officers or employees.
12. | Related Party Transactions: |
Interest Expense: Interest expense recognized for the period ended September 30, 2009 in connection with certain notes payable to related parties amounted to $44,881. Of this total, $14,375 relates to the interest coupon, $7,336 to the amortization of note discount associated with detachable warrants, and $23,200 to loan origination fees. The amounts reported under the related party caption on the face of the financial statement includes payments to one accredited investor with certain associations to related parties
13. | Recent Financing Activities |
On July 22, 2009, the Pennsylvania Department of Community and Economic Development approved Axion’s application for a loan from the Machinery and Equipment Loan Fund (MELF) in the maximum amount of $791,055. The proceeds of the loan will be used to defray part of the cost of equipment purchased for use at the Company’s facility on Green Ridge Road. The loan will bear interest at the rate of 3% interest per annum and will be payable in equal monthly installments of principal and interest over a period of seven years. The Company is required to create and/or retain the number of full-time equivalent jobs specified in the loan application within three (3) years after the date of disbursement of MELF loan proceeds. The Company received its initial funding proceeds as a result of this loan in the amount of $776,244 on September 14, 2009.
Bridge Loan Financing: In August of 2009 the Company structured short term secured bridge loan arrangements with certain of the Company’s directors and significant investors, The Company borrowed $800,000 from investors pursuant to this “Bridge Loan” through September 30, 2009. The Company’s obligations under the Bridge Loan are secured by a lien on its intellectual property.
The Bridge Loan matures on December 31, 2009 and was subject to a loan origination fee equal to 8% of the principal amount of the Bridge Loan. In connection with the Bridge Loan, 3,405 warrants were issued to the Bridge Loan investors for each $100,000 invested. These warrants have an exercise price of $2.00 per share and an expiration date of August 12, 2014. Standard anti-dilution provisions apply to the warrants. The Holders of these notes issued in connection with the Bridge Loan shall have the right to convert the principal amount of the notes together with accrued and unpaid interest, into the same security (upon the same terms) sold by the Company in an institutional offering.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On November 4, 2009 Fursa Global Event Driven Fund LP converted 63,100 of their Series A Convertible preferred stock into 862,466 shares of the Company’s common stock.
Our DEP grant, from the Commonwealth of Pennsylvania under the Pennsylvania Alternative Fuels Incentive Grant program, discussed under “Management’s Discussion and Analysis - Grant Activities”, has been fully approved, and we have submitted our first invoice for reimbursement of approximately $200,000 of the approximately $800,000 grant awarded. Work will continue under this contract and we anticipate 50% completion by the end of 2009.
Subsequent to September 30, 2009, we have continued our contractual arrangement with Exide and have shipped batteries monthly in accordance with contract terms. Our PbC® batteries continue in test programs both with Exide and automotive OEM’s. With our October shipments, we have now shipped product conducive to both power applications such as hybrid electric vehicles, and to storage applications such as wind, solar and grid. Our lead carbon battery plate configuration allows us to produce a product that can be pushed to either end of our performance chart - the higher power side (for hybrid vehicles) or the higher energy side (for storage applications).
We have accepted a purchase order for a Power Cube TM, and delivery is anticipated before the end of 2009. The Power Cube is to be utilized for a prototype oil rig which, if proven successful, may lead to significant follow on business. The Power Cube will provide emergency backup power that will allow for motor generator sets to be taken off-line resulting in a potential 20% decrease in fuel consumption, and a corresponding reduction in NoX and CO2 emissions, without sacrificing rig drilling speed. In addition, our PowerCube technology will allow the oil rig to run solely on batteries at certain times. As compared to traditional power sources, the batteries contained within the Power Cube provide a fast rate of recharge coupled with the ability to discharge power quickly, giving us an advantage in this market.
The Company has evaluated the period beginning October 1, 2009 through November 16, 2009, the date its financial statements were issued, and concluded there were no other events or transactions occurring during this period that required recognition or disclosure in its financial statements
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Product Opportunities
In April 2009, the Company entered into a long term supply agreement with Exide Technologies. Under that agreement, Axion will provide batteries and PbC® electrodes to Exide for testing and resale to their customers. Markets that the Company has targeted, both individually and in partnership with Exide through this agreement, include the European market for Micro-Hybrid and Mild-Hybrid vehicles. The hybrid vehicle market opportunity in Europe is driven by legislation passed April 23, 2009 by the European Union. This legislation, Regulation (EC) No 443/2009, requires car manufacturers to reduce CO2 emissions from the current level of 160 grams per/km, to a level of 120 grams per/km. Beginning in 2012, 65% of the manufacturer’s registered new passenger cars will be taken into account for purposes of determining each manufacturer’s average specific emissions of CO2. By January 1, 2015, 100% of registered new passenger cars will be taken into account. Excess emissions premiums will be assessed beginning in 2015. This premium is to be assessed on the entire fleet of new passenger cars registered during that year. The micro hybrid market is expected to grow dramatically in Europe beginning in 2012. By 2015 it is estimated that micro hybrids will comprise 50% of the 16,000,000 vehicles that will be manufactured that year. (Deutsche Bank Market Research, 3 November, 2009). The United States is also mandating a 30% decrease in Co2 emissions by 2016 (“Remarks by the President on National Fuel Efficiency Standards”, May 19, 2009). Micro hybrids will play a large roll in that reduction but the estimated percentage of the 17,000,000 vehicle market that micro hybrids will comprise varies widely, thus no further prediction as to the percentage can yet be made.
The PbC Battery provides an inexpensive solution for the Micro-Hybrid and Mild-Hybrid markets. Our current levels of production are inadequate for this market, so additional capacity must be put in place. In order to fund that added capacity, we will be required to secure additional funding.
Increased Production Plans
Our Exide agreement underscores the need for increased electrode production capacity. The single line, which is now on the ground in New Castle, was the first step in ramping up production, but several more production lines are needed. The interest of the European OEM’s, and the deadlines they must meet, has served to provide further focus on this production requirement if the Company is to take full advantage of the large scale emerging market opportunity. In addition, Exide received a recently announced Department of Energy funding that will include Axion’s PbC Technology™. This $34.3 million award to “Exide Technology with Axion Power International”, that partially funds increased AGM production capacity at Exide, places a production burden on the Company. While it enhances our opportunity to more quickly reach our long term goal of selling PbC® electrodes to lead acid battery manufacturers for their AGM products, it strains our projected production equipment ramp up. Our second strategic partner, East Penn Manufacturing, also received a $33.1 million award for production of a battery product containing carbon. Although this opportunity is smaller than the one provided from the Exide funding, it would further tax our existing production capabilities.
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 research and development (“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. The new operating entity now conducts research and development manufacturing activities and also manufactures lead-acid battery product for sale to distributors and end user customers.
At September 30, 2009, we have incurred cumulative net losses since inception of approximately $66.0 million applicable to the common shareholders. This includes approximately $17.5 million in accrued preferred stock dividends and beneficial conversion feature charges, $7.1 million in expenses from derivative revaluations and $2.2 million in interest of which $1.8 million was settled through non cash transactions. We had approximately $3.1 million in current assets and $2.8 million in current liabilities at September 30, 2009, which results in a working capital surplus of approximately $0.3 million. Our current burn rate as of September 30, 2009 is approximately $0.6 million per month.
Key Performance Indicators
As a Development Stage Company, with operational focus on the development and resultant commercialization of our PbC® electrodes and batteries, the usual financial measures are not particularly relevant or helpful in the assessment of our 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 will require additional government grants, debt or equity funding to maintain operations and fund R&D beyond November 30, 2009.
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 moving toward that goal, 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 processes to manufacture our PbC® negative electrodes and batteries in commercial quantities. While we have assembled an engineering team that we believe can assist us in accomplishing 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, there is no assurance of profits or whether those profits will be sufficient to sustain us as we continue to develop our new technology.
Recent Financing Activities
On July 22, 2009, the Pennsylvania Department of Community and Economic Development approved Axion’s application for a loan from the Machinery and Equipment Loan Fund (MELF) in the maximum amount of $791,055. The proceeds of the loan will be used to defray part of the cost of equipment purchased for use at the Company’s facility on Green Ridge Road. The loan will bear interest at the rate of 3% interest per annum and will be payable in equal monthly installments of principal and interest over a period of seven years. The Company is required to create and/or retain the number of full-time equivalent jobs specified in the loan application within three (3) years after the date of disbursement of MELF loan proceeds. The MELF loan initial proceeds in the amount of $776,244 was received by the Company on September 14, 2009. The first installment payment of the loan representing principal and interest in the amount of $10,257 was paid November 1, 2009.
Bridge Loan Financing: In August of 2009 we structured short term secured bridge loan arrangements with certain of our directors and significant investors, The “Bridge Loan”, secured by all our intellectual property, received funding of $800,000 through September 30, 2009.
The Secured Bridge Loan has an original maturity date of December 31, 2009; a loan origination fee equal to 8% of the original loan; 3,405 warrants upon occurrence of the loan issuable for each $100,000 invested and exercisable at $2.00 until August 12, 2014. Anti-dilution provisions apply to the warrants. The Holders of these Notes shall have the right to convert the Note together with interest, into any security sold by the Company in an institutional offering. Upon repayment of this Note, all conversion rights shall terminate forthwith.
Grant Activities
On October 6, 2008, we received notice that we were 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, we presented our technology to branches of the Armed Forces. In February of 2007, after receiving a letter of support from the Office of Naval Research, we submitted a proposal to the Department of Defense. The proposal to further study the applicability of our 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 we received formal notice on October 6, 2008. The potential three year $5,000,000 grant has an initial year funding of $1,200,000 and is expected to begin in calendar year 2009. Under the grant program, we the Navy and Marine Corps will study the feasibility of utilizing our 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, we received two 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 two grants total approximately $380,000 and will help support research into two key areas. 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. The second grant seeks simply to characterize our 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 already underway and will continue for a period of 14 months. Grant proceeds of $302,000 were received in the third quarter of 2009 and recorded as a reduction against R&D expense.
On February 9, 2009, we received notice that we are the recipient a grant from the Pennsylvania Alternative Fuels Incentive Grant program. The $800,000 initial grant, which was announced by Governor Edward Rendell on January 29, 2009, 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 our proprietary PbC™ battery technologies provide 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.
On August 5, 2009, the United States Department of Energy (DOE) announced that “Exide Technology with Axion Power International” was awarded a $34.3 million grant for the production of advanced lead-acid batteries using lead-carbon electrodes for micro and mild hybrid applications under a program to Accelerate the Manufacturing and Deployment of the Next Generation of U.S. Batteries and Electric Vehicles. At the time of filing of this Quarterly Report on Form 10-Q, it is still not determined what portion, if any, of this grant will be awarded to or indirectly made available for the benefit of Axion.
A summary of awarded grants is listed as follows:
DOD Office of Naval Research | | $ | 1,200,000 | |
ALABC | | | 380,000 | |
PA Alternative Fuels Incentive Grant Program | | | 800,000 | |
| | $ | 2,380,000 | |
Contract Activities
Exide Technologies
In April of 2009, the Company entered into a long term supply agreement with Exide Technologies. Under that agreement, Axion will provide batteries and PbC® electrodes to Exide for testing and resale to their customers. Markets that the Company has targeted, both individually and in partnership with Exide through this agreement, include the European market for Micro-Hybrid and Mild-Hybrid vehicles. The hybrid vehicle market opportunity in Europe is driven by legislation passed April 23, 2009 by the European Union. This legislation, Regulation (EC) No 443/2009, requires car manufacturers to reduce CO2 emissions from the current level of 160 grams per/km, to a level of 120 grams per/km. Beginning in 2012, 65% of the manufacturer’s registered new passenger cars will be taken into account for purposes of determining each manufacturer’s average specific emissions of CO2. By January 1, 2015, 100% of registered new passenger cars will be taken into account. Excess emissions premiums will be assessed beginning in 2015. This premium is to be assessed on the entire fleet of new passenger cars registered during that year. (e.g. in 2015, X car manufacturer sells 1M registered passenger cars and has fleet average CO2 emissions that exceeds its average specific emissions of CO2 by 5 grams per/km will be assessed a premium of 235M Euros, or 235 Euros per registered new passenger car). Of the 15 million or more hybrid cars manufactured for the European market beginning in 2013, (as forecasted in both the Deutsche Bank and Valero reports) up to 70% are projected to be micro-hybrid. The PbC Battery provides an inexpensive solution for the Micro-Hybrid and Mild-Hybrid markets. Our current levels of production are inadequate for this market, so additional capacity must be put in place. In order to fund that added capacity, we will be required to secure additional funding.
According to the terms of the agreement, three consecutive phased purchase and test periods will commence immediately, with Axion supplying an escalating number of batteries to Exide on a monthly basis. The first two phases will span 18 months and if successful the parties will move to the final phase of the agreement. The quantity of the products supplied will need to achieve certain defined milestones, commensurate with what the market potentials could be, over the final 2.5 year period of the agreement if exclusivity is to be maintained. Shipments delineated under the agreement would begin in Phase I, which began in September and is scheduled to last 10 months, and would ramp up at each phase point, assuming successful testing. Monthly shipments of product began in September 2009 and have continued through the end of the third quarter and into the fourth quarter under contract terms.
Results of Operations
Overview
The comparative data below presents our results of operations for the three and nine months ended September 30, 2009 and September 30, 2008, respectively. The provided percentages demonstrate the relative significance of the individual line items and also the relative changes from year to year.
| · | Our primary activity in our current development stage consists 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 employee compensation, legal, auditing and other costs associated with our SEC filings, selling and marketing costs, investor public relations, and legal costs associated with litigation. |
| · | Research & development expenses are incurred to design, develop, and test advanced batteries and an energy storage product based on our patented lead carbon technology. 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. |
Statements of Operations
The following table shows the percentage relationship of the line items to the net loss applicable to the common shareholder.
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
Statements of Operations | | 2009 | | | % of net loss | | | 2008 | | | % of net loss | | | 2009 | | | % of net loss | | | 2008 | | | % of net loss | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 962,833 | | | | | | $ | 149,441 | | | | | | $ | 1,567,816 | | | | | | $ | 541,248 | | | | |
Cost of goods sold | | | 981,273 | | | | | | | 81,019 | | | | | | | 1,380,923 | | | | | | | 266,344 | | | | |
Gross profit (loss) | | | (18,440 | ) | | | 0.1 | % | | | 68,422 | | | | -3.1 | % | | | 186,893 | | | | -0.8 | % | | | 274,904 | | | | -3.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research & development | | | 869,892 | | | | 5.1 | % | | | 1,033,961 | | | | 47.3 | % | | | 3,327,676 | | | | 14.1 | % | | | 2,438,345 | | | | 29.3 | % |
Selling, general & administrative | | | 873,213 | | | | 5.1 | % | | | 993,479 | | | | 45.5 | % | | | 2,887,597 | | | | 12.3 | % | | | 4,172,675 | | | | 50.2 | % |
Interest expense - related party | | | 44,881 | | | | 0.3 | % | | | (2,500 | ) | | | -0.1 | % | | | 44,881 | | | | 0.2 | % | | | 1,175,370 | | | | 14.1 | % |
Impairment of assets | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % |
Derivative revaluation | | | 12,048,203 | | | | 70.2 | % | | | - | | | | 0.0 | % | | | 13,592,717 | | | | 57.8 | % | | | (2,844 | ) | | | 0.0 | % |
Interest & other income, net | | | (1,341 | ) | | | 0.0 | % | | | (42,961 | ) | | | -2.0 | % | | | (14,039 | ) | | | -0.1 | % | | | (34,524 | ) | | | -0.4 | % |
Net loss before income taxes | | | (13,853,288 | ) | | | 80.8 | % | | | (1,913,557 | ) | | | 87.6 | % | | | (19,651,939 | ) | | | 83.5 | % | | | (7,474,118 | ) | | | 89.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income Taxes | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % |
Deficit accumulated during development stage | | | (13,853,288 | ) | | | 80.8 | % | | | (1,913,557 | ) | | | 87.6 | % | | | (19,651,939 | ) | | | 83.5 | % | | | (7,474,118 | ) | | | 89.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less preferred stock dividends and beneficial conversion feature | | | (3,302,428 | ) | | | 19.2 | % | | | (270,898 | ) | | | 12.4 | % | | | (3,871,570 | ) | | | 16.5 | % | | | (843,230 | ) | | | 10.1 | % |
Net loss applicable to common shareholders | | $ | 17,155,716 | | | | 100.0 | % | | $ | (2,184,455 | ) | | | 100.0 | % | | | (23,523,509 | ) | | | 100.0 | % | | $ | (8,317,348 | ) | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted net loss per share | | $ | (0.64 | ) | | | | | | $ | (0.08 | ) | | | | | | $ | (0.89 | ) | | | | | | $ | (0.39 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | | | 26,676,678 | | | | | | | | 26,045,156 | | | | | | | | 26,508,643 | | | | | | | | 21,263,533 | | | | | |
Summary of Consolidated Results for period ending September 30, 2009 compared with September 30, 2008
Revenue
Revenues for the three and nine months ended September 30, 2009 were approximately $962,833 and $1,567,816, respectively, compared to revenues of approximately $149,441 and $541,248, respectively, for the corresponding periods in 2008. This represents a 544% and 190% increase, respectively, in revenue for the three and nine months ended September 30, 2009 over the corresponding periods in 2008 and derives from increased sales of traditional batteries to a large scale buyers group and sales to a large North American lead-acid battery manufacturing company. We had two customers that accounted for approximately 49% and 13% of revenue respectively for the three and nine months ended September 30, 2009 and one customer which accounted for approximately 11% of the revenue for the nine months ended September 30, 2008. As a Development Stage Company, with operational focus on the development and commercialization of our PbC® electrodes and batteries, revenues generated from current PbC sales remain insignificant when compared to total operations.
Cost of Goods Sold
Cost of goods sold represents costs for batteries sold to customers and include various raw materials with lead being the most significant. We also use components such as plastic battery cases and covers as well as separators and acid. We also incur manufacturing labor and overhead costs as well as costs for packaging and shipping. Cost of goods sold for the three and nine months ended September 30, 2009 was approximately $ 981,273 and $ 1,380,923, respectively, compared to cost of goods sold of approximately $ 81,019 and $ 266,344, respectively, for the same periods in 2008. This represents approximately a 1,111% and 418% increase, respectively, in cost of goods sold for the three and nine months ended September 30, 2009 and is consistent with the increase in sales volume of lower margin products. Cost of goods sold for the three months ended September 30, 2009 is also reflective of additional production costs incurred for new battery products and valuation adjustments to inventory carrying values of $73,600 and promotional sales discounts offered of $15,225.
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 three and nine months ended September 30, 2009 were approximately $ 869,892 and $ 3,327,676, respectively, compared to approximately $ 1,033,961 and $ 2,438,345, respectively, for the same periods in 2008, representing a 16% decrease and 36% increase, respectively, in spending, as compared to the same periods in 2008. The three month period costs are lower than the comparable period in 2008 due to the recognition of $302,000 in grant proceeds received in the third quarter of 2009 and recorded as a reduction against R&D expense. The year to date increase is due to increased costs associated with additional efforts incurred to design, develop and test advanced batteries and an energy storage product 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.
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. Selling, general and administrative costs for the three and nine months ended September 30, 2009 were approximately $ 873,213 and $ 2,887,597, respectively, compared to approximately $ 993,479 and $ 4,172,675, respectively, for the same periods in 2008. This represents a 12% and 31% decrease in spending over the same periods during 2008. In 2008, we experienced cost increases primarily due to substantial non-recurring legal, auditing, accounting and other costs associated with becoming current with our public filings, public relations, registration and litigation costs and also one-time employee costs with respect to restructuring of employment agreements.
Derivative revaluation
Losses from derivative revaluation for the three and nine months ended September 30, 2009 were $12,048,203 and $13,592,717 compared to $0 and $(2,844) for the same periods in 2008, which represents an increase in the fair value of derivative liabilities resulting from the adoption of ASC 815-40, on January 1, 2009. The loss for the three and nine month periods includes an increase in the derivative liability in the amount of $7,211,049 resulting from the reset in the exercise price of the warrants previously issued to Quercus from $2.60 to $0.75 per share.
Interest Expense
Interest expense during the three and nine months ended September 30, 2009 were $ 44,881 and $44,881, respectively, as compared to approximately $(2,500) and $1,175,370 during the three and nine months ended September 30, 2008. This decrease was due to the satisfaction of indebtedness in 2008.
Liquidity and Capital Resources
The condensed consolidated financial statements have been prepared assuming that we will continue as a going concern; however, at our current and planned rate of spending, our cash and cash equivalents of $0.8 million, as of September 30, 2009 are not sufficient to allow us to continue operations without additional funding from grant or financing sources. Especially given the current economic climate, no assurance can be given that we will be successful in arranging additional financing needed to continue the execution of our business plan, which includes the development of new products. Failure to obtain such financing may require management to substantially curtail operations, which may result in a material adverse effect on our financial position and results of operations. Since January 2009, our primary source of financing has been from working capital carried over from 2008, which predominantly arose from the 2008 Quercus Trust investments. $1.5 million in proceeds from secured loans received during the third quarter of 2009 were required to help sustain operations through a planned capital raise. These factors raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might occur if we are unable to continue as a going concern.
We may also receive funds from recent grant submissions both with the federal government, through the “Stimulus Package” programs, and the Commonwealth of Pennsylvania. While these latter two events do not currently have a direct effect on liquidity, they do provide the basis for potential liquidity sources in 2010.
On September 30, 2009, our cash position was $0.8 million, and we had working capital of $0.3 million.
Cash, Cash Equivalents and Working Capital
At September 30, 2009, we had approximately $0.8 million of cash and cash equivalents compared to approximately $3.1 million at December 31, 2008. At September 30, 2009 working capital was approximately $0.3 million compared to working capital of approximately $5.4 million at December 31, 2008. Cash equivalents consist of short-term liquid investments with original maturities of no more than three months and are readily convertible into cash and included the following at September 30, 2009:
| | Coupon / Yield | | Maturity | | September 30, 2009 | |
Fidelity Institutional Money Market | | | 0.42% | | n/a | | $ | 162,260 | |
Cash Flows from Operating Activities
Net cash used in operations for the nine months ended September 30, 2009 was approximately $(5.0) million. Net cash used in operations for this same period in 2008 was approximately $(6.6) million. This is a reduction in cash used of 24%. The use of cash in operations is consistent with the development stage of this business from an operations standpoint.
Cash Flows from Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2009 was approximately $1.2 million compared to net cash used by investing activities of approximately $(1.1) million for the same period in 2008. Activities in 2009 include cash provided by the maturity of approximately $2.2 million of short term investments deposited into cash equivalents net of approximately $1.0 million used to purchase equipment for both production and research and development and notes receivable.
Cash Flows from Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2009 was approximately $1.5, compared to approximately $15.0 million of cash provided during the same period ended September 30, 2008. Financing activities for the nine months ended September 30, 2009 consisted of $0.7 in cash on notes received from accredited investors and $0.8 in MELF financing from the Commonwealth of Pennsylvania. Financing activities for the nine months ended September 30, 2008 consisted of $16.5 million from the issuance of common stock less repayment of $1.5 million for retirement of the 2007 bridge loans.
Significant Financing Arrangements
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.
On June 30, 2008, we 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 we had previously entered into. Prior to June 30, certain of the bridge lenders had converted $335,000 into 158,659 shares of common stock and warrants to purchase 237,488 shares of common stock at an exercise price of $2.60 per share. On June 30, 2008, one of our 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.
On September 22, 2009, we entered into an Amendment to Warrants and Securities Purchase Agreement with Quercus Trust, amending the January 14, 2008 Warrant and Securities Purchase Agreement. The material terms of the Amendment are as follows:
1. The exercise for warrants previously issued to Quercus by us is reset from $2.60 per share to $0.75 per share.
2. Any previously accrued liquidated damages under the Securities Purchase Agreement to the date of the Amendment are waived.
3. Axion and Quercus have agreed to elect three new directors on behalf of Quercus, each to serve a three year term.
4. Quercus has agreed to invest an additional $2,000,000 in connection with a minimum $10 million capital raise by us upon certain terms and conditions as set forth in the Amendment.
5. Certain deadlines in the Agreement for filing of post effective amendments are extended from 7 business days and 30 calendar days are extended to 15 business days and 60 calendar days, respectively.
The Amendment provides us with a further financing commitment by Quercus as well as provision of the benefit of the experience and expertise of the three named individuals as new directors to us. The Amendment resolves certain milestones set forth in the Agreement which were not fully met due to the noncompletion of the Production Contract which was entered into by us on June 27, 2008.
Critical Accounting Policies, Judgments and Estimates
The “Management’s Discussion and Analysis of Financial Condition or Plan of Operation” section of this report discusses our financial statements, which have been prepared in accordance with 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 condensed 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.
Derivative Financial Instruments: The Company’s objectives in using derivative financial instruments are to obtain the lowest cash cost-source of funds. Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC topic 815-40 "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". The estimated fair value of the derivative liabilities is calculated using the Black-Scholes-Merton method where applicable and such estimates are revalued at each balance sheet date, with changes in value recorded as other income or expense in the consolidated statement of operations. As a result of the Company’s adoption of ASC topic 815-40, effective January 1, 2009 some of the Company’s warrants are now accounted for as derivatives.
Revenue Recognition: The Company records sales when revenue is earned. Shipping terms are generally FOB shipping point and revenue is recognized when product is shipped to the customer. In limited cases, if terms are FOB destination or contingent upon collection by a prime contractor, then in these cases, revenue is recognized when the product is delivered to the customer’s delivery site or the conditions for collection have been fulfilled. The Company records sales net of discounts and estimated customer allowances and returns. The Company recognizes revenue when there is persuasive evidence of an agreement, delivery has occurred or services have been rendered, the sales price to the buyer is fixed or determinable, and collectability is reasonably assured.
Proceeds from Grant: The Company records proceeds from grants over the period necessary to match them with the related costs for which such grants are to compensate. Grants for assets are recorded as deferred revenue and amortized over the expected life of such asset as a reduction of depreciation expense. Grants relating to income that are deemed significant in amount are recorded as other income, whereas grants that are deemed not significant are recorded as a reduction against the related expense. The Company recognizes proceeds from grants only when (a) there is reasonable assurance that the Company has complied with all conditions attached to the grant, and (b) the grant proceeds will be received.
Stock-Based Compensation: Prior to January 1, 2006, we accounted for stock option awards in accordance with the recognition and measurement provisions of former authoritative literature APB 25 and related interpretations, as permitted by former authoritative literature Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation,”. Under APB 25, compensation cost for stock options issued to employees was measured as the excess, if any, of the fair value of our 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, we reported pro-forma disclosures presenting results and earnings as if we had used the fair value recognition provisions of SFAS 123 in the Notes to the Condensed Consolidated Financial Statements.
Effective January 1, 2006, we adopted the provisions of ASC topic 718 using the modified prospective transition method. Stock-based compensation related to non-employees is recognized as compensation expense in the accompanying condensed 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. Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50 “Equity-Based Payments to Non-Employees” (formerly 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.
Research and Development: R&D costs are recorded in accordance with FASB ASC topic 730, “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 us, (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.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by our Annual Report on Form 10-K for the year ended 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 September 30, 2009, 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’s assessment of internal control over financial reporting is governed by 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 September 30, 2009:
· | Performance appraisals for the managerial and administrative staff have not been performed consistently on an annual basis and, as a result, these employees may not have a clear understanding of their responsibilities or performance compared to these responsibilities. |
· | As a small company with limited personnel, we do not maintain sufficient segregation of duties as evidenced by the following: |
| · | Our Sales team has the ability and responsibility for entering sales orders into our accounting system. In addition, a sales member can ship very small orders. Segregation of duties should be established, where practical, for all sales in regards to shipping to end customers. |
| · | Some of our employees have the ability to purchase and receive small dollar goods. There needs to be implemented a written policy that sets forth the formal procedures for purchasing of these small dollar goods. |
| · | Our accounting staff employees with vendor accounts payable responsibilities also have access to vendor maintenance controls. Access to vendor maintenance controls should be kept separate from the accounts payable functions. |
· | 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 not implemented the formal documented guidelines for authorizations for entering into agreements (i.e. purchase orders, non-disclosure agreements, sales and other contracts) |
Because of the material weaknesses noted above, management has concluded that we did not maintain effective internal control over financial reporting as of September 30, 2009, based on Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by COSO.
Remediation of Material Weaknesses in Internal Control over Financial Reporting and Actual Changes in Internal Control over Financial Reporting During the Last Fiscal Quarter That Have Materially Affected or Are Reasonably Likely to Materially Affect, Internal Control Over Financial Reporting
We are in the process of implementing remediation efforts with respect to eliminating material weaknesses noted above as follows and have made the following actual changes to internal controls during the quarter ended September 30, 2009 as noted below (and other than as noted below we have made no changes in internal controls over financial reporting for the period ended September 30, 2009):
· | Formal job descriptions have been documented for substantially all of our employees. We expect that any new positions that arise as a result of increased PbC manufacturing will be documented coincident with assigning employees to those positions. |
· | We have implemented our new Enterprise Resource Planning (ERP) system and accounting system that restricts access and adds needed layers of approvals and internal audit processes for our primary accounting activities.. |
· | We are improving our financial reporting controls by: |
| o | All journal entries are reviewed and approved prior to entry into the general ledger. A formal written policy with regard to this process has been implemented during the quarter ending September 30, 2009. |
| o | We have documented all key financial reporting processes prior to filing our 10-Q for the quarter ending September 30, 2009. |
| o | As part of our assessing our general information technology processes and controls, we have documented document controls and retention procedures during the quarter ending September 30, 2009. |
· | As part of our implementation of our ERP system we have documented all key inventory control processes. We have segregated inventory purchasing and receiving functions. We have established written procedures for adding and modifying manufacture bills of materials. We have also established written procedures to monitor and evaluate our inventory measurement and valuation methods and processes, including ongoing inventory cycle counts as deemed necessary and comparisons and reconciliations of physical inventory quantities as reported in our ERP system with quantities reported in our materials quality control system. |
· | We have documented key business processes and procedures that are critical to manage and operate our business on a daily basis. We expect the implementation of the majority of these processes to be completed prior to the filing of our 10-K for the year ending December 31, 2009. |
· | We have documented authorization levels stating criteria as to approvals of business transactions including formal documented guidelines for creating properly authorized levels for entering into agreements (i.e. purchase orders, sales and other contracts). We have also segregated the functions of initiating wire transfers. |
· | We implemented project and contract accounting processes during the quarter ending September 30, 2009 as a means to accumulate and increase controls over costs associated with internal projects as well as costs incurred that are subject to reimbursement for certain grant projects. |
· | Internal control weaknesses that may arise as a result of lack of segregation of duties are mitigated by other business and financial process controls. |
· | A formal policy has been established to mitigate the risk of inadequate procedures to ensure appropriate application of new accounting pronouncements. |
Other than as described above, there have not been any other changes that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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.
Taylor Litigation and Bankruptcy Court 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 orders entered on February 11, 2008 and June 9, 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. On April 14, 2009, the Ontario Superior Court entered an order dismissing us from the Taylor 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).
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 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 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. At a hearing on the Taylors’ second motion to vacate the February 11, 2008 summary judgment order on April 23, 2009, the Bankruptcy Court denied the Taylors’ motion in its entirety. The order denying the Taylors’ second motion to vacate and judgment were entered on November 10, 2009.
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 as creditors and shareholders 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 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 has also been 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, as subsequently confirmed in the judgment entered on November 10, 2009, the Taylor Group has no interest in or rights to the technology. By virtue of the April 14, 2009 order from the Ontario Superior Court, the Taylor Litigation has been dismissed against us.
Contingent Shares
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.
Risks related to our business
We have incurred net losses from inception and do not expect to introduce our first commercial PbC® products for 3 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 nine months ended September 30, 2009, we had a net loss applicable to common shareholders of approximately $23.7 million and cumulative losses from inception (September 18, 2003) to September 30, 2009 of $66.0 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 3 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.
We are experiencing a significant cash shortage and without sufficient financing or increase in revenues we may be required to curtail operations, and this demonstrates uncertainty as to our ability to continue as a going concern.
As of September 30, 2009, our cash and cash equivalents amounted to $ 0.8 million. Without any substantial revenues, we have been dependent upon more than $18.5 million in net cash provided by financing activities, since January 1, 2007 to remain in business. If we do not continue to raise capital and increase revenue until we generate sufficient gross margin from revenue to cover our operating expenses, we will be required to discontinue or further substantially modify our business. These factors raise substantial doubt about our ability to continue as a going concern.
We are in breach of certain registration rights.
As of September 30, 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 1,381,925 shares of common stock that may be issued upon conversion of our 8% Cumulative Convertible Senior Preferred Stock, 9,495,998 shares of common stock that may be issued upon conversion of our Series A Convertible Preferred Stock, and an additional 1,881,905 shares of common stock issuable upon the exercise of certain of our outstanding options, and an additional 14,156,012 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 us 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. It should be noted that as of September 30, 2009, 702,152 shares of the Senior Preferred Stock and 5,655,294 shares of the Series A Convertible Preferred Stock are eligible upon conversion to be issued without a restrictive legend under Rule 144; therefore; registering these shares provides no additional benefit to the holders thereof.
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 nine months ended September 30, 2009, we spent $139,736 on these expenses, however, despite the delay for smaller companies to comply with 404(b) provision to fiscal years ending on or after June 15, 2010,we do expect Commission rules and regulations, including the prospective requirements of auditor attestation under Section 404 of the Sarbanes Oxley Act of 2002, will continue to increase during the rest of 2009 and to make it more difficult and expensive for us to attract and retain qualified directors and executive officers.
We cannot begin commercial production of our PbC™ technology for 3months.
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 3 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.
Risks relating to our common stock
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 26,743,172 shares of common stock outstanding at September 30, 2009, and (a) our Series A Convertible Preferred Stock is presently convertible into 9,495,998 shares of common stock, (b) our shares of Cumulative Convertible Senior Preferred Stock are presently convertible into 1,381,925 shares of common stock, (c) we have warrants outstanding that, if exercised, would generate proceeds of $22,669,782 and cause us to issue up to an additional 14,156,012 shares of common stock and (d) we have options outstanding to purchase common stock that, if exercised, would generate proceeds of $5,553,148 and result in the issuance of an additional 1,881,905 shares of common stock.
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 October 30, 2009, the latest practicable date, was $1.68 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 complete list of risk factors is set forth in our Form 10-K for the year ended December 31, 2008 for full consideration of the risk factors involved in investing in our stock.
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 |
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AXION POWER INTERNATIONAL, INC.
/s/ Thomas Granville |
Thomas Granville, |
Principal Executive Officer |
Dated: November 16, 2009 |
|
/s/ Donald T. Hillier |
Donald T. Hillier, Principal Financial Officer and |
Principal Accounting Officer |
Dated: November 16, 2009 |