Attached files
file | filename |
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EX-32.1 - Axion Power International, Inc. | v165104_ex32-1.htm |
EX-31.1 - Axion Power International, Inc. | v165104_ex31-1.htm |
EX-32.2 - Axion Power International, Inc. | v165104_ex32-2.htm |
EX-31.2 - Axion Power International, Inc. | v165104_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Amendment
No. 1 to 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 June 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 x 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 Not
applicable.
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 x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
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 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 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
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 or additional
financing, which may be difficult to generate given the current economic
environment;
|
●
|
we
may be unable to enforce or defend our ownership of proprietary
technology;
|
●
|
we
have never manufactured carbon electrode assemblies in large commercial
quantities;
|
●
|
we
may be unable to develop a cost effective alternative to conventional lead
electrodes;
|
●
|
our
technology may be rendered obsolete as a result of technological changes
in the battery industry or other storage
technologies;
|
●
|
we
may not be able to establish reliable supply channels for the raw
materials and components that will be used in our commercial proprietary
lead/carbon (“PbC®”) batteries;
|
●
|
other
manufacturers may not be able to modify established lead-acid battery
manufacturing processes to replicate our processes to accommodate
differences between their products and our commercial PbC™ battery
technology;
|
●
|
we
will have limited market opportunities based on our anticipated
manufacturing capacity;
|
●
|
our
shareholders may suffer significant dilution in the event that our
outstanding convertible securities, warrants and options are ever
exercised;
|
●
|
we
depend on key personnel and our business may be severely disrupted if we
lose the services of our key executives and
employees;
|
●
|
our
revenues may suffer if general economic conditions worsen, remain in
the current adverse state and/or do not improve in a timely manner;
and
|
●
|
we
are subject to stringent and evolving environmental
regulation.
|
Explanatory
Note
Restatement
of Historical Financial Statements
Amendment
No. 1 to Form 10-Q As a result of Securities and Exchange Commission comments,
we have reissued the financial statements to restate the following:
The
Company has recalculated its derivative liability arising from the impact of
"down round protection" in certain of its financial instruments based upon
the impact of FASB ASC 815-40-15-5 (formerly EITF 07-05), which became effective
as of January 1, 2009. Based upon this recalculation, the Company has
recorded an additional derivative liability on its balance sheet and a resulting
change in income (loss) on its condensed consolidated statement of
operations. This has increased the deficit accumulated during
the development stage and the net loss attributable to common shareholders by
$1,544,154 to $(5,798,651) and $(6,367,793) for the six months ended June 30,
2009.
The above
restatements have no effect on total stockholders’ equity or net cash
used by operating activities for the quarter ended June 30,
2009.
TABLE
OF CONTENTS
PART I - FINANCIAL
INFORMATION
|
3
|
||
ITEM 1.
|
FINANCIAL STATEMENTS
|
3
|
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
17
|
|
ITEM 4T.
|
CONTROLS AND PROCEDURES
|
26
|
|
PART II - OTHER INFORMATION
|
29
|
||
ITEM 1.
|
LEGAL PROCEEDINGS.
|
29
|
|
ITEM 1A.
|
RISK FACTORS
|
31
|
|
ITEM 6.
|
EXHIBITS.
|
33
|
2
ITEM 1. FINANCIAL STATEMENTS
AXION
POWER INTERNATIONAL, INC
|
||||
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||
(A
Development Stage Company)
|
June
30, 2009
|
December
31, 2008
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 950,013 | $ | 3,124,168 | ||||
Escrow
deposits for foreign patent applications
|
68,160 | - | ||||||
Short-term
investments
|
- | 2,193,920 | ||||||
Accounts
receivable
|
253,906 | 128,035 | ||||||
Other
receivables
|
13,037 | 64,456 | ||||||
Prepaid
expenses
|
35,133 | 78,989 | ||||||
Inventory
|
1,725,542 | 1,269,515 | ||||||
Total
current assets
|
3,045,791 | 6,859,083 | ||||||
Property
& equipment, net
|
3,625,654 | 3,274,183 | ||||||
Other
receivables, non-current
|
50,404 | 28,388 | ||||||
TOTAL
ASSETS
|
$ | 6,721,849 | $ | 10,161,654 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 1,700,592 | $ | 1,324,287 | ||||
Other
current liabilities
|
174,646 | 162,580 | ||||||
Total
current liabilities
|
1,875,238 | 1,486,867 | ||||||
Deferred
revenue
|
709,068 | 751,096 | ||||||
Derivative
liabilities
|
3,995,056 | - | ||||||
Total
liabilities
|
6,579,362 | 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)
|
1,731,710 | 1,656,735 | ||||||
Series
A preferred – 2,000,000 shares designated
718,997
shares issued and outstanding (718,997 in 2008)
|
9,934,525 | 9,440,359 | ||||||
Common
stock-100,000,000 shares authorized $0.0001 par value
|
||||||||
26,453,437
issued & outstanding (26,417,437 in 2008)
|
2,645 | 2,641 | ||||||
Additional
paid in capital
|
37,327,491 | 46,184,287 | ||||||
Deficit
accumulated during development stage
|
(48,601,680 | ) | (49,111,062 | ) | ||||
Cumulative
foreign currency translation adjustment
|
(252,204 | ) | (249,269 | ) | ||||
Total
Stockholders' Equity
|
142,487 | 7,923,691 | ||||||
TOTAL
LIABILITIES & STOCKHOLDERS' EQUITY
|
$ | 6,721,849 | $ | 10,161,654 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
AXION
POWER INTERNATIONAL, INC
|
||||||||||||||||||||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||||||||||||||
(A
Development Stage Company)
|
||||||||||||||||||||||||||
UNAUDITED
|
Three
Months Ended June
30, |
Six
Months Ended June
30, |
Inception (9/18/2003) to |
||||||||||||||||||
2009
Restated
|
2008
|
2009
Restated
|
2008
|
June
30, 2009
Restated
|
||||||||||||||||
Revenues
|
$ | 277,890 | $ | 176,080 | $ | 604,983 | $ | 391,807 | $ | 2,093,830 | ||||||||||
Cost
of goods sold
|
163,963 | 80,235 | 399,650 | 185,325 | 1,609,912 | |||||||||||||||
Gross
profit
|
113,927 | 95,845 | 205,333 | 206,482 | 483,918 | |||||||||||||||
Expenses
|
||||||||||||||||||||
Research
& development
|
1,223,817 | 733,221 | 2,457,784 | 1,404,384 | 16,409,454 | |||||||||||||||
Selling,
general & administrative
|
1,132,841 | 1,466,031 | 2,014,384 | 3,179,196 | 20,029,765 | |||||||||||||||
Interest
expense - related party
|
- | 758,197 | - | 1,177,870 | 2,151,923 | |||||||||||||||
Impairment
of assets
|
- | - | - | - | 1,391,485 | |||||||||||||||
Derivative
revaluation
|
2,723,203 | - | 1,544,514 | (2,844 | ) | (4,970,154 | ) | |||||||||||||
Mega
C Trust Share Augmentation (Return)
|
- | - | - | - | 400,000 | |||||||||||||||
Interest
& other income, net
|
(4,098 | ) | 19,765 | (12,698 | ) | 8,437 | (546,850 | ) | ||||||||||||
Net
loss before income taxes
|
(4,961,836 | ) | (2,881,369 | ) | (5,798,651 | ) | (5,560,561 | ) | (34,381,705 | ) | ||||||||||
Income
Taxes
|
- | - | - | - | 4,300 | |||||||||||||||
Deficit
accumulated during
development
stage
|
(4,961,836 | ) | (2,881,369 | ) | (5,798,651 | ) | (5,560,561 | ) | (34,386,005 | ) | ||||||||||
Less
preferred stock dividends
and
beneficial conversion feature
|
(287,992 | ) | (284,917 | ) | (569,142 | ) | (572,332 | ) | (14,215,675 | ) | ||||||||||
Net
loss applicable to common shareholders
|
$ | (5,249,828 | ) | $ | (3,166,286 | ) | $ | (6,367,793 | ) | $ | (6,132,893 | ) | $ | (48,601,680 | ) | |||||
Basic
and diluted net loss per share
|
$ | (0.20 | ) | $ | (0.16 | ) | $ | (0.24 | ) | $ | (0.32 | ) | $ | (2.92 | ) | |||||
Weighted
average common shares outstanding
|
26,427,019 | 20,290,404 | 26,423,233 | 18,990,487 | 16,623,540 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
AXION
POWER INTERNATIONAL, INC
|
||||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||
(A
Development Stage Company)
|
||||
UNAUDITED
|
Six
Months Ended
|
Inception
|
|||||||||||
June
30,
|
(9/18/2003) to
|
|||||||||||
2009
Restated
|
2008
|
6/30/2009
Restated
|
||||||||||
Cash
Flows from Operating Activities:
|
||||||||||||
Deficit
accumulated during development stage
|
$ | (5,798,651 | )) | $ | (5,560,561 | ) | $ | (34,386,005 | ) | |||
Adjustments
required to reconcile deficit
|
||||||||||||
accumulated
during development stage to cash flows
|
||||||||||||
used
by operating activities
|
||||||||||||
Depreciation
|
196,685 | 83,671 | 739,971 | |||||||||
Non-cash
interest expense
|
- | 906,096 | 1,830,583 | |||||||||
Impairment
of assets
|
- | - | 1,391,486 | |||||||||
Derivative
revaluations
|
1,544,514 | (2,844 | ) | (4,970,154 | ) | |||||||
Mega
C Trust Share Augmentation (Return)
|
- | - | 400,000 | |||||||||
Share
based compensation expense
|
470,926 | 410,834 | 4,821,425 | |||||||||
Changes
in Operating Assets & Liabilities
|
||||||||||||
Accounts
receivable
|
(125,871 | ) | (16,652 | ) | (260,776 | ) | ||||||
Other
receivables
|
51,419 | 269,083 | 8,923 | |||||||||
Prepaid
expenses
|
43,856 | (5,560 | ) | (32,545 | ) | |||||||
Inventory
|
(456,027 | ) | (534,065 | ) | (1,725,541 | ) | ||||||
Accounts
payable
|
376,305 | 368,262 | 3,355,236 | |||||||||
Other
current liabilities
|
12,066 | 424,451 | 195,778 | |||||||||
Liability
to issue equity instruments
|
- | - | 178,419 | |||||||||
Deferred
revenue and other
|
(42,028 | ) | (2,370 | ) | 796,547 | |||||||
Net
cash used by operating activities
|
(3,726,806 | ) | (3,659,655 | ) | (27,656,652 | ) | ||||||
Cash
Flows from Investing Activities
|
||||||||||||
Escrow
deposits for foreign patent applications
|
(68,160 | ) | - | (68,160 | ) | |||||||
Short
term investments
|
2,193,920 | - | - | |||||||||
Long
term notes, net
|
(22,016 | ) | - | (1,267,420 | ) | |||||||
Purchase
of property & equipment
|
(548,158 | ) | (661,691 | ) | (4,362,338 | ) | ||||||
Investment
in intangible assets
|
- | - | (167,888 | ) | ||||||||
Net
cash provided (used) by investing activities
|
1,555,586 | (661,691 | ) | (5,865,806 | ) | |||||||
Cash
Flow from Financing Activities
|
||||||||||||
Proceeds
from related party debt, net
|
- | (248,457 | ) | 5,179,771 | ||||||||
Proceeds
from sale of common stock; net of costs
|
- | 16,521,000 | 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
|
- | 16,272,543 | 34,493,357 | |||||||||
Net
Change in Cash and Cash Equivalents
|
(2,171,220 | ) | 11,951,197 | 970,899 | ||||||||
Effect
of Exchange Rate on Cash
|
(2,935 | ) | (2,316 | ) | (20,886 | ) | ||||||
Cash
and Cash Equivalents - Beginning
|
3,124,168 | 671,244 | - | |||||||||
Cash
and Cash Equivalents - Ending
|
$ | 950,013 | $ | 12,620,125 | $ | 950,013 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
5
AXION
POWER INTERNATIONAL, INC.
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Basis
of Presentation
|
In the
opinion of management, the information furnished in this Form Amendment No. 1 to
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 six month periods ended June 30, 2009 and 2008, as well as the
cumulative period from inception through June 30, 2009. In addition to normal
recurring adjustments, the Company restated its financial statements, in the
notes captioned “Restatement of Financial Statements for Quarter Ended June 30,
2009”. The condensed consolidated balance sheet as of June 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.
|
Restatement
of Financial Statements for Quarter Ended June 30,
2009
|
Reported
|
Adjustments
|
Reference
|
Restated
|
|||||||||||||
ASSETS
|
||||||||||||||||
Current
assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 950,013 | $ | - | $ | 950,013 | ||||||||||
Escrow
deposits for foreign patent applications
|
68,160 | - | 68,160 | |||||||||||||
Accounts
receivable
|
253,906 | - | 253,906 | |||||||||||||
Other
receivables
|
13,037 | - | 13,037 | |||||||||||||
Prepaid
expenses
|
35,133 | - | 35,133 | |||||||||||||
Inventory
|
1,725,542 | - | 1,725,542 | |||||||||||||
Total
current assets
|
3,045,791 | - | 3,045,791 | |||||||||||||
Property
& equipment, net
|
3,625,654 | - | 3,625,654 | |||||||||||||
Other
receivables, non-current
|
50,404 | - | 50,404 | |||||||||||||
TOTAL
ASSETS
|
$ | 6,721,849 | $ | - | $ | 6,721,849 | ||||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||||||
Current
liabilities:
|
||||||||||||||||
Accounts
payable
|
$ | 1,700,592 | $ | - | $ | 1,700,592 | ||||||||||
Other
current liabilities
|
174,646 | - | 174,646 | |||||||||||||
Total
current liabilities
|
1,875,238 | - | 1,875,238 | |||||||||||||
Deferred
revenue
|
709,068 | - | 709,068 | |||||||||||||
Derivative
Liabilities
|
- | 3,995,056 |
1
|
3,995,056 | ||||||||||||
Total
liabilities
|
2,584,306 | 3,995,056 | 6,579,362 | |||||||||||||
Stockholders'
Equity:
|
||||||||||||||||
Convertible
preferred stock
|
||||||||||||||||
Senior
preferred
|
1,731,710 | - | 1,731,710 | |||||||||||||
Series
A preferred
|
9,934,525 | - | 9,934,525 | |||||||||||||
Common
stock
|
2,645 | - | 2,645 | |||||||||||||
Additional
paid in capital
|
46,655,209 | (9,327,718 | ) |
2
|
37,327,491 | |||||||||||
Deficit
accumulated during development stage
|
(53,934,342 | ) | 5,332,662 |
3
|
(48,601,680 | ) | ||||||||||
Cumulative
foreign currency translation adjustment
|
(252,204 | ) | - | (252,204 | ) | |||||||||||
Total
Stockholders' Equity
|
4,137,543 | (3,995,056 | ) | 142,487 | ||||||||||||
TOTAL
LIABILITIES & STOCKHOLDERS' EQUITY
|
$ | 6,721,849 | $ | - | $ | 6,721,849 |
6
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
UNAUDITED
|
Six
Months Ended June 30, 2009
|
|||||||||||||||
Restated
|
Adjustments
|
Reference
|
Restated
|
|||||||||||||
Revenues
|
$ | 604,983 | $ | - | $ | 604,983 | ||||||||||
Cost
of goods sold
|
399,650 | - | 399,650 | |||||||||||||
Gross
profit
|
205,333 | - | 205,333 | |||||||||||||
Expenses
|
||||||||||||||||
Research
& development
|
2,457,784 | - | 2,457,784 | |||||||||||||
Selling,
general & administrative
|
2,014,384 | - | 2,014,384 | |||||||||||||
Derivative
revaluation
|
- | 1,544,514 |
4
|
1,544,514 | ||||||||||||
Interest
& other income, net
|
(12,698 | ) | - | (12,698 | ) | |||||||||||
Net
loss before income taxes
|
(4,254,137 | ) | (1,544,514 | ) | (5,798,651 | ) | ||||||||||
Deficit
accumulated during development stage
|
(4,254,137 | ) | (1,544,514 | ) | (5,798,651 | ) | ||||||||||
Less
preferred stock dividends and beneficial conversion
feature
|
(569,142 | ) | - | (569,142 | ) | |||||||||||
Net
loss applicable to common shareholders
|
$ | (4,823,279 | ) | $ | (1,544,514 | ) | $ | (6,367,793 | ) | |||||||
Basic
and diluted net loss per share
|
$ | (0.18 | ) | $ | (0.24 | ) | ||||||||||
Weighted
average common shares outstanding
|
26,423,233 | - | 26,423,233 |
7
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Reference
Notes:
1.
|
During
the restatement of the period the Company adopted EITF 07-5 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. The
derivative liability balance at June 30, 2009 is $3,995,056, of which
$3,476,640 is assigned to The Quercus Trust warrants and $518,416 to the
warrants issued for services in connection with The Quercus Trust
offering.
|
2.
|
During
the restatement of the period the Company adopted EITF 07-5 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. On January 1, 2009, the Company reduced
additional paid in capital by 9,327,718, representing the fair value
originally assigned to The Quercus Trust warrants in the amount of
$8,133,983 plus the fair value originally assigned to the warrants issued
for services in connection with The Quercus Trust offering amounting to
$1,193,735.
|
3.
|
During
the restatement of the period the Company adopted EITF 07-5 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. The adoption precipitated a reduction in the
deficit accumulated during development stage in the amount of $5,332,662
through June 30, 2009. This reduction is comprised of the cumulative
effect of a change in accounting principle that decreased the deficit
accumulated during the development stage in the amount of $6,877,176,
representing the change in fair value from the date of origination of the
instruments though January 1, 2009, the effective date of change in
accounting principle and an increase in the deficit
accumulated during the development stage resulting from derivative
revaluation during the six month period ending June 30, 2009 in the amount
of $1,544,514.
|
4.
|
During
the restatement of the period the Company adopted EITF 07-5 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. The amount recorded under derivative
revaluation of $1,544,514 reflects the increase in fair value of
derivative liabilities from the adoption date of EITF 07-5 on January 1,
2009 through the six month period ending June 30,
2009.
|
3.
|
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 six months of 2009, the Company had revenues of $ 0.6
million. Gross margin from sales and financings in fiscal year 2008
and through June 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.
4.
|
Recent
Accounting Pronouncements
|
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. However, on February 12, 2008, the FASB issued FASB
Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157,”
(“FSP No. 157-2”), which delays the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). FSP No. 157-2 defers the effective date of SFAS No.
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within scope of FSP No. 157-2. The Company
does not believe that the adoption of SFAS No. 157 will have a material impact
on its condensed consolidated financial statements. On October 10, 2008, the
FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When
the Market for That Asset is Not Active, (“FSP 157-3”) that clarifies the
application of SFAS 157 in a market that is not active and provides an example
to illustrate key considerations in determining the fair value of a financial
asset when the market for that financial assets is not active. The FSP 157-3 is
applicable to the valuation of auction-rate securities held by the Company for
which there was no active market as of June 30, 2009. FSP 157-3 is effective
upon issuance, including prior periods for which the financial statements have
not been issued. The adoption of FSP 157-3 did not have a material impact on the
Company’s consolidated results of operations or financial
condition.
8
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
In March
2008, FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 161,
"Disclosures about Derivative Instruments and Hedging Activities-an amendment of
FASB Statement No. 133”. SFAS 161 requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. As such,
the Company is required to adopt these provisions at the beginning of the fiscal
year ending December 31, 2009. The adoption of SFAS 161 did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
In May
2008, FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 162,
"The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. SFAS 162 is
effective for the financial statements beginning June 30, 2009, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles.” The
adoption of SFAS 162 did not have a material impact on the Company’s
consolidated results of operations or financial condition.
In May
2008, FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 163,
"Accounting for Financial Guarantee Insurance Contracts-an interpretation of
FASB Statement No. 60" (“SFAS 163”). SFAS 163 interprets Statement 60 and amends
existing accounting pronouncements to clarify their application to the financial
guarantee insurance contracts included within the scope of this Statement. SFAS
163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years,
except for some disclosures about the insurance enterprise’s risk-management
activities. This Statement requires that disclosures about the risk-management
activities of the insurance enterprise be effective for the first period
(including interim periods) beginning after issuance of this Statement. As such,
the Company is required to adopt these provisions at the beginning of the fiscal
year ended December 31, 2009. The adoption of SFAS 163 did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
In June
2008, the FASB finalized EITF 07-5, "Determining Whether an Instrument (or
Embedded Feature) is indexed to an Entity's Own Stock" (“EITF 07-5”). EITF 07-5
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 FASB No. 133. “Accounting for Derivative Instruments and Hedging
Activities” (“FAS 133”). EITF 07-5 is effective for the Company’s fiscal year
beginning after December 15, 2008. The Company adopted EITF 07-5 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 6 for further
discussion.
In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. SFAS
No. 165 sets forth: (1) 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 financial statements,
(2) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The Company has
evaluated the period beginning July 1, 2009 through [August 13, 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, FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting” (Codification), which replaces
SFAS No. 162. This Codification will become the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this Statement, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. This Statement is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009 and the Company’s adoption is not expected to have a material
impact on the Company’s consolidated results of operations or financial
condition.
9
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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.
5.
|
Inventory
|
Inventory
is recorded at the lower of cost or market value, and adjusted as appropriate
for decreases in valuation and obsolescence. Adjustments to the valuation and
obsolescence reserves are made after analyzing market conditions, current and
projected sales activity, inventory costs and inventory balances to determine
appropriate reserve levels. As of June 30, 2009, no reserve for obsolescence was
deemed necessary. Cost is determined using the first-in first-out (FIFO) method.
Many components and raw materials we purchase have minimum order quantities. As
of June 30, 2009, inventory costs of $1,725,542 consisted of $571,017 of raw
materials and $1,154,525 of finished goods and finished
subassemblies.
6.
|
Derivative
liabilities
|
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 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.
The
warrants contain conventional anti-dilution provisions and also 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 EITF 07-5, 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 reclassifiedfrom Additional paid-in capital. The fair value of these
Derivative liabilities as of June 30, 2009 was $3,995,056. The Black Scholes
Merton stock option valuation model was used to determine the fair values. 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. The significant assumptions used in
the June 30, 2009 valuation were: the exercise price of $2.60; the market value
of the Company’s common stock on June 30, 2009, $1.40; expected volatility of
53.80%; risk free interest rate of 2.09%; and a remaining contract term of 3.77
years.
10
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The
increase in fair value of the Company’s Derivative liabilities of $2,723,204 and
$1,544,514 was recorded as an expense during the three and six months ended June
30, 2009.
7.
|
Warrants
|
The
following table provides summary information on warrants outstanding as of June
30, 2009. There were no new warrants issued during the first six months of
2009.
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
|
-
|
-
|
-
|
|||||||||
Exercised
|
-
|
-
|
-
|
|||||||||
Forfeited
or lapsed
|
(150,000)
|
$
|
6.00
|
-
|
||||||||
Warrants
outstanding at June 30, 2009
|
14,128,772
|
$
|
2.91
|
3.4
|
8.
|
Preferred
Stock
|
The
Company’s certificate of incorporation authorizes the issuance of 12,500,000
shares of blank check preferred stock. The Company’s board of directors has the
power to establish the designation, rights and preferences of any preferred
stock. Accordingly, the board of directors has the power, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of common stock.
At June
30, 2009, 137,500 shares of 8% Cumulative Convertible Senior Preferred stock
were issued and outstanding. For the six months ending June 30, 2009, $74,975 in
dividends was accrued, bringing the stated value of that preferred stock to
$14.04 per share.
For the
six months ended June 30, 2009, no 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 June 30, 2009,
718,997 shares of Series A Convertible Preferred stock were issued and
outstanding. For the six months ending June 30, 2009, $494,165 in dividends was
accrued, bringing the stated value of that preferred stock to $14.26 per
share.
9.
|
Equity
Compensation
|
In
December 2004, FASB issued FASB 123R, “Share-Based Payment” (“SFAS
123R”). SFAS 123R supersedes SFAS 123, and Accounting Principles Board Opinion
25, “Accounting for Stock
Issued to Employees” (“APB 25”) and its related implementation guidance.
On January 1, 2006, the Company adopted the provisions of SFAS 123R using the
modified prospective transition method. Under this method, compensation expense
is recorded for all stock based awards granted after the date of adoption and
for the unvested portion of previously granted awards that remain outstanding as
of the beginning of the adoption. Prior periods have not been restated for the
effects of SFAS 123R. Under SFAS 123R, employee-compensation expense related to
stock based payments are recorded over the requisite service period based on the
grant date fair value of the awards.
The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF 96-18,
“Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF 00-18 “Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than
Employees.” The measurement date for fair value of the equity instruments
is determined by the earlier of (i) the date at which commitment for performance
by the vendor or consultant is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity
instruments
issued to consultants, the fair value of the equity instrument is recognized
over the term of the consulting agreement.
11
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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 six months ended June 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.
The
assumptions noted in the following table were used for the options granted for
the period ended June 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 $218,960
for the period ended June 30, 2009. The impact of this expense was to increase
basic and diluted loss per share by $.008 for the period ended June 30, 2009.
The adoption of SFAS 123R did not have an impact on cash flows from operating or
financing activities.
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
June 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
June 30, 2009, based on the grant date for options.
12
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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
|
(944,035 | ) | $ | 5.96 | $ | 0.61 | ||||||||||||||
Options
outstanding at June 30, 2009
|
1,911,905 | $ | 2.98 | $ | 1.05 | 4.1 | $ | 3,480 | ||||||||||||
Options
exercisable at June 30, 2009
|
1,038,655 | $ | 3.33 | $ | 1.15 | 2.6 | $ | 1,160 |
The
weighted-average grant date fair value of options granted during the period
ended June 30, 2008 was $0.89. The total intrinsic value of options exercised
during the period ended June 30, 2008 was $0.00.
The
following table provides summary information on all non-vested stock options as
of June 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
|
(151,000 | ) | $ | 0.81 | ||||
Options
subject to future vesting at June 30, 2009
|
873,250 | $ | 0.93 |
As of
June 30, 2009, there was $509,739 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 1.3 years. The total fair value of
options which newly vested during the period ended June 30, 2009 was
$121,932. ($115,657 during the comparable period ended June 30,
2008).
10.
|
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 June 30, 2009, the
Company would have added 9,667,571 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 June
30, 2008, the Company would have added 9,723,571 common equivalent shares to the
weighted average shares outstanding to compute the diluted weighted average
shares outstanding.
11.
|
Comprehensive
Income and Significant Non-Cash
Transactions
|
Statement
of Financial Accounting Standard No. 130, “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 June 30,
2009 and 2008 are as follows:
13
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS – CONTINUED
Restated
Six Months
Ended June
30, 2009
|
Six
Months
Ended June
30, 2008
|
|||||||
Net
loss applicable to common shareholders
|
$
|
(6,367,793)
|
$
|
(6,132,893
)
|
||||
Foreign
currency translation adjustment
|
$
|
(2,935)
|
$
|
(2,316
)
|
||||
Comprehensive
Income/(loss)
|
$
|
(6,370,728)
|
$
|
(6,135,209
)
|
The
following table provides summary information on our significant non-cash
investing and financing transactions during the year-to-date periods ended June
30, 2009 and 2008.
Six Months
Ended June
30, 2009
|
Six Months
Ended June
30, 2008
|
|||||||
Satisfaction
of 2007 liability to issue equity instruments
|
$ | - | $ | 103,339 | ||||
Preferred
converted to common stock
|
$ | - | $ | 635,641 | ||||
Dividend
accrued to preferred stock – Senior
|
$ | 74,975 | $ | 69,295 | ||||
Dividend
accrued to preferred stock – Series A
|
$ | 494,165 | $ | 502,991 | ||||
Warrants
issued for commission on sale of stock
|
$ | $ | 1,193,735 | |||||
Fair
value of warrants issued with related party note
|
$ | $ | 601,753 | |||||
Origination
fees issued with related party note
|
$ | $ | 7,500 | |||||
Notes
payable to converted to common stock
|
$ | - | $ | 1,072,716 | ||||
Interest
converted to common stock
|
$ | - | 7,768 |
12.
|
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
|
14
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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.
|
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.
13.
|
Subsequent
Events
|
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.
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. The final details will still require further
negotiation with all parties.
15
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS – CONTINUED
In August
of 2009 the Company structured short term secured bridge loan arrangements with
certain of the Company’s directors and significant investors, The “Bridge
Loan”, secured by all the Company’s 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.
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 and
delivered to Quercus on June 27, 2008.
Subsequent events were evaluated
through November 6, 2009, the date the financial statements were
issued.
16
Restatement
As a
result of Securities and Exchange Commission comments, we have reissued the
financial statements to restate the following:
The
Company has recalculated its derivative liability arising from the impact of
"down round protection" in certain of its financial instruments based upon
the impact of FASB ASC 815-40-15-5 (formerly EITF 07-05), which became effective
as of January 1, 2009. Based upon this recalculation, the Company has
recorded an additional derivative liability on its balance sheet and resulting
change in income (loss) on its condensed consolidated statement of
operations. This has increased the deficit accumulated during
the development stage and the net loss attributable to common shareholders by
$1,544,514to $ (5,798,651) and $(6,367,793) for the six months ending June 30,
2009.
The above
restatements have no effect on total Stockholders’ Equity or Net cash
used by operating activities for the quarter ended June 30,
2009.
Product
Opportunities
In April
of 2009, the Company entered into a long term supply agreement with Exide
Technologies. Under that agreement, Axion will provide batteries and
electrodes to Exide for resale to their customers. Markets that the
Company has targeted, both individually and in partnership with Exide through
this agreement, include the European Micro-Hybrid and Mild-Hybrid. The hybrid
market in Europe is driven by legislation passed April 23, 2009. This
legislation 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% average of the fleet must meet that standard. By January 1, 2015, there must
be 100% adoption. Stiff penalties will be enforced for lack of compliance
starting with the first gram of CO2 over 120. The fine will be assessed on
the entire fleet (e.g. In 2015, X car maufacturer sells 1M cars but has CO2
emissions of 125 grams per/km. That OEM will be fined 235M Euros). Of the
10,000,000 or more hybrid cars testimated to be manufactured in 2012,
80% will 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.
Increased
Production Plans
Our Exide
agreement underscores the need for increased electrode production capacity.
The single line, that 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 DoE 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 electrodes
to lead acid battery companies 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.
17
At June
30, 2009, we have incurred cumulative net losses since inception of
approximately $48.6 million applicable to the common shareholders. This includes
approximately $2.2 million in interest of which $1.8 million was settled through
non cash transactions, and $5.0 million in income from derivative revaluations
triggered by EITF 07-5 were also settled through non cash transactions. We have
an additional $14.2 million in accumulated preferred stock dividends. We had approximately
$3.0 million in current assets and $1.9 million in current liabilities at June
30, 2009, which results in working capital surplus of approximately $1.1
million.
Key
Performance Indicators
Because
of our early stage of development, 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 September 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 methodologies to manufacture our energy storage devices 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 and commence
contract manufacturing there is no assurance of profits or whether those profits
will be sufficient to sustain us as we continue to develop our new
technology.
18
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 begin in calendar year 2009. Under the grant program,
we, and the Navy and Marine Corps, will study the feasibility of utilizing one
of 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 totals
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. The grant proceeds are expected to begin to be released in the third
quarter of 2009.
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.
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
On or
about April 8, 2009, we signed a definitive Memorandum of Understanding for a
multi-year, global supply relationship with Alpharetta, GA-based Exide
Technologies (Nasdaq: XIDE) for the purchase of our PbC® batteries and other
Axion technologies. We are a developer of advanced batteries and energy storage
products that incorporate patented lead carbon battery PbC™ technology. Exide
Technologies, one of the three largest battery companies in the world, is a
global leader in stored electrical energy solutions.
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 is
scheduled to last 10 months and would ramp up at each phase point, assuming
successful testing. No further details on anticipated shipments and schedules
were released.
19
Results
of Operations
Overview
The
comparative data below presents our results of operations for the three and six
months ended June 30, 2009 and June 30, 2008, respectively. While certain of the
data is not strictly comparable because some line items are positive and some
negative, the provided percentages demonstrate the relative significance of the
individual line items and also the relative changes from year to
year.
●
|
Our
primary 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.
|
20
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 June
30, |
Six
Months Ended June
30, |
|||||||||||||||||||||||||||||||
Statements
of Operations
|
Restated
2009
|
% of
net loss
|
2008
|
% of
net loss
|
Restated
2009
|
% of
net loss
|
2008
|
% of
net loss
|
||||||||||||||||||||||||
Revenues
|
$ | 277,890 | $ | 176,080 | $ | 604,983 | $ | 391,807 | ||||||||||||||||||||||||
Cost
of goods sold
|
163,963 | 80,235 | 399,650 | 185,325 | ||||||||||||||||||||||||||||
Gross
profit
|
113,927 | -2.2 | % | 95,845 | -3.0 | % | 205,333 | -3.2 | % | 206,482 | -3.4 | % | ||||||||||||||||||||
Expenses
|
||||||||||||||||||||||||||||||||
Research
& development
|
1,223,817 | 23.3 | % | 733,221 | 23.2 | % | 2,457,784 | 38.6 | % | 1,404,384 | 22.9 | % | ||||||||||||||||||||
Selling,
general & administrative
|
1,132,841 | 21.6 | % | 1,466,031 | 46.3 | % | 2,014,384 | 31.6 | % | 3,179,196 | 51.8 | % | ||||||||||||||||||||
Interest
expense - related party
|
- | 0.0 | % | 758,197 | 23.9 | % | - | 0.0 | % | 1,177,870 | 19.2 | % | ||||||||||||||||||||
Derivative
revaluation
|
2,723,203 | 51.9 | % | - | 0.0 | % | 1,544,514 | 24.3 | % | (2,844 | ) | 0.0 | % | |||||||||||||||||||
Interest
& other income, net
|
(4,098 | ) | -0.1 | % | 19,765 | 0.6 | % | (12,698 | ) | -0.2 | % | 8,437 | 0.1 | % | ||||||||||||||||||
Net
loss before income taxes
|
(4,961,836 | ) | 94.5 | % | (2,881,369 | ) | 91.0 | % | (5,798,651 | ) | 91.1 | % | (5,560,561 | ) | 90.7 | % | ||||||||||||||||
Deficit
accumulated during development stage
|
(4,961,836 | ) | 94.5 | % | (2,881,369 | ) | 91.0 | % | (5,798,651 | ) | 91.1 | % | (5,560,561 | ) | 90.7 | % | ||||||||||||||||
Less
preferred stock dividends
And beneficial
conversion feature
|
(287,992 | ) | 5.5 | % | (284,917 | ) | 9.0 | % | (569,142 | ) | 8.9 | % | (572,332 | ) | 9.3 | % | ||||||||||||||||
Net
loss applicable to
common
shareholders
|
$ | (5,249,828 | ) | 100.0 | % | $ | (3,166,286 | ) | 100.0 | % | $ | (6,367,793 | ) | 100.0 | % | $ | (6,132,893 | ) | 100.0 | % | ||||||||||||
Basic
and diluted net loss per share
|
$ | (0.20 | ) | $ | (0.16 | ) | $ | (0.24 | ) | $ | (0.32 | ) | ||||||||||||||||||||
Weighted
average
common
shares outstanding
|
26,427,019 | 20,290,404 | 26,423,233 | 18,990,487 |
Summary
of Consolidated Results for period ending June 30, 2009 compared with June 30,
2008
Revenue
Revenues
for the three and six months ended June 30, 2009 was approximately $0.3 million
and $0.6 million, respectively, compared to revenues of approximately $0.2
million and $0.4 million, respectively, for the corresponding periods in 2008.
This represents a 58% and 54% increase, respectively, in revenue for the three
and six months ended June 30, 2009 over the corresponding periods in 2008 and
derives from increased sales of traditional batteries to a large scale buyers
group and our manufacturing contract for a large North American lead-acid
battery manufacturing company. We had two customers that accounted for
approximately 27% and 12% of revenue respectively for the six months ended June
30, 2009 and one customer which accounted for approximately 19% of the revenue
for the same period in 2008. Due to the developmental stage of our technology,
the revenue generated remains insignificant when compared to total
operations.
21
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 six
months ended June 30, 2009 was approximately $0.2 million and $0.4 million,
respectively, compared to cost of goods sold of approximately $0.1 million and
$0.2 million, respectively, for the same periods in 2008. This
represents approximately a 104% and116% increase, respectively, in cost of goods
sold for the three and six month ended June 30, 2009 and is consistent with the
increase in sales volume of lower margin products.
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 six months ended June 30, 2009 were approximately
$1.2 million and $2.5 million, respectively, compared to
approximately $0.7 million and $1.4 million, respectively, for the same periods
in 2008, representing a 67% and 75% increase, respectively, in spending, as
compared to the same periods in 2008. This 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 six months ended June 30, 2009 were
approximately $1.1million and $2.0 million, respectively, compared to
approximately $1.5 million and $3.2 million, respectively, for the same periods
in 2008. This represents a 23% and 37% 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
Derivative
revaluation for the three and six months ended June 30, 2009 resulted in
recognition of non cash expense of $2.7 and $1.5 million compared to
$0.0 million for the same periods in 2008, represents an increase in the fair
value of derivative liabilities resulting from the adoption of EITF 07-5, on
January 1, 2009.
Interest
Expense
Interest
expense during the three and six months ended June 30, 2009 were $0.0 and $0.0
million, respectively, as compared to approximately $0.8 and $1.2 million during
the three and six months ended June 30, 2008. This decrease was due
to the satisfaction of indebtedness in 2008.
22
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, we believe that our cash and cash equivalents of $1.0 million, as of
June 30, 2009 are not sufficient to allow us to continue operations without
additional funding. 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 only source of financing has been from working capital carried
over from 2008, which predominantly arose from the Quercus Trust investments
that occurred during 2008. 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.
Despite
the capital available as of June 30, 2009, we have experienced some current
encouraging trends. In July 2009, we sold batteries with an aggregate
sales price of approximately $450,000, and we have a verbal commitment from a
new customer to purchase batteries in minimum amounts of $500,000 per month over
12 months commencing in August 2009. These two events provide
potential for significantly improved cash from operations for the third and
fourth quarters of 2009.
Furthermore,
we have made significant strides in our hybrid battery program, which shows
potential for revenue from sales in 2010. We also have some feedback,
although no assurances, that we will receive material 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 of potential liquidity sources in 2010.
On June
30, 2009, our cash position was $1.0 million, and we had working capital of $1.1
million.
In
accordance with EITF 07-5, the Company, beginning on January 1, 2009, recognizes
warrants with down round protection as liabilities at their respective fair
values on each reporting date. The derivative liabilities recorded in the
balance sheet reflect accounting for some of the Company’s warrants as a
liability rather than as a component of equity. These derivative liabilities are
a non-cash item and reflect the fair value of the related instruments. They do
not reflect an amount that is owed to the warrant holders or any requirement for
payment whatsoever. Increases in the Company’s common stock price, or actual
reductions in exercise prices will cause the related derivative liabilities to
increase and will result in a charge to derivative revaluation expense.
Decreases in the Company’s common stock price will cause the related derivative
liabilities to decrease and will result in a derivative revaluation income.
While the warrants remain unexercised, assuming no change in the common stock
price, or actual reductions in the exercise price, the derivative liabilities
will gradually diminish as the warrant expiration date approaches. If the
warrants are exercised, any remaining derivative liabilities on the date of
exercise will be credited to Additional Paid in Capital. Upon the expiration or
exercise of the Company’s warrants, the applicable derivative Liabilities will
cease to exist and amounts charged to Additional Paid in Capital will be
completely offset by charges to Accumulated deficit during development stage.
Therefore, eventually the net effect of the change in accounting principle
caused by the adoption of EITF 07-5 to Stockholder’s Equity will be zero, though
the financial statements will be subject to material fluctuations as the
Company’s common stock price increases or decreases or there are actual
reductions in the exercise price until the applicable warrants expire or are
exercised.
Cash,
Cash Equivalents and Working Capital
At June
30, 2009, we had approximately $1.0 million of cash and cash equivalents
compared to approximately $3.1 million at December 31, 2008. At June 30, 2009
working capital was approximately $1.1 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 June
30, 2009:
23
Coupon
/
Yield
|
Maturity
|
June
30,
2009
|
|||||||
Fidelity
Institutional Money Market
|
0.71%
|
n/a
|
$
|
761,845
|
Cash
Flows from Operating Activities
Net cash
used in operations for the six months ended June 30, 2009 was approximately
$(3.7) million. Net cash used in operations for this same period in 2008 was
approximately $(3.7) million. 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 six months ended June 30, 2009 was
approximately $1.6 million compared to net cash used by investing activities of
approximately $(0.7) 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 $(0.5)
million used to purchase equipment for both production and research and
development and notes receivable.
Cash
Flows from Financing Activities
There
were no financing activities for the six months ended June 30, 2009, compared to
approximately $16.3 million of cash provided during the same period ended June
30, 2008. Financing activities for the six months ended June 30, 2008 consisted
of $16.5 million from the issuance of common stock (before deduction of offering
expenses and fees) and the repayment of $0.2 million for retirement of the
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.
The
warrants contain conventional anti-dilution provisions for adjustment of the
exercise price in the event we issue additional shares of our common stock or
securities convertible into common stock (subject to certain specified
exclusions) at a price less than 2.60 per share.
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.
24
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
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”.
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 EITF 07-5, effective January 1, 2009 some of the Company’s
warrants are now accounted for as derivative liabilities.
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.
Stock-Based Compensation:
Prior to January 1, 2006, we accounted for stock option awards in
accordance with the recognition and measurement provisions of APB 25 and related
interpretations, as permitted by Statement of Financial Accounting Standard No.
123, “Accounting for
Stock-Based Compensation,” (“SFAS 123”). Under APB 25, compensation cost
for stock options issued to employees was measured as the excess, if any, of the
fair value of 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 SFAS 123R 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 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.
25
Research and Development:
R&D costs are recorded in accordance with FASB No. 2, “Accounting for Research and
Development Costs,” which requires that costs incurred in R&D
activities covering basic scientific research and the application of scientific
advances to the development of new and improved products and their uses be
expensed as incurred. The policy of expensing the costs of R&D activities
relate to (1) in-house work conducted by 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.
ITEM 4T. CONTROLS AND PROCEDURES |
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 June 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
has conducted, with the participation of our Chief Executive Officer and our
Chief Financial Officer, an assessment, including testing of the effectiveness,
of our internal control over financial reporting as of June 30, 2009.
Management’s assessment of internal control over financial reporting was
conducted using the criteria in Internal Control over Financial
Reporting - Guidance for Smaller Public Companies issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(“COSO”).
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. In connection with our
management’s assessment of our internal control over financial reporting as
required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified the
following material weaknesses in our internal control over financial reporting
as of June 30, 2009:
●
|
We
do not have documented job descriptions for each position in the Company.
Performance appraisals have not been performed consistently on an annual
basis and, as a result, our employees may not have a clear understanding
of their responsibilities or performance compared to these
responsibilities.
|
26
●
|
We
have not maintained sufficient segregation of duties as evidenced
by:
|
●
|
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 a formal policy established that sets
forth the policy for purchasing small dollar
goods.
|
●
|
Our
accounting staff employees with payable responsibilities also have access
to vendor maintenance controls. Access to vendor maintenance controls
should be kept separate from the accounts payable
functions.
|
●
|
We
have concluded that there were not effective financial reporting controls
in the following areas that could lead to inaccurate financial
reporting:
|
●
|
Documented
processes do not exist for approval of General Ledger journal entries
prior to entry.
|
●
|
Documented
processes do not exist for several key processes such as a closing
checklist, budget-to-actual analyses, balance sheet variation analysis,
pro forma financial statements, and the usage of key
spreadsheets.
|
●
|
Adequate
procedures to ensure appropriate application of new accounting
pronouncements.
|
●
|
We
have identified weaknesses in our inventory
controls:
|
●
|
Documented
processes do not exist for several key inventory control processes
including inventory adjustments, reserves for excess, defective and
obsolete inventory, product shipments and the tracking and recording of
in-transit inventory.
|
●
|
Documented
inventory valuation processes are lacking or do not exist including costs
to be expensed versus inventoried, standard cost changes, actual versus
standard cost analysis and the accurate accumulation of total production
costs.
|
●
|
We
do not have a closed loop monitoring process in place, to ensure that
issues, improvement and other directed actions have been completed in a
timely manner.
|
●
|
We
do not do criminal background checks on the board of directors and
employees.
|
●
|
Per
the KPMG, Fraud Risk Management White Paper, “U.S. sentencing guidelines
(amended, November 2004) for organizational defendants establish minimum
compliance and ethics program requirements for organizations seeking to
mitigate penalties for corporate misconduct. Specifically, the amended
guidelines call on organizations to: (1) promote a culture that encourages
ethical conduct and a commitment to compliance with the law (2) establish
standards and procedures to prevent and detect criminal misconduct and (3)
Use reasonable efforts and exercise due diligence to exclude individuals
from positions of substantial authority who have engaged in illegal
activities or other conduct inconsistent with an effective compliance and
ethics program.”
|
●
|
We
have key financial, sales order processing, shipping and receiving
processes that are used to operate our business on a daily basis that are
not formally documented.
|
●
|
We
do not have formal documented guidelines for creating properly authorized
levels for entering into agreements (i.e. purchase orders, non-disclosure
agreements, sales and other contracts) or distributing cash (signing
checks, creating authorizing wire
transfers).
|
27
Because
of the material weaknesses noted above, management has concluded that we did not
maintain effective internal control over financial reporting as of June 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 the material
weaknesses noted above as follows and have made the following actual changes as
noted below::
●
|
During
the first quarter of 2009, we hired an experienced manager of Human
Resources who is establishing formal HR policies and procedures, will
conduct employee training sessions, is documenting formal job descriptions
and will have all employees acknowledge key policies and sign the Code of
Conduct. Formal job descriptions have been documented for approximately
80% of our managerial, administrative and engineering positions, and
approximately 50% of our plant employees. We expect that all
positions will have formal descriptions documented prior to filing our
10-Q for the quarter ending September 30,
2009.
|
●
|
During
the first quarter of 2009, we made significant progress on implementation
of a 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. With this
implementation, which is expected to be completed prior to filing our 10-Q
for the quarter ending September 30, 2009, employees with accounts payable
responsibilities will not be able to unilaterally add, delete or change
vendor accounts.
|
●
|
We
are improving our financial reporting controls
by:
|
●
|
All journal
entries are reviewed and approved prior to entry into the General
Ledger. A formal written policy with regard to this process
will be available prior to filing our 10-Q for the quarter ending
September 30, 2009.
|
●
|
We
have documented many key financial reporting
processes and expect to be completed with documentation of all key
processes prior to filing our 10-Q for the quarter ending September 30,
2009.
|
●
|
As
part of our assessing our general information technology processes and
controls, we are establishing an effective document control and
retention procedure. We expect this task to be completed prior to filing
our 10-Q for the quarter ending September 30,
2009.
|
●
|
We
have established budgets and we examine and document on a month to month
basis budget versus actual
variances.
|
●
|
We
generate detailed monthly Board of Director financial reports
and discuss with the Board financial results on a monthly
basis.
|
●
|
As
part of our implementation of our ERP system we are documenting
all key inventory control processes. We have segregated inventory
purchasing and receiving functions. We are establishing procedures for
adding and modifying bills of materials. We are monitoring and evaluating
our inventory measurement and valuation methods and processes. Also, we
have just started the process to implement sales forecasts to
generate purchasing and production forecasts and for inventory management.
We anticipate that these tasks will be completed prior to filing our 10-Q
for the quarter ending September 30,
2009.
|
●
|
We
are evaluating development of a written process for utilization
of criminal background checks for all new members of the board
of directors and new employee candidates, prior to their
appointment/hire. We expect to complete consideration and
implementation of any possible outcome procedures by the end of the 2009
fiscal year.
|
●
|
We
are documenting key business processes and
procedures that are critical to manage and operate our business
on a daily basis. We expect this task to be completed prior to the filing
of our 10-Q for the quarter ending September 30,
2009.
|
28
●
|
We
are documenting 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) or distributing cash (signing checks, creating
authorizing wire transfers). We anticipate that this tasks will be
completed prior to the issuance of our 10-Q for the quarter ending
September 30, 2009.
|
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.
This
quarterly report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Commission that permit us to
provide only management's report in this quarterly report.
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.
29
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.
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, 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
We agreed
to sell 1,000,000 shares of common stock to a foreign partnership, Mercatus
& Partners Limited at a price of $2.50 per share as part of a group of
comparable transactions where the purchaser planned to contribute a portfolio of
small public company securities to a pair of offshore funds in exchange for fund
units, and then use the fund units as security for bank financing that would be
used to pay for the underlying securities. Contrary to the terms and conditions
of our agreement, the foreign partnership was in possession of a stock
certificate representing these 1,000,000 shares; however, completion of the
transaction was contingent upon receipt of the proceeds from the foreign
partnership, which were not received. The 1,000,000 shares were recovered on
December 4, 2007 and forwarded to Continental Stock Transfer Agency for
cancellation, which took place that same month.
In
connection with the offering described above, four holders of warrants to
purchase shares of our common stock agreed to exercise their warrants to
purchase, in the aggregate, 301,700 shares of common stock (the “Incompletely
Exercised Warrant Shares”) for the purpose of selling them to the foreign
partnership in a transaction that was substantially similar to the one we
entered into with the same foreign partnership. These shares were to be issued
to the foreign partnership upon receipt of payment, which was in turn contingent
upon the foreign partnership tendering the payment of the purchase price for
these shares. Contrary to the terms and conditions of their agreements, the
foreign partnership transferred the shares to two of its creditors who both hold
the shares as holders-in-due-course. We are pursuing the partnership and
the custodians of the stock for the monetary value of the stock. We retained
counsel to cause the parties who have possession of the Incompletely Exercised
Warrant shares to return the shares absent payment and commenced litigation
soon thereafter.
On or
about March 24, 2009, we were awarded judgment by default against the
partnership and an individual defendant for $1,499,100 plus accrued and unpaid
interest thereon. The net result to the Company will be a cash infusion of
approximately $1,000,000. Like most judgments, there is no guarantee the
Company will be able to fully collect on this amount.
30
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 to 6 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 six months ended June 30, 2009, we had a net loss applicable to
common shareholders of approximately $6.4 million and cumulative losses from
inception (September 18, 2003) to June 30, 2009 of $48.6 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 to 6 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
June 30, 2009, our cash and cash equivalents amounted to $ 1.0 million. Without
any substantial revenues, we have been dependent upon more than $17.0 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
June 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 1,150,911 shares of common stock that may
be issued upon conversion of our 8% Cumulaive Convertible Senior Preferred
Stock, 8,204,365 shares of common stock that may be issued upon conversion of
our Series A Convertible Preferred Stock, and an additional 1,911,905 shares of
common stock issuable upon the exercise of certain of our outstanding options,
and an additional 14,228,772 shares of common stock issuable upon the exercise
of certain of our outstanding warrants. We are still in breach of all of our
obligations to register these shares. There are no liquidated damages stipulated
for our failure to register such shares; however, the holders of these
securities may still elect to pursue remedies against 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.
Pursuant
to Section 4.1(d)(v) of the Securities Purchase Agreement, dated January 14,
2008, between the Quercus Trust and the Company, liquidated damages accrue at
the rate of one percent (1%) per month (based upon the purchase price of
Registrable Securities not registered (which is the securities purchased by
Quercus less the “cut back shares” which were not registered) if a Post
Effective Amendment to the S-1 Registration Statement, which became effective on
August 5, 2008, registering shares for resale on behalf of Quercus Trust, is not
filed by certain stated deadlines, including within 30 days after the Company’s
Annual Report on Form 10-K is due. The Company did not file its Post
Effective Amendment by April 30, 2009, as required, and has thus incurred
liquidated damages equal to $44,054 per month plus interest accruing at the rate
of 18% per annum on any payment not made within 7 business days of the date
due. Interest on the initial $44,054 shall continue to accrue until
the amount is paid. As of June 30, 2009, liquidated damages and
related interest in the amount of $45,380 is included in Selling, general and
administrative expenses and Other current liabilities. Further liquidated
damages do not accrue as our Post Effective Amendment became effective on May
29, 2009.
31
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 six months ended June
30, 2009, we spent $88,000 on these expenses, however, 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 full-scale commercial production of our PbC™ technology for 3 to
6months.
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 to 6 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
The number of shares of common stock
we are obligated to register could depress our stock
price.
Effective
August 5, 2008, we registered 2,782,837 shares of our common stock for resale by
certain Selling Stockholders, and under various agreements with certain Selling
Shareholders, we have registered an additional 638,199 shares in May 2009. These
shares represent approximately 1.2% of our capitalization assuming the
exercise of certain warrants and options and conversion of preferred stock. The
sale of a significant number of these shares may cause the market price of our
common stock to decline.
We
have issued a large number of convertible securities, warrants and options that
may increase, perhaps significantly, the number of common shares
outstanding.
We had
26,453,437 shares of common stock outstanding at June 30, 2009, and (a) our
Series A Convertible Preferred Stock is presently convertible into 8,204,365
shares of common stock, (b) our shares of Cumulative Convertible Senior
Preferred Stock are presently convertible into 1,150,911 shares of common stock,
(c) we have warrants outstanding that, if exercised, would generate proceeds of
$41,115,303 and cause us to issue up to an additional 14,128,772 shares of
common stock and (d) we have options to purchase common stock that, if
exercised, would generate proceeds of $5,688,148 and result in the issuance of
an additional 1,911,905 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.
32
Our
complete list of risk factors is set forth in our Form 10-K for the year ended
December 31, 2009 for full consideration of the risk factors involved in
investing in our stock.
ITEM
6.
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule
13a-14(a)
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule
13a-14(a)
|
32.1
|
Statement
of Chief Executive Officer Pursuant to Section 1350 of Title 18 of
the United States Code
|
32.2
|
Statement
of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the
United States Code
|
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
6, 2009
|
|
/s/
Donald T. Hillier
|
|
Donald
T. Hillier, Principal Financial Officer and
|
|
Principal
Accounting Officer
|
|
Dated: November
6, 2009
|
33