Attached files
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EX-32.2 - AXION INTERNATIONAL HOLDINGS, INC. | v173099_ex32-2.htm |
EX-31.1 - AXION INTERNATIONAL HOLDINGS, INC. | v173099_ex31-1.htm |
EX-32.1 - AXION INTERNATIONAL HOLDINGS, INC. | v173099_ex32-1.htm |
EX-31.2 - AXION INTERNATIONAL HOLDINGS, INC. | v173099_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-Q/A
R
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31, 2008
OR
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from to
Commission
File Number: 0-13111
AXION
INTERNATIONAL HOLDINGS, INC
(Exact
name of registrant as specified in its charter)
Colorado
|
84-0846389
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
665
Martinsville Road, Basking Ridge, New Jersey 07920
(Address
of principal executive offices)
908-542-0888
(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 o No
þ
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 £
No þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer £
|
Accelerated
filer £
|
Non-accelerated
filer £
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No
þ
The
number of outstanding shares of the registrant’s common stock, without par
value, as of February 17, 2009 was 15,563,137
TABLE
OF CONTENTS
PAGE
|
|||
PART
I.
|
FINANCIAL
INFORMATION
|
||
Item
1.
|
Financial
Statements
|
1
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
15
|
|
Item
4.
|
Controls
and Procedures
|
15
|
|
PART
II.
|
OTHER
INFORMATION
|
16
|
|
Item
1.
|
Legal
Proceedings
|
16
|
|
Item
1A.
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Risk
Factors
|
16
|
|
Item
2.
|
Unregistered
Sales of Securities and Use of Proceeds
|
16
|
|
Item
3.
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Defaults
Upon Senior Securities
|
16
|
|
Item
4.
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Submissions
of Matters to a Vote of Security Holders
|
16
|
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Item
5.
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Other
Information
|
16
|
|
Item
6.
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Exhibits
|
16
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SIGNATURES
|
17
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Explanatory
Note
The
consolidated financial statements for the three months ended December 31,
2008 and related disclosures in this Amendment No.1 to Quarterly Report on Form
10-Q have been restated in accordance with the changes described
below.
In January 2010, we concluded that
it was necessary to amend this Quarterly Report in order to restate its
financial statements for the period ended December 31, 2008 to (1) record
share-based compensation charges not previously recorded and (2) adjust recorded
interest expense as a result of adjustments we made for the fiscal year ended
September 30, 2008 to our accounting for debt discounts and debt
modifications.
No
attempt has been made in this Amendment No. 1 to modify or update the
disclosures in the original Quarterly Report except for the changes to the
financial statements described above and related changes to Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations and
Item 4. Controls and Procedures.
A
DEVELOPMENT STAGE COMPANY
CONSOLIDATED
BALANCE SHEET
Unaudited
|
Audited
|
|||||||
December 31, 2008
|
September 30, 2008
|
|||||||
Assets
|
Restated
|
Restated
|
||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 930,376 | $ | 138,826 | ||||
Accounts
Receivable
|
4,200 | - | ||||||
Inventories
|
205,096 | 110,416 | ||||||
Prepaid
expenses
|
6,903 | 7,264 | ||||||
Total
current assets
|
1,146,575 | 256,506 | ||||||
Property,
equipment, and leasehold improvements, at cost:
|
||||||||
Equipment
|
9,838 | 9,838 | ||||||
Machinery
and equipment
|
268,125 | 261,425 | ||||||
Purchased
software
|
56,329 | 56,329 | ||||||
Furniture
and fixtures
|
9,322 | 9,322 | ||||||
Leasehold
improvements
|
29,300 | 29,300 | ||||||
372,914 | 366,214 | |||||||
Less
accumulated depreciation
|
(36,484 | ) | (25,609 | ) | ||||
Net
property and leasehold improvements
|
336,430 | 340,605 | ||||||
Long-term
and intangible assets
|
||||||||
License,
at acquisition cost,
|
68,284 | 68,284 | ||||||
Deposits
|
4,000 | 4,000 | ||||||
72,284 | 72,284 | |||||||
Total
assets
|
$ | 1,555,289 | $ | 669,395 | ||||
Liabilities and Stockholders'
Deficit
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 310,723 | $ | 326,511 | ||||
Notes payable
|
55,624 | - |
|
|||||
Accrued
liabilities
|
281,250 | 202,262 | ||||||
Interest
payable
|
62,973 | 55,641 | ||||||
Accrued
payroll
|
9,927 | 23,142 | ||||||
Total
current liabilities
|
720,497 | 607,556 | ||||||
Senior
secured convertible debenture, net of discount
|
593,567 | 576,666 | ||||||
Total
liabilities
|
1,314,064 | 1,184,222 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
deficit:
|
||||||||
Common
stock, no par value; authorized, 100,000,000 shares;
|
||||||||
15,449,501
shares issued and outstanding
|
4,482,012 | 3,029,334 | ||||||
Deficit
accumulated during development stage
|
(4,240,787 | ) | (3,544,161 | ) | ||||
Total
stockholders' deficit
|
241,225 | (514,827 | ) | |||||
Total
liabilities and stockholders' deficit
|
$ | 1,555,289 | $ | 669,395 |
See
accompanying notes to consolidated financial statements.
1
A
DEVELOPMENT STAGE COMPANY
CONSOLIDATED
STATEMENT OF OPERATIONS
Unaudited
|
Audited
|
From Inception
|
||||||||||
Three Months Ending
|
Period Ending
|
November 1, 2007 to
|
||||||||||
December 31, 2008
|
September 30, 2008
|
December 31, 2008
|
||||||||||
Restated
|
Restated
|
Restated
|
||||||||||
Revenue
|
$ | 4,200 | $ | 6,472 | $ | 10,672 | ||||||
Cost
of goods sold
|
$ | - | $ | 743 | $ | 743 | ||||||
Gross
margin
|
4,200 | 5,729 | 9,929 | |||||||||
Research
and development costs
|
154,940 | 340,456 | 495,396 | |||||||||
Marketing
and sales
|
46,732 | 90,945 | 137,677 | |||||||||
General
and administrative expenses
|
427,542 | 1,269,558 | 1,697,200 | |||||||||
Depreciation
and amortization
|
10,875 | 25,609 | 36,484 | |||||||||
Total
operating costs and expenses
|
640,089 | 1,726,567 | 2,367,376 | |||||||||
Loss
from operations
|
(635,889 | ) | (1,720,838 | ) | (2,356,727 | ) | ||||||
Other
expense (income), net
|
||||||||||||
Other
income
|
- | (20,000 | ) | (20,000 | ) | |||||||
Interest
expense, net
|
60,732 | 738,449 | 799,181 | |||||||||
Debt
conversion expense
|
- | 1,104,871 | 1,104,871 | |||||||||
Total
other expense, net
|
60,732 | 1,823,320 | 1,884,052 | |||||||||
Loss
before income taxes
|
(696,621 | ) | (3,544,161 | ) | (4,240,782 | ) | ||||||
Provision
for income taxes
|
- | - | - | |||||||||
Net
loss
|
(696,621 | ) | (3,544,161 | ) | (4,240,782 | ) | ||||||
Weighted
average common shares - basic and diluted
|
14,217,968 | 9,138,437 | 9,923,956 | |||||||||
Basic
and diluted net loss per share
|
$ | (0.05 | ) | $ | (0.39 | ) | $ | (0.43 | ) |
See
accompanying notes to consolidated financial statements.
2
A
DEVELOPMENT STAGE COMPANY
CONSOLIDATED
STATEMENT OF CASH FLOWS
Unaudited
|
Audited
|
From Inception
|
||||||||||
Three Months ending
|
Period Ending
|
November 1, 2007 to
|
||||||||||
December 31, 2008
|
September 30, 2008
|
December 31, 2008
|
||||||||||
Restated
|
Restated
|
Restated
|
||||||||||
Cash
flow from operating activities:
|
||||||||||||
Net
loss
|
$ | (696,621 | ) | $ | (3,544,169 | ) | $ | (4,240,782 | ) | |||
Adjustments
to reconcile net loss to net
|
||||||||||||
cash
used in operating activities
|
`
|
`
|
||||||||||
Depreciation,
and amortization
|
10,875 | 25,609 | 36,484 | |||||||||
Accretion
of interest expense on convertible debentures
|
44,400 | 634,002 | 678,402 | |||||||||
Debt conversion expense | - | 1,104,874 | 1,104,874 | |||||||||
Gain
on sale of assets
|
(20,000 | ) | (20,000 | ) | ||||||||
Issuance
of common stock for accrued interest and services
|
80,803 | 187,890 | 268,693 | |||||||||
Changes
in operating assets and liabilities
|
||||||||||||
Accounts
receivable
|
(4,200 | ) | 59,048 | 54,848 | ||||||||
Inventory
|
(94,680 | ) | (110,416 | ) | (205,096 | ) | ||||||
Prepaid
expenses and other
|
361 | (5,507 | ) | (5,146 | ) | |||||||
Accounts
payable
|
19,809 | 304,929 | 324,738 | |||||||||
Accrued
liabilities
|
37,503 | 66,341 | 103,844 | |||||||||
Net
cash used in operating activities
|
(601,750 | ) | (1,297,391 | ) | (1,899,141 | ) | ||||||
Cash
flows from investing activities:
|
||||||||||||
Purchase
of equipment and leasehold improvements
|
(6,700 | ) | (358,742 | ) | (365,442 | ) | ||||||
Proceeds
from sale of assets acquired in merger
|
506,000 | 506,000 | ||||||||||
Cost
to acquire license
|
(48,284 | ) | (48,284 | ) | ||||||||
Net
cash provided by investing activities
|
(6,700 | ) | 98,974 | 92,274 | ||||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from short term note (net)
|
125,000 | 27,154 | 152,154 | |||||||||
Issuance
of common stock, net of expenses
|
1,275,000 | 1,267,077 | 2,542,078 | |||||||||
Issuance
of convertible debenture
|
- | 200,000 | 200,000 | |||||||||
Repayment
of debenture
|
- | (200,000 | ) | (200,000 | ) | |||||||
Cash
acquired in reverse merger
|
- | 43,011 | 43,011 | |||||||||
Net
cash provided by financing activities
|
1,400,000 | 1,337,242 | 2,737,243 | |||||||||
Net
increase in cash
|
791,550 | 138,826 | 930,376 | |||||||||
Cash
at beginning of period
|
138,826 | - | - | |||||||||
Cash
at end of period
|
$ | 930,376 | $ | 138,826 | $ | 930,376 | ||||||
Non-cash
financing activities:
|
||||||||||||
Common
stock for services
|
$ | - | $ | 30,000 | $ | 30,000 | ||||||
Conversion
of Debenture ( Notes)
|
$ | - | $ | 890,278 | $ | 890,278 | ||||||
Common
stock issued for settlement of accrued liabilities
|
$ | - | $ | 67,048 | $ | 67,048 | ||||||
Common
stock issued for license agreement
|
$ | - | $ | 20,000 | $ | 20,000 | ||||||
Common
stock issued pursuant to merger
|
$ | - | $ | 358,395 | $ | 358,395 |
See
accompanying notes to consolidated financial statements.
3
AXION
INTERNATIONAL HOLDING INC.
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2008
(Unaudited)
Effective
as of August 4, 2008, Axion International Holdings, Inc. (“Holdings”)
effectuated a 1-for 4 reverse stock split of its outstanding Common
Stock. All references to the number of Holding’s Common Stock
contained in this Quarterly Report have been retroactively adjusted and are on a
post-reverse split basis.
(1) Description
of the Business and Basis of Presentation
Description
of Business
Axion
International Holdings, Inc. (“Holdings”), formerly Analytical Surveys, Inc.,
was formed in 1981 to provide data conversion and digital mapping services to
users of customized geographic information systems. However, Holdings
experienced a steady decrease in the demand for its services. In fiscal 2006,
Holdings acted upon its belief that it would not be able to sustain the
operations of its historical business. Holdings focused on completing
its long-term contracts that would generate cash and sold its Wisconsin-based
operations and assigned its long-term contracts that required new or additional
working capital to complete. Holdings transitioned its principal
business into that of an independent oil and gas enterprise focused on
leveraging non-operating participation in drilling and production prospects for
the development of U.S. on-shore oil and natural gas reserves.
Holdings’
success as an oil and gas company was unsuccessful. In May 2007,
Holdings terminated its oil and gas executives and took steps to reduce expenses
and commitments in oil and gas investments.
As a
result, in November 2007, Holdings entered into an Agreement and Plan of Merger,
among Holdings, Axion Acquisition Corp., a Delaware corporation and a newly
created direct wholly-owned subsidiary of Holdings (the “Merger Sub”), and Axion
International, Inc., a Delaware corporation which incorporated on August 6, 2006
with operations commencing in November 2007 (“Axion”). On March 20,
2008 (the “Effective Date”), Holdings consummated the merger (the “Merger”) of
Merger Sub into Axion, with Axion continuing as the surviving corporation and a
wholly-owned subsidiary of Holdings. Each issued and outstanding
share of Axion became 47,630 shares of Holdings’ common stock (“Common Stock”),
or 9,190,630 shares in the aggregate constituting approximately 90.7% of
Holdings’ issued and outstanding Common Stock as of the Effective Date of the
Merger. The Merger resulted in a change of control, and as such,
Axion (“we”, “our” or the “Company”) is the surviving entity.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the unaudited interim financial statements furnished herein include
all adjustments necessary for a fair presentation of the Company’s financial
position at December 31, 2008 (unaudited), and the results of its operations and
the cash flows for the three months ended December 31, 2008 and for the period
from inception to December 31, 2008 (unaudited). All such adjustments are of a
normal and recurring nature. Interim financial statements are prepared on a
basis consistent with the Company’s annual financial statements. Results of
operations for the three months ending December 31, 2008 are not necessarily
indicative of the operating results that may be expected for the year ending
September 30, 2009.
The
consolidated balance sheet as of September 30, 2008 and the consolidated
statement of operations and the consolidated statement of cash flows for the
period ending September 30, 2008 have been derived from the audited financial
statements at that date but does not include all of the information and notes
required by accounting principles generally accepted in the United States for
complete financial statements.
For
further information, refer to the consolidated financial statements and notes
thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal
year ended September 30, 2008.
Our
consolidated financial statements include the accounts of our majority-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Development Stage
Company. The accompanying financial statements have been
prepared in accordance with the Statement of Financial Accounting Standards
(“SFAS”) No. 7 ”Accounting and
Reporting by Development-Stage Enterprises”. A
development-stage enterprise is one in which planned principal operations have
not commenced or if its operations have commenced, there has been no significant
revenues there from. To date, we have generated $10,762 in revenue,
which was primarily related to the sale of railroad crossties for
testing. To date, our operations consist of raising capital,
preparing for more significant commercial product sales, and building our
operating capabilities. There is no guarantee that we will be able to sell
product or generate additional revenues.
4
Reverse
Merger. The Merger has been accounted for as a reverse merger
in the form of a recapitalization with Axion as the successor. The
recapitalization has been given retroactive effect in the accompanying financial
statements. The accompanying consolidated financial statements represent those
of Axion for all periods prior to the consummation of the Merger.
Going Concern. We have
incurred significant losses in the three month period ending December 31, 2008
and since inception we have had a working capital deficit. These conditions
raise substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
results from the outcome of this uncertainty. We anticipate that during the next
twelve months we will need to raise additional capital through equity or
debt financing.
Use of
Estimates. The preparation of the financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Our
consolidated financial statements include the accounts of our majority-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
(2)
Summary of Significant Accounting Policies
Cash and Cash Equivalents: We
consider all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
Equipment and Leasehold
Improvements: Equipment
and leasehold improvements are recorded at cost and are depreciated and
amortized using the straight-line method over estimated useful lives of three to
ten years. Repairs and maintenance are charged directly to operations
as incurred.
Allowance for Doubtful
Accounts: We
accrue a reserve on a receivable when, based upon the judgment of management, it
is probable that a receivable will not be collected and the amount of any
reserve may be reasonably estimated. As of December 31, 2008 we had
an allowance for doubtful accounts of $0.
Inventories:
Inventories are priced at the lower of cost (first–in, first–out) or market and
consist primarily of raw materials. No adjustment has been to the cost of
inventories as of December 31, 2008.
Revenue and Cost Recognition:
Our revenue recognition policies are in compliance with Staff Accounting
Bulletin (SAB) No. 104, “Revenue Recognition.” Revenue is
recognized when persuasive evidence of an agreement with the customer exists,
products are shipped or title passes pursuant to the terms of the agreement with
the customer, the amount due from the customer is fixed or determinable,
collectability is reasonably assured, and when there are no significant future
performance obligations.
Customers
are billed based on the terms included in the contracts, which are generally
upon delivery of certain products or information, or achievement of certain
milestones as defined in the contracts. When billed, such amounts are
recorded as accounts receivable. Revenue earned in excess of billings
represents revenue related to services completed but not billed, and billings in
excess of revenue earned represent billings in advance of services
performed.
Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools and
depreciation costs. Losses on contracts are recognized in the period
such losses are determined. We do not believe warranty obligations on
completed contracts are significant. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined.
Income Taxes: Income taxes
are reflected under the liability method, which establishes deferred tax assets
and liabilities to be recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
5
U.S.
generally accepted accounting principles require that we record a valuation
allowance against deferred tax assets if it is “more likely than not” that we
will not be able to utilize it to offset future taxes. Due to the
size of the net operating loss carry forward in relation to our recent history
of unprofitable operations and due to the continuing uncertainties surrounding
our future operations as discussed above, we have not recognized any of this net
deferred tax asset. We currently provide for income taxes only to the
extent that we expect to pay cash taxes (primarily state taxes and the federal
alternative minimum tax) on current taxable income.
Impairment of Long-Lived Assets
Other Than Goodwill: We account for the impairment and disposition of
long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 requires that our long-lived
assets be assessed for potential impairment in their carrying values whenever
events or changes in circumstances indicate such impairment may have
occurred. An impairment charge to current operations is recognized
when the estimated undiscounted future net cash flows of the asset are less than
its carrying value. Any such impairment is recognized based on the differences
in the carrying value and estimated fair value of the impaired
asset.
Stock-Based Compensation: We
have three nonqualified stock option plans with 2,117,970 shares available for
grant as of December 31, 2008. The exercise price of the options are
established by the Board of Directors on the date of grant and are generally
equal to the market price of the stock on the grant date. The Board
of Directors may determine the vesting period of any option issued. The options
issued are exercisable in whole or in part for a period of up to ten years from
the date of grant. All outstanding options pursuant to such plans on the date of
the Merger became fully vested pursuant to the change of control that occurred
in connection with the Merger. No options have been granted pursuant
to the plans since the effective date of the Merger. Subsequent to the Merger
the options granted to the employees under the provisions of these plans have
expired. Accordingly, at December 31, there were no options
outstanding under these plans.
We
have also issued stock options pursuant to employment agreements with our Chief
Executive Officer and our President, granting the right to 762,076 and 381,038
shares of Common Stock, respectively, at an exercise price of $.00002 per share,
under the terms of certain performance-based stock
options.
Earnings (Loss) Per
Share: Basic
earnings (loss) per share are computed by dividing earnings (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share include the effects
of the potential dilution of outstanding options, warrants, and convertible debt
on our Common Stock as determined using the treasury stock method. Additionally,
for the three month period ended December 31, 2008, potential dilutive common
shares under our convertible instruments, warrant agreements and stock option
plans of 3,607,012 were not included in the calculation of diluted earnings per
share as they were antidilutive.
Financial Instruments: The
carrying amounts of financial instruments are estimated to approximate estimated
fair values. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of cash, receivables, accounts payable, and accrued
liabilities approximate fair value due to the short maturity of these
instruments. The carrying amounts of debt approximate fair value due to the
variable nature of the interest rates and short-term maturities of these
instruments.
Concentration of Credit Risk:
We maintain our cash with a major U.S. domestic bank. The amounts held in this
bank exceed the insured limit of $250,000 from time to time. The
terms of these deposits are on demand to minimize risk. We have not
incurred losses related to these deposits.
Operating Cycle: In
accordance with industry practice, we include in current assets and liabilities
amounts relating to long-term contracts, which generally have operating cycles
extending beyond one year. Other assets and liabilities are classified as
current and non-current on the basis of expected realization within or beyond
one year.
(3)
Intangibles and Exclusive Agreement
In
February 2007, we acquired an exclusive, royalty-bearing license in specific but
broad global territories to make, have made, use, sell, offer for sale, modify,
develop, import, export products made using patent applications owned by Rutgers
University. We plan to use such these revolutionary patented
technologies in the production of structural plastic products such as railroad
crossties, bridge infrastructure, utility poles, marine pilings and bulk
heading.
We paid
approximately $32,000 and issued 714,447 shares of our Common Stock as
consideration to Rutgers. We have estimated the fair market value of
the consideration received in exchange for the shares totaled approximately
$20,000. We recorded these amounts, as well as legal expenses we
incurred to acquire the license, as an intangible asset. The license
has an indefinite life and will be tested for impairment on an annual
basis.
6
We are
obligated to pay royalties on various product sales to Rutgers, and to reimburse
Rutgers for certain patent defense costs. Patent defense costs paid
to Rutgers, a related party, for the three month period ending December 31, 2008
we did not incur any expense. However, we have incurred a total expense of
$55,172 in 2008. We also pay annual membership dues to AIMPP, a department of
Rutgers, as well as consulting fees for research and development
processes. Membership dues and consulting fees totaled $2,000 for the
period ending December 31, 2008.
(4) Debt
The
components of debt are summarized as follows.
Dec, 31, 2008
|
||||
Long-Term
Debt
|
||||
Senior
secured convertible debentures
|
$ | 725,736 | ||
Discount
|
(132,169 | ) | ||
593,567 | ||||
Less
current portion
|
— | |||
$ | 593,567 |
Pursuant
to the Merger, we assumed three 13% Senior Secured Convertible Debentures (the
“Debentures”) totaling $1,643,050. Simultaneous with the Merger, in
connection with the assignment of $1,000,000 of the outstanding principal amount
of the Debentures, the holders of the Debentures agreed to extend the maturity
date to June 30, 2008 and to cancel 361,234 warrants to purchase shares of our
Common Stock at an exercise price of $0.40 per share, which warrants had been
issued in connection with the original issuance of the Debentures. In
April 2008 in connection with the assignment of the remaining $643,050 of the
Debentures, the maturity date of the Debentures was further extended to March
30, 2009, the remaining 231,542 warrants which had been issued in connection
with the original issuance of the Debentures were cancelled, and the principal
amount of the $643,050 being assigned was increased to $650,000.
In April
2008, holders of the Debentures elected to convert $100,000 principal into
250,000 shares of Common Stock, and we repaid $200,000 of the outstanding
principal. In May 2008, we issued a Series B Debenture (the “Series B
Debenture”) in the principal amount of $200,000 to ADH Ventures, LLC (“ADH”),
one of the holders of the Debentures and which beneficially owns more than 5% of
our outstanding Common Stock, with substantially the same terms as the existing
Debentures.
In
August 2008, one of the holders of the Debentures elected to convert $282,564 of
principal into 706,410 shares of Common Stock. In September 2008, the Debenture
holders converted an additional $714,200 into 2,109,834 shares of Common Stock.
They also agreed to amend and restructure the Debentures and the Series B
Debentures to (i) lower the interest rate from 13% to 9%, (ii) extend the
maturity date to September 30, 2010 and (iii) eliminate such holders’ security
interest in the assets of the Company and its subsidiaries. In addition, the
Debenture and Series B Debenture in the aggregate principal amount of $667,436
held by ADH were amended to reduce the conversion price from $.40 to $.30. A loss on
debt extinguishment of $931,327 was recognized as debt conversion
expense. The amount of the loss represents the excess of the fair
value of shares of common stock and new convertible debentures issued, amounting
to $1,336,253 and $989,480, respectively, over the value of the beneficial
conversion options present in the extinguished notes at the extinguishment date,
$1,051,212, plus the carrying value of the extinguished notes,
$342,808.
In
September 2008, we restructured $325,000 of outstanding 13% convertible
debentures, under which such debentures were converted at a conversion price of
$0.40 per share into 812,500 shares of common stock and a new 9% Convertible
Debenture due September 30, 2010 (the “New Debenture) in the principal amount of
$172,500 to Divash Capital Partners LLC. The New Debenture was issued
without any further cash consideration and is convertible at a conversion price
of $1.50 per share. We treated the transaction as an induced
conversion and recorded debt conversion expense of $173,547, representing the
fair value of the consideration issued.
At the
time of the merger we evaluated the application of EITF 98-05, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments” and concluded that the conversion option
of the Debentures was a beneficial conversion feature with intrinsic
value. We recorded the fair value of the beneficial conversion
feature of the Debentures, which we estimate to be $825,000, as a discount to
par value which was being amortized over the term of the Debentures. As the
Debentures have been converted and restructured the intrinsic value as been
adjusted and will continue to be amortized over the remaining
term.
The
following table summarizes the issuances, repayments, and conversion of the
Series A, Series B, and New debentures from inception to December 31,
2008:
Acquired
in Merger
|
$ | 1,643,050 | ||
Repayments
|
(200,000 | ) | ||
Issuances
|
379,450 | |||
Conversion
|
(1,096,764 | ) | ||
Balance,
December 31, 2008
|
$ | 725,736 |
7
Required
principal payments on long-term debt at December 31, 2008 totaled $0 for fiscal
year ending September 30, 2009 and $725,736 for fiscal 2010.
In the
three month period ending December 31, 2008 we issued 0% promissory notes
totaling $175,000 to selected parties to fund working capital needs. These
promissory notes were to mature upon the Company achieving $250,000 in equity
financing. Due to the consummation of the private placement in January 2009 (see
Note 5-“Stockholder Equity”), these promissory notes have become due and owning.
One of the promissory notes in the principal amount of $50,000 was repaid in the
December 2008 and the remaining notes were repaid in January 2009.
(5) Stockholder’s
Equity
We are
authorized to issue 100,000,000 shares of Common Stock, no par value, and
2,500,000 shares of Preferred Stock, no par value. There were 15,449,501 shares
of Common Stock and no shares of Preferred Stock outstanding on December 31,
2008
We may
issue up to 2,500,000 shares of preferred stock, no par value, with dividend
requirements, voting rights, redemption prices, liquidation preferences and
premiums, conversion rights and other terms without a vote of the
shareholders. We also may issue up to 2,117,970 shares pursuant to
our three nonqualified stock option plans and 1,350,614 shares pursuant to stock
options that were granted outside the parameters of such plans.
In
January 2009, the Company consummated a private placement of 1,562,500 shares of
Common Stock at a price of $0.88 per share with an aggregate price of
$1,375,000. We received $1,275,000 of the purchase price in December 2008 prior
to the consummation of the private placement. Accordingly, for accounting
purpose, we have deemed the sale of 1,448,864 shares of Common stock with an
aggregate price of $1,275,000 to have occurred in December 2008.
The
following table sets forth the number of shares of Common Stock that were
issuable upon conversion of outstanding warrants and convertible debt as of
December 31, 2008.
Conversion/
Exercise Price
|
Common Shares
Issuable
|
|||||||||||
Class
A Warrants
|
95,473 | $ | 5.36 | 95,473 | ||||||||
Class
B Warrants
|
95,473 | 5.96 | 95,473 | |||||||||
Class
E Warrants
|
188,018 | 4.74 | 188,018 | |||||||||
Note
Warrants issued to advisors in November 2006
|
47,482 | 2.36 | 47,482 | |||||||||
Debentures
|
78,236 | 0.30 | 260,787 | |||||||||
Debentures
|
275,000 | 0.40 | 687,500 | |||||||||
Series
B Debentures
|
200,000 | 0.30 | 666,667 | |||||||||
New
Debentures
|
172,500 | 1.50 | 115,000 | |||||||||
Other
Warrants
|
200,000 | 0.88 | 200,000 | |||||||||
Total
shares issuable and weighted average prices
|
1.26 | 2,356,400 |
(6)
Stock–based compensation
Pursuant
to employment agreements dated January 1, 2008, our Chief Executive Officer will
have the right to purchase up to 762,076 post-merger and post-split shares of
Common Stock at an exercise price of $.0002 per share, and our President has the
right to purchase up to 381,038 shares of Common Stock at an exercise price of
$.0002 per share, under the terms of certain performance-based stock
options. The options have a five year term and will vest upon the
achievement of annual revenue targets as follows.
Number of shares
(post merger and
post split)
|
Vests upon
achievement of annual
revenue totaling
|
Exercise Price
|
Intrinsic value
on date of
grant
|
||||||||
190,519
|
$ |
10
million
|
$ | .00002 | $ | 104,600 | |||||
285,779
|
$ |
15
million
|
$ | .00002 | $ | 156,900 | |||||
285,779
|
$ |
25
million
|
$ | .00002 | $ | 156,900 | |||||
381,038
|
$ |
25
million
|
$ | .00002 | $ | 209,200 |
The
intrinsic value of the options, based on the fair market value of shares sold in
a private placement in December 2007, totaled $627,600. Stock-based
compensation expense will be recognized in future periods in accordance with the
performance-based terms of the options.
8
We have
three nonqualified stock option plans with 2,117,970 shares available for grant
as of December 31, 2008. The exercise price of the options are
established by the Board of Directors on the date of grant and are generally
equal to the market price of the stock on the grant date. The Board
of Directors may determine the vesting period for each new grant and options
issued are exercisable in whole or in part for a period of up to ten years from
the date of the grant. All outstanding options pursuant to such plans on the
date of the Merger became fully vested pursuant to the change of control that
occurred in connection with the Merger. No options have been granted
pursuant to the plans since the effective date of the Merger. Subsequent to the
Merger the options granted to the employees under the provisions of these plans
have expired. Accordingly, at December 31, 2008, there were no
options outstanding under these plans.
(7) Litigation
and Other Contingencies
In
November 2005 and November 2007, Holdings was named as party to suits filed in
the State of Indiana by the Sycamore Springs Homeowners Association, as well as
certain homeowners in the Sycamore Springs neighborhood of Indianapolis,
Indiana, and by the developers of the Sycamore Springs
neighborhood. The claimants alleged that various Mid-States
Engineering entities that are alleged to be subsidiaries of MSE Corporation,
which Holdings acquired in 1997, adversely affected the drainage system of the
Sycamore Springs neighborhood, and sought damages from flooding that occurred on
September 1, 2003. Mediation efforts held in November 2007 and April
2008 have been successful, and each of the suits has been settled. The agreement
is a compromise of disputed claims asserted or which may be asserted by the
claimants against the settling defendants for any past, present and future
losses, damages, and claims they may have against the settling
defendants. The claims from all three lawsuits arise from a single
occurrence with one deductible applying to the matter, and defense of the
actions were provided by Holdings’ insurance carrier. We assumed a
$100,000 obligation payable to our insurer, which represents the deductible
pursuant to the terms of Holdings’ insurance coverage.
In April
2006, Holdings commenced an action against Tonga Partners, L.P. (“Tonga”),
Cannell Capital, L.L.C. and J. Carlo Cannell in the United States District Court
of New York, for disgorgement of short-swing profits pursuant to Section 16 of
the Securities Exchange Act of 1934, as amended. On November 10,
2004, Tonga converted a convertible promissory note into 1,701,341 shares of
Common Stock, and thereafter, between November 10 and November 15, 2004, sold
such shares for short-swing profits. In September 2008, the District
Court granted Holdings summary judgment against Tonga for disgorgement of
short-swing profits in the amount of $4,965,898. The defendants have
indicated that they will be appealing from the order granting Holdings summary
judgment.
We are
also subject to various other routine litigation incidental to our business.
Management does not believe that any of these routine legal proceedings would
have a material adverse effect on our financial condition or results of
operations.
(8)
Related Party Transactions
Pursuant
to a management consulting agreement with Regal Capital LLC (“Regal’), of which
our Secretary and Director Michael Martin is a managing partner, we issued
2,572,007 shares of our Common Stock to Regal as payment for management
consulting services. The consulting agreement also provides for a
monthly fee of $10,000 during the term of the consulting services and an
additional payment of a $230,000 fee structured over time. We
accounted for the entire fee, other than the $10,000 monthly fee, as a cost of
raising capital and reduced the proceeds of the private placement completed in
December 2007 accordingly. As of December 31, 2008, we had paid the
entire $230,000 fee.
Pursuant
to our acquisition of the license rights granted by Rutgers University, we
issued 714,447 shares of Common Stock to Rutgers. We are obligated to pay
certain fees, including royalties and membership dues to Rutgers. We also pay
consulting fees to Rutgers pursuant to the development of our
processes. See Note 3 - “Intangibles and Exclusive
Agreement”.
Pursuant
to an employment agreement with Lori A. Jones, a director and our former Chief
Executive Officer and former interim Principal Financial Officer, Ms. Jones was
entitled, among other things, to bonus compensation of $50,000 payable in 12
monthly installments upon the closing of an acquisition, merger or other
strategic transaction. Pursuant to an agreement, Ms. Jones agreed to
receive 25,000 shares of our Common Stock in lieu of the $50,000 cash bonus she
was entitled to receive as a result of the Merger. In April 2008, we
entered into a consulting arrangement with Ms. Jones, whereby Ms. Jones agreed
to provide consulting services to the Company’s new management team through
December 2008. Pursuant to the consulting arrangement, Ms. Jones is
entitled to receive a fixed fee of $22,500 plus a monthly fee of $3,000, plus
fees for additional services as necessary. As of December 31, 2008 we
had paid all fees owed to Ms. Jones.
9
(9)
Restatements
In
connection with the preparation of its Annual Report on Form 10-K for the year
ended September 30, 2009, the Company determined that certain transactions were
not accurately presented in the financial statements included in the Company’s
Annual Report on Form 10-KSB for the year ended September 30, 2008 and the
Company’s Quarterly Reports on Form 10-Q for the three months ended December 31,
2008, March 31, 2009 and June 30, 2009. These include the
following:
a)
|
The
recognition and accounting for shares of common stock, options and
warrants issued to service-providers
|
|
b)
|
The
recognition and accounting for discounts on notes payable and convertible
notes payable resulting from the concurrent issuance of warrants and from
beneficial conversion features
|
c)
|
The
treatment of debt modifications
|
The
Company and the Company's audit committee discussed the above errors and
adjustments with the Company's independent registered public accounting firm and
determined that a restatement is necessary. The Annual Report on Form 10-K for
the fiscal year ended September 30, 2009 reflects the changes for the annual
results for the year ended September 30, 2008.
As a
result of the correction of the errors described above, the Company restated its
financial statements for the three months ended December 31, 2008 included in
this Quarterly Report on Form 10-Q as follows:
AXION
INTERNATIONAL HOLDINGS, INC.
|
||||||||||||
CONSOLIDATED
BALANCE SHEET
|
Unaudited
December 31, 2008 as previously
reported |
Adjustments
|
Unaudited
December 31, 2008
as
restated
|
||||||||||
Assets
|
||||||||||||
Current
assets:
|
||||||||||||
Cash
and cash equivalents
|
$ | 930,376 | $ | 930,376 | ||||||||
Accounts
Receivable
|
4,200 | 4,200 | ||||||||||
Inventories
|
205,096 | 205,096 | ||||||||||
Prepaid
expenses
|
6,903 | 6,903 | ||||||||||
Total
current assets
|
1,146,575 | 1,146,575 | ||||||||||
Property,
equipment, and leasehold improvements, at cost:
|
||||||||||||
Equipment
|
9,838 | 9,838 | ||||||||||
Machinery
and equipment
|
268,125 | 268,125 | ||||||||||
Purchased
software
|
56,329 | 56,329 | ||||||||||
Furniture
and fixtures
|
9,322 | 9,322 | ||||||||||
Leasehold
improvements
|
29,300 | 29,300 | ||||||||||
372,914 | 372,914 | |||||||||||
Less
accumulated depreciation
|
(36,484 | ) | (36,484 | ) | ||||||||
Net
property and leasehold improvements
|
336,430 | 336,430 | ||||||||||
Long-term
and intangible assets
|
||||||||||||
License,
at acquisition cost,
|
68,284 | 68,284 | ||||||||||
Deposits
|
4,000 | 4,000 | ||||||||||
72,284 | 72,284 | |||||||||||
Total
assets
|
$ | 1,555,289 | $ | 1,555,289 | ||||||||
Liabilities
and Stockholders' Deficit
|
||||||||||||
Current
liabilities
|
||||||||||||
Accounts
payable
|
$ | 435,723 | $ | (125,000 | ) (d) | $ | 310,723 | |||||
Notes
payable, net of discount
|
55,624 | (b), (c) | 55,624 | |||||||||
Accrued
liabilities
|
323,308 | (42,058 | ) (e) | 281,250 | ||||||||
Interest
payable
|
62,973 | 62,973 | ||||||||||
Accrued
payroll
|
9,927 | 9,927 | ||||||||||
Total
current liabilities
|
831,931 | (111,434 | ) | 720,497 | ||||||||
Senior
secured convertible debenture, net of discount
|
342,407 | 251,160 | (c), (e) | 593,567 | ||||||||
Total
liabilities
|
1,174,338 | 139,726 | 1,314,064 | |||||||||
Commitments
and contingencies
|
||||||||||||
Stockholders'
deficit:
|
||||||||||||
Common
stock, no par value; authorized, 100,000,000 shares;
|
||||||||||||
15,449,501
shares issued and outstanding
|
3,267,858 | 1,214,154 | (a),(b),(e) | 4,482,012 | ||||||||
Deficit
accumulated during development stage
|
(2,886,907 | ) | (1,353,880 | ) (a),(c),(e) | (4,240,787 | ) | ||||||
Total
stockholders' deficit
|
380,951 | (139,726 | ) | 241,225 | ||||||||
Total
liabilities and stockholders' deficit
|
$ | 1,555,289 | $ | 1,555,289 |
10
AXION
INTERNATIONAL HOLDINGS, INC.
|
||||||||||||
CONSOLIDATED
STATEMENT OF OPERATIONS
|
Unaudited Three Months Ending |
Adjustments
|
Unaudited
Three Months Ending
December 31, 2008
restated
|
||||||||||
Revenue
|
$ | 4,200 | $ | 4,200 | ||||||||
Cost
of goods sold
|
- | - | ||||||||||
Gross
margin
|
4,200 | 4,200 | ||||||||||
Research
and development costs
|
154,940 | 154,940 | ||||||||||
Marketing
and sales
|
46,732 | 46,732 | ||||||||||
General
and administrative expenses
|
355,739 | $ | 71,803 | (a) | 427,542 | |||||||
Depreciation
and amortization
|
10,875 | 10,875 | ||||||||||
Total
operating costs and expenses
|
568,286 | 71,803 | 640,089 | |||||||||
Loss
from operations
|
(564,086 | ) | (71,803 | ) | (635,889 | ) | ||||||
Other
expense (income), net
|
||||||||||||
Other
income
|
- | - | ||||||||||
Interest
expense, net
|
51,496 | 9,236 | (c) | 60,732 | ||||||||
Total
other expense, net
|
51,496 | 9,236 | 60,732 | |||||||||
Loss
before income taxes
|
(615,582 | ) | (81,039 | ) | (696,621 | ) | ||||||
Provision
for income taxes
|
- | - | ||||||||||
Net
loss
|
$ | (615,582 | ) | $ | (81,039 | ) | $ | (696,621 | ) | |||
Weighted
average common shares - basic and diluted
|
14,217,968 | 14,217,968 | ||||||||||
Basic
and diluted net loss per share
|
$ | (0.04 | ) | $ | (0.05 | ) | ||||||
(a)
Stock option expense of $71,803 was recognized for grants of options to
consultants by increases to general and administrative expenses and common
stock.
|
||||||||
(b)
Discounts on notes payable of $96,875 were recorded in connection with the
concurrent issuance of warrants, with a correponding increase to common
stock.
|
||||||||
(c)
The amortization of discounts on notes payable and convertible debentures
was increased by a $9,236, which increased interest
expense.
|
||||||||
(d)
Notes payable of $125,000 were reclassified from accounts
payable.
|
||||||||
(e)
Opening balance sheet adjustments were recorded for the restatements
described in note 2 to the Company's financial statements included in
its
annual report on Form 10-K for the year ended September 30, 2009 as
follows:
|
Accrued
liabilities
|
$ | (42,058 | ) | |
Convertible
debentures, net of discount
|
269,423 | |||
Common
stock
|
1,045,476 | |||
Retained
earnings
|
(1,272,841 | ) |
11
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The
discussion of our financial condition and results of operations set forth below
should be read in conjunction with the consolidated financial statements and
related notes thereto included elsewhere in this Form 10-Q. This Form 10-Q
contains forward-looking statements that involve risk and uncertainties. The
statements contained in this Form 10-Q that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. When used in
this Form 10-Q, or in the documents incorporated by reference into this Form
10-Q, the words “anticipate,” “believe,” “estimate,” “intend”, “expect”, “may”,
“will” and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements include, without limitation,
statements relating to competition, management of growth, our strategy, future
sales, future expenses and future liquidity and capital resources. All
forward-looking statements in this Form 10-Q are based upon information
available to us on the date of this Form 10-Q, and we assume no obligation to
update any such forward-looking statements. Our actual results, performance and
achievements could differ materially from those discussed in this Form 10-Q.
Factors that could cause or contribute to such differences (“Cautionary
Statements”) include, but are not limited to, those discussed in Item !.
Business – “Risk Factors” and elsewhere in Holdings’s Annual Report on Form
10-KSB, which are incorporated by reference herein. All subsequent
written and oral forward-looking statements attributable to Holdings or the
Company, or persons acting on their behalf, are expressly qualified in their
entirety by the Cautionary Statements.
Basis
of Presentation
The
financial information presented in this form 10-Q is not audited and is not
necessarily indicative of our future consolidated financial position results of
operations or cash flows. Our fiscal year-end is September 30, and our fiscal
quarters end on December 31, March 31, and June 30. Unless otherwise stated, all
dates refer to our fiscal year and fiscal periods.
Overview
Axion
International Holdings, Inc. (“Holdings”) was formed in 1981 to provide data
conversion and digital mapping services to users of customized geographic
information systems. On March 20, 2008, Holdings consummated an
Agreement and Plan of Merger (the “Merger”), among Holdings, Axion Acquisition
Corp., a Delaware corporation and direct wholly-owned subsidiary of the Holdings
(the “Merger Sub”), and Axion International, Inc., a Delaware corporation which
incorporated on August 6, 2006 with operations commencing in November 2007,
(“Axion”). Pursuant to the Merger, the Merger Sub was merged into
Axion, with Axion continuing as the surviving corporation and a wholly-owned
subsidiary of Holdings. Each issued and outstanding share of Axion
became 47,630 shares of Holdings common stock (“Common Stock”), or 9,190,630
shares in the aggregate constituting approximately 90.7% of Holdings issued and
outstanding Common Stock as of the effective date of the Merger. The
Merger resulted in a change of control, and as such, Axion (“we”, “our” or the
“Company”) is the surviving entity.
Axion is
the exclusive licensee of revolutionary patented technologies developed for the
production of structural plastic products such as railroad crossties, bridge
infrastructure, marine pilings and bulk heading. We believe these
technologies, which were developed by scientists at Rutgers University
(“Rutgers”), can transform recycled consumer and industrial plastics into
structural products which are more durable and have a substantially greater
useful life than traditional products made from wood, steel and
concrete. In addition, we believe our recycled composite products
will result in substantial reduction in greenhouse gases and also offer flexible
design features not available in standard wood, steel or concrete
products.
The
Merger has been accounted for as a reverse merger in the form of a
recapitalization with Axion as the successor. The recapitalization
has been given retroactive effect in the accompanying financial
statements. The accompanying consolidated financial statements
represent those of Axion for all periods prior to the consummation of the
Merger.
Critical
Accounting Policies
Management’s
Discussion and Analysis of Financial Condition and Results of Operations are
based upon our financial statements, which have been prepared in accordance with
generally accepted accounting principles (“GAAP”) in the U.S. The preparation of
financial statements in conformity with GAAP requires management to make
estimates, judgments and assumptions that affect the amounts reported in our
condensed consolidated financial statements and accompanying notes. Our critical
accounting policies are those that affect our financial statements materially
and involve difficult, subjective or complex judgments by
management.
An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used or changes in the accounting estimate that are reasonably likely to
occur could materially change the financial statements.
12
Cash and Cash
Equivalents. We consider all highly liquid investments with
maturities of three months or less to be cash equivalents. Our
investments are subject to potential credit risk. Our cash management and
investment policies restrict investments to low-risk, highly liquid
securities.
Income
Taxes. Income taxes are reflected under the liability method,
which establishes deferred tax assets and liabilities to be recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
U.S.
generally accepted accounting principles require that we record a valuation
allowance against deferred tax assets if it is “more likely than not” that we
will not be able to utilize it to offset future taxes. Because we are
a development stage company and have no history of profitable operations, we
have not recognized any of this net deferred tax asset. We currently
provide for income taxes only to the extent that we expect to pay cash taxes
(primarily state taxes and the federal alternative minimum tax) on current
taxable income.
Use of
Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date the
financial statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Inventories. Inventories
are priced at the lower of cost (first–in, first–out) or market and consist
primarily of raw materials. No adjustment has been to the cost of
inventories as of September 30, 2008.
Fair Value of Financial
Instruments. SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments”, requires that we disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
Goodwill and Intangible
Assets: We have adopted SFAS No. 142, “Goodwill and Other Intangible
Assets”, (“SFAS No. 142”). As a result, we do not amortize goodwill, and
instead annually evaluate the carrying value of goodwill for impairment, in
accordance with the provisions of SFAS No. 142. Goodwill represents the excess
of the cost of investments in subsidiaries over the fair value of the net
identifiable assets acquired. We hold licenses and expect both
licenses and the cash flow generated by the use of the licenses to continue
indefinitely due to the likelihood of continued renewal at little or no
cost.
Reverse Merger Purchase
Accounting. In connection with our Merger, we have made
estimates regarding the fair value of the assets acquired and the liabilities
assumed. Adjustments to these estimates are made during the
acquisition allocation period, which is generally up to twelve months from the
acquisition date. Subsequent to the allocation period, costs incurred
in excess of the recorded acquisition accruals are generally expensed as
incurred and if accruals are not utilized for the intended purpose, the excess
will be recorded as an adjustment to the cost of the acquired entity, which was
charged to paid in capital.
Litigation. We are
subject to various claims, lawsuits and administrative proceedings that arise
from the ordinary course of business. Liabilities and costs
associated with these matters require estimates and judgment based on
professional knowledge and experience of management and our legal
counsel. When estimates of our exposure for claims or pending or
threatened litigation matters meet the criteria of SFAS No. 5 “Accounting for
Contingencies”, amounts are recorded as charges to
operations. The ultimate resolution of any exposure may change as
further facts and circumstances become known. See Note 7 –
“Litigation and Other Contingencies”.
Results
of Operations
Three
Months ended December 31, 2008 Compared to Period from Inception through
December 31, 2008
Revenue. We are a development
stage commercial company and have not generated any meaningful revenues.
Revenues in the period from inception through December 31,
2008 were $10, 672 and primarily related to the sale of railroad crossties
intended for field testing.
Research and Development
Expense. Research and development expense for the three months
ended December 31, 2008 and for the period of inception through December 31,
2008 totaled $154,940 and $495,396 respectively. These expenses were principally
related to the development of our molds, products, and quality control
processes. This also includes expenses related to professional consulting fees,
membership dues paid to technology-related organizations that are directly
related research and development in polymer plastics. We continue to work with
our scientific team at Rutgers University to enhance our product formulations,
develop new innovative products, and expand the reach of our existing
products.
13
Marketing and Sales
Expenses. Marketing and selling expenses for the three months
ended December 31, 2008 and for the period the period of inception through
December 31, 2008 totaled $46,732 and $137,677, respectively. These expenses
were directly related to the development of our marketing materials and
increased sales activity. Our initial target markets are the domestic and
international railroad industry, the U.S. military, vehicular and pedestrian
bridges, marine rehabilitation, golf architecture, and industrial engineering
firms. We have had early success with the US Army and received orders
for the fabrication and installation of two thermoplastic composite I-Beam tank
bridges at Fort Bragg, North Carolina.
General and
Administrative. General and administrative costs for the three
months ended December 31, 2008 totaled $427,642 and $1,697,200 from the period
of inception. These expenses are primarily related to wages and salaries of the
management team, consulting fees related to market opportunities, patent defense
costs, and other corporate expenses.
Depreciation and
Amortization. Depreciation and amortization for the three
months ended December 31, 2008 and for the period of inception through December
31,2008 totaled $10,875 and $36,484 respectively, as we continue to
build our molds and operating capability.
Interest Expense, Net.
Commencing on September 29, 2008, our Debentures, Series B Debentures and
New Debentures earned interest at the rate of 9% per annum and mature on
September 30, 2010. Accordingly, we recorded coupon interest expense totaling
approximately $16,332 for the three months ended December 31, 2008.
Additionally, we amortize the discount that represents the fair value of
beneficial conversion feature of the Debentures, Series B Debentures and New
Debentures as interest expense. We recorded approximately $44,400 in non-cash
interest expense in the current quarter as we amortized the debenture
discounts.
Net Loss. We recorded a net
loss of $696,621 in the three months ended December 31, 2008, or $0.05 per
share. For the period from inception to December 31, 2008 we have incurred
a net operating loss of $4,240,782 or $0.43 per share. We
anticipate that we will continue to incur losses during the development stage of
the Company.
Liquidity
and Capital Resources: Plan of Operation
As of
December 31, 2008, we had $930,376 in cash and cash equivalents. Our
debentures bear interest at the rate of 9% per annum and are due and payable on
September 30, 2010, if not converted into Common Stock. As of
December 31, 2008, the aggregate outstanding principal amount of the debentures
was $725,736. The Debentures and the Series B Debentures are convertible at the
option of the holders into Common Stock at a rate of $0.40 or $0.30 per share,
and accordingly, we may issue up to 1,614,954 shares of Common Stock if the
remaining principal balance is converted in its entirety. The New
Debentures are convertible at the option of the holders into Common Stock at a
rate of $1.50 per share, and accordingly, we may issue up to 115,000 shares of
Common Stock if the remaining principal balance is converted in its
entirety. We may also elect to pay interest in the form of Common
Stock at the applicable conversion rate of each debenture. We recorded the
debentures at a discount after giving effect to the $986,747 intrinsic value of
the beneficial conversion feature and recorded the discount as
equity. We are amortizing the discount as interest expense over the
life of the debentures as the carrying value of the debentures accretes to the
respective face value. The carrying value of the debentures at
December 31, 2008 was $593,567.
We have
used $601,750 in our operating activities in the three months ended December 31,
2008 primarily as a result of our activities relating to the commercialization
of our business and expansion of our distribution capabilities.
Financing activities, during the quarter ending December 31, 2008 consisted
principally of the issuance of short term 0% promissory notes that generated net
proceeds of $125,000 and of cash deposits of $1,275,000 in advance of
anticipated equity financing. We also incurred expense of $6,700 for additional
machinery that will be used in the production of our products.
We have
used $1,899,141 in our operating activities since inception, primarily as a
result of our activities devoted to commercializing our business.
Financing activities, consisting principally of the sale of securities,
generated net cash proceeds totaling approximately $2,542,078 from inception
through December 31, 2008. We used $365,442 to purchase equipment, machinery,
software, and leasehold improvements from inception to December 31 2008,
including $268,125 for production molds and equipment and $56,329 for computer
software that will be used in the production and design of our
products. We also invested approximately $48,000 in the
acquisition of our
license from Rutgers during the period from inception through September 30,
2008. In addition, we received $506,000 from the sale of assets we
acquired in the Merger. We believe we will need to raise additional capital
through additional equity or debt financing in order to fund our operations and
repay our debt obligations. Our current operating plans for the next fiscal year
are to meet our existing customer commitments, enhance our research and
development capabilities, expand our marketing, sales, and engineering staffs,
and continue to develop innovative solutions. We may receive a
substantial amount of cash pursuant to the judgment rendered against Tonga, but
the outcome and the timing of the appeal filed by Tonga is
uncertain. Our ability to pay principal and interest on our
outstanding debentures, which are due in September 2010, as well as to meet our
other debt obligations and requirements to fund our planned capital
expenditures, depends on our future operating performance and ability to raise
capital. We
anticipate that we will have to raise additional funds through the issuance of
debt and/or equity during the next twelve months. There can be no
assurance that financing will be available, or if available, that such financing
will be upon terms acceptable to us. These conditions raise doubt about our
ability to continue as a going concern.
14
Disclosure
About Off-Balance Sheet Arrangements
We do not
have any transactions, agreements or other contractual arrangements that
constitute off-balance sheet arrangements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risks.
Not
applicable.
Item
4. Controls and Procedures
(a) Evaluation of
disclosure controls and procedures. We maintain “disclosure controls and
procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, or the Exchange Act, that are designed to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in Securities and Exchange Commission rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer to allow
timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Based
on our evaluation, our Chief Executive Officer and our current Chief
Financial Officer have concluded that, as of the end of the period covered by
this Quarterly Report on Form 10-Q, our disclosure controls and procedures were
not effective due to
the following material weaknesses:
·
|
Insufficient
personnel or expertise in the accounting function to provide for adequate
segregation of duties surrounding the approval, processing and recording
of transactions, the proper recording of complex transactions, independent
review of journal entries and account analyses, an adequate monitoring
program and a robust risk assessment function.
|
|
·
|
Missing
or nonoperating controls over the recording of stock-based compensation
transactions, allocation of production costs, and the preparation of
account analyses.
|
·
|
Insufficient
formal documentation of accounting policies and procedures to ensure
continued operating
effectiveness.
|
As a
result of these weaknesses, certain errors in accounting for debt modifications,
debt discounts and share-based transactions in the year ended September 30, 2008
and the nine months ended June 30, 2009 were not prevented or
detected.
Management
intends to focus its remediation efforts in the near term on developing
additional formal policies and procedures surrounding transaction processing,
particularly with respect to debt and share-based transactions, and
period-end account analyses and providing for additional review and monitoring
procedures and periodically assess the need for additional accounting resources
as the business develops. Management will continue to monitor and
evaluate the effectiveness of our internal controls and procedures and our
internal control over financial reporting on an ongoing basis and are committed
to taking further action and implementing enhancements or improvements, as
necessary.
(b) Changes in
internal control over financial reporting.
There has
been no changes in our internal control over financial reporting (as defined in
Rules 13a-13(f) and 15d-15(f) under the Exchange Act) that occurred during the
period covered by this quarterly report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
15
Part
II
Other
Information
Item 1. Legal
Proceedings.
None.
Item
1A. Risk Factors.
Not applicable.
Item
2. Unregistered Sales of Securities and Use of Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
Item
5. Other Information.
None.
Item
6. Exhibits.
Exhibits:
31.1
|
Section
302 Certification of Chief Executive Officer
|
31.2
|
Section
302 Certification of Principal Financial Officer
|
32.1
|
Section
906 Certification of Principal Executive Officer
|
32.2
|
Section
906 Certification of Principal Financial
Officer
|
16
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Axion
International Holdings, Inc.
|
|||
Date: February
22, 2010
|
/s/ James Kerstein
|
||
James
Kerstein
|
|||
Chief
Executive Officer
|
|||
Date: February
22, 2010
|
/s/ Gary
Anthony
|
||
Gary
Anthony
|
|||
Chief
Financial Officer
|
17