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EX-23.2 - Axion Power International, Inc. | v180179_ex23-2.htm |
As
filed with the Securities and Exchange
Commission
April 7, 2010
|
Registration
Statement No. 333-164352
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 1 TO REGISTRATION STATEMENT
ON
FORM S-1
UNDER
THE
SECURITIES ACT OF 1933
AXION
POWER INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
65-0774638
|
2121
|
||
(State
or other jurisdiction of
|
(I.R.S.
Identification Number)
|
(Primary
Standard Industrial
|
||
incorporation
or organization)
|
Classification
Code Number)
|
3601
Clover Lane
New
Castle, Pennsylvania 16105
Telephone
(724) 654-9300
(Address,
including zip code, and telephone number, including
area
code, of registrant’s principal executive offices)
Thomas
Granville
3601
Clover Lane
New
Castle, Pennsylvania 16105
Telephone
(724) 654-9300
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Jolie
Kahn, Esq.
61
Broadway, Suite 2820
New
York, NY 10006
Telephone
(212) 422-4910
and
Quentin
Collin Faust, Esq.
Andrews
Kurth LLP
1717
Main Street, Suite 3700
Dallas,
Texas 75201
Telephone
(214) 659-4400
Approximate Date of Commencement of
Proposed Sale to the Public: At such time or times after the effective
date of this registration statement as the selling stockholders shall
determine.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and
“small reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
|
Amount to be
Registered
|
Proposed Maximum
Offering Price
per Unit(1)
|
Proposed
Maximum Aggregate
Offering Price
|
Amount of
Registration Fee
|
||||||||||||
Common
Stock, par value $0.0001 per share
|
45,757,572 | $ | 1.37 | $ | 62,687,873 | $ | 4,469,65 | (2) |
(1)
|
Estimated for the purpose of
determining the registration fee pursuant to Rule 457(c), based on the
average of the bid and asked price as of January 7,
2010.
|
(2)
|
Paid
in connection with the original filing of this registration
statement.
|
The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The
information in the prospectus is not complete and may be changed. The selling
stockholders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell and is not soliciting an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
Subject
to Completion, dated April 7, 2010
PROSPECTUS
45,757,572
Shares of Common Stock
This
prospectus relates to the offer and sale of up 45,757,572 shares of common stock
of Axion Power International, Inc., a Delaware corporation, issued to certain
selling stockholders, which are signatories on the below listed securities
purchase agreement pursuant to a Securities Purchase Agreement, dated December
18, 2009, between the selling stockholders and the Company and that may be
offered and sold from time to time by the selling stockholders.
Unless
otherwise noted, the terms “the Company,” “our
Company,” “Axion,” “we,” “us” and “our” refer to Axion Power
International, Inc. and its subsidiaries.
The 45,757,572
shares of common stock covered by this prospectus may be offered and sold from
time to time by the selling stockholders or by their pledgees, donees,
transferees, assignees or other successors-in-interest that receive any of the
shares as a gift, distribution, or other non-sale related transfer.
The
selling stockholders may offer their shares from time to time directly or
through one or more underwriters, broker-dealers or agents, in the
over-the-counter market at market prices prevailing at the time of sale, in one
or more negotiated transactions at prices acceptable to the selling
stockholders, or otherwise.
We will
not receive any proceeds from the sale of shares by the selling stockholders. In
connection with any sales of the common stock offered hereunder, the selling
stockholders, any underwriters, agents, brokers or dealers participating in such
sales may be deemed to be “underwriters” within the meaning of the Securities
Act of 1933, as amended (the “Securities Act”).
We will
pay the expenses related to the registration of the shares covered by this
prospectus. The selling stockholders will pay any commissions and selling
expenses they may incur.
Our
common stock trades on the Over the Counter Bulletin Board under the symbol
“AXPW.OB”. The closing sale price on the OTC Bulletin Board on April 1, 2010,
was $1.15 per share.
Investing
in the common stock offered by this prospectus is speculative and involves a
high degree of risk. See “Risk Factors” beginning on page 5.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date
of this prospectus
is
, 2010
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
|
3
|
RISK
FACTORS
|
5
|
USE
OF PROCEEDS
|
12 |
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
12 |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
17 |
BUSINESS
|
28
|
LEGAL
PROCEEDINGS
|
37 |
MANAGEMENT
|
39 |
EXECUTIVE
COMPENSATION
|
46
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
51
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
|
52 |
THE
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
|
53
|
DESCRIPTION
OF SECURITIES
|
57
|
LEGAL
MATTERS
|
61
|
EXPERTS
|
61
|
WHERE
YOU CAN FIND MORE INFORMATION
|
61
|
AXION
POWER INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2009
|
64
|
PART
II – INFORMATION NOT REQUIRED IN PROSPECTUS
|
105 |
SIGNATURES
|
115
|
-i-
ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with the Securities
and Exchange Commission using the Securities and Exchange Commission’s
registration rules for a delayed or continuous offering and sale of securities.
Under the registration rules, using this prospectus and, if required, one or
more prospectus supplements, the selling stockholders named herein may
distribute the shares of common stock covered by this prospectus. This
prospectus also covers any shares of common stock that may become issuable as a
result of stock splits, stock dividends or similar transactions.
A
prospectus supplement may add, update or change information contained in this
prospectus. We recommend that you read carefully this entire prospectus,
especially the section entitled “Risk Factors” beginning on page 5, and any
supplements before making a decision to invest in our common stock.
Cautionary
Note Regarding Forward-Looking Information
This
prospectus, in particular the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” appearing herein, contains certain
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended , and Section 21E of the Securities Exchange Act of
1934, as amended. 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 prospectus as well as in reports, statements, and information we have
filed with the Securities and Exchange Commission, 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 prospectus 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;
|
·
|
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;
|
1
|
·
|
we will have limited market
opportunities based on our anticipated manufacturing
capacity;
|
|
·
|
our shareholders may suffer
significant dilution in the event that our outstanding warrants and
options are ever exercised;
|
|
·
|
we depend on key personnel and
our business may be severely disrupted if we lose the services of our key
executives and employees;
|
|
·
|
our revenues may suffer if
general economic conditions worsen, remain in the current
adverse state and/or do not improve in a timely manner;
and
|
|
·
|
we are subject to stringent
environmental regulation.
|
2
PROSPECTUS
SUMMARY
This
summary highlights important information about this offering and our business.
It does not include all information you should consider before investing in our
common stock. Please review this prospectus in its entirety, including the risk
factors and our financial statements and the related notes, before you decide to
invest.
Our
Company
We are a
development stage company that was formed as Axion Power Corporation in
September 2003 to acquire and develop certain innovative battery technology.
Since inception, Axion Power Corporation has been engaged in research and
development of the new technology for the production of lead-acid-carbon energy
storage devices (technology) that we refer to as our PbC devices. As of December
31, 2003, Axion Power Corporation engaged in a reverse acquisition with Tamboril
Cigar Company, 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 Axion Power
Corporation, 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 R&D and manufacturing activities and also manufactures lead-acid
battery product for sale to distributors and end user customers.
Since
inception, our operations have been financed by a small group of individuals and
entities with little to no revenue generated from operations. As a result,
trading in our common stock has been sporadic, volumes have been low, and the
market price has been volatile. We believe that a successful transition from
R&D to manufacturing, and therefore marketing and selling our proprietary
products, will improve our cash balances and market profile and may result in a
more active trading market for our stock. However, we can provide no guarantees
that our transition efforts will be successful.
Our
Business
We are a
development stage company that has invested six years and approximately $18.4
million through December 31, 2009 in R&D expense to develop a patented
energy storage device that uses carbon electrode assemblies to replace the
lead-based negative electrodes found in conventional lead-acid batteries. Our
PbC energy storage device is a battery-supercapacitor hybrid that combines the
simplicity of lead-acid batteries with the fast recharge rate and longer cycle
life of supercapacitors, resulting in a relatively low-cost device that has
versatility of design that will allow differing iterations to deliver maximum
power; maximum energy; or a range of balances between the two. We
recently raised over $25 million, which will be used mainly to secure additional
equipment and expand personnel and operations as we move out of a development
stage into a commercial stage and begin full scale manufacturing of our
products.
We
believe our advanced battery technologies are uniquely situated to answer the
current challenges facing the conventional lead-acid battery and that industry
as a whole. While we explore the various potential applications for our PbC
technology, our battery manufacturing plant in New Castle, Pennsylvania provides
us with both an excellent R&D facility and a well suited pilot production
plant in which to produce our advanced energy storage devices. This plant allows
us to manufacture our PbC carbon electrodes in limited quantity and to assemble
our new energy storage batteries for laboratory testing and for small scale
demonstration projects. In manufacturing this battery assembly using
conventional lead-acid battery production equipment, we provide proof to our
future PbC carbon negative electrode customers that our product is suitable to
immediate use in their factories.
3
The
Offering
Common
stock offered by the selling stockholders:
|
45,757,572
shares of our common stock, par value $0.0001 per
share.
|
|
Offering
prices:
|
The
shares offered by this prospectus may be offered and sold at prevailing
market prices or such other prices as the selling stockholders may
determine.
|
|
Common
stock outstanding:
|
84,653,302
shares as of March 17, 2010.
|
|
Dividend
policy:
|
Dividends
on our common stock may be declared and paid when and as determined by our
board of directors. We have not paid and do not expect to pay dividends on
our common stock.
|
|
Over
the Counter Bulletin Board symbol:
|
AXPW.OB
|
|
Use
of proceeds:
|
We
are not selling any of the shares of common stock being offered by this
prospectus and will receive no proceeds from the sale of the shares by the
selling stockholders. All of the proceeds from the sale of common stock
offered by this prospectus will go to the selling stockholders at the time
they sell their shares.
|
Risk
Factors
See “Risk
Factors” beginning on page 5 for a discussion of
factors you should carefully consider before deciding to invest in our common
stock.
Our
Address
Our
principal executive offices are located at 3601 Clover Lane, New Castle,
Pennsylvania 16105, and our telephone number is (724) 654-9300.
4
RISK
FACTORS
Investing
in our common stock is very speculative and involves a high degree of risk. You
should carefully consider all of the information in this prospectus before
making an investment decision. The following are among the risks we face related
to our business, assets and operations. They are not the only risks we face.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also arise. Any of these risks could
materially and adversely affect our business, results of operations and
financial condition, which in turn could materially and adversely affect the
trading price of our common stock. You should not purchase our shares unless you
can afford to lose your entire investment.
Risks
related to our business
We
are a development stage company, and our business and prospects are extremely
difficult to evaluate.
Since our
inception in September 2003, the majority of our resources have been dedicated
to our R&D efforts, and we have only recently begun to transition into the
very early stages of commercial PbC prototype production. We
do not have a stable operating history that you can rely on in connection with
your evaluation of our current business and our future business prospects. Our
business and prospects must be carefully considered in light of the limited
history of PbC technology and the many business risks, uncertainties and
difficulties that are typically encountered by development stage companies that
have sporadic revenues and are committed to focusing on research, development
and product testing for an indeterminate period of time. Some of the principal
risks and difficulties we have encountered and expect to continue to encounter
include, but are not limited to, our ability to:
|
·
|
Maintain effective control over
the cost of our research, pace of progress, development and product
testing activities;
|
|
·
|
Develop cost effective
manufacturing methods for essential components of our proposed
products;
|
|
·
|
Improve the performance of our
commercial prototype
batteries;
|
|
·
|
Successfully transition from our
laboratory research and pilot production efforts to commercial
manufacturing and sales of our battery
technologies;
|
|
·
|
Adapt and successfully execute
our business plan;
|
|
·
|
Implement and improve
operational, financial and management control systems and
processes;
|
|
·
|
License complementary
technologies if necessary and successfully defend our intellectual
property rights against potential
claims;
|
|
·
|
Respond effectively to
competitive developments and changing market
conditions;
|
|
·
|
Continue to attract, retain and
motivate qualified personnel;
and
|
|
·
|
Manage each of the other risks
set forth below.
|
Because
of our limited operating history and our relatively recent transition into the
production of prototype PbC devices that we are relying on to become our core
revenue generating products, we have limited insight into trends and conditions
that may exist or might emerge and affect our business. There is no assurance
that our business strategy will be successful or that we will successfully
address the risks identified in this prospectus.
5
We
have incurred net losses from inception and do not expect to introduce our first
commercial PbC products for a minimum of three months.
From our
inception we have incurred net losses and expect to continue to incur
substantial and possibly increasing losses for the foreseeable future as we
increase our spending to finance the development of and production methods for
our PbC devices, our administrative activities, and the costs associated with
being a public company. Our operating losses have had, and will continue to
have, an adverse impact on our working capital, total assets and stockholders’
equity. For the year ended December 31, 2009, we had a net loss applicable to
common shareholders of approximately $18.6 million. In addition, we
had cumulative losses from inception (September 18, 2003) to December 31, 2009
of $60.9 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
three months. There can be no assurance that our development and testing
activities will be successful or that our proposed products will achieve market
acceptance or be sold in sufficient quantities and at prices necessary to make
them commercially viable. If we do not realize sufficient revenue to achieve
profitability, our business could be harmed.
Our
revenues may suffer if general economic conditions do not begin to
improve.
Our
revenues and our ability to generate earnings are affected by the general
economic factors that are adversely impacting the global economy, such as lack
of liquidity in the capital markets, reduced demand for consumer and industrial
products, excessive inflation, currency fluctuations, increased commodity prices
and employment levels, resulting in a temporary or longer-term overall decline
in demand for our products. This trend has already commenced with excess supply
beginning to build up in the industries in which we operate. Therefore, any
continued downturn or recession in the United States, Canada or the European
Economic Community is expected to have a material adverse effect on our
business, results of operations and financial condition.
As
we sell our products, we may become the subject of product liability
claims.
Due to
the hazardous nature of many of the key materials used in the manufacturing of
batteries, the producers of such products may be exposed to a greater number of
product liability claims, including possible environmental claims. We currently
have product liability insurance up to $1,000,000 per occurrence and $5,000,000
in the aggregate to protect us against the risk that in the future a product
liability claim or product recall could materially and adversely affect our
business operations. Inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of our product. We cannot
assure you that as we continue distribution of our products that we will be able
to obtain or maintain adequate coverage on acceptable terms, or that such
insurance will provide adequate coverage against all potential claims. Even if
we maintain adequate insurance, any successful claim could materially and
adversely affect our reputation and prospects, and divert management’s time and
attention. If we are sued for any injury allegedly caused by our future products
our liability could exceed our total assets and our ability to pay such
liability.
Our
products contain hazardous materials including lead.
Lead is a
toxic material that is a primary raw material in our batteries. We also use,
generate and discharge other toxic, volatile and hazardous chemicals and wastes
in our research, development and manufacturing activities. We are required to
comply with federal, state and local laws and regulations regarding pollution
control and environmental protection. Under some statutes and regulations, a
government agency, or other parties, may seek to recover response costs from
operators of property where releases of hazardous substances have occurred or
are ongoing, even if the operator was not responsible for such release or
otherwise at fault. In addition, more stringent laws and regulations may be
adopted in the future, and the costs of complying with those laws and
regulations could be substantial. If we fail to control the use of, or
inadequately restrict the discharge of, hazardous substances, we could be
subject to significant monetary damages and fines, or be forced to suspend
certain operations.
6
We
are subject to stringent environmental regulation.
We use or
generate certain hazardous substances in our research and manufacturing
facilities. We do not carry environmental impairment insurance. We believe that
all permits and licenses required for the operation of our business are in
place. Although we do not know of any material environmental, safety or health
problems in our property or processes, there can be no assurance that problems
will not develop in the future which could have a material adverse effect on our
business, results of operation, or financial
condition.
The
growth we seek is substantial and challenging to achieve and
maintain.
The
realization of our business objectives will require substantial future growth.
Even in the event we are able to complete the development of our prototypes,
introduce our products to the market and grow our business, we expect that rapid
growth will significantly challenge our managerial, operational and financial
resources. We must continue to prepare for our growth, if any, through
appropriate systems and controls. We must also establish, train and manage a
much larger work force, which will again require advance planning. If we do not
prepare for and manage the growth of our business effectively, our potential for
success could be materially and adversely affected.
Being
a public company increases our administrative costs significantly.
As a
public company, we incur significant legal, accounting and other expenses that
would not be incurred by a comparable private company. Securities and Exchange
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 twelve
months ended December 31, 2009, we spent $230,433 on these expenses, however, we
do expect that Securities and Exchange Commission rules and regulations,
including the prospective requirements of auditor attestation under Section 404
of the Sarbanes Oxley Act of 2002, will make it more difficult and expensive for
us to attract and retain qualified directors and executive
officers.
We
depend on key personnel, and our business may be severely disrupted if we lose
the services of our key executives and employees.
Our
business is dependent upon the knowledge and experience of our key scientists,
engineers and executive officers. Given the competitive nature of our industry,
there is the risk that one or more of our key scientists or engineers will
resign their positions, which could have a disruptive impact on our operations.
If any of our key scientists, engineers or executive officers do not continue in
their present positions, we may not be able to easily replace them and our
business may be severely disrupted. If any of these individuals joins a
competitor or forms a competing company, we could lose important know-how and
experience and incur substantial expense to recruit and train suitable
replacements. Currently, all of our key employees have employment contracts
which have remaining terms of at least three months and non-compete provisions
that extend an additional 24 months.
We
cannot begin automated production of our PbC technology for a minimum of three
months.
We will
not be able to begin full commercial production of our PbC energy storage
devices until we complete our current testing operations, our planned
application evaluation and our planned product development. We believe our path
to automated production will require a minimum of three 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.
7
Our
certificate of incorporation and by-laws provide for indemnification and
exculpation of our officers and directors.
Our
certificate of incorporation provides for indemnification of our officers,
directors and employees to the fullest extent permitted by Delaware law. It also
provides exculpation of our directors for monetary damages arising from breach
of their fiduciary duties in cases that do not involve fraud or willful
misconduct. The Securities and Exchange Commission has advised that it believes
that indemnification for liabilities arising under the securities laws is
against public policy as expressed in the securities laws and is therefore
unenforceable.
We
have limited manufacturing experience which may translate into substantial cost
overruns in manufacturing and marketing our products.
As we
transition into the commercial production of our prototype devices, we may
experience substantial cost overruns in manufacturing and marketing our PbC
technologies, and may not have sufficient capital in the future to successfully
complete such tasks. In addition, we may not be able to manufacture or market
our products because of industry conditions, general economic conditions, and/or
competition from potential manufacturers and distributors. Either of these
inabilities could cause us to abandon our current business plan and may cause
our operations to eventually fail.
Risks
related to our PbC Technology
We
need to improve the performance of our commercial prototypes to achieve large
scale production.
Our
commercial prototypes do not satisfy all of our performance expectations, and we
need to continue to improve various aspects of our PbC technology as we move
forward with larger scale production of our commercial prototypes. There is no
assurance that we will be able to resolve the known technical issues. Future
testing of our prototypes may reveal additional technical issues that are not
currently recognized as obstacles. If we cannot improve the performance of our
prototypes in a timely manner, we may be forced to redesign or delay the large
scale production of commercial prototypes or possibly cause us to abandon our
product development efforts altogether.
We
do not have any long-term vendor contracts.
We
currently purchase the raw materials for our carbon electrodes and a variety of
other components from third parties. We then fabricate our carbon electrodes and
build our prototypes in-house. We do not have any long-term contracts with
suppliers of raw materials and components, and our current suppliers may be
unable to satisfy our future requirements on a timely basis. Moreover, the price
of purchased raw materials and components could fluctuate significantly due to
circumstances beyond our control. If our current suppliers are unable to satisfy
our long-term requirements on a timely basis, we may be required to seek
alternative sources for necessary materials and components or redesign our
proposed products to accommodate available substitutes.
We
do not have extensive manufacturing experience.
We do not
have extensive manufacturing experience with respect to manufacturing our
commercial prototypes in quantities required to achieve our operational goals,
and there is no assurance that we will be able to retain a qualified
manufacturing staff or effectively manage the manufacturing of our proposed
products when we are ready to do so.
8
We
will be a small player in an intensely competitive market and may be unable to
compete.
The
lead-acid battery industry is large, intensely competitive and resistant to
technological change. If our product development efforts are successful, we will
have to compete or enter into further strategic relationships with
well-established companies that are much larger and have greater financial
capital and other resources than we do. We may be unable to convince end users
that products based on our PbC technology are superior to available
alternatives. Moreover, if competitors introduce similar products, they may have
a greater ability to withstand price competition and finance their marketing
programs. There is no assurance that we will be able to compete
effectively.
To
the extent we enter into strategic relationships, we will be dependent upon our
partners.
Some of
our products are not intended for direct sale to end users and our business
strategy are likely to require us to enter into strategic relationships with
manufacturers of other power industry equipment that use batteries and other
energy storage devices as important components of their finished products. The
agreements governing any future strategic relationships are unlikely to provide
us with control over the activities of any strategic relationship we negotiate
and our future partners, if any, could retain the right to terminate the
strategic relationship at their option. Our future partners will have
significant discretion in determining the efforts and level of resources that
they dedicate to our products and may be unwilling or unable to fulfill their
obligations to us. In addition, our future partners may develop and
commercialize, either alone or with others, products that are similar to or
competitive with the products that we intend to produce.
Risks
relating to our intellectual property
We
may rely on licenses for our PbC technology, which may affect our continued
operations with respect thereto.
As we
develop our PbC technology, we may need to license additional technologies to
optimize the performance of our products. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate any licensed technology into our proposed
products. Our inability to obtain any necessary licenses could delay our product
development and testing until alternative technologies can be identified,
licensed and integrated. The inability to obtain any necessary third-party
licenses could cause us to abandon a particular development path, which could
seriously harm our business, financial position and results of our
operations.
If
we are unable to protect our proprietary technology and preserve our trade
secrets, we will increase our vulnerability to competitors which could
materially adversely impact our ability to remain in business.
Our
ability to successfully commercialize our products will depend, in large
measure, on our ability to protect those products and our technology with
domestic and foreign patents. We will also need to continue to preserve our
trade secrets. The issuance of a patent is not conclusive as to its validity or
as to the enforceable scope of the claims of the patent. The patent positions of
technology companies, including us, are uncertain and involve complex legal and
factual issues.
We cannot
assure you that our patents will prevent other companies from developing similar
products or products which produce benefits substantially the same as our
products, or that other companies will not be issued patents that may prevent
the sale of our products or require us to pay significant licensing fees in
order to market our products. Accordingly, if our patent applications are not
approved or, even if approved, if such patents are circumvented or not upheld in
a court of law, our ability to competitively exploit our patented products and
technologies may be significantly reduced. Additionally, the coverage claimed in
a patent application can be significantly reduced before the patent is
issued.
From time
to time, we may need to obtain licenses to patents and other proprietary rights
held by third parties in order to develop, manufacture and market our products.
If we are unable to timely obtain these licenses on commercially reasonable
terms, our ability to commercially exploit such products may be inhibited or
prevented. Additionally, we cannot assure investors that any of our products or
technology will be patentable or that any future patents we obtain will give us
an exclusive position in the subject matter claimed by those patents.
Furthermore, we cannot assure investors that our pending patent applications
will result in issued patents, that patent protection will be secured for any
particular technology, or that our issued patents will be valid or enforceable
or provide us with meaningful protection.
9
If
we are required to engage in expensive and lengthy litigation to enforce our
intellectual property rights, the costs of such litigation could be material to
our results of operations, financial condition and liquidity and, if we are
unsuccessful, the results of such litigation could materially adversely impact
our entire business.
We may
find it necessary to initiate further litigation to enforce our patent rights,
to protect our trade secrets or know-how or to determine the scope and validity
of the proprietary rights of others. We plan to aggressively defend our
proprietary technology and any issued patents if funding is available to do so.
Litigation concerning patents, trademarks, copyrights and proprietary
technologies can often be time-consuming and expensive and, as with litigation
generally, the outcome is inherently uncertain.
Although
we have entered into invention assignment agreements with our employees and with
certain advisors, if those employees or advisors develop inventions or processes
independently which may relate to products or technology under development by
us, disputes may also arise about the ownership of those inventions or
processes. Time-consuming and costly litigation could be necessary to enforce
and determine the scope of our rights under these agreements.
We also
rely on confidentiality agreements with our strategic partners, customers,
suppliers, employees and consultants to protect our trade secrets and
proprietary know-how. We may be required to commence litigation to enforce such
agreements, and it is certainly possible that we will not have adequate remedies
for breaches of our confidentiality agreements.
Other
companies may claim that our technology infringes on their intellectual property
or proprietary rights and commence legal proceedings against us which could be
time-consuming and expensive and could result in our being prohibited from
developing, marketing, selling or distributing our products.
Because
of the complex and difficult legal and factual questions that relate to patent
positions in our industry, we cannot assure you that our products or technology
will not be found to infringe upon the intellectual property or proprietary
rights of others. Third parties may claim that our products or technology
infringe on their patents, copyrights, trademarks or other proprietary rights
and demand that we cease development or marketing of those products or
technology or pay license fees. We may not be able to avoid costly patent
infringement litigation, which will divert the attention of management away from
the development of new products and the operation of our business. We cannot
assure investors that we would prevail in any such litigation. If we are found
to have infringed on a third party's intellectual property rights, we may be
liable for money damages, encounter significant delays in bringing products to
market or be precluded from manufacturing particular products or using
particular technology.
Other
parties may challenge certain of our foreign patent applications. If such
parties are successful in opposing our foreign patent applications, we may not
gain the protection afforded by those patent applications in particular
jurisdictions and may face additional proceedings with respect to similar
patents in other jurisdictions, as well as related patents. The loss of patent
protection in one jurisdiction may influence our ability to maintain patent
protection for the same technology in another jurisdiction.
New
technology may lead to our competitors developing superior products which would
reduce demand for our products.
Research
into the electrochemical applications for carbon nanotechnology and other
storage technologies is proceeding at a rapid pace, and many private and public
companies and research institutions are actively engaged in the development of
new battery technologies based on carbon nanotubes, nanostructured carbon
materials and other non-carbon materials. These new technologies may, if
successfully developed, offer significant performance or price advantages when
compared with our technologies. There is no assurance that our existing patents
or our pending and proposed patent applications will offer meaningful protection
if a competitor develops a novel product based on a new
technology.
10
Risks
relating to our common stock
The
number of shares of common stock we are obligated to register could depress our
stock price.
Effective
May 29, 2009, we registered 3,421,036 shares of our common stock for resale by
certain selling stockholders. Pursuant to the private placement which
closed on December 22, 2009, and which is the subject of this prospectus, we are
obligated to register an additional 45,757,572 shares of our common stock for
resale by the selling stockholders.The sale of a significant number of these
shares as well as the shares of common stock covered by this prospectus 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
As of
March 17, 2010, we had 84,653,302 shares of common stock outstanding, (a) we
have 100,000 unvested common shares that have been granted and not issued, (b)
we have warrants outstanding and that, if exercised, would generate proceeds of
$18,979,625 and cause us to issue up to an additional 13,865,433 shares of
common stock. 1,385,714 of these warrants were classified as derivative
liabilities, and (c) we have options outstanding to purchase common stock that,
if exercised, would generate proceeds of $4,655,799 and result in the issuance
of an additional 1,721,270 shares of common stock.
We have
provided and intend to continue offering compensation packages to our management
and employees that emphasize equity-based compensation.
As a key
component of our growth strategy, we have provided and intend to continue
offering compensation packages to our management and employees that emphasize
equity-based compensation. In particular:
|
·
|
Our incentive stock plan
authorized incentive awards for up to 2,000,000 shares of our common
stock; we have issued incentive awards for an aggregate of 782,950 shares;
and we have the power to issue incentive awards for an additional
1,217,050 shares without stockholder
approval;
|
|
·
|
Our independent directors’ stock
option plan authorized options for up to 500,000 shares of our common
stock; we have issued options for an aggregate of 467,685 shares; and have
the power to issue options for an additional 32,315 shares without
stockholder approval;
|
|
·
|
We have issued contractual
options for an aggregate of 1,943,000 shares of our common stock, of which
908,000 are currently outstanding, to executive officers under the terms
of their employment agreements with us;
and
|
|
·
|
We have issued contractual
options for an aggregate of 1,180,700 shares of our common stock, of which
485,400 are currently outstanding to certain employees, attorneys and
consultants under the terms of their agreements with
us.
|
We are
required to account for the fair market value of equity compensation awards as
operating expenses. As our business matures and expands, we expect to incur
increasing amounts of non-cash compensation expense, which may materially and
adversely affect our future operating results.
We
may issue stock to finance acquisitions.
We may
wish to acquire complementary technologies, additional facilities and other
assets. Whenever possible, we will try to use our stock as an acquisition
currency in order to conserve our available cash for operations, but use of
stock as an acquisition currency will also dilute the ownership of then current
existing stockholders. Future acquisitions may give rise to substantial charges
for the impairment of goodwill and other intangible assets that would materially
and adversely affect our reported operating results. Any future acquisitions
will involve numerous business and financial risks, including:
11
|
·
|
difficulties in integrating new
operations, technologies, products and
staff;
|
|
·
|
diversion of management attention
from other business concerns;
and
|
|
·
|
cost and availability of
acquisition financing.
|
We will
need to be able to successfully integrate any businesses we may acquire in the
future, and the failure to do so could have a material adverse effect on our
business, results of operations and financial condition.
Because
of factors unique to us, the market price of our common stock is likely to be
volatile.
The large
number of shares that we have registered and will register in the future on
behalf of certain selling stockholders, the development stage of our business
and numerous other factors, the trading price of our common stock has been and
is likely to continue to be highly volatile. In addition, actual or anticipated
variations in our quarterly operating results; the introduction of new products
by competitors; changes in competitive conditions or trends in the battery
industry; changes in governmental regulation and changes in securities analysts’
estimates of our future performance or that of our competitors or our industry
in general, could adversely affect our future stock price. Investors should not
purchase our shares if they are unable to suffer a complete loss of their
investment.
Our
stock price may not stabilize at current levels.
Our
common stock is quoted on the Over the Counter Bulletin Board. Since trading in
our common stock began in January 2004, trading has been sporadic, trading
volumes have been low and the market price has been volatile. The closing price
reported as of March 17, 2010, the latest practicable date, was $1.15 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.
USE
OF PROCEEDS
We are
not selling any of the shares of common stock being offered by this prospectus
and will receive no proceeds from the sale of the shares by the selling
stockholders. All of the proceeds from the sale of common stock offered by this
prospectus will go to the selling stockholders at the time they offer and sell
such shares. We will bear all costs associated with registering
the shares of common stock offered by this prospectus.
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At the
start of the year ended December 31, 2008, our common stock was trading on the
OTC Pink Sheets under the symbol AXPW.PK. On July 3, 2008, our common
stock resumed trading on the Over the Counter Bulletin Board under the symbol
“AXPW”. Trading in our common stock has historically been sporadic,
trading volumes have been low, and the market price has been
volatile.
The
following table shows the range of high and low bid prices for our common stock
as reported by the OTC Pink Sheets and the OTC Bulletin Board, as the case may
be, for each quarter since the beginning of 2008. The quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may not
represent actual transactions.
12
Period
|
High
|
Low
|
||||||
First
Quarter 2008
|
$ | 2.74 | $ | 1.85 | ||||
Second
Quarter 2008
|
$ | 2.50 | $ | 1.15 | ||||
Third
Quarter 2008
|
$ | 2.05 | $ | 1.30 | ||||
Fourth
Quarter 2008
|
$ | 1.72 | $ | 1.01 | ||||
First
Quarter 2009
|
$ | 1.25 | $ | 0.80 | ||||
Second
Quarter 2009
|
$ | 2.10 | $ | 0.78 | ||||
Third
Quarter 2009
|
$ | 2.75 | $ | 1.05 | ||||
Fourth
Quarter 2009
|
$ | 2.25 | $ | 1.20 |
On March
17, 2010, the sale price for our common stock as reported on the Over the
Counter Bulletin Board was $1.15 per share.
Securities
outstanding and holders of record
On March
17, 2010, there were approximately 463 record holders of our common stock and
84,653,302 shares of our Common Stock issued and outstanding.
Dividend
Policy
We have
not paid and do not expect to pay dividends on our common stock. Any future
decision to pay dividends on our common stock will be at the discretion of our
board of directors and will depend upon, among other factors, our results of
operations, financial condition, capital requirements and contractual
restrictions
Information
respecting equity compensation plans
Summary Equity Compensation
Plan Information: The following table provides summary information on our
equity compensation plans as of December 31, 2009:
Plan category:
|
Number of shares
issuable on exercise of
outstanding options
|
Weighted average
exercise price of
outstanding options
|
Number of shares
available for future
issuance under equity
compensation plans
|
|||||||||
Equity
compensation plans approved by stockholders
|
||||||||||||
2004 Incentive
Stock Plan
|
51,950 | $ | 3.48 | 1,217,050 | ||||||||
2004
Directors’ Option Plan
|
438,120 | $ | 1.78 | 32,315 | ||||||||
|
||||||||||||
Equity
compensation plans not approved by stockholders
|
||||||||||||
Contract
options held by officers
|
908,000 | $ | 3.22 | |||||||||
Contract
options held by employees, consultants and attorneys
|
485,400 | $ | 2.74 | |||||||||
Total equity
awards
|
1,883,470 | $ | 2.77 |
The
Company has two stockholder approved equity compensation plans and occasionally
enters into employment and other contracts that provide for equity compensation
arrangements other than those contemplated by the stockholder approved plans.
The following sections summarize the Company’s equity compensation
arrangements.
Equity
Incentive Plans Not Approved by Stockholders: The Company issued 629,300,
228,000, 789,500 and 36,000 stock purchase options in the fiscal years ended
December 31, 2006, 2007, 2008 and 2009, respectively, to officers, employees,
attorneys and consultants in connection with contractual agreements that do not
reduce the shares available under the stockholder’s approved plans. The
following paragraphs summarize these contractual stock options.
13
In
January 2004, members of the law firm of Fefer, Petersen & Cie, general
corporate counsel (of which one member was a director of the Company at the
time) were granted two-year contractual options to purchase 189,300 shares of
common stock at a price of $2.00 per share as partial compensation for services
rendered, valued at $68,296. These members also received 116,700 warrants as
consideration of pre-merger Tamboril debt. In August 2004, $1.00 of the exercise
price of the total 306,000 options and warrants owned by these members was
considered paid in advance in consideration of unbilled legal services provided
by the firm. The Company recorded $306,000 related to this reduction. All of the
warrants and options were exercised in the fourth quarter of 2005; however,
$306,000 of the amount is included in stock subscription receivable as of
December 31, 2005 and was received in 2006.
In July
2004, the President and Chief Operating Officer of the Company, Charles
Mazzacato, was granted a contractual option to purchase 240,000 shares of common
stock at a price of $4.00 per share. This option vests on a monthly basis at the
rate of 60,000 shares per year commencing July 31, 2005 and is exercisable for
five years after each vesting date. The market value of our common stock at the
date of grant was greater than the exercise price, which resulted in a total
intrinsic value of $180,000. In accordance with Accounting Principles
Board Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”) the
Company expensed the intrinsic value over the vesting period which resulted in
expense of $18,750 and $45,000 during the years ended December 31, 2004 and
2005, respectively. On January 1, 2006, the Company adopted the provisions of
ASC718 “Compensation – Stock Compensation” using the modified prospective
transition method as discussed below and recorded compensation of $124,364
during the year ended December 31, 2006. During the year ended December 31, 2006
the options were forfeited as a result of his termination of employment from the
Company in 2006.
In July
2004, the Chief Financial Officer of the Company, Peter Roston, was granted a
contractual option to purchase 200,000 shares of common stock at a price of
$4.00 per share. This option will vest on a monthly basis at the rate of 50,000
shares per year commencing July 31, 2005 and is exercisable for five years after
each vesting date. The market value of the Company’s common stock at the date of
grant was greater than the exercise price, which resulted in a total intrinsic
value of $150,000. In accordance with APB 25 the Company has expensed the
intrinsic value over the vesting period, which resulted in expense of $15,625
and $37,500 during the years ended December 31, 2004 and 2005, respectively. On
January 1, 2006, the Company adopted the provisions of ASC 718 (formerly FASB
123R) as discussed below and recorded compensation of $138,182 during the year
ended December 31, 2006. During the year ended December 31, 2006 the options
were forfeited as a result of his termination of employment from the Company in
2006.
In April
2005, the Chief Executive Officer of the Company, Thomas Granville, was granted
a contractual option to purchase 180,000 shares of common stock at a price of
$2.50 per share. This option vests at the rate of 7,500 shares per month
commencing May 1, 2005 and is exercisable for five years after each vesting
date. The market value of our common stock at the date of grant was less than
the exercise price which resulted in no intrinsic value in accordance with APB
25. On January 1, 2006, the Company adopted the provisions of ASC 718 as
discussed below and recorded compensation of $112,500 during the year ended
December 31, 2006.
In April
2005, a European financial advisor was granted a contractual option to purchase
30,000 shares of common stock at a price of $2.50 per share. Options for an
aggregate of 20,000 shares vested during the year ended December 31, 2005 and
will be exercisable for five years. On December 31, 2005, a total of 10,000
unvested options were forfeited when the advisory agreement was terminated. The
options were valued at $35,998 using the Black-Scholes-Merton option pricing
model and included as expense in 2005.
In
September 2005, the Chief Technical Officer of the Company, Edward Buiel, was
granted a contractual option to purchase 90,000 shares of common stock at a
price of $4.00 per share. This option vests at the rate of 2,500 shares per
month commencing October 2005 and is exercisable for five years after each
vesting date. The market value of our common stock at the date of grant was less
than the exercise price which resulted in no intrinsic value in accordance with
APB 25. On January 1, 2006, the Company adopted the provisions of ASC 718 as
discussed below and recorded compensation of $68,100 during the year ended
December 31, 2006.
14
In
February 2006, the Chief Executive Officer of the Company, Thomas Granville, was
granted an option to purchase 500,000 shares of common stock at an exercise
price of $6.00. Of this total 300,000 options vested immediately and the balance
is expected to vest, subject to the attainment of certain specified objectives,
over the next one to three years. These options are valued at $300,187 utilizing
the Black-Scholes-Merton option pricing model with $259,027 of compensation
recorded in 2006.
In
February 2006, the Chief Technical Officer of the Company, Edward Buiel, was
granted an option to purchase 35,000 shares of common stock at an exercise price
of $6.00. Of this total 10,000 options vested immediately and the balance is
expected to vest, subject to the attainment of certain specified objectives,
over the next two to three years. These options are valued at $20,994 utilizing
the Black-Scholes-Merton option pricing model with $13,330 of compensation
recorded in 2006.
In
February 2006, members and affiliates of the law firm of Fefer, Petersen &
Cie, general corporate counsel (of which one member was a director of the
Company at the time) were granted an option to purchase 360,000 shares of common
stock at an exercise price of $6.00. Of this total 240,000 options vested
immediately and the balance will vest at the rate of 10,000 shares per month
during the year ended December 31, 2006. These options are valued at $193,449
utilizing the Black-Scholes-Merton option pricing model and are recorded as
legal expense in 2006.
In
February 2006, the external bankruptcy counsel of the Company, Cecilia
Rosenauer, was granted an option to purchase 15,000 shares of common stock at an
exercise price of $6.00. The options vested on the effective date of Mega-C’s
Chapter 11 plan of reorganization, which took place in November 2006. These
options are valued at $2,483 utilizing the Black-Scholes-Merton option pricing
model and are recorded as legal expense in 2006.
In March
2006, two employees were granted options to purchase a total of 24,000 shares of
common stock at an exercise price of $4.00 and $6.00. The options vest at a rate
of 2,500 per month over the first 6 months and 1,500 per month thereafter. The
options are exercisable through March 2009. These options are valued at $28,257
utilizing the Black-Scholes-Merton option pricing model with $24,408 of
compensation recorded in 2006.
In
December 2006, the Chief Technical Officer of the Company, Edward Buiel, was
granted a contractual option to purchase an additional 100,000 shares of our
common stock at a price of $3.75 per share. A total of 50,000 options vested on
December 29, 2009 and the remaining 50,000 will vest on December 29, 2010The
options will be exercisable for a period of five years from the vesting date.
These options are valued at $267,372, utilizing the Black-Scholes-Merton option
pricing model with $6,481 of compensation recorded in 2006.
In
February 2006, a consultant, Trey Fecteau, was granted an option to purchase
97,000 shares of common stock at an exercise price of $4.00. The options vested
upon completion of contractual services in December 2006. The options are
exercisable through December 2009. These options are valued at $150,702
utilizing the Black-Scholes-Merton option pricing model. This amount reduced the
proceeds of the Series A Preferred Stock offering in 2006.
In
January 2007, D. Walker Wainwright, a director of the Company, was granted an
option to purchase 40,000 shares of common stock at an exercise price of $5.00
as compensation for services related to due diligence, negotiation and sale of
the 2006 Series A Preferred Stock offering. These three-year options were
immediately vested on the date of grant, are valued at $52,230 utilizing the
Black-Scholes-Merton option pricing model and are recorded as offering costs in
2007.
In August
2007, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was
granted a contractual option to purchase 80,000 shares of common stock at an
exercise price of $4.50. 20,000 options vest immediately upon contract inception
and the remainder vest at a rate of 10,000 per month over the life of his
six-month employment contract. These two-year options are valued at $37,356
utilizing the Black-Scholes-Merton option pricing model with $24,904 recorded as
compensation in 2007.
15
In
December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert
Nelson, was granted a contractual option to purchase 108,000 shares of common
stock at an exercise price of $5.00. The options vest at a rate of 3,000 per
month over a three year period, but are being amortized over the term of his two
year employment contract. These five-year options are valued at $108,504
utilizing the Black-Scholes-Merton option pricing model with $4,521 recorded as
compensation in 2007.
In March
2008, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was
granted a contractual option to purchase 30,000 shares of common stock at an
exercise price of $4.50. 10,000 options vested immediately upon grant and are
exercisable through December 2009, and the remaining 20,000 options vested in
May 2008 and are exercisable through May 2010. These options are
valued at $15,600 utilizing the Black-Scholes-Merton option pricing model with
$15,600 recorded as compensation in 2008.
In June
2008, the Company’s Chief Financial Officer, Andrew Carr Conway, Jr., was
granted a contractual option to purchase 10,000 shares of common stock at an
exercise price of $4.50. These options vested in June 2008. These options are
valued at $5,200 utilizing the Black-Scholes-Merton option pricing model and
recorded as compensation in 2008.
In June
2008, the following Equity Awards were issued as part of a restructuring of key
employee contracts that was designed to provide for the long term stability of
the Company:
(i) Our
Chief Executive Officer, Thomas Granville, was granted a contractual option to
purchase an additional 90,000 shares of our common stock at a price of $2.50 per
share. The options vest prorated over the 24-month term of his contract, and are
exercisable for a period of five years from the vesting date. These options are
valued at $79,872, utilizing the Black-Scholes-Merton option pricing model with
$23,296 of compensation recorded in 2008.
(ii) Our
Chief Technical Officer, Edward Buiel, was granted a contractual option to
purchase an additional 100,000 shares of our common stock at a price of $2.50
per share. The options will cliff vest on May 31, 2011, and are exercisable for
a period of five years from the vesting date. These options are valued at
$95,436, utilizing the Black-Scholes-Merton option pricing model with $18,557 of
compensation recorded in 2008.
(iii) Our
Chief Financial Officer, Donald Hillier, was granted an option to purchase
180,000 shares of our common stock. The exercise price of the option is $2.50
per share, and the option vests at the rate of 5,000 shares per month through
the term of the Employment Agreement and are exercisable for a period of 5 years
from the vesting date. These options are valued at $179,244, utilizing the
Black-Scholes-Merton option pricing model with $34,853 of compensation recorded
in 2008.
Three
employees were granted contractual options to purchase an additional 200,000
shares of our common stock at a price of $2.50 per share. 5,000 of these options
vested in June 2008 upon execution of the employment contracts, with the balance
cliff vesting on June 15, 2011, and are exercisable for a period of three years
from the vesting date. These options are valued at $165,041, utilizing the
Black-Scholes-Merton option pricing model with $34,222 of compensation recorded
in 2008.
Seven
employees were granted contractual options to purchase an additional 179,500
shares of our common stock at a price of $2.50 per share. 43,500 of these
options vested in December 2008 upon execution of the employment contracts, with
the balance vesting through the term of the employment agreement and are
exercisable for a period of three years from the vesting date. These options are
valued at $36,171, utilizing the Black-Scholes-Merton option pricing model with
$5,330 of compensation recorded in 2008.
During
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 of expense expected to be recorded during
2009.
16
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated
financial statements and the related notes that are set forth in our financial
statements elsewhere in this prospectus.
Overview
We are a
development stage company that was formed in September 2003 to acquire and
develop certain innovative battery technology. Since inception, Axion Power
Corporation, (“APC”) has been engaged in R&D of the new technology for the
production of lead-acid-carbon energy storage devices that we refer to as our
PbC devices. As of December 31, 2003, APC engaged in a reverse acquisition with
Tamboril, a public shell company. Tamboril was originally incorporated in
Delaware in January 1997, operated a wholesale cigar business until December
1998 and was an inactive public shell thereafter until December 2003. The
information presented herein relates to the operations of APC, the accounting
acquirer. Tamboril, the legal acquirer, changed its name to Axion Power
International, Inc. We formed a new corporation, Axion Power Battery
Manufacturing Inc., which purchased the foreclosed assets of a failed battery
manufacturing plant and now conducts our manufacture of specialty
batteries.
At
December 31, 2009, we have incurred cumulative net losses of approximately $60.9
million applicable to the common shareholder. This includes approximately $2.3
million in interest of which $1.4 million relates to discount on notes. We have
an additional $17.7 million in accumulated preferred stock dividends. We had approximately
$24.7 million in current assets and $1.6 million in current liabilities at
December 31, 2009, which left a net working capital surplus of approximately
$23.2 million. As discussed below, we netted $24.9
million in cash proceeds and converted $0.4 of notes payable including fees into
the sale of our common stock in December 2009, along with $0.8 million in debt
financing proceeds and $0.6 million in grant funding proceeds. Management
believes those funds will support operations through 2012.
During
2009, we continued to make improvements to our production processes including
capital acquisitions and quality control systems. We also received, installed
and continued to engineer our first automated electrode manufacturing line.
Manufacturing activity for 2009 consisted of continued production of PbC
prototype and test batteries, as well as manufacturing traditional batteries
pursuant to sales orders. Manufacturing of traditional batteries enables us to
train factory personnel, test systems and make production and quality
improvements with the focus on future PbC battery
production. Additionally, some of the proceeds from the December 2009
private placement will be used to complete our first electrode production line
and add the proper automated quality control components. This basic line will
then be duplicated and improved as additional electrode production lines are
added to allow us to get to meaningful commercialization levels. We will also
use a portion of the proceeds for working capital.
Since
early in 2008, we have devoted time and financial resources to upgrading, and
where necessary replacing, existing battery manufacturing equipment as part of
our long range business plan. In the future, a large portion of this upgraded
equipment will be used to manufacture our proprietary PbC lead carbon product.
The Quercus Trust invested $18 million in us in 2008 which, among other
things, moved these upgrades forward. The investment also
allowed us to pursue design and fabrication of automated electrode
manufacturing equipment, which will be used in the manufacture of
the negative carbon electrode component of our PbC battery.
Key
Performance Indicators
Because
of our early stage of development, the usual financial measures are not
particularly relevant or helpful in the assessment of company
operations.
We do not
use non-financial measures to evaluate our performance other than the degree of
success of our R&D and demonstration projects. Our demonstration projects
entail extended periods of time to assess our energy devices over multiple
charge and 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 R&D efforts and move to the
commercialization of our proprietary product. Capital is also necessary to fund
the equipment and methods required to progress from demonstration projects to
commercial deployment. We believe we can maintain operations and fund R&D
and production through 2012 without further capital infusions.
17
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 R&D will not be needed. The successful completion of present
and future characterization and demonstration projects is critical to the
development and acceptance of our technology.
We must
devise methodologies to manufacture our energy storage devices in commercial
quantities. While we have assembled an engineering team that we believe can
accomplish this goal, and are adding to it as we go forward, there is no
assurance that we will be able to successfully mass produce our
product.
If we
successfully complete our characterization and demonstration projects, we must
present sufficiently compelling evidence to prospective users of energy storage
devices in order to persuade them to purchase our technology.
Material
Trends and Uncertainties
We will
continue to utilize substantial portions of our available cash 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 AGM batteries, there is no assurance of profits or
whether those profits will be sufficient to sustain us as we continue to develop
our new technology.
Recent
Financing Activities
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 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 warrants to purchase an additional 2,380,953 shares of
common stock at an exercise price of $2.60 per share.
On June
30, 2008, Quercus invested the final $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. By June 30, certain of the
bridge lenders had converted $1,080,684 into 514,611 shares of common stock and
warrants to purchase 580,940 shares of common stock at an exercise price of
$2.60 per share. The warrant expires on June 29, 2013. As a result of
conversion and repayment, the December 2007 Bridge Loans have been completely
retired, extinguishing all indebtedness under those instruments as of July 1,
2008.
Machinery and Equipment Loan
Fund. On July 22, 2009, the Pennsylvania Department of
Community and Economic Development approved our application for a loan from the
Machinery and Equipment Loan Fund 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 our facility on Green Ridge Road in
New Castle. 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, maturing on October 1, 2016. We are 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
Machinery and Equipment Loan Fund loan proceeds. The Machinery and Equipment
Loan Fund loan initial proceeds in the amount of $776,244 were received by us on
September 14, 2009.
2009 Secured Bridge Loan
Financing. In August of 2009 we structured a short term bridge
loan with certain of our directors and investors, the “Secured Bridge Loan”,
secured by all of our intellectual property. Under the arrangement, we received
funding of $800,000 through September 30, 2009.
18
The
Secured Bridge Loan had 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. On or about
December 8, 2009, we borrowed an additional $541,666 from Robert Averill, one of
our directors, on substantially similar terms to the bridge loans in August
2009. The new bridge loan bears no interest but has a fee of 8% of the
principal amount thereof. The holders of these notes had the right to
convert the note together with interest, into any security sold by us in an
institutional offering. $371,353 of the principal amount and fee was
converted into an investment in us as part of the December 22, 2009 private
placement described below, and $970,313 of principal amount and accrued fees
thereon was repaid in December of 2009. Upon repayment of the
note, all conversion rights terminated.
The December 2009 Private
Placement. On December 18, 2009, we entered into a Securities
Purchase Agreement pursuant to which we agreed to issue common stock at a price
of $0.57 per share for total gross proceeds of $26,081,816 and net cash proceeds
of $24,928,323 after “breakup” fees and cash offering costs. The transaction
was consummated on December 22, 2009.
In
connection with the execution of the Securities Purchase Agreement, The Quercus
Trust entered into a Lock Up Agreement with regard to all of its shares of our
common stock held by The Quercus Trust and any warrants to purchase shares of
our common stock for a period of one year, and an Amendment No. 2 to the
Securities Purchase Agreement with The Quercus Trust pursuant to which it agreed
(i) to waive further registration rights on shares owned by The Quercus
Trust that have not yet been registered; (ii) to waive further anti-dilution
rights on its warrants to purchase our common stock below an exercise price of
$0.75 per share; and (iii) to pay the Company $500,000 in lieu of acquiring an
additional $2,000,000 of our common stock under the Securities Purchase
Agreement with the Quercus Trust.
In the
registration rights agreement entered into in conjunction with the Securities
Purchase Agreement with those selling stockholders, we agreed to file one or
more registration statements under the Securities Act of 1933, as amended,
covering the resale by those selling stockholders of the shares of our common
stock issued pursuant to the Securities Purchase Agreement. The registration
rights provisions contain conventional terms including indemnification and
contribution undertakings and a provision for liquidated damages in the event
the required registration statements are not filed, or are not declared
effective, prior to deadlines set forth in the Securities Purchase
Agreement.
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 this 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. Under the grant program, we will be working with the Navy and
Marine Corps to study the feasibility of utilizing one of our PbC ® products in
their assault and silent watch vehicles. We expect to
complete negotiation of our agreement for this project in 2010 and would expect
to commence activities immediately thereafter.
On
February 5, 2009, we received two grants from the Advanced Lead-Acid Battery
Consortium (the “ALABC”), the leading industry association made up in part by
the largest companies supplying the world’s battery market. The two grants total
approximately $380,000 and will help support research into two key areas. The
first grant seeks to identify the mechanism by which the optimum specification
of carbon, when included in the negative active material of a valve-regulated
lead-acid battery, provides protection against accumulation of lead sulfate
during high-rate partial-state-of-charge operation. The second grant seeks
simply to characterize our proprietary PbC battery in hybrid electric vehicle
(HEV) type duty-cycle testing. The grants are administered through the Durham,
NC-based International Lead Zinc Research Organization acting on behalf of the
ALABC. The research work is already underway and will continue into the first
quarter of 2010.
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: HEVs,
such as the popular Toyota Prius; “plug-ins” (PHEVs) used
in commuter, delivery and other vehicles; and in electric vehicles (EVs) and
converted (from combustion engine operation) EVs. The grant was initially billed
against in the fourth quarter of 2009 and the project will continue into the
fourth quarter of 2010.
19
On August
5, 2009, the United States Department of Energy 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. As of the date of this report, it is still not
determined what portion, if any, of this grant will be awarded to or indirectly
made available for the benefit of the Company.
On
December 22, 2009, the Pennsylvania Energy Development Authority
awarded us a $248,650 grant to assist us in the development and deployment of an
Axion PowerCube™ battery energy storage system using the our PbC battery
technology. The 500 kilowatt PowerCube will be built and installed at our New
Castle battery manufacturing facility and will be designed to enhance a Smart
Grid electrical distribution system, that will potentially include a
future solar-powered electric vehicle charging station and a potential
wind-powered energy system. We expect to begin work
on this project in the first quarter of 2010.
In
a press release dated February 22, 2010, it was announced that Axion Power
Battery Manufacturing, Inc. will receive a $298,605 solar energy program grant
to assist with solar power energy storage research and development. This grant,
along with proceeds from the December 22, 2009 Pennsylvania Energy Development
Authority award will contribute funding to our development program with an
estimated total project cost of $1 million.
A summary
of awarded grants is listed as follows:
Total Grant
Amount
|
2009 Cost
Reimbursement
|
|||||||
|
|
|||||||
DOD
Office of Naval Research
|
$ | 1,200,000 | $ | — | ||||
ALABC
|
380,000 | 380,000 | ||||||
PA
Alternative Fuels Incentive Grant Program
|
800,000 | 195,000 | ||||||
Pennsylvania
Energy Development Authority
|
248,650 | — | ||||||
Pennsylvania
Department of Community and Economic Development
|
298,605 | — | ||||||
$ | 2,927,255 | $ | 575,000 |
Results
of Operations
The
comparative data below presents our results of operations for the years ended
December 31, 2009 and 2008. While certain of the data is not strictly comparable
because some line items are positive and some negative, the provided percentages
demonstrate the relative significance of the individual line items and also the
relative changes from year to year.
|
·
|
Our primary activity in our
current development stage consists of R&D efforts for advanced battery
applications and PbC carbon electrode
devices.
|
|
·
|
Revenues are for specialty
collector and racing car, AGM batteries, flooded batteries, all sold to
customers, as well as PbC test batteries sold to a strategic partner. Cost
of goods sold represent the raw materials, components, labor and
manufacturing overhead absorbed in producing batteries sold to
customers.
|
|
·
|
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 R&D
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
R&D activities including the creation, testing and improvement of
plant production processes needed for production of our proprietary
technologies.
|
|
·
|
Selling,
general and administrative expenses include employee compensation, legal,
auditing and other costs associated with our Securities and Exchange
Commission filings, selling and marketing costs, investor public
relations, and legal costs associated with
litigation.
|
20
Years Ended
|
||||||||||||||||
December 31,
|
||||||||||||||||
Statements
of Operations
|
2009
|
% of net loss
|
2008
|
% of net loss
|
||||||||||||
Revenues
|
$ | 1,843,592 | $ | 679,559 | ||||||||||||
Cost
of goods sold
|
1,693,714 | 368,922 | ||||||||||||||
Gross
profit
|
149,878 | -0.8 | % | 310,637 | -2.9 | % | ||||||||||
Expenses
|
||||||||||||||||
Research
& development
|
4,426,956 | 23.8 | % | 3,960,909 | 37.3 | % | ||||||||||
Selling,
general & administrative
|
3,837,526 | 20.6 | % | 4,846,189 | 45.7 | % | ||||||||||
Interest
expense - related party
|
186,063 | 1.0 | % | 1,137,436 | 10.7 | % | ||||||||||
Derivative
revaluation
|
6,292,401 | 33.8 | % | (2,844 | ) | 0.0 | % | |||||||||
Interest
& other income, net
|
(14,641 | ) | -0.1 | % | (57,224 | ) | -0.5 | % | ||||||||
Net
loss before income taxes
|
(14,578,427 | ) | 78.3 | % | (9,573,829 | ) | 90.2 | % | ||||||||
Income
Taxes
|
- | 0.0 | % | (79,170 | ) | -0.7 | % | |||||||||
Deficit
accumulated during development stage
|
(14,578,427 | ) | 78.3 | % | (9,494,659 | ) | 89.5 | % | ||||||||
Less
preferred stock dividends and beneficial conversion
feature
|
(4,046,836 | ) | 21.7 | % | (1,117,699 | ) | 10.5 | % | ||||||||
Net
loss applicable to common shareholders
|
$ | (18,625,263 | ) | 100.0 | % | $ | (10,612,358 | ) | 100.0 | % | ||||||
Basic
and diluted net loss per share
|
$ | (0.67 | ) | $ | (0.46 | ) | ||||||||||
Weighted
average common shares outstanding
|
27,619,839 | 22,826,187 |
Summary
of Consolidated Results for the Year Ended December 31, 2009 compared with the
Year Ended December 31, 2008
Revenue
Revenues
for year ended December 31, 2009 were approximately $1.8 million compared to
revenues of approximately $0.7 million for the same period in 2008. This
represents an increase of 157% in revenues reported during 2009 over the same
period in 2008. This increase is primarily the result
of increased sales of flooded batteries to a large scale buyers group
and to a large North American lead-acid battery manufacturing company
and also from sales of PbC test batteries to a strategic partner. We
have two customers that accounted for approximately 61% of revenue for the year
ended December 31, 2009 and one customer accounted for 10% of revenue for the
same period in 2008. As a Development Stage Company, with operational
focus on the development and commercialization of our PbC electrodes and
batteries, revenues generated from current PbC sales remain insignificant when
compared to total operations.
21
Cost
of Goods Sold
Cost of
goods sold represents costs for batteries sold to customers and includes 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 year ended December
31, 2009 was approximately $1.7 million compared to cost of goods sold of
approximately $0.4 million for the year ended December 31, 2008. This
represents approximately a 325% increase, and is consistent with the increase in
sales volume and the increase in sales of lower margin
products. Included in cost of goods sold is a lower of cost or market
adjustment for inventory for the year ended December 31, 2009 which was $0.1
million as compared to $0 at December 31, 2008. This represents a reduction of
carrying costs for inventory items in which the expected net realizable value
exceeds the historical carrying costs. As of December 31, 2009,
inventory costs of $1,008,092 consisted of $432,385 of finished goods, $212,844
of work-in-process and $364,557 of raw materials. As of December 31, 2008,
inventory costs of $1,269,515 consisted of $353,657 of finished goods, $343,776
of work-in-process and $572,082 of raw materials.
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 year ended December 31, 2009 were approximately $4.4 million
compared to approximately $4.0 million for year ended December 31, 2008,
representing a 10% increase in spending in the year ended December 31, 2009 over
the year ended December 31, 2008. During 2009 research and development expenses
were reduced by $0.4 for cost reimbursements arising from research grant
proceeds invoiced and earned during the second half of 2009. The
increase in expense is due to 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 year ended December 31, 2009 were approximately
$3.8 million compared to approximately $4.8 million for the year ended December
31, 2008. This represents a 21% decrease in spending compared with the same
period during 2008. In 2008, expenses included some non recurring costs due to
substantial legal, auditing and accounting expenses associated with becoming
current with our public filings.
Interest
Expense - Related Party
Interest
expense during the year ended December 31, 2009 was $0.2 million, as compared to
approximately $1.1 million for the year ended December 31, 2008, representing an
82% decrease. This decrease was due to the satisfaction of
indebtedness in 2008, thus lowering interest accruing and payable in
2009.
Derivative
Revaluation
FASB ASC
815-40 "Derivatives and
Hedging – Contracts in Entity’s own Equity" became effective January 1,
2010 and required that derivative revaluations be recognized whenever the
Company incurs a liability associated with the issuance of an equity-based
instrument. The instrument is revalued for each reporting period until the
liability is settled.
Losses
from derivative revaluation for the year ended December 31, 2009, were $6.2
million. $5.0 million of the loss is attributed to revaluations of the warrants
issued to The Quercus Trust, comprised of a $7.2 million loss due to the reset
in the exercise price of the warrants previously issued to Quercus from $2.60 to
$0.75 per share, offset by $2.2 million of income from revaluations attributable
to lower stock prices. As part of the most recent amendment to the Quercus
Securities Purchase Agreement, The Quercus Trust waived any future “down round”
protection below $0.75; therefore, the liability attributed to those warrants
has been reclassified into stockholders’ equity. $1.3 million of the December
31, 2009 loss results from revaluation of warrants issued to placement agents
associated with the 2008 sale of Common Stock of the Company to The Quercus
Trust. Of this loss, $1.0 million arose as a result of the reduction of the
warrant exercise price in accordance with the warrant agreement from $2.60 to
$0.57 per share as a result of the December 2009 private
placement. There was $2,844 in derivative revaluation income during
2008 prior to the adoption of FASB ASC 815-40.
22
Net
Loss
For the
fiscal year ended December 31, 2009, our net loss before income taxes increased
$5.0 million, or 52%, to $(14.6) million on revenue of $1.8 million, from an
operating loss of approximately $9.6 million on revenue of $0.7 million for the
fiscal year ended December 31, 2008. As discussed above, the factors primarily
affecting this increase in operating loss were the non-cash derivative
revaluation losses resulting from the January 1, 2009 adoption of FASB ASC
815-40 offset in part by lower selling, general, administrative and interest
expenses. Excluding derivative revaluation, loss before income taxes would have
been $8.3 million and $9.6 million for the years ended December 31, 2009 and
2008, respectively, a decrease of 14%.
The net
loss applicable to common shareholders for the year ended December 31, 2009 of
$18.6 million includes $4.0 million of non-cash charges related to the preferred
stock dividend. The net loss applicable to common shareholders of $10.6 million
for the year ended December 31, 2008 includes non-cash charges related to
preferred stock dividends of $1.1 million.
Liquidity
and Capital Resources
Our
primary source of liquidity has historically been cash generated from issuances
of our equity or debt securities. From inception through fiscal year ended
December 31, 2009, we generated insignificant revenue from operations. Given the
recent financing proceeds from our December 2009 private placement with gross
proceeds of $26 million, we expect to be able to continue operations through
2012 without additional funding from grants or financing resources.
We may
also receive funds from recent grant submissions both with the federal
government, through the “Stimulus Package” programs, and the Commonwealth of
Pennsylvania. While these latter two events do not currently have a
direct effect on liquidity, they do provide the basis for potential liquidity
sources in 2010.
Cash,
Cash Equivalents, Short Term Investments and Working Capital
At
December 31, 2009, we had approximately $23.3 million of cash and cash
equivalents compared to approximately $3.1 million at December 31,
2008. At December 31, 2009 working capital was $23.2 million compared
to a working capital of $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. Due to the
timing of recent financing, on December 31, 2009, none of our cash had been
deposited into short-term liquid investments and remained as cash on deposit
fully insured by the FDIC Temporary Liquidity Guarantee Program.
Cash
Flows from Operating Activities
Net cash
used in operations for the year ended December 31, 2009 was $6.6 million. Cash
used in operations for this same period ended December 31, 2008 was
approximately $8.9 million. The use of cash in operations is reflective of the
net loss before income taxes at this developmental stage of the business. The
26% reduction of cash used in operations for the year ended December 31, 2009 as
compared to the prior year is primarily due to $1.0 million decrease in selling,
general and administrative costs, a $0.9 million reduction of interest expense,
and $0.4 million due to changes in components of operating assets and
liabilities.
Cash
Flows from Investing Activities
Net
cash provided by investing for year ended December 31, 2009 was approximately
$0.8 million compared to net cash used by investing activities of approximately
$(3.6) million for the same period ended December 31, 2008. Activities in 2009
include cash provided by the maturity of approximately $2.2 million of short
term investments deposited into cash equivalents offset by approximately $1.4
million used to purchase equipment for both production and research and
development and notes receivable.
23
Cash
Flows from Financing Activities
Financing
activities for the year ended December 31, 2009 consisted of $0.8 million in
Machinery and Equipment Loan Fund financing received from the Commonwealth of
Pennsylvania. $24.9 million in cash received from a private placement offering,
plus $0.3 million from the conversion of related party notes into common stock
as part of the December 2009 private placement offering.
Significant
Financing Arrangements
The Quercus
Investment. On January 14, 2008, we entered into the
Securities Purchase Agreement with Quercus, pursuant to which we agreed to issue
to Quercus up to 8,571,429 shares of our common stock, together with a five year
common stock purchase warrants that will entitle the holder to purchase up to
10,000,000 additional shares of our common stock.
At the
initial closing on January 14, 2008, Quercus invested $4.0 million in exchange
for 1,904,762 shares and warrants to purchase an additional 2,857,143 shares at
an exercise price of $2.60 per share. At the second closing on April 17, 2008,
Quercus invested an additional $4.0 million in exchange for 1,904,762 shares of
our common stock and warrant to purchase an additional 2,380,953 shares of at an
exercise price of $2.60 per share.
On June
30, 2008, we completed the third and final tranche of the Quercus investment,
whereby Quercus invested $10.0 million in exchange for 4,761,905 shares of our
common stock and warrants to purchase an additional 4,761,905 shares of stock at
an exercise price of $2.60 per share. All of the warrants issued to Quercus
expire by June 29, 2013. A portion of the proceeds of the June 30, 2008
financing were used to retire the remainder of the $2,640,000 December 2007
Bridge Loan that we had previously entered into. Prior to June 30, certain of
the bridge lenders had converted $335,000 into 158,659 shares of common stock
and warrants to purchase 237,488 shares of common stock at an exercise price of
$2.60 per share. On June 30, 2008, one of our directors converted $800,000 of
Bridge Loan indebtedness into 380,952 shares of common stock and a warrant to
purchase 380,952 shares at an exercise price of $2.60 per share. The warrant
expires on June 29, 2013 and the entire conversion was under the same terms as
the Quercus investment.
On
September 22, 2009, we entered into an Amendment to Warrants and Securities
Purchase Agreement with Quercus Trust, amending the January 14, 2008 Warrant and
Securities Purchase Agreement. The material terms of the Amendment are as
follows:
·
|
The exercise for warrants
previously issued to Quercus by us is reset from $2.60 per share to $0.75
per share.
|
·
|
Any previously accrued liquidated
damages under the Securities Purchase Agreement to the date of the
Amendment are
waived.
|
·
|
Axion and Quercus
have agreed to elect three new directors on behalf of Quercus, each
to serve a three year
term.
|
·
|
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.
|
·
|
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.
|
This
Amendment provided 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 resolved
certain milestones set forth in the Agreement which were not fully met due to
the non completion of the Production Contract which was entered into by us on
June 27, 2008. See further discussion under the caption entitled 2009 Private Placement
below.
Machinery and Equipment Loan
Fund. On July 22, 2009, the Pennsylvania Department of
Community and Economic Development approved our application for a loan from the
Machinery and Equipment Loan Fund 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 our facility on Green Ridge Road in
New Castle. 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 maturing on October 1, 2016. We are 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
Machinery and Equipment Loan Fund loan proceeds. The Machinery and Equipment
Loan Fund loan initial proceeds in the amount of $776,244 were received by us on
September 14, 2009.
24
2009 Secured Bridge Loan
Financing. In August of 2009 we structured a short term bridge
loan with certain of our directors and investors, the “Secured Bridge Loan”,
secured by all of our intellectual property. Under the arrangement, we received
funding of $800,000 through September 30, 2009.
The
Secured Bridge Loan had 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. On or about
December 8, 2009, we borrowed an additional $541,666 from Robert Averill, one of
our directors, on substantially similar terms to the bridge loans in August
2009. The new bridge loan bears no interest but has a fee of 8% of the
principal amount thereof. The holders of these notes had the right to
convert the note together with interest, into any security sold by us in an
institutional offering. $371,353 of the principal amount and fee was
converted into an investment in us as part of the December 22, 2009 private
placement described below, and $970,313 of principal amount and accrued fees
thereon was repaid in December of 2009. Upon repayment of the
note, all conversion rights terminated.
2009 Private Placement. On
December 18, 2009, we entered into a Securities Purchase Agreement as a Private
Placement, pursuant to which we agreed to issue 45,757,572 shares of our common
stock at a price of $0.57 per share for total gross proceeds of $26,081,816.
($371,366 of which was a non-cash conversion of outstanding bridge loan
indebtedness plus fees and interest thereon), The net cash proceeds, from this
transaction of $24,928,323, include $500,000 in “breakup” fees from the Quercus
Trust, cash offering costs of $1,282,127 and $50,000 in legal fees
related to the transaction. We also issued 719,665 shares of our common stock
for $410,209 of non cash offering costs. The transaction was consummated on
December 22, 2009.
On
December 15, 2009, in connection with the execution of the Securities Purchase
Agreement, The Quercus Trust entered into a Lock Up Agreement with regard to all
of its shares of our common stock held by The Quercus Trust and any warrants to
purchase shares of our common stock for a period of one year, and an Amendment
No. 2 to the Securities Purchase Agreement with The Quercus Trust pursuant to
which it agreed (i) to waive further registration rights on shares owned by
The Quercus Trust that have not yet been registered; (ii) to waive further
anti-dilution rights on its warrants to purchase our common stock below an
exercise price of $0.75 per share; and (iii) to pay the Company $500,000 in lieu
of acquiring an additional $2,000,000 of our common stock under the Stock
Purchase Agreement with the Quercus Trust.
Research Grant . On December 22, 2009,
the Pennsylvania Energy Development Authority awarded us a $248,650 grant to
assist us in the development and deployment of an Axion PowerCube battery energy
storage system using our PbC batteries. The 500 kilowatt PowerCube will be
built and installed at our New Castle battery manufacturing facility and will be
designed to enhance a Smart Grid electrical distribution system, including a
potential future solar-powered electric vehicle charging station and a potential
wind-powered energy system.
The
“Management’s Discussion and Analysis of Financial Condition or Plan of
Operation” section of this prospectus 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.
Critical
Accounting Policies, Judgments and Estimates
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.
25
Principles of Consolidation:
The condensed consolidated financial statements include the accounts of
the Company, and its wholly owned subsidiaries, Axion Power Battery
Manufacturing, Inc., APC and C&T. All significant inter-company balances and
transactions have been eliminated in consolidation.
Derivative Financial
Instruments: The Company’s objectives in using derivative financial
instruments are to obtain the lowest cash cost-source of funds. Derivative
liabilities are recognized in the consolidated balance sheets at fair value
based on the criteria specified in FASB ASC topic 815-40 "Derivatives and Hedging – Contracts
in Entity’s own Equity". The estimated fair value of the derivative
liabilities is calculated using the Black-Scholes-Merton method where applicable
and such estimates are revalued at each balance sheet date, with changes in
value recorded as other income or expense in the consolidated statement of
operations. As a result of the Company’s adoption of ASC topic 815-40, effective
January 1, 2009 some of the Company’s warrants are now accounted for as
derivatives.
Inventory: Inventory is
recorded at the lower of cost or market value, and adjusted as appropriate for
decreases in valuation and obsolescence. Adjustments to the valuation and
obsolescence reserves are made after analyzing market conditions, current and
projected sales activity, inventory costs and inventory balances to determine
appropriate reserve levels. As of December 31, 2009, $118,257 in inventory
valuation reserves was established. Cost is determined using the first-in
first-out (FIFO) method. Many components and raw materials we purchase have
minimum order quantities. As of December 31, 2009, inventory costs of $1,008,092
consisted of $432,385 of finished goods, $212,844 of work-in-process and
$364,557 of raw materials. As of December 31, 2008, inventory costs of
$1,269,515 consisted of $353,657 of finished goods, $343,776 of work-in-process
and $572,082 of raw materials.
Revenue
Recognition: 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. Evidence of an agreement and fixed or
determinable sales price is predominantly based on a customer purchase order or
other form of written sales order or written agreement. Sales on account are
approved only for credit-worthy customers; otherwise payment in full is received
prior to shipment. 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. We offer a 90 day free replacement warranty on some specialty collector
car and motorsports products. Collector car products also carry a four year
prorated warranty that begins at the end of the 90 days. To date, our
warranty exposure on these products has been minimal. Flooded battery sales do
not have standard warranty provisions and instead are sold at a discount in lieu
of warranty. There are no other post shipment obligations that may
impact the timing of revenue recognition for the year ending December 31,
2009.
Proceeds from
Grants: The Company records proceeds from grants over the period
necessary to match them with the related costs for which such grants are to
compensate. Grants for assets are recorded as deferred revenue and amortized
over the expected life of such asset as a reduction of depreciation expense. As
permitted by IAS 20.29, a grant relating to income may be reported separately as
other income or deducted from the related expenses. The Company records grants
as deduction from related expenses or as other income as follows: (i) grants not
deemed significant by management are considered to be reimbursements for
specific research activities and are recorded as such, and (ii) grants that are
considered material are those activities performed under a contract, typically
with a governmental agency, in which there is required a significant allocation
of Company resources, including personnel and materials, and thus are recorded
as other income.
The
Company recognizes proceeds from grants only when (a) there is reasonable
assurance that the Company has complied with all conditions attached to the
grant, and (b) the grant proceeds are collectible. To date proceeds from grants,
other than proceeds for assets, have been direct reimbursements for costs
incurred for research activities on behalf of a trade group that are deemed not
significant and are reported as a reduction of the direct research costs
incurred. To date, other than proceeds for assets and the two grants totaling
$380,000 from the ALABC, there have not been any proceeds recognized from grants
that are considered significant.
26
Stock-Based Compensation:
Prior to January 1, 2006, we accounted for stock option awards in
accordance with the recognition and measurement provisions of former
authoritative literature APB 25 and related interpretations, as permitted by
former authoritative literature Statement of Financial Accounting Standard No.
123 (“SFAS 123”), “Accounting
for Stock-Based Compensation”. Under APB 25, compensation cost for stock
options issued to employees was measured as the excess, if any, of the fair
value of our stock at the date of grant over the exercise price of the option
granted. Compensation cost was recognized for stock options, if any, ratably
over the vesting period. As permitted by SFAS 123, we reported pro-forma
disclosures presenting results and earnings as if we had used the fair value
recognition provisions of SFAS 123 in the Notes to the Condensed Consolidated
Financial Statements.
Effective
January 1, 2006, we adopted the provisions of FASB ASC topic 718 using the
modified prospective transition method. Stock-based compensation related to
non-employees is recognized as compensation expense in the accompanying
condensed consolidated statements of operations and is based on the fair value
of the services received or the fair value of the equity instruments issued,
whichever is more readily determinable. Our accounting policy for equity
instruments issued to consultants and vendors in exchange for goods and services
follows the provisions of FASB ASC 505-50 “Equity-Based Payments to
Non-Employees” (formerly EITF 96-18, “Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain
Transactions Involving Equity Instruments granted to Other Than
Employees.”) The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (1) the date at which a
commitment for performance by the consultant or vendor is reached or (2) the
date at which the consultant or vendor’s performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement.
Research and Development:
R&D costs are recorded in accordance with FASB ASC topic 730, “Accounting for Research and
Development Costs,” which requires that costs incurred in R&D
activities covering basic scientific research and the application of scientific
advances to the development of new and improved products and their uses be
expensed as incurred. The policy of expensing the costs of R&D activities
relate to (1) in-house work conducted by us, (2) costs incurred in connection
with contracts that outsource R&D to third party developers and (3) costs
incurred in connection with the acquisition of intellectual property that is
properly classified as in-process R&D. R&D includes the conceptual
formulation, design and testing of product alternatives, construction of
prototypes, and operation of pilot plants. It does not include routine or
periodic alterations to existing products, production lines, manufacturing
processes, and other ongoing operations, even though those alterations may
represent improvements, and it also does not include market research
or market-testing activities. 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.
27
BUSINESS
Our
Corporate History
Axion
Power Corporation was formed in September of 2003 to acquire and develop certain
innovative battery technology. Since inception Axion Power Corporation has been
engaged in research and development (“R&D”) of the new technology for the
production of our PbC batteries. As of December 31, 2003, Axion Power
Corporation engaged in a reverse acquisition with Tamboril Cigar Company
(“Tamboril”), a public shell company whereby Axion Power Corporation became a
wholly-owned subsidiary of Tamboril. Tamboril was originally incorporated in
Delaware in January 1997, operated a wholesale cigar business until December
1998 and was an inactive public shell thereafter until December 2003. Tamboril
changed its name to Axion Power International, Inc. immediately following the
reverse acquisition.
Since
inception, our operations have been financed by investors with little to no
revenue generated from operations. As a result, trading in our common stock has
been sporadic, volumes have been low, and the market price has been volatile. We
believe that a successful transition from R&D to manufacturing will improve
our cash balances and market profile and may result in a more active trading
market for our stock. However, we can provide no guarantees that our transition
efforts will be successful.
Since
early in 2008, we have devoted time and financial resources to upgrading, and
where necessary replacing, existing battery manufacturing equipment as part of
our long range business plan. In the future, a large portion of this
upgraded equipment will be used to manufacture our proprietary PbC lead carbon
product.
On
December 18, 2009, we entered into a Securities Purchase Agreement pursuant to
which we agreed to issue common stock at a price of $0.57 per share for total
gross proceeds of $26,081,816 and net cash proceeds of $24,928,323 after
“breakup” fees and cash offering costs. The transaction was consummated on
December 22, 2009.
During
2009, we continued to make improvements to our production processes including
capital acquisitions and quality control systems. We also received, installed
and continued to engineer our first automated electrode manufacturing line.
Manufacturing activity for 2009 consisted of continued production of PbC
prototype and test batteries, as well as manufacturing traditional batteries
pursuant to sales orders. Manufacturing of traditional batteries enables us to
train factory personnel, test systems and make production and quality
improvements with the focus on future PbC battery production. Some of
the proceeds from the private placement funding we closed in December 2009 are
intended to be used to fully complete our first electrode production line and
add the proper automated quality control components. This basic line will then
be duplicated and improved as additional electrode production lines are added to
allow us to get to meaningful commercialization levels. We will also use a
portion of the proceeds for working capital.
28
The
Battery Industry
There are
two principal types of lead-acid batteries: flooded batteries and valve
regulated lead-acid. The choice of battery depends mainly on the specific
application that the battery serves. Typical standby or stationary applications
use valve regulated lead-acid batteries due to their inherent advantages
including spill proof design, low maintenance, compact form, low self-discharge
and high performance. On the other hand, applications like industrial equipment,
traction and railroad applications are better served by the flooded lead-acid
battery types due to their superior performance in continuous deep discharge
applications and at high operating temperatures, among other features.
Technology within the lead-acid battery industry has remained relatively stable
for the last 30 years, and an industry-wide lack of innovation has generally
restrained growth into new applications and emerging markets.
Alternative
energy applications like wind and solar power require an energy storage solution
that combines low cost and long deep discharge cycle life. Lead-acid batteries
are currently one of the gold standards in large-scale power storage
applications, but the short cycle-life of lead-acid chemistry at deep discharge
levels is a primary inhibitor to growth. Due primarily to the cycle-life
limitations of lead-acid batteries, a number of battery manufacturers are
experimenting with alternative battery technologies that are far more expensive
to implement, but offer substantial cycle-life advantages.
The North
American lead-acid battery industry is mature with a few leading vendors that
have a global presence and a larger number of smaller regional and local vendors
that cater to the needs of the North American market. The first tier companies
that have a global presence include EnerSys, Exide Technologies, Johnson
Controls and FIAMM. The second tier companies that cater mainly to the North
American Markets include, among others, East Penn Manufacturing, C&D
Technologies, GS Batteries, Crown Batteries, Trojan Battery and Eagle Picher
Technologies. The user segments that rely on lead-acid batteries include
automotive applications, standby applications ranging from uninterruptible power
supplies to telecommunication applications, limited power storage for wind and
solar systems and motive power for heavy-duty equipment and railroad
applications.
Our
Business
We are a
development stage company that has invested six years and approximately $18.4
million through December 31, 2009 in R&D expense to develop a patented
energy storage device that uses carbon electrode assemblies to replace the
lead-based negative electrodes found in conventional lead-acid batteries. Our
PbC energy storage device is a battery-supercapacitor hybrid that combines the
simplicity of lead-acid batteries with the fast recharge rate and longer cycle
life of supercapacitors, resulting in a relatively low-cost device that has
versatility of design that will allow differing iterations to deliver maximum
power; maximum energy; or a range of balances between the two.
Our PbC
technology is protected by six issued U.S. patents, nine pending U.S. patent
applications and other proprietary features and structures. The resulting
devices are technically sophisticated and yet simple in design. The carbon
electrode assemblies are fabricated from readily available raw materials using,
for the most part, standard industrial processes and techniques. The electrodes
are then assembled into PbC batteries that can employ the same cases, covers,
positive electrodes, separators and electrolyte as conventional lead-acid
batteries, and can be assembled with the same equipment and manufacturing
methods used throughout the world for manufacturing conventional lead-acid
batteries. PbC batteries use significantly less lead than standard lead-acid
batteries with a comparable size, and the lead, plastics and acid employed are
routinely and profitably recycled at existing recycling facilities around the
world, which makes the PbC battery extremely environmentally friendly and far
more so than most competing battery technologies.
In
February 2007, our PbC technology received the Frost & Sullivan Technology
Innovation Award for the best development in the field of lead-acid batteries
for 2006.
In
January 2009, our facility was tested and found to be in compliance with
emission standards established by new federal guidelines in accordance with the
Clean Air Act–Title III; however, this does not ensure continued or future
compliance by the Company.
29
We
believe that for large-scale deep-discharge energy storage systems (10 kWh or
greater), our PbC devices may prove to offer the lowest total cost of ownership
solution available in comparison to alternative battery storage technologies. As
ongoing development work on our technologies progress, we believe that further
cost reductions and performance gains will be likely.
We
believe our advanced battery technologies are uniquely situated to answer the
current challenges facing the conventional lead-acid battery and that industry
as a whole. While we explore the various potential applications for our PbC
technology, our battery manufacturing plant in New Castle, Pennsylvania provides
us with both an excellent R&D facility and a near perfect pilot production
plant in which to produce our advanced energy storage devices. This plant allows
us to manufacture our PbC carbon electrodes in limited quantity and to assemble
our new energy storage batteries for laboratory testing and for small scale
demonstration projects. In manufacturing this battery assembly using
conventional lead-acid battery production equipment, we provide proof to our
future PbC carbon negative electrode customers that our product is suitable to
immediate use in their factories.
The PbC
battery production is limited at this time by our inability to make the carbon
electrodes in large numbers. As part of our plan to transition from pilot
production of PbC electrodes to commercial manufacturing we entered into a
letter agreement in the fourth quarter of 2008 for a sublease agreement for a
second facility in New Castle, Pennsylvania that provides us with an additional
54,000 square feet of production, R&D and office space. It is anticipated
that this facility will be used primarily to produce our PbC electrode
assemblies. In addition, this transition will require that we:
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refine our planned fabrication
methods for carbon electrode
assemblies;
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demonstrate the feasibility of
manufacturing our PbC device and our other technologies, using standard
techniques and equipment;
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demonstrate and document the
performance of our products in key applications;
and
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respond appropriately to
anticipated and unanticipated technical and manufacturing
challenges.
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Our
battery plant has a permitted manufacturing capacity of 3,000 lead-acid and/or
PbC batteries per day and so we currently have excess battery manufacturing
capacity that we are able to dedicate to production of high margin specialty
batteries that are required in relatively small numbers for direct sales and to
also perform toll manufacturing for one of the largest lead-acid battery
manufacturers in North America. We continue efforts to increase our sales of
such batteries and have hired personnel to further that end.
We plan
to develop our lead carbon technology for use in a variety of applications
including:
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motive power
applications;
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stationary power
applications;
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hybrid electric vehicle
applications; and
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military
applications.
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We
believe demand for cost-effective energy storage systems produced using our PbC
technology will grow rapidly. We also believe our technologies can be among the
leaders in the high performance battery market. We believe our competitive
advantages will include:
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Cost effectiveness: Due to an
extended cycle life and relatively low production
costs;
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30
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Ease of integration: Our planned
carbon electrode assemblies will be designed to replace the standard lead
negative electrodes in conventional lead-acid batteries. In some
applications that require fixed voltage operations, voltage conversion may
be needed;
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Superior flexibility: By changing
the number, geometry and arrangement of the electrode assemblies, we
expect to be able to configure our devices to favor either maximum energy
storage or maximum power delivery;
and
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Reduced lead content: Depending
on the energy, power and cycling requirements of a particular application,
our fully recyclable device will use substantially less lead than
conventional lead-acid
batteries.
|
We
anticipate our ability to establish and maintain a competitive position will be
dependent on several factors, including:
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the availability of raw materials
and key components;
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our ability to design and
manufacture commercial carbon electrode
assemblies;
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our ability to establish and
operate facilities that can fabricate electrode assemblies and
commercially manufacture our PbC device with consistent quality at a
predictable cost;
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our ability to establish and
expand a customer base;
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our ability to execute and
perform on any future strategic distribution agreements with tier one
and/or tier two battery
manufacturers;
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our ability to compete against
established and emerging battery and other storage
technologies;
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general worldwide economic
conditions;
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the market for batteries in
general; and
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our ability to retain key
personnel.
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Our
objective is to become an industry leader in low cost, high performance energy
storage systems. We plan to achieve this objective by pursuing the following
core strategies:
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Platform
technology business model. We plan to implement a platform
technology business model where we will focus on developing and
manufacturing carbon electrode assemblies that we can offer for sale to
established battery manufacturers who want to use our PbC carbon electrode
products in their batteries.
|
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Leverage
relationships with thought leaders. We are engaged in discussions
with industry consortia, research institutions and other thought leaders
in the fields of utility applications, hybrid electric vehicles and
automotive fuel cell technology. As we develop our relationships in the
field of energy research, we believe the opportunities for government
funding and consortia participation will expand rapidly and improve our
access to potential suppliers and
customers.
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Leverage
relationships with battery manufacturers. Our business model is based on
the premise that we can most effectively address the needs of the market
by selling electrode assemblies to established lead-acid
battery manufacturers who want to add advanced battery technology to their
existing product lines. This business model should allow us to leverage
the business abilities, manufacturing facilities and distribution networks
of established manufacturers, in order to reduce our time to market and
increase our potential market
penetration.
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31
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Build a
recognized brand. We
believe strong brand name recognition is important to increase product
awareness and to effectively penetrate the mass market. We intend to
differentiate our brand by emphasizing our combination of high performance
and low total cost of ownership per storage
cycle.
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Secondary
focus on emerging markets. Emerging markets for hybrid
electric vehicles and conventional utility applications are becoming
increasingly attractive. We are actively evaluating the potential for
using our lead carbon technology products in these emerging
markets.
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Maintain our
technical advantage and reduce manufacturing costs. We intend to maintain our
technical advantage by continuing to invest in R&D to improve the
performance of our PbC devices and other technologies and to continue to
lower our manufacturing
costs.
|
The
battery industry is mature, capital intensive, heavily regulated, highly
competitive and averse to product performance risks associated with radical
departures from established technology and, with the severe decline in worldwide
automobile sales, currently experiencing unprecedented cutbacks. Additionally,
due to the nature of the industry, we do not believe we will be able to make a
credible entry into the battery market until we have proven the advantages of
our PbC device technology in demonstration projects with end users. Therefore,
our business plan contemplates two discrete phases: the Development Phase
(including prototype and demonstration) and the Commercialization
Phase.
Development
Phase. During the Development Phase, we are focusing on producing small
quantities of commercial prototypes in our own manufacturing facilities. These
commercial prototypes will serve as the foundation for a series of paid
demonstration projects with established end users. If the projects are
successful and end user testing validates the advantages of our PbC device
technology under real-world operating conditions, it will be easier to proceed
to the full commercialization phase. In general, our development path in each
identified target market will include the following:
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Prototype
manufacturing. We
are finalizing design work and manufacturing methods for our commercial
prototype PbC carbon electrodes. These electrode assemblies will be the
key component in the on site manufacturing of our PbC
batteries.
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Demonstration
projects. When we
have developed and bench tested our commercial prototype PbC devices for a
particular target market, we will negotiate additional demonstration
projects for each of the intended applications. In some of the larger
projects we may partner with a larger battery manufacturer in order to
provide the required quantity of PbC devices. Our goal is to
document the superior performance of our products in real-world
applications.
|
|
·
|
Commercial
production. When we
have developed sufficient data to support a decision to commence full
scale production of a product or product line, we intend to use our New
Castle, Pennsylvania facility until we reach our maximum permitted
capacity, after which we plan to pursue strategic relationships with other
battery manufacturers that are willing to manufacture co-branded
commercial PbC products. Those products will contain our proprietary
negative electrode assembly, which we will continue to manufacture at our
New Castle facility and build our brand
recognition.
|
Our
planned demonstration projects are not expected to generate sufficient gross
profit to offset our expected operating costs. Accordingly, we do not expect to
attain profitability during the demonstration phase. If we enter into a
commercialization relationship for a specific product or product line, we
believe our margins may improve based on efficiencies of scale. However, there
is no assurance that the commercialization of products for one or more market
segments will generate sufficient revenue to offset our anticipated R&D and
other operating expenses and yield a profit.
32
Commercialization
Phase. During the commercialization phase, we intend to implement a
platform technology business model where we will develop and manufacture the PbC
carbon electrode assemblies that are unique to our PbC batteries. In addition to
using these assemblies in our batteries, we eventually intend to sell our
proprietary assemblies to other established battery manufacturers who are
seeking to market more advanced batteries. We believe a platform technology
business model will reduce our time to market, allow us to rely on the
established business abilities of existing manufacturers and forge a strong
brand identity for our PbC products, while allowing us to focus on a narrow band
of value-added activities that should minimize our investment and maximize our
profitability.
Until we
complete our planned demonstration projects, our negotiation position with
respect to manufacturing relationships with established battery manufacturers
may be impaired. Even if our planned demonstration projects are successful, we
may be unable to negotiate manufacturing relationships on terms acceptable to
us. If we decide to manufacture and distribute a line of commercial battery
products ourselves, rather than sell carbon electrode assemblies to established
battery manufacturers, our time to market and our anticipated capital costs may
increase dramatically.
We plan
to initially focus on high-value market segments where the total cost of
ownership is the primary determining factor in product selection. We believe our
commercial PbC device will be most appealing where longer life, high
performance, and low maintenance are fully valued.
Acquisition
of Our PbC Device Technology
We
incorporated Axion Power Corporation in September 2003, for the purpose of
acquiring rights to a lead carbon technology, that we have since named PbC, from
C&T, the original owner of the patents. The founders of Axion Power
Corporation were passive stockholders of Mega-C Power Corp., which from 2001
until mid 2003 held a limited, nonexclusive license to market products utilizing
the lead carbon technology that we currently own and have since expanded upon.
In February 2003, the Ontario Securities Commission began an investigation into
Mega-C’s stock sales that terminated Mega-C’s ability to finance its operations
and continue in business. The founders of Axion Power Corporation had
collectively invested approximately $3.9 million in Mega-C and were facing a
total loss of this investment when Mega-C was unable to continue in business. In
connection with the organization of Axion Power Corporation, the founders
invested approximately $1.4 million.
In late
December 2003, Tamboril had 1,875,000 shares outstanding. After evaluating the
lead carbon technology and Axion Power Corporation, Tamboril’s management
negotiated a series of related transactions that included:
|
·
|
a reverse acquisition between
Tamboril and Axion Power
Corporation;
|
|
·
|
the establishment of the Mega-C
Trust for the stated purpose of preserving the potential equitable rights
of Mega-C’s creditors and stockholders while potentially insulating Axion
Power Corporation and Tamboril from the litigation risks associated with
the activities of Mega-C and its promoters;
and
|
|
·
|
a purchase of the PbC device
technology from C&T.
|
Of the
10,739,500 common shares that Tamboril issued for the outstanding securities of
Axion Power Corporation, 7,327,500 shares, or approximately 58% of our
post-transaction capitalization, were deposited in the Mega-C Trust. The
remaining 3,412,000 shares were distributed among Axion Power Corporation’s
stockholders. After the closing, Axion Power Corporation’s stockholders,
C&T’s stockholders and the Mega-C Trust owned 95% of our stock. For
financial reporting purposes, Axion Power Corporation was deemed to be the
accounting acquirer of Tamboril, followed by a recapitalization.
Our
Patents and Intellectual Property
We own
six issued U.S. patents and have nine patent applications pending at the date of
this prospectus covering various aspects of our PbC technologies. There is no
assurance that any of the pending patent applications will ultimately be
granted. Our issued patents are:
33
|
·
|
U.S. Patent No. 6,466,429
(expires May 2021) - Electric double layer
capacitor;
|
|
·
|
U.S. Patent No. 6,628,504
(expires May 2021) - Electric double layer
capacitor;
|
|
·
|
U.S. Patent No. 6,706,079
(expires May 2022) - Method of formation and charge of the negative
polarizable carbon electrode in an electric double layer
capacitor;
|
|
·
|
U.S. Patent No. 7,006,346
(expires April 2024) - Positive Electrode of an electric double layer
capacitor;
|
|
·
|
U.S. Patent No. 7,110,242
(expires February 2021) - Electrode for electric double layer capacitor
and method of fabrication thereof;
and
|
|
·
|
U.S. Patent No. 7,119,047
(expires February 2021) - Modified activated carbon for carbon for
capacitor electrodes and method of fabrication
thereof.
|
We have
no duty to pay any royalties or license fees with respect to the
commercialization of our PbC device technology, and we are not subject to any
field of use restrictions. We believe our patents and patent applications, along
with our trade secrets, know-how and other intellectual property, will be
critical to our success.
Our
ability to compete effectively with other companies will depend on our ability
to maintain and protect the PbC device intellectual property and technology. We
plan to file additional patent applications in the future. However, the degree
of protection offered by our existing patents or the likelihood that our future
applications will be granted is uncertain. Competitors in both the United States
and foreign countries, many of which have substantially greater resources and
have made substantial investment in competing technologies, may have, or may
apply for and obtain patents that will prevent, limit or interfere with our
ability to make and sell products based on our PbC device technology.
Competitors may also intentionally infringe on our patents. The prosecution and
defense of patent litigation is both costly and time-consuming, even if the
outcome is favorable to us. An adverse outcome in the defense of a patent
infringement suit could subject us to significant liabilities to third parties.
Although third parties have not asserted any infringement claims against us,
there is no assurance that third parties will not assert such claims in the
future.
We also
rely on trade secrets, know-how and other unpatented technology, and there is no
assurance that others will not independently develop the same or similar
technology or obtain unauthorized access to our trade secrets, know-how and
other unpatented technology. To protect our rights in these areas, we require
all employees, consultants, advisors and collaborators to enter into strict
confidentiality agreements. These agreements may not provide meaningful
protection for our unpatented technology in the event of an unauthorized use,
misappropriation or disclosure. While we have attempted to protect the
unpatented proprietary technology that we develop or acquire, and will continue
to attempt to protect future proprietary technology through patents, copyrights
and trade secrets, we believe that our success will depend, to a large extent,
upon continued innovation and technological expertise.
We may
license technology from third parties. Our proposed products are still in the
development stage, and we may need to license additional technologies to
optimize the performance of our products. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate any licensed technology into our proposed
products. Our inability to obtain any necessary licenses could delay our product
development and testing until alternative technologies can be identified,
licensed and integrated.
34
In
general, the level of protection afforded by a patent is directly proportional
to the ability of the patent owner to protect and enforce his rights through
legal action. Since our financial resources are limited, and patent litigation
can be both expensive and time consuming, there can be no assurance that we will
be able to successfully prosecute an infringement claim in the event that a
competitor develops a technology or introduces a product that infringes on one
or more of our patents or patent applications. There can be no assurance that
our competitors will not independently develop other technologies that render
our proposed products obsolete. In general, we believe the best protection of
our proprietary technology will come from market position, technical innovation,
speed-to-market and product performance. There is no assurance that we will
realize any benefit from our intellectual property rights.
Our
Competition
We plan
to compete with a number of established competitors in the battery and
supercapacitor industry, including:
· Maxwell
|
· Enersys
|
· Energy Coversion
Devices
|
· Exide
|
· Panasonic
|
·
Japan Storage
Battery
|
· Nippon-Chmicon
|
· Ness
|
In
addition, many universities, research institutions and other companies are
developing advanced energy storage technologies including:
|
·
|
symmetric
supercapacitors;
|
|
·
|
asymmetric supercapacitors with
organic electrolytes;
|
|
·
|
nickel metal hydride
batteries;
|
|
·
|
lithium ion
batteries;
|
|
·
|
other advanced lead-acid devices
and
|
|
·
|
flow
batteries
|
Other
business entities are developing advanced energy production technologies like
fuel cells, solar cells and windmills which may use our products, or, in some
cases, compete with our products. Since some of our competitors are developing
technologies that may ultimately have costs similar to, or lower than, our
projected costs, there can be no assurance we will be able to compete
effectively.
Most of
our potential competitors have longer operating histories, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources than us. As a result, they may be able to respond more quickly to
changing customer demands or to devote greater resources to the development,
promotion and sales of their products than we can.
Our
competitors with more diversified product offerings may be better positioned to
withstand changing market conditions. Some of our competitors own, partner with,
have longer term or stronger relationships with suppliers of raw materials and
components, which could result in them being able to obtain raw materials on a
more favorable basis than us. It is possible that new competitors or alliances
among existing competitors could emerge and rapidly acquire significant market
share, which would harm our business.
The
development of technology, equipment and manufacturing techniques and the
operation of a facility for the automated production of rechargeable batteries
requires large capital expenditures. In order to minimize our capital investment
in manufacturing facilities and establish strong brand name recognition for our
products, our overall strategy is to negotiate strategic alliances and other
production agreements with established battery manufacturers that want to add a
high-performance co-branded products to their existing product lines. There can
be no assurance, however, that our platform technology business model will
succeed in the battery industry.
35
Raw
Materials
During
the research stage, we used readily available raw materials, off-the-shelf
components manufactured by others and hand-made components fabricated by our
staff. As we begin manufacturing in commercial quantities, we will need to
establish reliable supply channels for commercial quantities of raw materials
and components. We believe established suppliers of raw materials and components
will be able to satisfy our requirements on a timely basis. However we do not
have any long-term supply contracts and the unavailability of necessary raw
materials or components could delay the production of our products and adversely
impact our results of operations.
Lead is
the primary raw material in lead-acid batteries and currently accounts for
approximately 80% of our raw material and component costs in the specialty
conventional lead-acid batteries we now manufacture. Lead prices have fluctuated
dramatically over the last two years, similar to other industrial grade
commodity metals. Our PbC technology will require substantially less lead than
conventional batteries, providing a distinct competitive cost advantage if lead
prices increase above historical averages.
Environmental
Protection
Lead is a
toxic material that is a primary raw material in our PbC batteries. We also use,
generate and discharge other toxic, volatile and hazardous chemicals and wastes
in our research, development and manufacturing activities. We comply with
federal, state and local laws and regulations regarding pollution control and
environmental protection. Under some statutes and regulations, a government
agency, or other parties, may seek to recover response costs from operators of
property where releases of hazardous substances have occurred or are ongoing,
even if the operator was not responsible for such release or otherwise at fault.
In addition, more stringent laws and regulations may be adopted in the future,
and the costs of complying with those laws and regulations could be substantial.
If we fail to control the use of, or to adequately restrict the discharge of,
hazardous substances, we could be subject to significant monetary damages and
fines, or forced to suspend certain operations. In January of 2009, our facility
was tested and found to be in compliance with emission standards as established
by new federal guidelines in accordance with the Clean Air Act – Title
III.
Our
Research and Development
We engage
in extensive R&D for the purpose of improving our PbC technology and our
proposed products. Our goal is to increase efficiency and reduce costs in order
to maximize our competitive advantage. Our R&D organization works closely
with our engineering team, our suppliers and potential customers to improve our
product design and lower manufacturing costs. During the years ended December
31, 2009 and 2008, we spent $4.4 million and $4.0 million, respectively, on
R&D, and $18.4 million since inception. While our limited financial
resources and short operating history makes it difficult for us to estimate our
future expenditures, we expect to incur R&D expenditures of consistent
magnitude for the foreseeable future.
Our
Employees
We
presently employ a staff of 57, including a 16 member scientific and engineering
team, and 26 individuals who are involved principally in manufacturing. We are
not subject to any collective bargaining agreements, and we believe we have a
good relationship with our employees.
36
Description
of Properties
In April
2008, we signed a new lease that added to our existing space at our
manufacturing plant in New Castle, Pennsylvania. The lease calls for a monthly
payment of $16,142 with an initial term of two years beginning April 2008. The
lease includes two successive five-year renewal options, with future rent to be
negotiated at a commercially reasonable rate. We entered into a new lease for
this space on March 28, 2010, for the period commencing April 3, 2010 with a
monthly rental payment of $16,700, which is fixed through 2013, and an initial
term of three years, with two successive five-year renewal options and with
future rent to be negotiated at a commercially reasonable rate. The
battery manufacturing facility includes approximately 70,438 square feet of
floor space, including 7,859 square feet of office, locker, lab and lunch area,
46,931 square feet of manufacturing space, 1,488 square feet of dedicated lab
space, 9,200 square feet of storage buildings and 5,000 square feet of basement
area. In addition to the monthly rental, we are obligated to pay all required
maintenance costs, taxes and special assessments, maintain public liability
insurance, and maintain fire and casualty insurance for an amount equal to 100%
of the replacement value of the leased premises. Our battery manufacturing
operations at this facility are conducted through a wholly owned subsidiary
named Axion Power Battery Manufacturing, Inc. Our management believes our
property is in good condition.
In
December 2008, we signed a letter agreement to sublease from a current tenant on
a month-to-month basis a building consisting of 54,000 square feet in New
Castle, Pennsylvania. This space provides 48,000 of combined manufacturing and
warehouse space and 6,000 square feet of combined office and R&D space. This
letter agreement is effective through December 31, 2010. We can enter into a
sales agreement at any time during the sublease letter agreement. The
rent is $19,300 on a monthly basis. In addition to the monthly rent,
we are obligated to pay all required maintenance costs, taxes and special
assessments, maintain public liability insurance, and maintain fire and casualty
insurance for an amount equal to 100% of the replacement value of the leased
premises. We intend to conduct our PbC and R&D operations from
this facility.
Taylor Litigation
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, Axion Power Corporation, 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, as confirmed by a judgment entered on
November 10, 2009, 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.
37
The
litigation settlement and releases provided by the Chapter 11 plan are now
binding on Mega-C, the Chapter 11 trustee, the Taylor Group and all other
parties described in the plan of reorganization. In an order entered on February
11, 2008, the Bankruptcy Court granted our motion for partial summary judgment,
holding that the alleged “oral” agreement creating rights or interests in the
Technology in favor of the Taylor Group never existed and, even if it had, the
Taylor Group transferred any such rights to the Debtor which were then
transferred to us by the confirmed Chapter 11 plan. The Bankruptcy Court held
that the Taylor Group has no interest in or rights to the Technology. The
Bankruptcy Court held that any attempts to claim an interest in or contest our
title to the Technology are contrary to the permanent injunction of the Chapter
11 plan. The Bankruptcy Court held that the Taylor Litigation against us is
barred by the permanent injunction of the confirmed Chapter 11
plan.
In orders
entered on June 9, 2008, the Bankruptcy Court mandated that the Taylor Group
litigation against us be dismissed. On June 18, 2008, the Taylor Group filed a
notice of appeal from these orders. The Taylor Group signed a pleading
consenting to dismiss us from the Taylor Group litigation in Canada.
On June 27, 2008, we filed a notice of cross-appeal from the Bankruptcy
Court’s orders denying our request for sanctions and our request to hold the
Taylors in contempt of court for their failure to comply with the permanent
injunction of the confirmed Chapter 11 plan. The Taylors’ appeal and our
cross-appeal have been dismissed as interlocutory by the Bankruptcy Appellate
Panel for lack of jurisdiction. On February 10, 2009, the Taylors filed a
second motion to vacate the February 11, 2008 order granting summary judgment in
our favor. At a hearing on the Taylors’ second motion to vacate the
February 11, 2008 summary judgment order on April 23, 2009, the Bankruptcy Court
denied the Taylors’ motion in its entirety. The order denying the Taylors’
second motion to vacate and judgment were entered on November 10,
2009.
In
connection with a related adversary proceeding in the Bankruptcy Court, the
Liquidation Trustee and the Taylors entered into a settlement agreement
whereby, among other things, the Taylors agreed to withdraw virtually all of
their claims as creditors and shareholders in the Mega C bankruptcy
case, dismiss their appeals from the confirmation order and dismiss their
appeal from the Settlement Agreement. The Taylors’
appeals from the confirmation order and from the settlement agreement have now
been dismissed. The Ninth Circuit dismissed the appeal from the Settlement
Agreement by a group identifying themselves as the “Unaffiliated Shareholders”.
The Ninth Circuit awarded double costs on appeal to the Company. The
Unaffiliated Shareholders’ appeal from the Confirmation Order has also been
dismissed. As a result, all appeals from the Settlement Agreement and the
Confirmation Order have been resolved in the Company’s favor.
By virtue
of the confirmed Chapter 11 plan, all of the Mega-C’s right, title and interest,
if any, in the technology was transferred to us. By virtue of the February 11,
2008 orders of the Bankruptcy Court, as subsequently confirmed in the judgment
entered on November 10, 2009, the Taylor Group has no interest in or rights to
the technology. By virtue of the April 14, 2009 order from the
Ontario Superior Court, the Taylor Litigation has been dismissed against
us. The Taylors filed a notice of appeal from the November judgment,
which is pending in the Bankruptcy Appellate Panel for the Ninth Circuit.
We filed a cross-appeal from the portion of the judgment denying Axion’s
requests for sanctions and to hold the Taylors in contempt.
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.
38
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.
On or
about March 15, 2010, Axion Power International, Inc., Traci and William Ahearn,
Sally Fonner and Dr. James Smith (“Axion and the Four Shareholders”) have
entered into a settlement agreement with Banca M.B., Sp.A. under which
Banca M.B. Sp.A. has paid to Axion and the Four Shareholders the sum of Four
Hundred and Ninety Thousand Dollars in full settlement of all claims. As
part of this settlement, the case against Banca M.B., Sp.A. by Axion and the
Four Shareholders has been dismissed with prejudice; however, the cases against
Mr. Masi and Brown Brothers Harriman & Company are continuing. Axion
and the Four Shareholders also have a judgment in the amount of $1,500,000
against Mercatus & Partners, Ltd. and Stephano Cevolo which is being
domesticated in Italy with the intention of being executed against the assets of
both Mercatus & Partners, Ltd. and Mr. Cevolo in Italy.
Our board
of directors directs the management of the business and affairs of our company
as provided in our certificate of incorporation, our by-laws and the General
Corporation Law of Delaware. Members of our board of directors keep informed
about our business through discussions with senior management, by reviewing
analyses and reports sent to them, and by participating in board and committee
meetings.
Board
Leadership Structure and Risk Oversight; Diversity
Our
Company is led by Thomas Granville, who has served as chief executive officer
and chairman of the board since 2005. Our board of directors is
divided into four classes of directors that serve for staggered three-year
terms. Two of our current board members have been elected to serve for terms
that expire on the date of our 2010 annual meeting; two have been elected to
serve for terms that expire on the date of our 2011 annual meeting; three have
been elected to serve for terms that expire on the date of our 2012 annual
meeting; and two were elected by our board of directors in September 2009 to
serve for terms that expire on September 21, 2012. The board has
three standing committees – audit, compensation and technology. The
audit committee and compensation committees are comprised solely of independent
directors, and each committee has a chair. Our audit committee has
traditionally been responsible for overseeing risk management although this
function has more recently spread to our other committees as the compensation
committee has been actively involved in new employment contracts with executives
and our technology committee has taken an active role with regard to our
technology. Our full board receives periodic reports from
management.
Our board
leadership structure is used by other smaller public companies in the Unites
States, and we believe that this leadership structure is effective for the
Company. We believe that having a combined Chairman/CEO and chairs
for each of our board committees is the correct form of leadership for our
Company. We have a single leader for our Company and oversight of
Company operations by experienced directors, three of whom are also committee
chairs. We believe that our directors provide effective oversight of
the risk management function, especially through the work of the audit committee
and dialogue between the full board and our management.
The
Company does not currently consider diversity in identifying nominees for
director. Due to the small size of the Company, the priority has been
in attracting qualified directors, and issues such as diversity have not yet
been considered.
39
The
following table identifies our directors and specifies their respective ages and
positions with our Company.
Name
|
Age
|
Position
|
||
Thomas
Granville
|
65
|
Chief
Executive Officer and Director
|
||
Dr.
Howard K. Schmidt
|
51
|
Director
|
||
Michael
Kishinevsky
|
44
|
Director
|
||
Glenn
Patterson
|
56
|
Director
|
||
Stanley
A. Hirschman
|
63
|
Director
|
||
Robert
G. Averill
|
69
|
Director
|
||
D.
Walker Wainwright
|
59
|
Director
|
||
Joseph
P. Bartlett
|
51
|
Director
|
||
David
Anthony
|
48
|
Director
|
Executive
officers
The
following table identifies our non-director executive officers and specifies
their respective ages and positions with the Company.
Name
|
Age
|
Position
|
||
Dr.
Edward Buiel
|
37
|
Vice
President and Chief Technology Officer
|
||
Philip
S. Baker
|
62
|
Chief
Operating Officer
|
||
Dr.
Robert F. Nelson
|
69
|
Vice
President, Manufacturing and Engineering
|
||
Charles
R. Trego
|
59
|
Chief
Financial Officer
|
The
following paragraphs provide summary biographical information furnished by our
directors and non-director executive officers.
Directors
Robert G.
Averill, 69, has
served on our board of directors since February 2004. Mr. Averill is retired and
principally involved in personal investments. He served as a director of Implex
Corp., a New Jersey based developer and manufacturer of orthopedic implants that
he co-founded in 1991 and then sold to Zimmer Holdings, Inc. From 1978 to 1991,
Mr. Averill held a variety of executive positions with Osteonics Corp., a
developer and manufacturer of orthopedic implants that he co-founded in 1978 and
then sold to Stryker Corporation. From 1971 to 1977, Mr. Averill served as a
director and held a variety of executive positions with Meditech Inc., a
developer and manufacturer of orthopedic implants that he co-founded in 1971 and
sold to 3M Corporation in 1975. Mr. Averill holds 28 patents on a variety of
orthopedic devices and materials, and he is the co-author of several
publications in the field of orthopedics. Mr. Averill holds two degrees from the
Newark College of Engineering (BS-mechanical engineering, 1962 and
MS-engineering management, 1966). The Company has determined that Mr.
Averill should serve as a director due to his extensive engineering and
manufacturing background.
Thomas
Granville, 65,
has served on our board of directors since February 2004. Mr. Granville served
as the chairman of our board of directors from February 2004 through April 2005
when he agreed to accept full-time employment as our chief executive officer.
Mr. Granville served as the president of a New York State elevator company that
specialized in the installation and maintenance of elevators, escalators, moving
walkways and other building transportation products. Mr. Granville also served
15 years as treasurer and ten years as the president of the National Elevator
Industry Inc., a trade association that represents elevator manufacturers and
contractors, where his duties included labor negotiations for national contracts
and oversight duties to a $2.3 billion national pension fund. Mr. Granville has
also been a partner, or the general partner, of a number of real estate
partnerships that owned multi-family housing, commercial real estate and a cable
television company. Mr. Granville is a 1967 graduate of Canisus College.
(BA-Business Administration). The Company has determined that Mr.
Granville should serve as a director due to his position as senior executive
officer of the Company, which gives him valuable insight, as well as his prior
managerial experience which provides unique insight for the Board into the
operations of the Company.
40
Michael
Kishinevsky, 44,
is an independent director who has served on our board since 2005. Mr.
Kishinevsky is a Canadian lawyer who had been principally engaged in the
practice of corporate and commercial law from 1995 until 2005, with a particular
emphasis on the needs of Toronto’s Russian speaking population. For five years
Mr. Kishinevsky served as general legal counsel for C&T. Mr. Kishinevsky
currently serves as a director of Sunrock Consulting Ltd., a company he
co-founded in 1995, that specializes in the import and distribution of carbon
black and synthetic rubber. He is also the president and director of SunBoss
Chemicals Corp., a corporation specializing in chemical additives for the custom
rubber mixing industry. Mr. Kishinevsky is a 1989 graduate of the University of
Calgary (B.Sc. in Cellular, Molecular and Microbial Biology and B.Sc. in
Psychology) and a 1993 graduate of the University of Ottawa Law School. Mr.
Kishinevsky was called to the bar in the Ontario courts in 1995 and is a member
of the Law Society of Upper Canada. The Company has determined that
Mr. Kishinevsky should serve as a director due to his legal background as well
as his import and distribution experience which provides expertise on the Board
with regard to product distribution.
Howard K.
Schmidt, Ph.D., 51, is an independent
director, who has served on our board of directors since April, 2005. Dr.
Schmidt is presently employed as a Petroleum Engineering Consultant at Saudi
Aramco in Dhahran, Saudi Arabia. Until August, 2009, Schmidt was a
Senior Research Fellow in the Department of Chemical and Biomolecular
Engineering at Rice University in Houston, Texas. Between September, 2003 and
March, 2008, he was the Executive Director of the Carbon Nanotechnology
Laboratory (the “CNL”) at Rice University. Dr. Schmidt is an expert in the field
of carbon nanotechnology and single-wall carbon nanotubes. Before joining
the CNL, Dr. Schmidt operated Stump Partners, a Houston-based consultancy firm
and was involved in two Internet ventures. In 1989, Dr. Schmidt founded SI
Diamond Technology, Inc., a company that received the prestigious R&D 100
Award from Research and Development Magazine in 1989, went public in 1993, and
recently changed its name to Applied Nanotech Holdings, Inc. Dr. Schmidt holds
two degrees from Rice University (BS-Electrical Engineering, 1980 and
Ph.D.-Chemistry, 1986). The Company has determined that Dr. Schmidt
should serve as a director due to his unique and extremely invaluable technical
knowledge in engineering.
Glenn
Patterson, 56,
was appointed to our board of directors in February 2004 and is currently
elected to serve until our 2012 annual meeting. He is currently
president of HAP International Inc., an investment research and analysis company
specializing in renewable and smart grid applications. Mr.
Patterson, in addition to Axion Power International Inc., sits as a director on
Wired Sun, a privately held advanced PV thin film company and the Shopoff
Properties Trust Inc., a publicly held REIT. He is also active in community
events and is a member of the advisory board for the Oregon Chapter of the
Cystic Fibrosis Foundation. Until November 2004, Mr. Patterson was
president of the Oregon Electric Group, an electrical power and technology
services company based in Portland, Oregon. In September 2001, the Oregon
Electric Group of which Mr. Patterson was a major owner, was sold to
Montana-Dakota Resources, whose major subsidiaries includes electrical power
generating, utility and distribution companies with operations in 40 states. Mr.
Patterson graduated summa cum laude from Willamette University (BS-Economics) in
1975. The Company has determined that Mr. Patterson should serve as a
director due to his extensive background in power generation and electrical
power areas.
Stanley A.
Hirschman, 63,
was elected to our board of directors as an independent director at our 2006
annual meeting. He is President and Director of Optex Systems Holdings, a
manufacturer of optical sighting systems and assemblies primarily for Department
of Defense (DOD) applications. He is the former chairman of Mustang
Software, Inc. While at Mustang Software, Mr. Hirschman took a
hands-on role in the planning and execution of the strategic initiative to
increase stockholder value resulting in the successful acquisition of the
company by Quintus Corporation. During the past five years, Mr.
Hirschman has also sat on the following Boards: Bravo Brands, 5G Wireless
Communications, iWorld Projects & Services, Dalrada Financial, Datascension
and South Texas Oil. Prior to joining Optex Systems in 2008 he was
president of CPointe Associates, a management consultancy. He has also held
executive positions with Software Etc., T.J. Maxx, Gap Stores and Banana
Republic. Mr. Hirschman is a member of the National Association of Corporate
Directors, the KMPG Audit Committee Institute and is a graduate of the Harvard
Business School Audit Committees in the New Era of Governance
symposium. He is active in community affairs and serves on the
Advisory Board of the Salvation Army Adult Rehabilitation
Centers. The Company has determined that Mr. Hirschman should serve
as a director due to his extensive corporate governance and finance experience
as well as his wide experience as a public company director.
41
D. Walker
Wainwright, 59,
is an independent director who was appointed to our board of directors on
January 15, 2007. He is Chairman of Interboro Insurance Company, a provider of
personal lines insurance products in New York State. He is also the founder and
chief executive of Wainwright & Co. LLC, an independent financial advisory
firm and investment manager. The firm’s activities include the identification
and assessment of alternative investments, the monitoring of these investments
and the creation of proprietary portfolios. In this respect, the firm works with
investment management firms, not-for-profit organizations and family offices as
an independent consultant to create client-specific solutions. Wainwright &
Co. also researches and reviews private investments, including private equity
funds, to assist in determining their suitability for specific accounts or
portfolios. Formerly a Managing Director in investment banking at Smith Barney,
Inc. and at Kidder, Peabody & Co., Mr. Wainwright has over 35 years’
consulting, banking and investment banking experience. Having directed Kidder’s
investment banking efforts in the Asia Pacific Region, he has extensive
international experience and has lived in Australia and Lebanon. Mr. Wainwright
began his career at Chemical Bank and, subsequently, the Schroder Group. He is a
graduate of Stanford University (A.B. – 1972) and of Columbia University (M.B.A.
– 1976). The Company has determined that Mr. Wainwright should serve
as a director due to his long term finance and banking experience.
David
Anthony, 48, was
elected to our board of directors by the then-current board of directors in
September 2009 to fill one of the three new positions on the board created by
the board of directors. Mr. Anthony is an experienced entrepreneur,
venture capitalist, and educator. He is Managing Director of 21 Ventures, a
position he has held since 2003, and sits or has sat during the past five years
on the boards of Agent Video Intelligence, ThermoEnergy, Clean Power, Solar
Enertech, EFOI, Applied Solar 3GSolar, BioPetroClean, Juice Wireless, Open
Energy and VOIP Logic. Prior to 21 Ventures, David launched Notorious
Entertainment, a developer of multimedia brands. David received his MBA from The
Tuck School of Business at Dartmouth College and a BA in Economics from George
Washington University. The Company has determined that Mr. Anthony
should serve as a director due to his extensive experience in finance and
related areas, as well as his vast experience of service as a public
director.
Joseph P.
Bartlett, 51, was
elected to our board of directors by the then-current board of directors in
September 2009 to fill one of the three new positions on the board created by
the board of directors. Mr. Bartlett is counsel to the Quercus Trust
and has practiced corporate and securities law since 1985. From
September 2004 until August 2008 he was a partner at Greenberg Glusker
LLP in Los Angeles, California, and from September 2000 until
September 2004 he was a partner at Spolin Silverman Cohen and Bartlett
LLP. Mr. Bartlett sits on the boards or has sat on the boards during
the past five years of Applied Solar, and ThermoEnergy. He graduated,
magna cum laude, from the University of California, Hastings College of Law
in 1985, and received an AB in English literature from the University of
California at Berkeley in 1980. The Company has determined that Mr.
Bartlett should serve as a director due to his legal experience and his
relationship to Quercus Trust.
Executive
Officers
Dr. Edward Buiel,
Ph.D. was appointed chief of R&D in September 2005. Before joining
our Company, Dr. Buiel served for 3-1/2 years as project leader for the Energy
Storage Group of Meadwestvaco Corporation, one of the largest producers of
activated carbon in the world. In this position Dr. Buiel’s team focused on
developing activated carbon materials for electrochemical applications including
Lithiumion batteries, organic ultracapacitors, and asymmetric lead-carbon
capacitors. His responsibilities included managing a USCAR-Advanced Battery
Consortium project to develop activated carbon materials for hybrid electric
vehicle energy storage systems and managing a joint program with Sandia National
Laboratories to develop lead-carbon capacitors for grid-connected energy storage
systems. Previously, Dr. Buiel worked for nine months as a senior software
engineer for Vasocor, Inc. and for 2-1/2 years as a Senior Research Engineer for
the Automotive Carbon Group of Meadwestvaco Corporation. Dr. Buiel is a 1994
graduate of Queen’s University, Kingston, Ontario, where he earned a Bachelor of
Science in Engineering and Physics, and a 1998 graduate of Dalhousie University,
Halifax, Nova Scotia, where he earned a Ph.D. in Physics and wrote his doctoral
thesis on “The Development of Disordered Carbon Materials as Anode Materials for
Li-ion Battery Applications.”
42
Philip
S.
Baker was with Santa Fe Springs CA-based Trojan Battery Company from 1997
to 2009. From 2006 to 2009 he was Senior Vice President and General Manager of a
new battery facility for which he led all the phases of development and
operations in Sandersville, GA. Baker guided the lead-acid battery plant from
negotiations and permitting forward, and is considered to be an expert in
quality control and documentation, productivity and the maximization of uptime,
automation and the management of environmental issues. Prior to Sandersville,
Baker served from 2001 to 2005 at the Trojan plant in Lithonia GA as Senior Vice
President and General Manager, where he executed a turn-around in leadership,
quality and output, introduced Kaizen events and Six-Sigma tools and improved
productive output by 20% in critical bottleneck areas. Before Lithonia, Baker
worked for Trojan in Santa Fe Springs as Director of Operations. He was with
privately held Wyomissing PA-based Glen-Gery Corporation, a manufacturer of
building materials where 700 employees reported upstream to him. He began his
career at the Houston Brick & Tile Company after taking a degree in Ceramic
Engineering from the Georgia Institute of Technology.
Dr. Robert F.
Nelson, Ph.D. joined the Company as Vice President of Manufacturing
Engineering in December 2007. Before joining Axion, Dr. Nelson worked for
Firefly Energy, Inc. as a Technical Advisor and Senior Vice President of
Engineering for 4-1/2 years. His primary function at Firefly was to implement
the development and testing of VRLA cells and batteries. Before Firefly, Dr.
Nelson was an independent consultant for six years, working with some 45
companies on materials and designs of VRLA batteries. Previous positions include
three years at Bolder Technologies (1994-1997), three years at the International
Lead Zinc Research Organization (where he organized and managed the Advanced
Lead-Acid Research Organization, ALABC, from 1991 to 1994), one year at Portable
Energy Products (a lead-acid startup company) and 13 years with Gates Energy
Products, the innovator of VRLA technology. Over these 30 years, Dr. Nelson has
five patents, has given invited presentations at some 35 international
conferences and published 38 research papers in refereed journals. Before this,
he spent 11 years in teaching and researching, lastly at the University of
Georgia (1972-1977). Dr. Nelson is a 1963 graduate of Northwestern University
with a B.A. in Chemistry (cum laude) and a 1967 graduate of the University of
Kansas with a Ph.D. in Analytical Chemistry. During his academic career he gave
presentations at over 30 international conferences and published more than 35
refereed papers dealing with organic electrochemistry.
Charles R.
Trego most recently served as Executive Vice President and Chief
Financial Officer of Minrad International, an Amex-listed pharmaceutical and
medical device company in Orchard Park, NY. Minrad was acquired by India's
Piramal Healthcare in early 2009, and Trego was an integral part of the
acquisition strategy and managed the bridge financing through the transition.
Prior to that, from 2005 to 2008, he was Senior Vice President and Chief
Financial Officer of Elmira NY-based Hardinge Inc, a Nasdaq-listed global
machine tool company ($327M in annual revenue), and from 2003 to 2005 he was
Chief Financial Officer and Treasurer of Latham NY-based Latham International
($180M in annual revenue), a privately held manufacturer and marketer of
swimming pool components. After taking a degree in accounting from the
University of Dayton in 1972 and achieving his CPA designation in 1973, Trego
earned an MBA from the University of Dayton in 1978. His career began with a
position as Senior Auditor with Ernst & Whinney in Dayton, and continued
with increasingly responsible positions with Ponderosa Inc, Bojangles of
America, Rich Sea Pak, Rymer Foods and Rich Products Corporation. During his
14-year tenure as Chief Financial Officer at Rich Products, sales revenue
increased from $650M to more than $1.8B. He is experienced in M&A
activities, supply chain processes, information systems, business partnering,
team building, capital markets and risk management, as well as financial
management best practices. While at Rich Products he was also actively involved
in multiple aspects of operations.
43
Presiding
Director
Our Chief
Executive Officer, Thomas Granville, acts as the presiding director at meetings
of our board of directors. In the event that Mr. Granville is unavailable to
serve at a particular meeting, responsibility for the presiding director
function will rotate among the chairmen of each of the committees of our board
of directors.
Corporate
Governance
Our board
of directors believes that sound governance practices and policies provide an
important framework to assist them in fulfilling their duty to stockholders. Our
board of directors is working to adopt and implement many “best practices” in
the area of corporate governance, including separate committees for the areas of
audit and compensation, careful annual review of the independence of our Audit
and Compensation Committee members, maintenance of a majority of independent
directors, and written expectations of management and directors, among other
things.
Code
of Business Conduct and Ethics
Our board
of directors has adopted a Code of Business Conduct and Ethics, which has been
distributed to all directors, officers, and employees and will be given to new
employees at the time of hire. The Code of Business Conduct and Ethics contains
a number of provisions that apply principally to our Chief Executive Officer,
Chief Financial Officer and other key accounting and financial personnel. A copy
of our Code of Business Conduct and Ethics can be found under the “Investor
Information” section of our website at www.axionpower.com. We intend to disclose
any amendments or waivers of our Code of Business Conduct and Ethics on our
website at www.axionpower.com.
Communications
with the Board of Directors
Stockholders
and other parties who are interested in communicating with members of our board
of directors, either individually or as a group, may do so by writing to Thomas
Granville, c/o Axion Power International, Inc, 3601 Clover Lane, New Castle,
Pennsylvania, 16105. Mr. Granville will review all correspondence and forward to
the appropriate members of the board of directors copies of all correspondence
that, in the opinion of Mr. Granville, deals with the functions of the board of
directors or its committees or that he otherwise determines requires their
attention. Concerns relating to accounting, internal controls or auditing
matters should be immediately brought to the attention of our audit committee
and will be handled in accordance with procedures established by that
committee.
Director
Independence
Our board
of directors has determined that six of our directors would meet the
independence requirements of the American Stock Exchange if such standards
applied to the Company. In the judgment of the board of directors, Messrs.
Granville, Gelbaum, Bartlett and Anthony do not meet such independence
standards. In reaching its conclusions, the board of directors considered all
relevant facts and circumstances with respect to any direct or indirect
relationships between the Company and each of the directors, including those
discussed under the caption “Certain Relationships and Related Transactions”
below. Our board of directors determined that any relationships that exist or
existed in the past between the Company and each of the independent directors
were immaterial on the basis of the information set forth in the
above-referenced sections.
Board
Committees
The board
of directors currently has three standing committees: the audit committee, the
compensation committee, and the technology committee. These committees are
responsible to the full board.
44
Audit Committee – Our
board of directors has created an audit committee that presently consists of Mr.
Hirschman, Mr. Wainwright and Dr. Schmidt. Mr. Hirschman serves as chairman of
the audit committee. All members have a basic understanding of finance and
accounting, and are able to read and understand fundamental financial
statements. The board of directors has determined that all members of the audit
committee would meet the independence requirements applicable to NYSE Amex
listed companies although such standards do not apply to our company. Our board
of directors has also determined that based on work history none of our current
committee members meet the definition of an “Audit Committee Financial Expert”
as defined in Item 407(d)(5)(ii) under Regulation S-K, promulgated under the
Securities Exchange Act of 1934. The audit committee has the sole authority to
appoint, review and discharge our independent registered public accounting firm.
The audit committee reviews the results and scope of the audit and other
services provided by our independent registered public accounting firm, as well
as our accounting principles and our system of internal controls, reports the
results of their review to the full board of directors and to management, and
recommends to the full board of directors that the our audited consolidated
financial statements be included in our Annual Report on Form 10-K.
The audit
committee met 9 times during the year-ended December 31, 2009. The audit
committee charter can be found on our website under About Axion; Corporate Governance /
Committees, at www.axionpower.com.
Compensation
Committee – Our board of directors has created a compensation committee
that presently consists of Messrs. Averill, Patterson, Kishinevsky and
Wainwright. Mr. Averill serves as chairman of the compensation committee. The
compensation committee exercises our board of director’s authority concerning
compensation of the executive management team and non-employee directors and
administers our stock-based incentive compensation plans. The compensation
committee typically meets in separate sessions independently of board meetings.
The compensation committee typically schedules telephone meetings as necessary
to fulfill its duties. The chairman establishes meeting agendas after
consultation with other committee members and Mr. Thomas Granville, our Chief
Executive Officer. Subject to supervision by the full board of directors, the
compensation committee administers our 2004 Incentive Stock Plan. Our Chief
Executive Officer and other members of management regularly discuss our
compensation issues with compensation committee members. Subject to compensation
committee review, modification and approval, Mr. Granville typically makes
recommendations respecting bonuses and equity incentive awards for the other
members of the executive management team. The compensation committee establishes
all bonus and equity incentive awards for Mr. Granville in consultation with
other members of the management team. Our board of directors
has determined that all members of the compensation committee would meet the
independence requirements applicable to NYSE Amex listed companies although such
standards do not apply to us.
The
compensation committee conducted one formal meeting during the year ended
December 31, 2009. In addition, the compensation committee met periodically and
informally with our CEO throughout the year ended December 31, 2008. The
compensation committee charter can be found on our website under “About Axion; Corporate
Governance; Committees,” at www.axionpower.com.
Technology Committee
– Our board of directors has created a technology committee that consists of
Messrs. Averill and Granville. Mr. Averill serves as chairman of the technology
committee. The technology committee provides board-level oversight, guidance and
direction to our R&D staff, supervises the activities of our Technical
Advisory Board, evaluates and makes recommendations with respect to the
acquisition and licensing of complementary and competitive technologies and
supervises the activities of our intellectual property lawyers.
The
technology committee did not formally meet during the year-ended December 31,
2009 but it did meet informally with our CTO and other members of the R&D
and manufacturing teams during the year-ended December 31,
2009.
We do not have a nominating
committee – Given the relatively small size of our board of directors and
the desire to involve the entire board of directors in nominating decisions, we
have elected not to have a separate nominating committee, and the entire board
of directors currently serves that function. With respect to director nominees,
our board of directors will consider nominees recommended by stockholders that
are submitted in accordance with our By-Laws. We do not have any specific
minimum qualifications that our board believes must be met by a board
recommended nominee for a position on our board of directors or any specific
qualities or skills that our board believes are necessary for one or more of our
directors to possess. We also do not have a specific process for identifying and
evaluating nominees for director, including nominees recommended by security
holders. The board has not paid fees to any third party to identify or evaluate
potential board nominees.
45
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth the compensation earned by or paid to our Named
Executive Officers with respect to the year ended December 31,
2009. The Named Executive Officers are as shown. We did not have any
non-equity incentive plans, pension plans or deferred compensation plans during
the year ended December 31, 2009.
Name and
Principal
Position
|
Year
|
Salary
($) (1)
|
Bonus
($) (2)
|
Stock
Awards
($) (3)
|
Option
Awards
($) (3)
|
All Other
Compensation
($) (4)
|
Total
Compensation
($)
|
||||||||
Thomas Granville
CEO
and
Director
(5)
|
2009
|
324,000 | 23,458 | 347,458 | |||||||||||
Thomas Granville
CEO
and Director (5)
|
2008
|
324,000 | 250,000 | 79,872 | 31,493 | 685,365 | |||||||||
Edward
Buiel
Vice
President and CTO
|
2009
|
180,000 | 18,230 | 198,230 | |||||||||||
Edward
Buiel
Vice
President and CTO
|
2008
|
180,000 | 125,000 | 141,500 | 95,436 | 16,920 | 558,856 |
Name and
Principal
Position
|
Year
|
Salary
($) (1)
|
Bonus
($) (2)
|
Stock
Awards
($) (3)
|
Option
Awards
($) (3)
|
All Other
Compensation
($) (4)
|
Total
Compensation
($)
|
||||||||
Donald
Hillier
CFO (6)
|
2009
|
150,000 | 19,643 | 169,643 | |||||||||||
Donald
Hillier
CFO (6)
|
2008
|
86,538 | 166,500 | 179,244 | 10,274 | 442,556 | |||||||||
Andrew
C Conway, Jr
CFO (7)
|
2008
|
92,308 | 20,625 | 112,933 | |||||||||||
Robert
Nelson
VP
Manufacturing Eng.
|
2009
|
132,000 | 7,408 | 139,408 | |||||||||||
Robert
Nelson
VP
Manufacturing Eng.
|
2008
|
132,000 | 16,582 | 148,582 |
1.
|
Salaries are presented as the
contractual amount earned for the year, regardless of date of
payment.
|
|
|
2.
|
Discretionary bonuses are not
made pursuant to any specific bonus plan. Bonuses cited were
awarded and paid in 2008.
|
|
|
3.
|
Stock and option awards were
granted pursuant to the individual employment contracts. Options are
valued using the Black-Scholes-Merton option pricing
model.
|
46
|
|
4.
|
Other compensation includes
Company perquisites relating to car allowances, use of company cars,
accrued vacation payments, moving expenses with related gross-up, other
earned compensation, as well as healthcare premiums paid under the group
health plan.
|
|
|
5.
|
During 2008, $627,375 of the
compensation reported to Mr. Granville was remitted to Gallagher Elevator
Co. (Gallagher) pursuant to his 2005 employment
contract. Remaining payments were remitted directly to Mr.
Granville through Payroll.
|
|
|
6.
|
Mr. Hillier joined the Company on
June 19, 2008. Salary and other compensation cited for 2008
reflects the apportionment of these expenses based on his dates of
service.
|
|
|
7.
|
Mr. Conway resigned from his
position as our Chief Financial Officer in June
2008.
|
Employment
Agreements
During
2008, we entered into executive employment agreements with Thomas Granville,
Edward Buiel, and Donald Hillier (who was terminated from employment on February
5, 2010). These agreements generally require each executive to devote
substantially all of his business time to our affairs, establish standards of
conduct, prohibit competition with our company during their term, affirm our
rights respecting the ownership and disclosure of patents, trade secrets and
other confidential information, provide for the acts and events that would give
rise to termination of such agreements and provide express remedies for a breach
of the agreement. Each of our executives will participate 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 are summarized
below:
|
·
|
Under the terms of his employment
agreement effective June 2008, which has a term of two years, Mr.
Granville receives an annual salary of $324,000, an annual car allowance
of $9,000, a signing bonus of $250,000, bonuses as determined by the
compensation committee, and a 5-year option to purchase 90,000 shares of
our common stock at a price of $2.50 per share that vests over 24 months
beginning in June 2008.
|
|
·
|
Under the terms of his employment
agreement effective June 2008, which had a term of two years and a
potential term extension to May 31, 2011, Mr. Buiel receives an annual
salary of $180,000, an annual car allowance of $6,000, a signing bonus of
$110,000 and a future extended term bonus of $50,000 if the executive is
still in the employ of the Company on June 1, 2011, bonuses as determined
by the compensation committee, and a 5-year option to purchase 100,000
shares of our common stock at a price of $2.50 per share with 50% cliff
vesting on each of December 31, 2009 and December 31, 2010
respectively. Mr. Buiel also received 30,000 shares of the
Company's common stock vesting during December 2009, and 50,000 shares of
the Company's common stock to vest on June 15,
2011.
|
|
·
|
Under the terms of his employment
agreement effective June 2008, which had a term of three years, Mr.
Hillier received an annual salary of $150,000, an annual car allowance of
$9,000, bonuses as determined by the compensation committee, and a 5-year
option to purchase 180,000 shares of our common stock at a price of $2.50
per share that vests over 36 months beginning in June 2008. Mr.
Hillier also received 90,000 shares of the Company's common
stock with vesting to occur in equal 30,000 shares on the next 3
anniversary dates of his employment agreement. Mr. Hillier
served as our CFO throughout fiscal year 2009 and was terminated as the
Company’s CFO on February 5,
2010.
|
|
·
|
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.
|
47
Warrants
As of
March 17, 2010, we have 13,865,433 outstanding warrants that represent potential
future cash proceeds to our company of $18,979,625. The
warrants are divided into seven classes that are presently exercisable and
expire at various times over the next 60 months. The following table summarizes
the number of warrants in each class, the anticipated proceeds from the exercise
of each class, and the expiration date of each class.
Warrant
Series
|
Number of
Warrants
|
Exercise
Price
|
Anticipated
Proceeds
|
Expiration
Date
|
||||||
Series
V Warrants
|
680,000
|
$
|
4.00
|
$
|
2,720,000
|
December
31, 2011
|
||||
Series
VI Warrants
|
989,363
|
$
|
6.00
|
$
|
5,936,178
|
March
31, 2011
|
||||
2007
Bridge Warrants
|
183,755
|
$
|
2.35
|
$
|
431,824
|
December
31, 2012
|
||||
2008
Conversion-Warrants
|
580,940
|
$
|
2.60
|
$
|
1,510,444
|
June
29, 2013
|
||||
2008
Quercus
|
10,000,000
|
$
|
0.75
|
$
|
7,500,000
|
June
29, 2013
|
||||
2008
Derivatives
|
1,385,714
|
$
|
0.57
|
$
|
789,857
|
June
29, 2013
|
||||
2009
Bridge Warrants
|
27,240
|
$
|
2.00
|
$
|
54,480
|
August
12, 2014
|
||||
2009
Bridge Warrants
|
18,421
|
$
|
2.00
|
$
|
36,842
|
December
8, 2014
|
||||
Total
|
13,865,433
|
$
|
18,979,625
|
The Board
of Directors on August 21, 2009 approved the issuance of warrants to purchase
not more than 1,600,000 shares of common stock at an exercise price of $2.00 per
share and a term of two years to the C&T Group. At the date of this
prospectus these warrants have not yet been issued pending "mutual
understanding" between the parties.
The
holders of warrants are not required to exercise their rights at any time prior
to the expiration date and we are unable to predict the amount and timing of any
future warrant exercises. We reserve the right to temporarily reduce the
exercise prices of our warrants from time to time in order to encourage the
early exercise of the warrants.
Stock
Options
As of
March 17, 2010, we have 1,692,270 outstanding stock options that represent
potential future cash proceeds to our company of $4,615,779. The outstanding
options include1,007,955 options that are currently vested and exercisable, or
1,019,205 that will become vested and exercisable within 60 days, and represent
potential future cash proceeds to our company of $3,081,353 and $3,109,478,
respectively. The remaining options will vest and become exercisable over the
next three years. The following table provides summary information on our
outstanding options.
Vested Option Grants
|
Unvested Option Grants
|
|||||||||||||||
Shares
|
Price
|
Proceeds
|
Shares
|
Price
|
Proceeds
|
|||||||||||
Incentive
Plan options
|
33,050
|
$
|
3.65
|
$
|
120,480
|
0
|
$
|
0
|
$
|
0
|
||||||
Directors’
Plan options
|
201,555
|
$
|
2.33
|
468,838
|
215,565
|
$
|
1.39
|
300,051
|
||||||||
Contract
options to officers
|
634,250
|
$
|
3.36
|
2,133,125
|
168,750
|
$
|
2.87
|
484,375
|
||||||||
Contract
options to consultants and employees
|
139,100
|
$
|
2.58
|
358,910
|
300,000
|
$
|
2.50
|
750,000
|
||||||||
Total
|
1,007,955
|
$
|
3.06
|
$
|
3,081,353
|
684,315
|
$
|
2.24
|
$
|
1,534,426
|
48
The
holders of options are not required to exercise their rights at any time and we
are unable to predict the amount and timing of any future option exercises. We
reserve the right to temporarily reduce the exercise prices of our options from
time to time in order to encourage the early exercise of the
options.
Nonqualified
deferred compensation
We had no
non-qualified deferred compensation plans during year ended December 31,
2009.
Post-Termination
Compensation
We have
not entered into change in control agreements with any of our named executive
officers or other members of the executive management team, although our
employment agreements with certain members of management do call for immediate
vesting of options upon a 50% change in control. No awards of equity incentives
under our 2004 Incentive Stock Plan or awards of options under our 2004 Outside
Directors Stock Option Plan provide for immediate vesting upon a change in
control other than a restricted stock grant of 36,000 shares issued to Robert
Nelson. However, the compensation committee has the full and exclusive power to
interpret the plans, including the power to accelerate the vesting of
outstanding, unvested awards. A “change in control” is generally
defined as (1) the acquisition by any person of 30% or more of the combined
voting power of our outstanding securities or (2) the occurrence of a
transaction requiring stockholder approval and involving the sale of all or
substantially all of our assets or the merger of us with or into another
corporation.
Director
Compensation
The
following table provides information regarding compensation paid to non-employee
directors for services rendered during the year ended December 31,
2009.
Name
|
Fees
Earned or
Paid in
Cash ($)
(1)
|
Stock
Awards
($)
|
Option
Awards
($)
(3)
|
Total ($)
|
|||||
Thomas Granville
|
(2 | ) | |||||||
Dr.
Igor Filipenko (4)
|
0 | 0 | |||||||
Robert
G. Averill
|
42,500 | 42,500 | |||||||
Dr.
Howard K. Schmidt
|
40,000 | 40,000 | |||||||
Michael
Kishinevsky
|
36,500 | 36,500 | |||||||
Glenn
Patterson
|
36,500 | 33,396 | 69,896 | ||||||
Stanley
A. Hirschman
|
44,500 | 33,396 | 77,896 | ||||||
D.
Walker Wainwright
|
45,000 | 33,396 | 78,386 | ||||||
David
Gelbaum (5)
|
0 | 0 | |||||||
David
Anthony (5)
|
0 | 0 | |||||||
Joseph
Bartlett (5)
|
0 | 0 |
1.
|
Fees are presented based on the
amount earned. All fees presented have been paid in full as of
January 8, 2010.
|
49
2.
|
Mr. Granville received no
compensation during 2009 for his service as a Director, as he served as
our CEO during that time period. For a summary of the
compensation received by him as CEO during 2009, see Summary Compensation
Table above.
|
3.
|
Three directors were reelected to
serve on the Board of Directors at the Annual Meeting held on June 25,
2009. Each director reelected received 42,855 five-year
options with an exercise price of $1.40 per share, pursuant to the 2004
Outside Directors Stock Option Plan. The options granted shall vest at the
rate of 14,285 per year commencing on the date of the company's annual
meeting, so long as the director serves as a member of the board on the
date of such meeting. The options are valued using the
Black-Scholes-Merton option pricing
model.
|
4.
|
On March 17, 2010, Dr. Igor
Filipenko gave notice of his resignation as a director of the Company,
effective immediately.
|
5.
|
David Gelbaum, David Anthony and
Joseph Bartlett were added to the Board as a condition of the Quercus
Trust Amendment to Warrants and Securities Purchase Agreement. These
members received no compensation for 2009. Mr. Gelbaum resigned
as a director on March 3,
2010.
|
The
members of our board of directors are actively involved in various aspects of
our business ranging from relatively narrow board oversight functions to
providing hands-on guidance to our executives and scientific staff with respect
to matters within their personal experience and expertise. We believe that the
active involvement of all directors in our principal business and policy
decisions increases our board of directors’ understanding of our needs and
improves the overall quality of our management decisions. In recognition of the
substantial time and personal effort that we require from our directors, we have
adopted director compensation policies that provide for higher director
compensation than is typically found in companies at our early stage of
development.
Only
nonmanagement directors are compensated separately for service as members of our
board of directors. Each of our nonmanagement directors received the following
components of compensation for the period January 1, 2009 through December 31,
2009:
|
·
|
A basic annual retainer of
$25,000 for service as a
director;
|
|
·
|
A supplemental retainer of $6,000
for service as chairman of any
committee;
|
|
·
|
A supplemental annual retainer of
$3,000 for service as a committee
member;
|
|
·
|
A meeting fee of $1,500 per day
for each board or committee meeting attended in person or $500 for each
board or committee meeting attended by telephone;
and
|
|
·
|
Reimbursement for all reasonable
travel, meals and lodging costs incurred on our
behalf.
|
At our
2004 annual meeting, our stockholders ratified a stock option plan for
independent directors that authorized the issuance of options to purchase
$20,000 of our common stock for each year of service as a director. At our 2005
annual meeting, the number of shares reserved for issuance under the outside
directors’ stock option plan was increased to 500,000.
For the
years ended December 31, 2009, 2008, 2007, 2006, 2005 and 2004, we issued
128,585, 179,555, 0, 60,000, 70,000 and 54,000, options pursuant to our
directors’ stock option plan, respectively. Of this total, no options were
exercised during the year ended December 31, 2009, 193,555 options are currently
vested and exercisable at a weighted average price of $2.27 per share and
116,000 options are unvested and will be exercisable at a weighted average price
of $1.38 per share.
50
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On March
17, 2010, we had 84,653,302 shares of common stock and 630,897 shares of Series
A Stock issued and outstanding. The following table sets forth certain
information with respect to the beneficial ownership of our securities as of
March 17, 2010, for (i) each of our directors and executive officers; (ii) all
of our directors and executive officers as a group; and (iii) each person who we
know beneficially owns more than 5% of our common stock.
Beneficial
ownership data in the table has been calculated based on the Securities and
Exchange Commission rules that require us to identify all securities that are
exercisable for or convertible into shares of our common stock within 60 days of
March 17, 2010 and treat the underlying stock as outstanding for the purpose of
computing the percentage of ownership of the holder.
Except as
indicated by the footnotes following the table, and subject to applicable
community property laws, each person identified in the table possesses sole
voting and investment power with respect to all capital stock held by that
person. The address of each named executive officer and director, unless
indicated otherwise by footnote, is c/o Axion Power International, Inc. 3601
Clover Lane, New Castle PA 16105.
|
Common Stock
|
Warrant &
Options
(1)
|
Combined
Ownership
|
Percentage
|
|||||
Quercus
Trust (2)
1835
Newport Blvd
A109
– PMB 467
Cosa
Mesa, CA 92627
|
8,571,429 | 10,000,000 | 18,571,429 | 19.6 | % | ||||
AWM
Investment Company, Inc. (3)
Special
Situations Cayman Fund LP (3)
527
Madison Avenue, Suite 2600
c/o
Austin W Marxe & David M Greenhouse
|
1,754,386 | — | 1,754,386 | 2.1 | % | ||||
AWM
Investment Company, Inc. (3)
Special
Situations Private Equity Fund
527
Madison Avenue, Suite 2600
c/o
Austin W Marxe & David M Greenhouse
|
1,315,789 | — | 1,315,789 | 1.6 | % | ||||
AWM
Investment Company, Inc. (3)
Special
Situations Technology Fund LP
527
Madison Avenue, Suite 2600
c/o
Austin W Marxe & David M Greenhouse
|
798,246 | — | 798,246 | 0.9 | % | ||||
AWM
Investment Company, Inc. (3)
Special
Situations Technology Fund II LP
527
Madison Avenue, Suite 2600
c/o
Austin W Marxe & David M Greenhouse
|
4,903,509 | — | 4,903,509 | 5.8 | % | ||||
James
E. Winner Jr. & Donna C Winner
JT TEN
(4)
Winner
Building, 32
West State Street,
Sharon,
PA 16146
|
8,245,614 | — | 8,245,614 | 9.7 | % | ||||
Manatuck
Hill Partners, LLC (5)
1465
Post Road East
Westport,
CT 06880
|
7,200,000 | — | 7,200,000 | 8.5 | % | ||||
Hare
& Co. (6)
Bank
of New York Mellon,
One
Wall Street, New York NY 10286
Attn
Anthony V. Saviano
3rd
floor / Window A
|
7,150,000 | — | 7,150,000 | 8.4 | % | ||||
Gelbaum,
David (7)
|
8,571,429 | 10,000,000 | 18,571,429 | 19.6 | % | ||||
Averill,
Robert
|
3,772,059 | 1,249,183 | 5,021,242 | 5.8 | % | ||||
Glenn
Patterson
|
2,812,001 | 499,145 | 3,311,146 | 3.9 | % | ||||
Filipenko,
Igor (8)
|
1,217,197 | 82,659 | 1,299,856 | 1.5 | % | ||||
Granville,
Tom
|
696,596 | 262,500 | 959,096 | 1.1 | % | ||||
Buiel,
Edward
|
311,000 | 165,000 | 476,000 | * | |||||
Nelson
, Robert
|
36,000 | 108,000 | 144,000 | * | |||||
Hillier,
Donald
|
30,000 | 95,000 | 125,000 | * | |||||
Wainwright,
Walker
|
— | 13,555 | 13,555 | * | |||||
Schmidt,
Howard
|
— | 37,500 | 37,500 | * | |||||
Hirschman,
Stan
|
— | 30,000 | 30,000 | * | |||||
Kishinevsky,
Michael
|
— | 29,500 | 29,500 | * | |||||
Bartlett,
Joseph
|
— | — | — | * | |||||
Anthony,
David
|
— | — | — | * | |||||
Directors
and officers as a group (14 persons)
|
17,446,282 | 12,572,042 | 30,018,324 | 30.9 | % | ||||
|
51
*
|
Less than
1%
|
(1)
|
Represents shares of common stock
issuable upon exercise of warrants and options held by the stockholder
that are presently exercisable or will become exercisable within 60
days.
|
(2)
|
The trustees of The Quercus Trust
are Mr. David Gelbaum and Ms. Monica Chavez Gelbaum, each with shared
voting and dispositive power over the shares held by this
trust.
|
(3)
|
AWM Investment Company, Inc.
(“AWM”) the general partner of and investment adviser to the Special
Situations Cayman Fund, L.P. AWM also serves as the investment adviser to,
Special Situations Private Equity Fund, L.P., Special Situations
Technology Fund II, L.P. and Special Situations Technology Fund, L.P.
Austin W. Marxe and David M. Greenhouse are the principal owners of AWM.
Through their control of AWM, Messrs. Marxe and Greenhouse share voting and investment
power over the portfolio securities of each of the funds listed
above.
|
(4)
|
James E. Winner Jr. & Donna C
Winner jointly share voting and dispositive power over the
shares.
|
(5)
|
Manatuck Hill Partners, LLC is an
investment adviser acting on behalf of its clients' accounts with
investments in Manatuck Hill Scout Fund, LP, Manatuck Hill Mariner Master
Fund, LP, and Manatuck Hill Navigator Master Fund, LP. Seward & Kissel
LLP serves as the legal representative for these accounts. Steve Orlov
& Mark Broach share voting and dispositive power over the
shares.
|
(6)
|
Hare & Co. is an investment
advisor operating in the U.K., with offices in New York. Blackrock
Investment Managers (UK) Ltd has voting and dispositive power over the
shares.
|
(7)
|
The ownership reflected for David
Gelbaum is the actual and beneficial ownership of The Quercus Trust. The
trustees of The Quercus Trust are Mr. David Gelbaum and Ms. Monica Chavez
Gelbaum, each with shared voting and dispositive power over the shares
held by this trust.
|
(8)
|
Includes 1,063,145 shares
beneficially held by Dr. Igor Filipenko, a former director, and 236,711
shares beneficially held by his
wife.
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions
with Directors
Robert
Averill—financing transactions-2009 . In August of 2009 we
structured a short term bridge loan with certain of our directors and investors,
the “Secured Bridge Loan”, secured by all of our intellectual property. Under
the arrangement, we received funding of $800,000 through September 30, 2009,
with $600,000 invested by Robert Averill, one of our directors. The Secured
Bridge Loan had an original maturity date of December 31, 2009; a loan
origination fee equal to 8% of the original loan, which was paid at maturity;
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. On or about December 8, 2009, we borrowed an additional
$541,666 from Robert Averill, one of our directors, on substantially similar
terms to the bridge loans in August 2009. The new bridge loan bears no interest
but has a fee of 8% of the principal amount thereof. The holders of these notes
had the right to convert the note together with interest, into any security sold
by us in an institutional offering. Robert Averill converted $171,353 of the
principal amount and fee into an investment in us as part of the December 22,
2009 private placement, and $970,313 plus $29,688 in fees was repaid in December
of 2009. Upon repayment of the note, all conversion rights terminated.
52
Transactions
with Executive Management
See
the “Executive Compensation” section for a discussion of the material elements
of compensation awarded to, earned by or paid to our named executive officers.
Other than as stated in the “Executive Compensation” section, we have not
entered into any transactions with executive management.
THE
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
This
prospectus covers 45,757,572 shares of common stock held by the selling
stockholders pursuant to the registration obligations of the Securities Purchase
Agreement in order to permit the resale of these shares of common stock by the
selling stockholders from time to time after the date of this prospectus. The
selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices. Except as set forth below, none of the selling stockholders
has held any position or office with us or any of our subsidiaries within the
past three years.
53
Amount
beneficially
owned by Selling
Stockholder
|
Amount to be
offered to Selling
Stockholder's
Account
|
Amount to be
beneficially owned
following completion
of offering
|
Percent of class to be
beneficially owned
following completion
of the offering
|
|||||||||||||
Westport
New Energy Fund, LLC (1)(2)
|
877,193 | 877,193 | - | |||||||||||||
Robert
Averill (3)
|
3,772,059 | 300,620 | 3,471,439 | 4.1 | % | |||||||||||
Katherine
F. Van der Mey
|
434,234 | 350,900 | 83,334 | 0.1 | % | |||||||||||
James
E. Winner, Jr & Donna C Winner JT TEN
|
8,245,614 | 8,245,614 | - | - | ||||||||||||
ACT
Capital Partners LP (1)(4)
|
750,000 | 750,000 | - | - | ||||||||||||
Cabernet
Partners, LP (1)(5)
|
100,000 | 100,000 | - | - | ||||||||||||
Chardonnay
Partners, LP (1)(6)
|
75,000 | 75,000 | - | - | ||||||||||||
David
A. Houghton
|
75,000 | 75,000 | - | - | ||||||||||||
-
-EDJ Limited (7) |
350,000 | 350,000 | - | - | ||||||||||||
-
Emerging Growth Equities, Ltd. PSP
dtd 9/1/99 FBO Gregory J. Berlacher, 401k (1)
|
50,000 | 50,000 | - | - | ||||||||||||
Emerging
Growth Equities, Ltd.
PSP
dtd 9/1/99 FBO Jay D. Seid, 401k (1)
|
65,000 | 65,000 | - | - | ||||||||||||
Gregory
J. Berlacher (1)
|
50,000 | 50,000 | - | - | ||||||||||||
Insignia
Partners, LP (1)(8)
|
500,000 | 500,000 | - | - | ||||||||||||
Lancaster
Investment Partners, LP (1)(9)
|
500,000 | 500,000 | - | - | ||||||||||||
Manatuck
Hill Partners, LLC (10)
|
5,778,000 | 5,778,000 | - | - | ||||||||||||
Manatuck
Hill Partners, LLC (10)
|
922,000 | 922,000 | - | - | ||||||||||||
Manatuck
Hill Partners, LLC (10)
|
500,000 | 500,000 | - | - | ||||||||||||
Narragansett
Strategic Master Fund (11)
|
1,700,000 | 1,700,000 | - | - | ||||||||||||
NFS
Custodian FBO Franz J Berlacher IRA(1)
|
100,000 | 100,000 | - | - | ||||||||||||
NFS
Custodian FBO Peter Stanley IRA (1)
|
100,000 | 100,000 | - | - | ||||||||||||
NFS Custodian FBO Robert A
Berlacher IRA(1)
|
100,000 | 100,000 | - | - | ||||||||||||
Northwood
Capital Partners, LP (1)(12)
|
1,300,000 | 1,300,000 | - | - | ||||||||||||
Peter
and Susan Stanley JTWROS (1)
|
200,000 | 200,000 | - | - | ||||||||||||
Porter
Partners, L.P. (13)
|
1,400,000 | 1,400,000 | - | - | ||||||||||||
Amir
L Ecker (1)
|
400,000 | 400,000 | - | - | ||||||||||||
Anthony
McDermott
|
500,000 | 500,000 | - | - | ||||||||||||
Arnold
G Bowles
|
135,000 | 135,000 | - | - | ||||||||||||
Bee
Publishing Company Inc. (14)
|
200,000 | 200,000 | - | - | ||||||||||||
Bruce
L. Evans Kathryn M. Evans TEN ENT
|
250,000 | 250,000 | - | - | ||||||||||||
Carolyn
Wittenbraker
|
100,000 | 100,000 | - | - | ||||||||||||
Del
Rey Management LP (15)
|
200,000 | 200,000 | - | - | ||||||||||||
Dennis
L. Adams
|
75,000 | 75,000 | - | - | ||||||||||||
Frank
J. Campbell III (1)
|
200,000 | 200,000 | - | - | ||||||||||||
Gus
Blass II
|
300,000 | 300,000 | - | - | ||||||||||||
Gus
Blass II IRA Rollover,
|
100,000 | 100,000 | - | - | ||||||||||||
Judith
Campbell (1)
|
100,000 | 100,000 | - | - | ||||||||||||
McDermott
Family Partnership II (16)
|
90,000 | 90,000 | - | - | ||||||||||||
NFS/FMTC
IRA FBO Amir L. Ecker (1)
|
750,000 | 750,000 | - | - | ||||||||||||
NFS/FMTC
IRA FBO Jerome J Skochin (1)
|
100,000 | 100,000 | - | - | ||||||||||||
NFS/FMTC
IRA FBO Maria T. Ecker
|
100,000 | 100,000 | - | - | ||||||||||||
NFS/FMTC
IRA-BDA
NSPS
Carol Frankenfield (1)
|
30,000 | 30,000 | - | - | ||||||||||||
Patricia
McDermott
|
175,000 | 175,000 | - | - | ||||||||||||
Richard
A. Jacoby
|
400,000 | 400,000 | - | - | ||||||||||||
Richard
A. Jacoby Trust
Dated
October 11, 2004,
David
R. Glyn, Trustee (17)
|
50,000 | 50,000 | - | - | ||||||||||||
Robert
H. Jacobs (1)
|
85,000 | 85,000 | - | - | ||||||||||||
Scudder
Smith Family Association LLC (18)
|
200,000 | 200,000 | - | - | ||||||||||||
Sean
McDermott (1)
|
50,000 | 50,000 | - | - | ||||||||||||
Robert
A. Fisk (1)
|
50,000 | 50,000 | - | - | ||||||||||||
The
Ecker Family Partnership (1)(19)
|
100,000 | 100,000 | - | - | ||||||||||||
William
Scott & Karen Kaplan, Trustees for William Scott & Karen Kaplan
Living Tr dtd 3/17/04 (20)
|
180,000 | 180,000 | - | - | ||||||||||||
Hare
and Co (21)
|
5,400,000 | 5,400,000 | - | - | ||||||||||||
Hare
and Co (21)
|
1,750,000 | 1,750,000 | - | - | ||||||||||||
Earthrise
Capital Fund, L.P. (22)
|
526,315 | 526,315 | - | - | ||||||||||||
Special
Situations Technology Fund II, L.P. (23)
|
4,903,509 | 4,903,509 | - | - | ||||||||||||
Special
Situations Technology Fund, L.P. (23)
|
798,246 | 798,246 | - | - | ||||||||||||
Special
Situations Private Equity Fund, L.P. (23)
|
1,315,789 | 1,315,789 | - | - | ||||||||||||
Special
Situations Cayman Fund, L.P. (23)
|
1,754,386 | 1,754,386 | - | - |
54
(1) The
selling stockholder is an affiliate of a broker dealer. Such selling stockholder
has represented and warranted that the selling stockholder purchased the shares
being registered for resale in the ordinary course of business, and at the time
of the purchase, the selling stockholder had no agreements or understandings,
directly or indirectly, with any persons to distribute the
securities.
(2)
Steven J. Knapp has voting and dispositive control over the shares owned by this
entity. The entity’s address is 257 Riverside Ave, Westport, CT
06880.
(3) Mr.
Averill is a director of the registrant. Mr. Averill owns 3,772,059 shares of
common stock of registrant, and 1,249,183 warrants and options to purchase
common stock of registrant. He is restricted with respect to his ability to sell
his shares under this registration statement by Company policy which restricts
the ability of officers and directors to sell shares of registrant’s stock only
during periods in which trading is permitted by management of the
registrant.
(4) Amir
Ecker has voting and dispositive control over the shares owned by this entity.
This entity’s address is 2 Radnor Corporate Center Suite 111 100 Matsonford Road
Radnor, PA 19087.
(5)
Robert A. Berlacher has voting and dispositive control over the shares owned by
this entity. This entity’s address is 676 Church Road Villanova, PA
19085.
(6)
Robert A. Berlacher has voting and dispositive control over the shares owned by
this entity. This entity’s address is 676 Church Road Villanova, PA
19085.
(7)
Jeffrey Porter has voting and dispositive control over the shares owned by this
entity. This entity’s address is 300 Drakes Landing Road, Suite 175 Greenbrae,
CA 94904.
(8)
Robert A. Berlacher and Bruce Terker have voting and dispositive control over
the shares owned by this entity. This entity’s address is 1150 First Avenue,
Suite 600 King of Prussia, PA 19406.
(9)
Robert A. Berlacher has voting and dispositive control over the shares owned by
this entity. This entity’s address is1150 First Avenue, Suite 600, King of
Prussia, PA 19406.
(10)
Manatuck Hill Partners, LLC is an investment adviser acting on behalf of its
clients' accounts with investments in Manatuck Hill Scout Fund, LP, Manatuck
Hill Mariner Master Fund, LP, and Manatuck Hill Navigator Master Fund, LP.
Seward & Kissel LLP serves as the legal representative for these accounts.
Steve Orlov & Mark Broach share voting and dispositive power over the
shares. The entity’s address is 1465 Post Road East Westport, CT
06880.
(11)
Joseph L. Dowling III has voting and dispositive control over the shares owned
by this entity. This entity’s address is Metro Center 5th Floor North 1 Station
Place Stamford, CT 06902.
(12)
Robert A. Berlacher has voting and dispositive control over the shares owned by
this entity. This entity’s address is 1150 First Avenue, Suite 600 King of
Prussia, PA 19406.
(13)
Jeffrey Porter has voting and dispositive control over the shares owned by this
entity. This entity’s address is 300 Drakes Landing Road, Suite 175 Greenbrae,
CA 94904.
(14)
Helen Smith has dispositive control over the shares owned by this entity. This
entity’s address is c/o Philadelphia Brokerage Corp.2 Radnor Corporate Center,
Suite 111 Radnor, PA 19087.
(15)
Gregory A. Bied has voting and dispositive control over the shares owned by this
entity. This entity’s address is 877 West Main Street #600, Boise, ID 83702,
Attn: Gregory A. Bied.
(16)
Anthony McDermott has voting and dispositive control over the shares owned by
this entity. This entity’s address is c/o Philadelphia Brokerage Corp., 2 Radnor
Corporate Center, Suite 111 Radnor, PA 19087.
(17)
David R. Glyn, as trustee, has voting and dispositive control over the shares
owned by this entity. This entity’s address is c/o 2490 White Horse Road,
Berwyn, PA 19312.
(18)
Helen Smith has voting and dispositive control over the shares owned by this
entity. This entity’s address is c/o Philadelphia Brokerage Corp. 2 Radnor
Corporate Center, Suite 111 Radnor, PA 19087.
(19) Amir
Ecker has voting and dispositive control over the shares owned by this entity.
This entity’s address is c/o Philadelphia Brokerage Corp., 2 Radnor Corporate
Center, Suite 111 Radnor, PA 19087.
(20)
William Scott and Karen Kaplan share voting and dispositive control over the
shares owned by this entity. This entity’s address is c/o Philadelphia Brokerage
Corp., 2 Radnor Corporate Center, Suite 111, Radnor, PA 19087.
(21) Hare
& Co. is an investment advisor operating in the U.K., with offices in New
York. Blackrock Investment Managers (UK) Ltd has voting and dispositive power
over the shares owned by this entity. The entity’s address is c/o Bank of New
York Mellon One Wall Street, New York NY 10286 Attn Anthony V. Saviano / 3rd
floor / Window A.
55
(22) Ann
Partlow and James P. LoGerfo, Managing Members, Earthrise Capital Partners, LLC,
the General Partner of Earthrise Capital Fund, LP, share voting and dispositive
control over the shares owned by this entity. This entity’s address is: 45
Rockefeller Plaza, 20th Floor New York, NY 10018.
(23) AWM
Investment Company, Inc. (“AWM”) the general partner of and investment adviser
to the Special Situations Cayman Fund, L.P. AWM also serves as the investment
adviser to, Special Situations Private Equity Fund, L.P., Special Situations
Technology Fund II, L.P. and Special Situations Technology Fund, L.P. Austin W.
Marxe and David M. Greenhouse are the principal owners of AWM. Through their
control of AWM, Messrs. Marxe and Greenhouse share voting and investment power
over the portfolio securities of each of the funds. The entity’s address is 527
Madison Avenue, Suite 2600 New York, NY 10022, ATTN: Marianne Kelly/Adam
Stettner.
The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
|
-
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
-
|
block trades in which the
broker-dealer will attempt to sell the shares as agent, but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
-
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
-
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
-
|
privately negotiated
transactions;
|
|
-
|
short sales effected after the
date the registration statement of which this prospectus is a part is
declared effective by the Securities and Exchange
Commission;
|
|
-
|
through the writing or settlement
of options or other hedging transactions, whether through an options
exchange or otherwise;
|
|
-
|
broker-dealers may agree with the
selling stockholders to sell a specified number of such shares at a
stipulated price per share;
and
|
|
-
|
a combination of any such methods
of sale.
|
The
selling stockholders may, from time to time, pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling stockholders also may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
56
The
aggregate proceeds to the selling stockholders from the sale of the common stock
offered by them will be the purchase price of the common stock less discounts or
commissions, if any. Each of the selling stockholders reserves the right to
accept and, together with their agents from time to time, to reject, in whole or
in part, any proposed purchase of common stock to be made directly or through
agents.
We will
not receive any of the proceeds from this offering.
The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.
The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
“underwriters” within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are “underwriters” within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements of
the Securities Act.
To the
extent required, the shares of our common stock to be sold, the names of the
selling stockholders, the respective purchase prices and public offering prices,
the names of any agents, dealer or underwriter, any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
In order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may not be sold
unless it has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied
with.
We have
advised the selling stockholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to the
activities of the selling stockholders and their affiliates. In addition, to the
extent applicable we will make copies of this prospectus (as it may be
supplemented or amended from time to time) available to the selling stockholders
for the purpose of satisfying the prospectus delivery requirements of the
Securities Act. The selling stockholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities
Act.
We have
agreed to indemnify the selling stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to the
registration of the shares offered by this prospectus.
We have
agreed with the selling stockholders to keep the registration statement of which
this prospectus constitutes a part effective until the earlier of (1) such time
as all of the shares covered by this prospectus have been disposed of pursuant
to and in accordance with the registration statement or (2) the date on which
the shares may be sold without restriction pursuant to Rule 144 of the
Securities Act.
DESCRIPTION
OF SECURITIES
General
Our
amended and restated certificate of incorporation authorizes the issuance of
100,000,000 shares of common stock and 12,500,000 shares of preferred stock. As
of March 17, 2010, we have 84,653,302 common shares and 630,897 shares of Series
A Preferred Stock outstanding that are convertible into 8,785,483 common shares.
Outstanding warrants, vested options, and convertible rights entitle the holders
to purchase 16,642,588
additional shares of common stock.
57
Within
the limits established by our amended and restated of incorporation, our board
of directors has the power at any time and without stockholder approval to issue
shares of our authorized common stock or preferred stock for cash, to acquire
property or for any other purpose that the board of directors believes is in the
best interests of our company. Our stockholders have no pre-emptive rights and
any decision to issue additional shares of common stock or preferred stock will
reduce the percentage ownership of our current stockholders and could dilute our
net tangible book value.
Our board
of directors has the power to establish the designation, rights and preferences
of any preferred stock we issue in the future. Accordingly, our board of
directors may, without stockholder approval, 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. Subject
to the directors’ duty to act in the best interest of our company, shares of
preferred stock can be issued quickly with terms calculated to delay or prevent
a change in control or make removal of management more difficult.
The
following summary of our capital stock does not purport to be complete and is
subject to and qualified in its entirety by our amended and restated certificate
of incorporation and our by-laws, each of which are included as exhibits to the
registration statement of which this prospectus forms a part and by the
provisions of applicable law.
Common
Stock
Our
common stockholders are entitled to one vote for each share held of record on
all matters to be voted on by stockholders. There is no cumulative voting with
respect to the election of directors, with the result that the holders of more
than 50% of the shares voted for the election of directors can elect the entire
board of directors. The holders of common stock are entitled to receive
dividends when, as and if declared by our board of directors out of funds
legally available. In the event of our liquidation, dissolution or winding up,
our common stockholders are entitled to share ratably in all assets remaining
available for distribution to them after payment of liabilities and after
provision has been made for each class of stock, if any, having preference over
the common stock. The holders of common stock have no preemptive or other
subscription rights and there are no redemption provisions applicable to the
common stock. All of our outstanding shares of common stock are fully paid and
non-assessable.
Senior
Preferred Stock
Our board
of directors designated 1,000,000 shares of our authorized preferred stock as
Senior Preferred Stock and no shares are outstanding at the date of this
prospectus.
Warrants
As of
March 17, 2010, we have 13,865,433 outstanding warrants that represent potential
future cash proceeds to our company of $18,979,625. The warrants are
divided into seven classes that are presently exercisable and expire at various
times over the next 60 months. The following table summarizes the number of
warrants in each class, the anticipated proceeds from the exercise of each
class, and the expiration date of each class.
Warrant
|
Number of
|
Exercise
|
Anticipated
|
Expiration
|
|||||||||
Series
|
Warrants
|
Price
|
Proceeds
|
Date
|
|||||||||
Series
V Warrants
|
680,000
|
$
|
4.00
|
$
|
2,720,000
|
December 31, 2011
|
|||||||
Series
VI Warrants
|
989,363
|
$
|
6.00
|
$
|
5,936,178
|
March
31, 2011
|
|||||||
2007
Bridge Warrants
|
183,755
|
$
|
2.35
|
$
|
431,824
|
December
31, 2012
|
|||||||
2008
Conversion-Warrants
|
580,940
|
$
|
2.60
|
$
|
1,510,444
|
June
29, 2013
|
|||||||
2008
Quercus
|
10,000,000
|
$
|
0.75
|
$
|
7,500,000
|
June
29, 2013
|
|||||||
2008
Derivatives
|
1,385,714
|
$
|
0.57
|
$
|
789,857
|
June
29, 2013
|
|||||||
2009
Bridge Warrants
|
27,240
|
$
|
2.00
|
$
|
54,480
|
August
12, 2014
|
|||||||
2009
Bridge Warrants
|
18,421
|
$
|
2.00
|
$
|
36,842
|
December
8, 2014
|
|||||||
Total
|
13,865,433
|
$
|
18,979,625
|
58
The Board
of Directors on August 21, 2009 approved the issuance of warrants to purchase
not more than 1,600,000 shares of common stock at an exercise price of $2.00 per
share and a term of two years to the C&T Group. At the date of this
prospectus these warrants have not yet been issued pending "mutual
understanding" between the parties.
The
holders of warrants are not required to exercise their rights at any time prior
to the expiration date and we are unable to predict the amount and timing of any
future warrant exercises. We reserve the right to temporarily reduce the
exercise prices of our warrants from time to time in order to encourage the
early exercise of the warrants.
Stock
Options
As of
March 17, 2010, we have 1,692,270 outstanding stock options that represent
potential future cash proceeds to our company of $4,615,779. The outstanding
options include1,007,955 options that are currently vested and exercisable, or
1,019,205 that will become vested and exercisable within 60 days, and represent
potential future cash proceeds to our company of $3,081,353 and $3,109,478,
respectively. The remaining options will vest and become exercisable over the
next three years. The following table provides summary information on our
outstanding options.
Vested Option Grants
|
Unvested Option Grants
|
|||||||||||||||||||||||
Shares
|
Price
|
Proceeds
|
Shares
|
Price
|
Proceeds
|
|||||||||||||||||||
Incentive
Plan options
|
33,050 | $ | 3.65 | $ | 120,480 | 0 | $ | 0 | $ | 0 | ||||||||||||||
Directors’
Plan options
|
201,555 | $ | 2.33 | 468,838 | 215,565 | $ | 1.39 | 300,051 | ||||||||||||||||
Contract
options to officers
|
634,250 | $ | 3.36 | 2,133,125 | 168,750 | $ | 2.87 | 484,375 | ||||||||||||||||
Contract
options to consultants and employees
|
139,100 | $ | 2.58 | 358,910 | 300,000 | $ | 2.50 | 750,000 | ||||||||||||||||
Total
|
1,007,955 | $ | 3.06 | $ | 3,081,353 | 684,315 | $ | 2.24 | $ | 1,534,426 |
The
holders of options are not required to exercise their rights at any time and we
are unable to predict the amount and timing of any future option exercises. We
reserve the right to temporarily reduce the exercise prices of our options from
time to time in order to encourage the early exercise of the
options.
Delaware
Anti-takeover Statute
We are
subject to the provisions of section 203 of the Delaware General Corporation Law
regulating corporate takeovers. In general, those provisions prohibit a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder, unless:
|
·
|
the transaction is approved by
the board of directors before the date the interested stockholder attained
that status;
|
|
·
|
upon consummation of the
transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced; or
|
|
·
|
on or after the date the business
combination is approved by the board of directors and authorized at a
meeting of stockholders by at least two-thirds of the outstanding voting
stock that is not owned by the interested
stockholder.
|
59
Section
203 defines “business combination” to include the following:
|
·
|
any merger or consolidation
involving the corporation and the interested
stockholder;
|
|
·
|
any sale, transfer, pledge or
other disposition of 10% or more of the assets of the corporation
involving the interested
stockholder;
|
|
·
|
subject to certain exceptions,
any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
|
|
·
|
any transaction involving the
corporation that has the effect of increasing the proportionate share of
the stock of any class or series of the corporation beneficially owned by
the interested stockholder;
or
|
|
·
|
the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the
corporation.
|
In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
A
Delaware corporation may opt out of this provision either with an express
provision in its certificate of incorporation or bylaws approved by its
stockholders. However, we have not opted out, and do not currently intend to opt
out, of this provision. The statute could prohibit or delay mergers or other
takeover or change in control attempts and, accordingly, may discourage attempts
to acquire us.
Certificate
of Incorporation and By-laws
Our
amended and restated certificate of incorporation and by-laws include provisions
that may have the effect of delaying or preventing a change of control or
changes in our management. These provisions include:
|
·
|
the division of our board of
directors into three classes of directors that serve for rotating
three-year terms;
|
|
·
|
the right of the board of
directors to elect a director to fill a vacancy created by the resignation
of a director or the expansion of the board of
directors;
|
|
·
|
the prohibition of cumulative
voting in the election of directors, which would otherwise allow less than
a majority of stockholders to elect director
candidates;
|
|
·
|
the requirement for advance
notice for nominations of candidates for election to the board of
directors or for proposing matters that can be acted upon at a
stockholders’ meeting;
|
|
·
|
the ability of the board of
directors to issue, without stockholder approval, up to 12,355,000 shares
of preferred stock with terms set by the board of directors, which rights
could be senior to those of common stock;
and
|
|
·
|
the right of our board of
directors to alter our bylaws without stockholder
approval.
|
Transfer
Agent
Our
transfer agent is Continental Stock Transfer & Trust, 17 Battery Place, New
York, New York 10004.
60
LEGAL
MATTERS
The
legality of the shares of common stock offered by this prospectus will be passed
upon for us by Jolie Kahn, Esq. of New York, NY.
EXPERTS
The
financial statements as of December 31, 2009 and 2008 included in this
prospectus have been so included in reliance on the report of Rotenberg &
Co. LLP, effective October 1, 2009, which was succeeded by merger by EFP
Rotenberg, LLP, an independent registered public accounting firm, given on the
authority of said firm as experts in accounting and auditing.
CHANGES
IN REGISTRANT’S CERTIFYING ACCOUNTANT
On
October 2, 2009, the Company received notice that its current auditors,
Rotenberg and Co., LLP, had resigned in connection with their merger with EFP
Group. The Company has engaged the new firm resulting from the merger, EFP
Rotenberg, LLP, to continue as the Company's independent registered public
accounting firm. All of the partners and employees of Rotenberg and Co., LLP and
EFP Group have joined the new firm, EFP Rotenberg, LLP.
The
reports of Rotenberg and Co., LLP as of and for the fiscal years ended December
31, 2007 and for the period from inception (September 18, 2003) through December
31, 2007, contained an explanatory paragraph indicating that there was
substantial doubt as to the Company's ability to continue as a going concern.
Other than such qualification, no report of Rotenberg and Co., LLP for the past
two fiscal years and the subsequent interim period preceding the resignation of
Rotenberg and Co., LLP contained an adverse opinion or disclaimer of opinion, or
were qualified or modified as to uncertainty, audit scope, or accounting
principles. During the Company's two most recent fiscal years and the subsequent
interim period preceding the resignation of Rotenberg and Co., LLP, there were
no disagreements with Rotenberg and Co., LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
On
October 9, 2009, the Board of the Company approved the engagement of EFP
Rotenberg, LLP of Rochester, New York, to be the Company's independent
registered public accountant effective October 1, 2009. We engaged EFP
Rotenberg, LLP as our new independent accountant concurrent with the merger of
EFP Group and Rotenberg and Co., LLP. Prior to such engagement, during the two
most recent fiscal years, the Company has not consulted the newly engaged
independent registered public accountant for any matter.
The
Company provided Rotenberg and Co., LLP with a copy of the disclosure relating
to this change in its certifying accountant and requested that Rotenberg and
Co., LLP furnish the Company with a letter addressed to the Securities and
Exchange Commission stating whether it agrees with the above statements and, if
it does not agree, the respects in which it does not agree, a copy of which is
filed as Exhibit 16.1 to the Registration Statement of which this prospectus is
a part.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed a registration statement on Form S-1 with the Securities and Exchange
Commission with respect to this offering. This prospectus, which is part of the
registration statement, does not include all of the information contained in the
registration statement. You should refer to the registration statement and its
exhibits and schedules for additional information. Whenever we make reference in
this prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits and
schedules attached to the registration statement for copies of the actual
contract, agreement or other document.
61
We also
file annual, quarterly and current reports, proxy statements and other documents
with the Securities and Exchange Commission under the Exchange Act. You may read
and copy any materials that we may file without charge at the Securities and
Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. You may call the Securities and Exchange Commission at
1-800-Securities and Exchange Commission-0330 for further information on the
operation of the Public Reference Room. You may obtain copies of the documents
at prescribed rates by writing to the Public Reference Section of the Securities
and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. The
Securities and Exchange Commission also maintains an Internet site,
http://www.sec.gov, which contains reports, proxy and information statements and
other information regarding issuers that file electronically with the Securities
and Exchange Commission. The other information we file with the Securities and
Exchange Commission is not part of the registration statement of which this
prospectus forms a part.
62
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Axion
Power International, Inc.
As
successor by merger, effective October 1, 2009, to the registered public
accounting firm Rotenberg & Co., LLP, we have audited the accompanying
consolidated balance sheets of Axion Power International, Inc. as of December
31, 2009 and 2008, and the related consolidated statements of operations, cash
flows, and changes in stockholders’ equity and comprehensive income for the
years then ended and for the period since inception (September 18, 2003) through
December 31, 2009. Axion Power International Inc.’s management is responsible
for these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Axion Power International,
Inc. as of December 31, 2009 and 2008, and the results of its operations and its
cash flows for the years then ended and for the period since inception
(September 18, 2003) through December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
As
discussed in Note 2 to the consolidated financial statements, effective January
1, 2009, the Company changed the manner in which it accounts for certain
warrants pursuant to new authoritative guidance in FASB ASC topic 815-40,
“Contract in Entity’s Own Equity.”
/s/ EFP
Rotenberg, LLP
EFP
Rotenberg, LLP
Rochester,
New York
March 30,
2010
63
AXION
POWER INTERNATIONAL, INC
CONSOLIDATED
BALANCE SHEETS
(A
Development Stage Company)
December 31, 2009
|
December 31, 2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 23,279,466 | $ | 3,124,168 | ||||
Short-term
investments
|
- | 2,193,920 | ||||||
Accounts
receivable
|
194,315 | 128,035 | ||||||
Other
receivables
|
208,179 | 64,456 | ||||||
Prepaid
expenses
|
79,987 | 78,989 | ||||||
Inventory
|
1,008,092 | 1,269,515 | ||||||
Total
current assets
|
24,770,039 | 6,859,083 | ||||||
Property
& equipment, net
|
4,216,080 | 3,274,183 | ||||||
Other
receivables, non-current
|
34,601 | 28,388 | ||||||
TOTAL
ASSETS
|
$ | 29,020,720 | $ | 10,161,654 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 1,375,292 | $ | 1,324,287 | ||||
Other
current liabilities
|
82,326 | 162,580 | ||||||
Notes
payable, current
|
101,684 | - | ||||||
Total
current liabilities
|
1,559,302 | 1,486,867 | ||||||
Deferred
revenue
|
856,237 | 751,096 | ||||||
Derivative
liabilities
|
1,616,788 | - | ||||||
Notes
payable, long term
|
649,549 | - | ||||||
Total
liabilities
|
4,681,876 | 2,237,963 | ||||||
Stockholders'
Equity:
|
||||||||
Convertible
preferred stock-12,500,000 shares authorized
|
||||||||
. Senior
preferred – 1,000,000 shares designated
. 0
issued and outstanding (137,500 in 2008)
|
- | 1,656,735 | ||||||
.
Series A preferred – 2,000,000 shares designated
. 630,897
shares issued and outstanding (718,997 in 2008)
|
9,069,871 | 9,440,359 | ||||||
Common
stock-100,000,000 shares authorized $0.0001 par value 75,767,818
issued & outstanding (26,417,437 in 2008)
|
7,576 | 2,641 | ||||||
Additional
paid in capital
|
76,372,520 | 46,184,287 | ||||||
Deficit
accumulated during development stage
|
(60,859,150 | ) | (49,111,062 | ) | ||||
Cumulative
foreign currency translation adjustment
|
(251,973 | ) | (249,269 | ) | ||||
Total
Stockholders' Equity
|
24,338,844 | 7,923,691 | ||||||
TOTAL
LIABILITIES & STOCKHOLDERS' EQUITY
|
$ | 29,020,720 | $ | 10,161,654 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
64
AXION
POWER INTERNATIONAL, INC
CONSOLIDATED
STATEMENTS OF OPERATIONS
(A
Development Stage Company)
Years Ended
|
Inception
|
|||||||||||
12/31/2009
|
(9/18/2003) to
|
|||||||||||
2009
|
2008
|
12/31/2009
|
||||||||||
Revenues
|
$ | 1,843,592 | $ | 679,559 | $ | 3,332,439 | ||||||
Cost
of goods sold
|
1,693,714 | 368,922 | 2,903,976 | |||||||||
Gross
profit (loss)
|
149,878 | 310,637 | 428,463 | |||||||||
Expenses
|
||||||||||||
Research
& development
|
4,426,956 | 3,960,909 | 18,378,626 | |||||||||
Selling,
general & administrative
|
3,837,526 | 4,846,189 | 21,852,907 | |||||||||
Interest
expense - related party
|
186,063 | 1,137,436 | 2,337,986 | |||||||||
Impairment
of assets
|
- | - | 1,391,485 | |||||||||
Derivative
revaluation
|
6,292,401 | (2,844 | ) | (222,267 | ) | |||||||
Mega
C Trust Share Augmentation (Return)
|
- | - | 400,000 | |||||||||
Interest
& other income, net
|
(14,641 | ) | (57,224 | ) | (548,793 | ) | ||||||
Net
loss before income taxes
|
(14,578,427 | ) | (9,573,829 | ) | (43,161,481 | ) | ||||||
Income
Taxes
|
- | (79,170 | ) | 4,300 | ||||||||
Deficit
accumulated during development stage
|
(14,578,427 | ) | (9,494,659 | ) | (43,165,781 | ) | ||||||
Less
preferred stock dividends and beneficial conversion
feature
|
(4,046,836 | ) | (1,117,699 | ) | (17,693,369 | ) | ||||||
Net
loss applicable to common shareholders
|
$ | (18,625,263 | ) | $ | (10,612,358 | ) | $ | (60,859,150 | ) | |||
Basic
and diluted net loss per share
|
$ | (0.67 | ) | $ | (0.46 | ) | $ | (3.45 | ) | |||
Weighted
average common shares outstanding
|
27,619,839 | 22,826,187 | 17,650,362 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
65
AXION
POWER INTERNATIONAL, INC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(A
Development Stage Company)
Years Ended
|
Inception
|
|||||||||||
December 31,
|
(9/18/2003)
to
|
|||||||||||
2009
|
2008
|
12/31/2009
|
||||||||||
Cash
Flows from Operating Activities:
|
||||||||||||
Deficit
accumulated during development stage
|
$ | (14,578,427 | ) | $ | (9,494,659 | ) | $ | (43,165,781 | ) | |||
Adjustments
required to reconcile deficit accumulated during development stage to
cash flows used by operating activities
|
||||||||||||
Depreciation
|
441,005 | 189,804 | 984,291 | |||||||||
Non-cash
interest expense
|
139,668 | 868,211 | 1,970,251 | |||||||||
Impairment
of assets
|
- | - | 1,391,486 | |||||||||
Derivative
revaluations
|
6,292,401 | (2,844 | ) | (222,267 | ) | |||||||
Mega
C Trust Share Augmentation (Return)
|
- | - | 400,000 | |||||||||
Share
based compensation expense
|
986,982 | 861,705 | 5,337,481 | |||||||||
Changes
in Operating Assets & Liabilities
|
||||||||||||
Accounts
receivable
|
(66,280 | ) | 5,612 | (201,184 | ) | |||||||
Other
receivables
|
(143,723 | ) | 277,345 | (186,219 | ) | |||||||
Prepaid
expenses
|
(998 | ) | 3,113 | (77,399 | ) | |||||||
Inventory
|
261,423 | (893,879 | ) | (1,008,091 | ) | |||||||
Accounts
payable
|
51,005 | (249,149 | ) | 3,029,936 | ||||||||
Other
current liabilities
|
(80,254 | ) | (421,009 | ) | 103,458 | |||||||
Liability
to issue equity instruments
|
- | - | 178,419 | |||||||||
Deferred
revenue and other
|
105,151 | (2,370 | ) | 943,726 | ||||||||
Net
cash used by operating activities
|
(6,592,047 | ) | (8,858,120 | ) | (30,521,893 | ) | ||||||
Cash
Flows from Investing Activities
|
||||||||||||
Short
term investments
|
2,193,920 | (2,193,920 | ) | - | ||||||||
Other
receivables, non-current
|
(6,213 | ) | (28,388 | ) | (1,251,617 | ) | ||||||
Purchase
of property & equipment
|
(1,382,902 | ) | (1,432,213 | ) | (5,197,082 | ) | ||||||
Investment
in intangible assets
|
- | - | (167,888 | ) | ||||||||
Net
cash provided (used) by investing activities
|
804,805 | (3,654,521 | ) | (6,616,587 | ) | |||||||
Cash
Flow from Financing Activities
|
||||||||||||
Proceeds
from related party debt, net
|
265,687 | (1,483,485 | ) | 5,445,458 | ||||||||
Proceeds
from notes payable, net
|
751,234 | - | 751,234 | |||||||||
Proceeds
from sale of common stock; net of costs
|
24,928,323 | 16,468,500 | 45,114,228 | |||||||||
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
|
25,945,244 | 14,985,015 | 60,438,601 | |||||||||
Net
Change in Cash and Cash Equivalents
|
20,158,002 | 2,472,374 | 23,300,121 | |||||||||
Effect
of Exchange Rate on Cash
|
(2,704 | ) | (19,450 | ) | (20,655 | ) | ||||||
Cash
and Cash Equivalents - Beginning
|
3,124,168 | 671,244 | - | |||||||||
Cash
and Cash Equivalents - Ending
|
$ | 23,279,466 | $ | 3,124,168 | $ | 23,279,466 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
66
Axion
Power International, Inc.
Consolidated
Statement of Stockholders' Equity (Deficit)
For
Periods Ended December 31, 2003 through 2009
(A
Development Stage Company)
Preferred
|
Common
|
Deficit
Accumulated
During
|
Other
Comprehensive
Income
Cumulative
|
Total
Stockholders'
|
||||||||||||||||||||||||||||||||||||
Shares
|
Senior
Preferred
|
Series A
Preferred
|
Shares
|
Common
Stock Amount
|
Additional Paid-
In Capital
|
Subscriptions
Receivable
|
Development
Stage
|
Translation
Adjustments
|
Equity
(Deficit)
|
|||||||||||||||||||||||||||||||
Inception September 18,
2003
|
0 | $ | 0 | $ | 0 | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||
Shares to founders upon
formulation of APC
|
1,360,000 | 137 | (137 | ) | 0 | 0 | ||||||||||||||||||||||||||||||||||
Stock based
compensation
|
170,000 | 17 | 48,936 | 48,953 | ||||||||||||||||||||||||||||||||||||
Conversion of debt to
equity
|
1,108,335 | 111 | 1,449,889 | (350,000 | ) | 1,100,001 | ||||||||||||||||||||||||||||||||||
Debt Discount from convertible
debt
|
86,402 | 86,402 | ||||||||||||||||||||||||||||||||||||||
Unamortized discount on
convertible debt
|
(77,188 | ) | (77,188 | ) | ||||||||||||||||||||||||||||||||||||
Fair value of options issued as
loan inducements
|
15,574 | 15,574 | ||||||||||||||||||||||||||||||||||||||
Recapitalization:
|
||||||||||||||||||||||||||||||||||||||||
- Shares issued to Mega-C
trust
|
6,147,483 | 615 | (615 | ) | 0 | |||||||||||||||||||||||||||||||||||
- Equity acquired in
recapitalization
|
1,875,000 | 188 | (188 | ) | 0 | |||||||||||||||||||||||||||||||||||
Net Loss December 31,
2003
|
(3,097,030 | ) | (3,097,030 | ) | ||||||||||||||||||||||||||||||||||||
Other Comprehensive income
(loss):
|
||||||||||||||||||||||||||||||||||||||||
Foreign Currency Translation
Adjustment
|
(56,547 | ) | (56,547 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive
loss
|
(3,153,577 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31,
2003
|
0 | $ | 0 | 10,660,818 | $ | 1,067 | $ | 1,522,674 | $ | (350,000 | ) | $ | (3,097,030 | ) | $ | (56,547 | ) | $ | (1,979,836 | ) | ||||||||||||||||||||
Shares issued to
founders
|
445,000 | 45 | (45 | ) | 0 | |||||||||||||||||||||||||||||||||||
Augmentation shares issued to
Mega-C trust
|
180,000 | 18 | (18 | ) | 0 | |||||||||||||||||||||||||||||||||||
Conversion of
debt
|
283,333 | 28 | 451,813 | 350,000 | 801,841 | |||||||||||||||||||||||||||||||||||
Warrants in consideration for
technology purchased
|
563,872 | 563,872 | ||||||||||||||||||||||||||||||||||||||
Common stock offering - net of
cost
|
823,800 | 81 | 1,607,053 | 1,607,134 | ||||||||||||||||||||||||||||||||||||
Proceeds from exercise of
warrants
|
475,200 | 48 | 867,972 | 868,020 | ||||||||||||||||||||||||||||||||||||
Liability converted as partial
prepayment on options
|
306,000 | 306,000 | ||||||||||||||||||||||||||||||||||||||
Stock based
compensation
|
45,000 | 5 | 191,738 | 191,742 | ||||||||||||||||||||||||||||||||||||
Fraction Shares Issued Upon
Reverse Spilt
|
48,782 | 5 | (5 | ) | 0 | |||||||||||||||||||||||||||||||||||
Net Loss December 31,
2004
|
(3,653,637 | ) | (3,653,637 | ) | ||||||||||||||||||||||||||||||||||||
Other Comprehensive income
(loss):
|
||||||||||||||||||||||||||||||||||||||||
Foreign Currency Translation
Adjustment
|
(74,245 | ) | (74,245 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive
loss
|
(3,727,882 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31,
2004
|
0 | $ | 0 | 12,961,933 | $ | 1,296 | $ | 5,511,054 | $ | 0 | $ | (6,750,667 | ) | $ | (130,792 | ) | $ | (1,369,109 | ) | |||||||||||||||||||||
Proceeds From Exercise of Warrants
& Options
|
853,665 | 85 | 1,283,395 | (496,000 | ) | 787,480 | ||||||||||||||||||||||||||||||||||
Common Stock Offering
Proceeds
|
600,000 | 60 | 1,171,310 | (200,000 | ) | 971,370 | ||||||||||||||||||||||||||||||||||
Preferred Stock Offering
proceeds
|
385,000 | 3,754,110 | (25,000 | ) | 3,729,110 | |||||||||||||||||||||||||||||||||||
Conversion of preferred to
common
|
(245,000 | ) | (2,475,407 | ) | 1,470,000 | 147 | 2,475,260 | 0 | ||||||||||||||||||||||||||||||||
Stock issued for
services
|
500,000 | 50 | 1,524,950 | 1,525,000 | ||||||||||||||||||||||||||||||||||||
Fair Value of Options for
Non-Employee Services
|
237,568 | 237,568 | ||||||||||||||||||||||||||||||||||||||
Employee incentive share
grants
|
219,000 | 22 | 647,480 | 647,502 | ||||||||||||||||||||||||||||||||||||
Impact of beneficial conversion
feature
|
3,099,156 | (3,099,156 | ) | 0 | ||||||||||||||||||||||||||||||||||||
Preferred Stock
Dividends
|
176,194 | (176,194 | ) | 0 | ||||||||||||||||||||||||||||||||||||
Net Loss December 31,
2005
|
(6,325,113 | ) | (6,325,113 | ) | ||||||||||||||||||||||||||||||||||||
Other
Comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||||||||
Foreign
Currency Translation Adjustment
|
(24,780 | ) | (24,780 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive
loss
|
(6,349,893 | ) | ||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2005
|
140,000 | $ | 1,454,897 | 16,604,598 | $ | 1,661 | $ | 15,950,173 | $ | (721,000 | ) | $ | (16,351,130 | ) | $ | (155,572 | ) | $ | 179,028 | |||||||||||||||||||||
Preferred
Series A Proceeds
|
782,997 | 7,571,768 | 7,571,768 | |||||||||||||||||||||||||||||||||||||
Preferred
- Dividends
|
119,092 | 103,101 | (222,193 | ) | 0 | |||||||||||||||||||||||||||||||||||
Senior
Preferred Cancellation
|
(2,500 | ) | (25,000 | ) | 25,000 | 0 | ||||||||||||||||||||||||||||||||||
Common
Stock Offering Proceeds
|
80,000 | 8 | 199,992 | 696,000 | 896,000 | |||||||||||||||||||||||||||||||||||
Proceeds
from exercise of warrants
|
56,700 | 6 | 113,394 | 113,400 | ||||||||||||||||||||||||||||||||||||
Employee
incentive share grants
|
6,000 | 1 | 23,999 | 24,000 | ||||||||||||||||||||||||||||||||||||
Augmentation
shares issued to Mega-C trust
|
(500,000 | ) | (50 | ) | (1,124,950 | ) | (1,125,000 | ) | ||||||||||||||||||||||||||||||||
Stock
based compensation
|
1,241,231 | 1,241,231 | ||||||||||||||||||||||||||||||||||||||
Fair
value of warrants with related party debt
|
885,126 | 885,126 | ||||||||||||||||||||||||||||||||||||||
Modification
of preexisting warrants
|
392,811 | 392,811 | ||||||||||||||||||||||||||||||||||||||
Fair
value warrants issued for services
|
86,848 | 86,848 | ||||||||||||||||||||||||||||||||||||||
Beneficial
conversion feature on related party debt
|
95,752 | 95,752 | ||||||||||||||||||||||||||||||||||||||
Beneficial
conversion feature on Preferred Stock
|
(6,096,634 | ) | 6,709,970 | (613,336 | ) | 0 | ||||||||||||||||||||||||||||||||||
Net
Loss December 31, 2006
|
(7,027,963 | ) | (7,027,963 | ) | ||||||||||||||||||||||||||||||||||||
Other
Comprehensive income (loss):
|
0 | |||||||||||||||||||||||||||||||||||||||
Foreign
Currency Translation Adjustment
|
(95,387 | ) | (95,387 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive
loss
|
(7,123,350 | ) | ||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2006
|
920,497 | $ | 1,548,989 | $ | 1,578,235 | 16,247,298 | 1,625 | 24,574,346 | - | (24,214,622 | ) | (250,959 | ) | $ | 3,237,614 | |||||||||||||||||||||||||
Preferred
Series A Proceeds
|
40,000 | 337,270 | 337,270 | |||||||||||||||||||||||||||||||||||||
Preferred
- Dividends
|
130,566 | 1,790,755 | (1,921,321 | ) | 0 | |||||||||||||||||||||||||||||||||||
Employee
incentive share grants
|
1,000 | 0 | 315,950 | 315,950 | ||||||||||||||||||||||||||||||||||||
Stock
based compensation
|
215,393 | 215,393 | ||||||||||||||||||||||||||||||||||||||
Fair
value of warrants with related party debt
|
98,463 | 98,463 | ||||||||||||||||||||||||||||||||||||||
Modification
of preexisting warrants
|
(164,179 | ) | 164,179 | 0 | ||||||||||||||||||||||||||||||||||||
Beneficial
conversion feature on Preferred Stock
|
6,096,634 | 400,000 | (6,496,634 | ) | 0 | |||||||||||||||||||||||||||||||||||
Net
Loss December 31, 2007
|
(5,866,127 | ) | (5,866,127 | ) | ||||||||||||||||||||||||||||||||||||
Other
Comprehensive income (loss):
|
0 | |||||||||||||||||||||||||||||||||||||||
Foreign
Currency Translation Adjustment
|
21,136 | 21,136 | ||||||||||||||||||||||||||||||||||||||
Comprehensive
loss
|
(5,844,991 | ) | ||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
960,497 | $ | 1,515,376 | $ | 9,802,894 | 16,248,298 | $ | 1,625 | $ | 25,768,331 | $ | 0 | $ | (38,498,704 | ) | $ | (229,823 | ) | $ | (1,640,301 | ) | |||||||||||||||||||
Preferred -
Dividends
|
141,359 | 976,340 | (1,117,699 | ) | 0 | |||||||||||||||||||||||||||||||||||
Preferred
Converted into Common Stock
|
(104,000 | ) | (1,338,875 | ) | 1,071,099 | 107 | 1,338,768 | 0 | ||||||||||||||||||||||||||||||||
Bridge
Loans Converted into Common Stock
|
514,611 | 51 | 1,080,633 | 1,080,684 | ||||||||||||||||||||||||||||||||||||
Proceeds
from Quercus Trust-net of costs
|
8,571,429 | 857 | 15,273,908 | 15,274,765 | ||||||||||||||||||||||||||||||||||||
Employee
incentive share grants
|
12,000 | 1 | 435,725 | 435,726 | ||||||||||||||||||||||||||||||||||||
Stock
based compensation
|
425,979 | 425,979 | ||||||||||||||||||||||||||||||||||||||
Fair
value of warrants with related party debt
|
667,208 | 667,208 | ||||||||||||||||||||||||||||||||||||||
Fair
value warrants issued for services
|
1,193,735 | 1,193,735 | ||||||||||||||||||||||||||||||||||||||
Net
Loss December 31, 2008
|
(9,494,659 | ) | (9,494,659 | ) | ||||||||||||||||||||||||||||||||||||
Other
Comprehensive income (loss):
|
0 | |||||||||||||||||||||||||||||||||||||||
Foreign
Currency Translation Adjustment
|
(19,446 | ) | (19,446 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive
loss
|
(9,514,105 | ) | ||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
856,497 | $ | 1,656,735 | $ | 9,440,359 | 26,417,437 | $ | 2,641 | $ | 46,184,287 | $ | 0 | $ | (49,111,062 | ) | $ | (249,269 | ) | $ | 7,923,691 | ||||||||||||||||||||
Preferred -
Dividends
|
126,497 | 909,819 | (1,036,316 | ) | 0 | |||||||||||||||||||||||||||||||||||
Preferred
Converted into Common Stock
|
(88,100 | ) | (1,280,308 | ) | 1,149,201 | 114 | 1,280,194 | 0 | ||||||||||||||||||||||||||||||||
Senior
Preferred Converted into Common Stock
|
(137,500 | ) | (1,982,315 | ) | - | 1,390,944 | 139 | 1,982,176 | 0 | |||||||||||||||||||||||||||||||
Reclassification
of warrants to APIC upon conversion of Senior Preferred
|
164,179 | (164,179 | ) | 0 | ||||||||||||||||||||||||||||||||||||
Reclassification
of Preferred Stock offering costs to APIC upon conversion into
Common
|
34,904 | (34,904 | ) | 0 | ||||||||||||||||||||||||||||||||||||
Bridge
Loans Converted into Common Stock
|
651,520 | 65 | 371,301 | 371,366 | ||||||||||||||||||||||||||||||||||||
Proceeds
from common stock offering-net of costs
|
45,825,716 | 4,583 | 24,923,740 | 24,928,323 | ||||||||||||||||||||||||||||||||||||
Employee
incentive share grants
|
333,000 | 33 | 500,451 | 500,484 | ||||||||||||||||||||||||||||||||||||
Stock
based compensation
|
441,120 | 441,120 | ||||||||||||||||||||||||||||||||||||||
Fair
value of warrants with related party debt
|
34,002 | 34,002 | ||||||||||||||||||||||||||||||||||||||
Fair
value warrants issued in lieu of liquidated damages
|
45,380 | 45,380 | ||||||||||||||||||||||||||||||||||||||
Cumulative
adjustments from adoption of ASC 815 as of January 1, 2009
|
(6,877,176 | ) | 6,877,176 | 0 | ||||||||||||||||||||||||||||||||||||
Reclassification
of warrants to derivative liabilities
|
(2,450,542 | ) | (2,450,542 | ) | ||||||||||||||||||||||||||||||||||||
Extinguishment
of derivative liabilities
|
7,126,155 | 7,126,155 | ||||||||||||||||||||||||||||||||||||||
Beneficial
conversion feature on Preferred Stock
|
3,010,517 | (3,010,517 | ) | 0 | ||||||||||||||||||||||||||||||||||||
Net
Loss December 31, 2009
|
(14,578,427 | ) | (14,578,427 | ) | ||||||||||||||||||||||||||||||||||||
Other
Comprehensive income (loss):
|
0 | |||||||||||||||||||||||||||||||||||||||
Foreign
Currency Translation Adjustment
|
(2,704 | ) | (2,704 | ) | ||||||||||||||||||||||||||||||||||||
Comprehensive loss
|
(14,581,131 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31,
2009
|
630,897 | $ | (0 | ) | $ | 9,069,871 | 75,767,818 | $ | 7,576 | $ | 76,372,520 | $ | 0 | $ | (60,859,150 | ) | $ | (251,973 | ) | $ | 24,338,844 |
The
Accompanying Notes are an Integral Part of the Financial Statements
67
AXION
POWER INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(A
DEVELOPMENT STAGE COMPANY)
Note 1 — Organization and Operations
These
consolidated financial statements of Axion Power International, Inc., a Delaware
corporation (API), include the operations of its wholly owned subsidiaries;
Axion Power Battery Manufacturing, Inc (APB), Axion Power Corporation, a
Canadian Federal corporation (“APC”), and C & T Co. Inc., an Ontario
corporation (“C&T”) (collectively, the “Company”).
Axion is
developing innovative battery/energy storage device technology. The Company
continues its research and development and has entered the testing phase of its
unique battery designs. Development activities, testing and prototype
manufacturing is performed at the Company’s manufacturing facilities. The
Company also manufactures on a limited basis specialty and traditional flooded
batteries for resale.
Note
2 —Accounting Policies
Use of
Estimates: The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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
Basis of
Presentation: The
financial statements have been presented in a “development stage” format in
accordance with the provisions of Statement of Financial Accounting Standards
(FASB) ASC 915, “Development
Stage Entities”. Since inception, the Company’s primary activities have
been raising capital, obtaining financing, developing Axion’s energy storage
technology and testing its proposed products.
Segment
Reporting: Management has determined that the Company is organized,
managed and internally reported as one business segment. Segments are determined
based on differences in products, internal reporting and how operational
decisions are made.
Foreign Currency
Translation: The accounts of APC
and C&T are measured using the Canadian dollar as the functional currency
for all the periods presented in the financial statements. The translation from
Canadian dollars to U.S. dollars is performed for the balance sheet accounts
using current exchange rates in effect at each of the balance sheet dates, and
for the revenue and expense accounts using the average rate in effect during the
periods. The resulting translation adjustments are recorded as a component of
accumulated other comprehensive income (loss) within stockholders’ equity. Gains
or losses resulting from transactions denominated in currencies other than the
functional currency are included in the results of operations as incurred. The
gains or losses arising from the inter-company loan denominated in U.S. dollars
are directly reflected in other comprehensive income, as the amounts are not
expected to be repaid in the foreseeable future.
Comprehensive
Income: The Company follows FASB ASC 220, “Comprehensive Income.”
Comprehensive income is the change in equity of a business enterprise during a
reporting period from transactions and other events and circumstances from
non-owner sources. In addition to the Company’s net loss, the change in equity
components under comprehensive income include the foreign currency translation
adjustment.
68
Fair Value of
Financial Instruments: FASB ASC 825, "Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments, including, but not limited to, cash and cash equivalents, accounts
receivable, refundable tax credits, prepaid expenses, accounts payable, accrued
expenses, notes payable to related parties and convertible debt-related
securities. Fair value estimates discussed herein are based upon certain market
assumptions and pertinent information available to management as of December 31,
2009 and 2008. The carrying value of the balance sheet financial instruments
included in the Company’s consolidated financial statements approximated their
fair values.
On
January 1, 2008, the Company adopted FASB ASC 820, “Fair Value Measurements
and Disclosures ” (ASC 820) which defines fair value, establishes a framework
for measuring fair value, and requires additional disclosures about fair value
measurements. The criterion that is set forth in ASC 820 is applicable to fair
value measurement where it is permitted or required under other accounting
pronouncements.
ASC 820
defines fair value as the exit price, which is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value measurement
is based on inputs of observable and unobservable market data that a market
participant would use in pricing the asset or liability. The use of observable
inputs is maximized where available and the use of unobservable inputs is
minimized for fair value measurement. As a means to illustrate the inputs used,
ASC 820 establishes a three-tier fair value hierarchy that prioritizes inputs to
valuation techniques used for fair value measurement.
|
·
|
Level 1 consists of observable
market data in an active market for identical assets or
liabilities.
|
|
·
|
Level 2 consists of observable
market data, other than that included in Level 1, that is either directly
or indirectly observable.
|
|
·
|
Level 3 consists of unobservable
market data. The input may reflect the assumptions of the Company of what
a market participant would use in pricing an asset or liability. If there
is little available market data, then the Company’s own assumptions are
the best available
information.
|
In the
case of multiple inputs being used in a fair value measurement, the lowest level
input that is significant to the fair value measurement represents the level in
the fair value hierarchy in which the fair value measurement is
reported.
Cash and Cash
Equivalents: For financial statement
presentation purposes, the Company considers those short-term, highly liquid
investments with original maturities of three months or less to be cash or cash
equivalents.
Concentration of
Credit Risk: The Company’s cash and cash equivalents are on deposit with
banks. Only a portion of the cash and cash equivalents would be covered by
deposit insurance and the uninsured balances are substantially greater than the
insured amounts. Although cash and cash equivalent balances exceed insured
deposit amounts, management does not anticipate non-performance by the
banks.
Accounts
Receivable: The Company records its accounts receivable at the original
invoice amount less an allowance for doubtful accounts. An account receivable is
considered to be past due if any portion of the receivable balance is
outstanding beyond its scheduled due date. On a quarterly basis, the Company
evaluates its accounts receivable and establishes an allowance for doubtful
accounts for specific accounts that are considered at risk as to collection.
When a customer account is considered to be uncollectible it is written off
against the related allowance. No interest is accrued on past due accounts
receivable.
Inventory:
Inventory is recorded at the lower of cost or market value, and adjusted as
appropriate for decreases in valuation and obsolescence. Adjustments to the
valuation and obsolescence reserves are made after analyzing market conditions,
current and projected sales activity, inventory costs and inventory balances to
determine appropriate reserve levels. As of December 31, 2009, $118,257 in
inventory valuation reserves was established. Cost is determined using the
first-in first-out (FIFO) method. Many components and raw materials we purchase
have minimum order quantities. As of December 31, 2009, inventory costs of
$1,008,092 consisted of $432,385 of finished goods, $212,844 of work-in-process
and $364,557 of raw materials. As of December 31, 2008, inventory costs of
$1,269,515 consisted of $353,657 of finished goods, $343,776 of work-in-process
and $572,082 of raw materials.
Property and
Equipment: Property and equipment
are recorded at cost. Depreciation is computed using the straight line method
over the estimated useful lives of the assets, ranging from 3 to 22
years.
69
Expenditures
for renewals and betterments are capitalized. Expenditures for minor items,
repairs and maintenance are charged to operations as incurred. Gain or loss upon
sale or retirement due to obsolescence is reflected in the operating results in
the period the event takes place.
Impairment or
Disposal of Long-Lived Assets: The Company adopted the provisions of FASB
ASC 360-10-15-3, “Impairment
or Disposal of Long-lived Assets.” This standard requires, among other
things, that long-lived assets be reviewed for potential impairment whenever
events or circumstances indicate that the carrying amounts may not be
recoverable. The assessment of possible impairment is based on the ability to
recover the carrying value of the asset from the expected future pre-tax cash
flows (undiscounted and without interest charges) of the related operations. If
these expected cash flows are less than the carrying value of such asset, an
impairment loss is recognized for the difference between estimated fair value
and carrying value. The primary measure of fair value is based on discounted
cash flows. The measurement of impairment requires management to make estimates
of these cash flows related to long-lived assets, as well as other fair value
determinations. There were no impairments recognized for years ended December
31, 2009 and 2008.
Derivative
Financial Instruments: The Company’s
objectives in using derivative financial instruments are to obtain the lowest
cash cost-source of funds. Derivative liabilities are recognized in the
consolidated balance sheets at fair value based on the criteria specified in
FASB ASC topic 815-40 "Derivatives and Hedging – Contracts
in Entity’s own Equity". The estimated fair value of the derivative
liabilities is calculated using the Black-Scholes-Merton method where applicable
and such estimates are revalued at each balance sheet date, with changes in
value recorded as other income or expense in the consolidated statement of
operations. As a result of the Company’s adoption of ASC topic 815-40, effective
January 1, 2009 some of the Company’s warrants are now accounted for as
derivatives.
On
January 1, 2009 the Company adopted ASC topic 815-40, and as a result the
10,000,000 outstanding warrants issued to the Quercus Trust and another
1,485,714 warrants issued as payment of services related to this offering, both
containing exercise price down round reset provisions that were previously
classified in equity, were reclassified to derivative liabilities. As of January
1, 2009, these warrants were no longer deemed to be indexed to the Company’s own
stock. The fair value of these derivative liabilities as of January 1, 2009 was
$2,450,542 and was reclassified from additional paid-in capital. The significant
assumptions used in the January 1, 2009 valuation were: the exercise price of
$2.60; the market value of the Company’s common stock on January 1, 2009, $1.15;
expected volatility of 49.44%; risk free interest rate of 1.28%; and a remaining
contract term of 4.27 years.
On
September 22, 2009, the exercise price for 10,000,000 warrants issued to The
Quercus Trust was reset from $2.60 to $0.75. On December 15, 2009 the
1,485,714 warrants issued in payment of services related to Quercus offering,
were reset from $2.60 to $0.57.
On
December 22, 2009 the derivative liability relating to the 10,000,000 Quercus
Trust warrants was extinguished, and the liability valued on that date of
$7,126,155 was reclassified back into Equity. The significant
assumptions used in the December 22, 2009 valuation were: the exercise price of
$0.75; the market value of the Company’s common stock on December 22, 2009,
$1.30; expected volatility of 61.5%; risk free interest rate of 1.22%; and a
remaining contract term of 2.5 years.
The fair
value of these derivative liabilities as of December 31, 2009 was $1,616,788.
The Black-Scholes-Merton stock option valuation model was used to determine the
fair values. The significant assumptions used in the December 31, 2009 valuation
were: the exercise price of $0.57; the market value of the Company’s common
stock on December 31, 2009, $1.56; expected volatility of 56.2%; risk free
interest rate of 1.70%; and a remaining contract term of 3.27
years. There was no corresponding derivative liability for the year
ended December 31, 2008 as it preceded the date of adoption of ASC
815-40.
The
increase in fair value of the Company’s derivative liabilities resulted in a
loss of $6,292,401 for year ended December 31, 2009 and $(222,267) since
inception. The loss for 2009 includes an increase in the derivative liability in
the amount of $8,257,840 resulting from the reset in the exercise price of
the 11,485,714 warrants previously issued.
Revenue
Recognition: 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. Evidence of an
agreement and fixed or determinable sales price is predominantly based on a
customer purchase order or other form of written sales order or written
agreement. Sales on account are approved only for credit-worthy customers;
otherwise payment in full is received prior to shipment. 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. We offer a 90 day free
replacement warranty on some specialty collector car and motorsports products.
Collector car products also carry a four year prorated warranty that begins at
the end of the 90 days. To date, our warranty exposure on these
products has been minimal. Flooded battery sales do not have standard warranty
provisions and instead are sold at a discount in lieu of
warranty. There are no other post shipment obligations that may
impact the timing of revenue recognition for the year ending December 31,
2009.
70
Shipping and
Handling Costs: All shipping and handling costs charged to customers are
recorded as Net Sales and all related expenses are included in Cost of Sales.
Shipping and handling costs not billed to customers are included in selling,
general and administrative expense.
Proceeds from
Grants: The Company records proceeds from grants over the period
necessary to match them with the related costs for which such grants are to
compensate. Grants for assets are recorded as deferred revenue and amortized
over the expected life of such asset as a reduction of depreciation expense. As
permitted by IAS 20.29 grants to reimburse current expenditures are deducted
from the related expenses. As permitted by IAS 20.29 “Accounting for Government
Grants”, a grant relating to income may be reported separately as other income
or deducted from the related expenses. The Company records grants as deduction
from related expenses or as other income as follows: (i) grants not deemed
significant by management are considered to be reimbursements for specific
research activities and are recorded as such, and (ii) grants that are
considered material are those activities performed under a contract, typically
with a governmental agency, in which there is required a significant allocation
of Company resources, including personnel and materials, and thus are recorded
as other income.
The
Company recognizes proceeds from grants only when (a) there is reasonable
assurance that the Company has complied with all conditions attached to the
grant, and (b) the grant proceeds will be received. To date proceeds from
grants, other than proceeds for assets, have been direct reimbursements for
costs incurred for research activities on behalf of a trade group that are
deemed not significant and are reported as a reduction of the direct research
costs incurred. To date, other than proceeds for assets, there have not been any
proceeds recognized from grants that are considered significant.
Stock-Based
Compensation: Prior to January 1, 2006, we accounted for stock
option awards in accordance with the recognition and measurement provisions of
former authoritative literature APB 25 and related interpretations, as permitted
by former authoritative literature Statement of Financial Accounting Standard
No. 123, (“SFAS 123”) “Accounting for Stock-Based
Compensation,”. Under APB 25, compensation cost for stock options issued
to employees was measured as the excess, if any, of the fair value of our stock
at the date of grant over the exercise price of the option granted. Compensation
cost was recognized for stock options, if any, ratably over the vesting period.
As permitted by SFAS 123, we reported pro-forma disclosures presenting results
and earnings as if we had used the fair value recognition provisions of SFAS 123
in the Notes to the Condensed Consolidated Financial
Statements.
Effective
January 1, 2006, we adopted the provisions of ASC topic 718 using the modified
prospective transition method. Stock-based compensation related to non-employees
is recognized as compensation expense in the accompanying condensed consolidated
statements of operations and is based on the fair value of the services received
or the fair value of the equity instruments issued, whichever is more readily
determinable. Our accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of ASC
505-50 “Equity-Based Payments
to Non-Employees” (formerly EITF 96-18, “Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain
Transactions Involving Equity Instruments granted to Other Than
Employees.”) The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (1) the date at which a
commitment for performance by the consultant or vendor is reached or (2) the
date at which the consultant or vendor’s performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement.
Research and
Development:
R&D costs are recorded in accordance with FASB ASC topic 730, “Accounting for Research and
Development Costs,” which requires that costs incurred in R&D
activities covering basic scientific research and the application of scientific
advances to the development of new and improved products and their uses be
expensed as incurred. The policy of expensing the costs of R&D activities
relate to (1) in-house work conducted by us, (2) costs incurred in connection
with contracts that outsource R&D to third party developers and (3) costs
incurred in connection with the acquisition of intellectual property that is
properly classified as in-process R&D. R&D includes the conceptual
formulation, design and testing of product alternatives, construction of
prototypes, and operation of pilot plants. It does not include routine or
periodic alterations to existing products, production lines, manufacturing
processes, and other ongoing operations, even though those alterations may
represent improvements, and it also does not include market research
or market-testing activities. All R&D costs have been
expensed.
71
Income
Taxes: Deferred income taxes are recorded in accordance with FASB ASC
740, “Income Taxes,”,
and deferred tax assets and liabilities are determined based on the differences
between financial reporting and the tax basis of assets and liabilities using
the tax rates and laws in effect when the differences are expected to reverse.
FASB ASC 740 provides for the recognition of deferred tax assets if realization
of such assets is more likely than not to occur. Realization of net deferred tax
assets is dependent upon generating sufficient taxable income in future years in
appropriate tax jurisdictions to realize benefit from the reversal of temporary
differences and from net operating loss, or NOL, carry forwards. The Company has
determined it is more likely than not that the deferred tax asset resulting from
these timing differences will not materialize and have provided a valuation
allowance against the entire net deferred tax asset. Management will continue to
evaluate the realizability of the deferred tax asset and its related valuation
allowance. If the assessment of the deferred tax assets or the corresponding
valuation allowance were to change, the Company would record the related
adjustment to income during the period in which the determination is made. The
tax rate may also vary based on actual results and the mix of income or loss in
domestic and foreign tax jurisdictions in which operations take
place.
Refundable
tax credits are recorded, to the extent receipt is assured, in the year that
they are earned and included in other income.
The
provision for taxes represents corporate-level franchise taxes which may be
based on assets, equity, capital stock or a variation thereof.
Recently Issued Accounting
Pronouncements:
The
Company adopted, as of July 1, 2009, the Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) as the source of
authoritative accounting principles recognized by the FASB to be applied to
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. The ASC does not change authoritative guidance.
Accordingly, implementing the ASC did not change any of the Company’s
accounting, and therefore, did not have an impact on the consolidated results of
the Company. References to authoritative GAAP literature have been updated
accordingly.
On
January 1, 2009, the Company adopted the provisions of FASB ASC topic 820
Fair Value Measurements and
Disclosures (formerly SFAS No. 157, Fair Value Measurements), with respect to
non-financial assets and liabilities. This pronouncement defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. The adoption of ASC topic 820 did not have a material
impact on the Company’s consolidated financial statements.
On
January 1, 2009, the Company adopted FASB ASC topic 815-40 "Derivatives and Hedging – Contracts
in Entity’s own Equity" (formerly EITF 07-5). ASC topic 815-40
provides guidance on determining whether an instrument (or an embedded feature)
is indexed to an entity’s own stock, which would qualify as a scope exception
under prior authoritative literature FASB No. 133. “Accounting for Derivative
Instruments and Hedging Activities” ASC 815-40 is effective for fiscal years
beginning after December 15, 2008. The Company adopted ASC topic 815-40 on
January 1, 2009 and as such some of the Company’s outstanding warrants that were
previously classified in equity were reclassified to liabilities as of January
1, 2009 as these warrants contain down round provisions and were no longer
deemed to be indexed to the Company’s own stock. See Note 2 for further
discussion.
On
January 1, 2009, the Company adopted the provisions of FASB ASC Topic
320-10-65 (formerly FSP FAS 107-1 and APB 28-1) “Interim Disclosures about Fair Value
of Financial Instruments”. This update requires fair value disclosures
for financial instruments that are not currently reflected on the balance sheet
at fair value on a quarterly basis. The adoption of ASC Topic 320-10-65 did not
have a material impact on the Company’s consolidated financial
statements.
On
January 1, 2009, the Company adopted the provisions of ASC 815-10 (formerly
FASB Statement 161, "Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”). FASB ASC 815-10 requires enhanced disclosures about an
entity’s derivative and hedging activities. FASB ASC 815-10 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008 with early application encouraged. The
adoption of this pronouncement did not have a material impact on the
consolidated financial statements.
72
In May
2009, the Company adopted FASB ASC topic 855, “Subsequent Events” (formerly
SFAS No. 165). This Statement sets forth: (i) the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and (iii) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The adoption
of ASC topic 855 did not have a material impact on the Company’s
consolidated financial statements. The Company has evaluated the period through
the date its financial statements were issued, and concluded there were no
events or transactions occurring during this period that required recognition or
disclosure in its financial statements.
In June
2009, the FASB issued ASC topic 105 “Generally Accepted Accounting
Principles”, (formerly Statement of Financial Standards (SFAS)
No. 168, The Hierarchy of
Generally Accepted Accounting Principles). ASC topic 105 contains
guidance which reduces the U.S. GAAP hierarchy to two levels, one that is
authoritative and one that is not. This pronouncement is effective
September 15, 2009. The adoption of this pronouncement did not have a
material impact on the consolidated financial statements.
In
September 2009, the FASB issued Accounting Standards Update (“ASU”) No.
2009-08, “Earnings Per Share”
Amendments to Section 260-10-S99. This Codification Update
represents technical corrections to Topic 260-10-S99, Earnings per Share, based
on EITF Topic D-53, “Computation of Earnings Per Share
for a Period that Includes a Redemption or an Induced Conversion of a Portion of
a Class of Preferred Stock” and EITF Topic D-42, The Effect of the
Calculation of Earnings per Share for the Redemption or Induced Conversion of
Preferred Stock goes into effect in the period that includes a redemption or
induced conversion. Adoption of this new guidance did not have a material
impact on the consolidated financial statements.
In
October 2009, the FASB issued authoritative guidance on ASC 605-25 “Revenue Recognition -
Multiple-Deliverable Revenue Arrangement “that will become effective
beginning July 1, 2010, with earlier adoption permitted. Under the new
guidance, when vendor specific objective evidence or third party evidence for
deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement
consideration using the relative selling price method. The new guidance includes
new disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition. We believe adoption
of this new guidance will not have a material impact on the consolidated
financial statements.
In
Release No. 33-9089, starting in 2010, the SEC ordered public companies to
increase the amount of information they provide on executive compensation
policies and explain how they affect risk management. The new rules will require
a discussion of the company's compensation policies and practices to employees,
including non-executive officers, to the extent that risks arising from such
policies and practices are reasonably likely to have a material adverse effect
on the entity. There are also requirements to disclose equity awards that are
subject to performance conditions, as well as changes to the summary
compensation table and director compensation tables. We believe adoption of this
new guidance did not have a material impact on the consolidated financial
statements.
In
January 2010, (ASU) No. 2010-06 , Fair Value Measurements and Disclosures (Topic
820)-Improving Disclosures about Fair Value Measurements) requires reporting
entities to provide information about movements of assets among Levels 1 and 2
of the three-tier fair value hierarchy established by SFAS No. 157 ( FASB ASC
820), Fair Value Measurements. Entities will also need to provide a
reconciliation of purchases, sales, issuance, and settlements of anything valued
with a Level 3method, which is used to price the hardest to value instruments.
The guidance is effective for any fiscal year that begins after December 15,
2010, and it should be used for quarterly and annual filings. We believe
adoption of this new guidance will not have a material impact on the
consolidated financial statements.
Note 3 -
Grant Income Pertaining to
Equipment
Grants from
Commonwealth of Pennsylvania: The Company records state grants
received for equipment as deferred revenue based on qualifying equipment
purchases that are billed to the Commonwealth for reimbursement. Deferred
revenue is amortized into income over the estimated useful life of the related
equipment. As of December 31, 2009, the liability for deferred revenue was
$856,237 and other receivables included $195,142 for equipment grants invoiced
in 2009. During the year 2009, $90,002 of income was recorded for the
amortization of deferred revenue. As of December 31, 2008, the liability for
deferred revenue from state equipment grants was $751,096, and there were no
other receivables relating to equipment grants.
73
Note 4
- Fair Value
Measures
The
Company has determined the fair value of certain assets through application of
ASC 820, Fair Value
Measurements.
The
Company did not hold any investment securities for the year ended December 31,
2009.
Fair
value of assets and liabilities measured at December 31, 2008 are as
follows:
Quoted Prices In Active Markets for
|
||||||||
Fair Value Measurements at Reporting Date Using:
|
Fair Value
|
Identical Assets/Liabilities (Level 1)
|
||||||
December
31, 2008:
|
||||||||
Available-for-sale
securities
|
- | - | ||||||
Certificates
of Deposit
|
$ | 194,000 | $ | 194,000 | ||||
United
States Treasury Bills
|
$ | 1,999,920 | $ | 1,999,920 |
There
were no investment gains or losses (realized and unrealized) included in
earnings for the periods reported.
Financial
assets and liabilities valued using Level 1 inputs are based on unadjusted
quoted market prices within active market.
Note
5 — Property and Equipment
A summary
of property and equipment at December 31, 2009 and 2008 is as
follows:
Estimated
useful
|
|||||||||
life
|
2009
|
2008
|
|||||||
Construction
in progress
|
$ | 1,000,692 | $ | 543,894 | |||||
Leasehold
improvements
|
Lesser
of
Lease
term
or
10 years
|
144,335 | 105,918 | ||||||
Machinery
& equipment
|
3-22
years
|
4,145,364 | 3,257,676 | ||||||
Less
accumulated depreciation
|
1,074,311 | 633,305 | |||||||
Net
|
$ | 4,216,080 | $ | 3,274,183 |
Depreciation
expense was $351,004 and $97,719 for the years ended December 31, 2009 and
December 31, 2008 respectively.
Certain
of our property and equipment amounting to $1,582,111 are secured by the
Pennsylvania Department of Community and Economic Development in relation to the
Machinery and Equipment Loan Fund financing. The initial loan proceeds in the
amount of $776,244 were received by us on September 14, 2009. The proceeds
of the loan will be used to defray part of the cost of equipment purchased for
use at our facility on Green Ridge Road in New Castle. 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,
maturing on October 1, 2016.
Note
6 - Related Party Debt Financing
2008
Activity:
Secured Bridge
Loan Financing: Certain Bridge Loans entered into in 2007 had an original
maturity date of March 31, 2008, with three extensions of the maturity date at
the option of the Company and higher interest rates applicable to each such
extension.
74
|
·
|
On
May 29, 2008, Glenn Patterson (HAP) converted $4,200 of his Bridge Loan
into equity under the same terms offered to Quercus discussed in Item 7
“Recent Financing Activities”, with the $95,800 in principal repaid under
the terms of the note for the Bridge Loan. Mr. Patterson received 4,627
warrants valued at $3,990 utilizing the Black-Scholes-Merton option
pricing model.
|
|
·
|
On
June 30, 2008, Igor Filipenko was repaid $225,000 in principal under the
terms of the note for the Bridge Loan. Mr. Filipenko received
9,148 warrants valued at $9,768 utilizing the Black-Scholes-Merton option
pricing model.
|
|
·
|
On
June 30, 2008, Robert Averill, converted $800,000 under the same terms
offered to Quercus discussed in Item 7 “Recent Financing Activities”, with
the $1,000,000 in principal repaid on July 1, 2008 under the
terms of the note for the Bridge Loan. Mr. Averill received
457,542 warrants valued at $342,748 utilizing the Black-Scholes-Merton
option pricing model.
|
Options and
Warrants: The Secured Bridge Loan Financing disclosed above provided for
the aggregate issuance of 484,278 common stock purchase warrants. We satisfied
our obligation to issue 397,750 warrants remaining under this obligation in
March 2008 by issue to two of our directors. $289,075 of unamortized
debt discount relating to the 2007 obligations was amortized during the 1st quarter
of 2008. Because of the delay in processing these 3 year warrants,
exercisable at a price of $6.00, were issued with an expiration date of March
31, 2011. Due to lower stock prices at the time of modification, the
modification of these instruments resulted in a net decrease in fair value of
these instruments. Decreases in fair value of embedded options resulting from a
modification should not be recognized and accordingly are not reflected on the
Company’s financial statements.
2009
Activity:
2009 Secured Bridge Loan
Financing. In August of 2009
we structured a short term bridge loan with certain of our directors and
investors, the “Secured Bridge Loan”, secured by all of our intellectual
property. Under the arrangement, we received funding of $800,000 through
September 30, 2009.The Secured Bridge Loan had 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. On or about December 8, 2009, we borrowed an additional
$541,666 from Robert Averill, one of our directors, on substantially similar
terms to the bridge loans in August 2009. The new bridge loan bears no
interest but has a fee of 8% of the principal amount thereof. The
holders of these notes had the right to convert the note together with interest,
into any security sold by us in an institutional offering. $371,353
of the principal amount and fee was converted into an investment in us as part
of the December 22, 2009 private placement, and $970,313 of principal amount and
accrued fees thereon was repaid in December of 2009. The amounts
reported as related party in this disclosure include payment to one accredited
investor with certain associations to related parties. Upon
repayment of the note, all conversion rights
terminated.
Options and
Warrants: The Secured Bridge Loan Financing disclosed above provided for
the aggregate issuance of 45,661 common stock purchase warrants with 38,851
issued to one director. $34,002 in debt discount was recognized
during 2009 relating to these warrants.
Interest
Expense: Interest expense recognized for the year ended
December 31, 2009 in connection with certain notes payable to related parties
amounted to $186,063. Of this total $46,395 relates to the interest
coupon and $139,668 to the amortization of note discount associated with loan
origination fees and detachable warrants. The amounts reported
as interest expense-related party on the income statement include payment to one
accredited investor with certain associations to related parties. Interest
expense recognized for the year ended December 31, 2008 in connection with
certain notes payable to related parties amounted to $1,137,485. Of
this total $277,045 relates to the interest coupon and $860,443 to the
amortization of note discount associated with loan origination fees and
detachable warrants. The amounts reported as interest
expense-related party on the income statement include payments to four
accredited investors with certain associations to related parties. The note
discounts are being amortized as interest expense over the life of the
respective notes.
Note
7— Stockholders' Equity
Authorized
Capitalization: The Company’s authorized capitalization includes
100,000,000 shares of common stock and 12,500,000 shares of preferred stock.
This represents an increase in the number of authorized common shares from
50,000,000 pursuant to the Shareholder meeting vote on November 12,
2008.
75
Common
Stock: At December 31, 2009, 75,767,818 shares of common stock were
issued and outstanding. The holders of common stock are entitled to one vote for
each share held of record on all matters to be voted on by stockholders. There
is no cumulative voting with respect to the election of directors, with the
result that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors. Holders of common stock are entitled
to receive dividends when and if declared by the board out of funds legally
available. In the event of liquidation, dissolution or winding up, the common
stockholders are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the common stock.
The common stockholders have no conversion, preemptive or other subscription
rights and there are no redemption provisions applicable to the common stock.
All of the outstanding shares of common stock are fully paid and
non-assessable.
Preferred
Stock: The Company’s certificate of incorporation authorizes the
issuance of 12,500,000 shares of blank check preferred stock. The Company’s
board of directors has the power to establish the designation, rights and
preferences of any preferred stock. Accordingly, the board of directors has the
power, without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of common stock.
At
December 31, 2009, 630,897 shares of Series A Convertible Preferred Stock were
issued and outstanding. Our Series A Convertible Preferred Stock has
been converted into 8,785,483 shares of common stock pursuant to an amendment to
the Series A Certificate of Designation filed with the Delaware Secretary of
State on February 24, 2010.
Equity
Transactions –period ended December 31, 2003
APC and
Tamboril Cigar Company (Tamboril, now Axion) reverse acquisition: In
December 2003 Tamboril entered into a reverse acquisition agreement with APC.
Under the terms of the agreement, all outstanding securities of APC were
acquired by Tamboril in exchange for newly issued stock. Upon consummation of
the transaction, the former stockholders of APC owned the majority of Tamboril’s
outstanding shares and controlled Tamboril’s Board of Directors. Accordingly,
the acquisition of APC by Tamboril was structured as a reverse acquisition under
which Tamboril was the legal acquirer in the transaction and APC was the
accounting acquirer. The transaction was treated as a recapitalization of APC
for accounting purposes. Tamboril had no material assets or liabilities and
1,875,000 common shares outstanding on December 31, 2003 when it entered into a
reverse acquisition with shareholders of APC. The historical financial
statements presented prior to December 31, 2003 represent those of APC since its
inception on September 18, 2003. The transactions of Tamboril are included
beginning January 1, 2004. Subsequently, Tamboril changed its name to Axion
Power International, Inc.
Prior to
the reverse acquisition, APC issued rights to its founders for 1,360,000 shares
of APC common stock as additional shares for money contributed through the
purchase of convertible debt. Accordingly, there was no expense recorded related
to these issuances of these shares. However, there was one founder that did not
contribute funds in which APC valued the 170,000 shares issued as expense for
services rendered during the period ending December 31, 2003 amounting to
$48,953 based on the value of the shares received for the funds contributed by
the other founders. The founders purchased convertible debt from APC for
$1,450,000 of which $350,000 was not collected until 2004 which is included as a
subscription receivable as of December 31, 2003. These convertible debt
instruments were converted prior to the merger in which 1,108,335 shares of APC
common stock were issued as consideration for $1,450,000 of convertible debt and
$92,761 in unamortized debt discount attributable to detachable
warrants.
The
following transactions were completed in conjunction with the original
closings:
|
·
|
Tamboril had 1,875,000 shares of
common stock outstanding at December 31, 2003 which is reflected as equity
acquired in the
recapitalization.
|
|
·
|
Tamboril settled $484,123 in
pre-merger accrued related party compensation debt through the issuance of
233,400 warrants. No corresponding expense was recorded on the Company’s
records because the debt was included on the legal acquirer’s (Tamboril’s)
records prior to the reverse
acquisition.
|
76
|
·
|
Tamboril issued 9,785,818 common
shares (prior to the return of 1,000,000 shares from The Trust for the
Benefit of the Shareholders of Mega-C Power Corp in the fiscal year ended
December 31, 2006, as disclosed in the note captioned “Subsequent Events”)
and 608,600 warrants to APC’s stockholders in exchange for a substantial
controlling interest in APC. This includes the common shares issued to the
founders, common shares and warrants issued in conjunction with the
convertible notes, and shares issued to the Mega C
Trust.
|
|
·
|
As part of the above described
transaction, APC shareholders, who had rights to the stock agreed to have
7,147,483 shares of Tamboril shares to be issued to the Trust and APC
shareholders retained the remaining shares. As a result of the November
21, 2006 Mega C Chapter 11 plan of reorganization, the Trust was required
to return 1,000,000 shares of the common stock distributed to the Trust
noted above for cancellation by the Company. The Company retroactively
adjusted the return of the shares against the shares issued to the Trust
resulting in 6,147,483 net shares issued to the Trust at December 31,
2003.
|
|
·
|
The original reverse acquisition
was amended on January 9, 2004. See discussion of the amendment under the
explanation of the equity 2004
below.
|
Equity
Transactions –period ended December 31, 2004
APC and
Tamboril Cigar Company (Tamboril, now Axion) reverse acquisition: Prior
to the second part of the reverse acquisition on January 9, 2004, the Company
adjusted the original shares issued to the founders by issuing rights to an
additional 445,000 shares to the founders and 180,000 shares to the Trust. Since
there was no additional service or money contributed there was no expense
recorded related to the additional shares issued. Also, the Company issued
45,000 shares to the CEO which amounted to $72,000 valued at the pink sheet bid
price on the date of grant. Certain related parties purchased convertible debt
from APC for $400,000. The $400,000 of convertible debt purchased during 2004
and the remaining $50,000 of convertible debt outstanding at December 31, 2003
was converted into 283,333 shares of APC common stock during 2004.
2004
Private Placements: During
the year ended December 31, 2004, the Company sold 823,800 shares of common
stock and 463,100 warrants for net cash proceeds of $1,607,134. The Company also
received $868,020 in cash proceeds from the exercise of 475,200 outstanding
common stock purchase warrants. The Company issued 48,782 shares of common stock
for rounding purposes in conjunction with the 2004 one-for-sixteen reverse stock
split.
Equity
Transactions –Year ended December 31, 2005
Augmentation
of Trust and Trust Settlement: In February 2005, the Company issued
500,000 shares of common stock to The Trust for the Benefit of the Shareholders
of Mega-C Power Corp. For accounting and financial reporting purposes, the stock
issuance transaction was valued at $1,525,000, which represents the value of the
shares on the date of issuance. This amount was charged to operating expenses
during the year ended December 31, 2005. There were 500,000 shares returned to
the Company for cancellation in November 2006 in connection with the bankruptcy
court confirmation of the settlement (see note captioned “Mega-C Power Corp
(Mega-C), Mega-C Trust (the Trust), The
Taylor Litigation”). Those shares were effectively the return of the 500,000
shares issued to the Trust in February, 2005. The return of those shares was
recorded as a reversal of the expense at fair value on the date of return in
2006 in the amount of $1,125,000 and has been subsequently cancelled. In
addition, under the bankruptcy court confirmation of the settlement, the Trust
corpus was reduced another 1,000,000 shares, which were returned to the Company
and cancelled. The return in 2006 was the result of a negotiated settlement and
there are no contingencies surrounding the Trust shares in 2005. This
cancellation was considered a retroactive adjustment to the shares issued in the
2003 reverse acquisition.
2005
Private Placement of Senior Preferred: In February 2005, the board of
directors designated 1,000,000 shares of preferred stock as 8% Cumulative
Convertible Senior Preferred Stock (the “senior preferred”). The Company sold
385,000 shares of senior preferred at a price of $10 per share. The net proceeds
of the offering included $2,754,110 in cash and $1,000,000 in liability
conversion (see Note captioned “Transactions with a Related Party (C&T)”).
At December 31, 2005, $25,000 of this amount was included in stock subscription
receivable that was subsequently reversed in 2006 when the amount was deemed
uncollectible. The senior preferred offering originally required the sale of a
minimum of 500,000 shares ($5,000,000) before the offering proceeds would be
available to the Company. The purchasers of the senior preferred ultimately
waived this minimum offering condition. The preferred stock has liquidation
preference equal to the stated value on the payment date before any payment or
distribution is made to the holders of common stock.
77
So long
as any senior preferred shares are outstanding, the Company cannot (i) issue any
series of stock having rights senior to or on parity with the senior preferred
(ii) amend, alter or repeal any provision of its Certificate of Incorporation or
bylaws to adversely affect the relative rights, preferences, qualifications,
limitations or restrictions of the senior preferred, or (iii) effect a
reclassification of the senior preferred without the consent of the holders of a
two-thirds majority of the outstanding shares. The Company is not authorized to
issue any additional shares of senior preferred.
To
provide for immediate cash needs during the offering period, the Company agreed
to issue warrants to any purchaser of senior preferred who agreed to loan the
Company the amount of the share proceeds until the $5 million minimum
subscription was reached. In connection therewith, the purchasers of $565,000 of
senior preferred agreed to release their subscription payments notwithstanding
the minimum subscription and other restrictions in the associated private
placement memorandum. As a result, the Company issued 282,500 warrants to those
purchasers. By March 2005, the $5 million minimum was still not met and the
Company agreed to issue 228,500 additional warrants to the purchasers of
$2,285,000 of senior preferred who agreed to waive the minimum subscription
requirement. The foregoing warrants are exercisable at a price of $2 per share,
and were to expire on March 21, 2007. Because the warrants
were detachable, granted in connection with the offering, immediately vested,
and exercisable at a price that was less than the reported fair market value of
the underlying common stock on the date of grant, the proceeds of the offering
were allocated between the senior preferred and the warrants based on the
relative fair value of each instrument. The assumed value of the senior
preferred was determined based on the fair value of the underlying common shares
and the fair value of the warrants was valued using the Black-Scholes-Merton
option pricing model. The proceeds allocated to the senior preferred amounted to
$3,440,268. The effective conversion price of the senior preferred was at a
price lower than the market price of the common stock at the date of the
issuance, resulting in a non-cash beneficial conversion feature of $2,315,482.
This beneficial conversion feature was immediately recognized as additional
non-cash dividends. On March 9, 2007 the Board of Directors unanimously agreed
to extend the life 476,000 $2.00 warrants issued in March 2005 to purchasers who
subscribed to the Senior Preferred private placement offering.
Holders
of senior preferred have the right to convert their shares into common stock at
any time, at an original conversion price of $2.00. The Company was required to
register the underlying shares by April 30, 2005. The shares were not registered
until June 2005 and as a result the conversion price was reduced to $1.86 per
share. This reduction in the conversion price resulted in an additional
beneficial conversion feature, valued at the fair value of the additional common
shares issuable as a result of the reduced conversion price, amounting to
$433,228.
Holders
of senior preferred are entitled to anti-dilution protection for certain
subsequent events, including the issuance of equity or debt securities that may
be converted into common stock at a conversion price that is less than the
conversion price of the senior preferred. As discussed in the note captioned
“Subsequent Events,” the Company sold approximately 823,000 shares of Series A
Preferred Stock that is convertible at a price of $1.25 per share. This stock
sale triggered the anti-dilution provisions of the senior preferred stock and
giving effect to all required adjustments, the adjusted conversion price of the
senior preferred is now $1.68 per share as of December 31, 2006.
In
September 2005, the Company offered all holders of preferred stock an early
conversion incentive that was approximately equivalent to one year’s anticipated
dividends on the preferred stock. While each share of senior preferred was
convertible into 5.5 shares of common stock when the Company offered the early
conversion incentive, 6 shares of common stock were issued for each share of
senior preferred converted during the incentive period. A total of 245,000
shares were converted. The fair value of the additional common shares issued as
a result of this inducement was recorded as a preferred dividend, amounting to
$350,446.
The total
of the beneficial conversion feature and conversion inducement for the year
ended December 31, 2005 that is included in preferred dividends on the
accompanying statement of operations amounted to $3,099,156. The Company
analyzed the embedded derivative conversion feature and the free standing
warrants issued in connection with the senior preferred and determined that the
instruments are equity instruments and accordingly, are not accounted for as
derivatives, requiring fair value accounting at each reporting
period.
Holders
of senior preferred are entitled to receive dividends at the annual rate of 8%.
Dividends are payable quarterly on the last day of March, June, September and
December of each year. Dividends are cumulative from the date of issuance and
payable to holders of record. In order to conserve available resources, the
Company did not pay cash dividends on the senior preferred in any quarter where
the Company reported a net loss. Any accrued dividends that are not paid in cash
will be added to the stated value of the senior preferred. Dividends accrued and
added to the stated value of the senior preferred during the year ended December
31, 2006 and 2005 amounted to $119,092 and $176,194, respectively.
78
The
senior preferred is redeemable by the Company under certain conditions unless
the holders elect to exercise their conversion rights prior to the redemption
date. Twenty percent of the senior preferred will become redeemable when the
market price of the Company’s common stock exceeds $6.00 per share for at least
30 trading days within any period of 45 consecutive trading days. Thereafter, an
additional twenty percent of the senior preferred will become redeemable for
each $1.00 increase in the stabilized market price of the Company’s common
stock. In connection with any proposed redemption of senior preferred, the
Company will give each holder not less than 30 days notice of its intention to
redeem a portion of the shares.
2005
Private Placement of Common Stock: Common stock private placement
activities during the year ended December 31, 2005 were as follows:
|
·
|
The Company sold 600,000 units,
each consisting of one share of common stock and a two-year warrant
exercisable at $4.00 for a purchase price of $2.00 per unit, or
$1,200,000, before offering costs. As of December 31, 2005, $200,000 is
included in stock subscriptions receivable, which was received in
2006.
|
|
·
|
A director exercised 446,000 - $1
warrants/options and 25,000 - $2 options with a total exercise price of
$496,000. The stock was issued and included in stock subscriptions
receivable as of December 31, 2005. As of June 19, 2006, the full
amount has
been settled.
|
|
·
|
Other holders exercised 382,665
options & warrants with an aggregate exercise price of
$787,395.
|
Equity
Transactions –Year ended December 31, 2006
Augmentation
of Trust and Trust Settlement: See above 2005 transactions and the
discussion in the note captioned “Mega-C Power Corp (Mega-C), Mega-C Trust (the Trust),
The Taylor
Litigation” for disclosures about shares issued to the Trust, returned from the
Trust in November 2006 and the accounting for those shares.
Senior
Preferred: During 2006, a subscription for senior preferred shares was
cancelled, reducing the balance by 2,500 shares or $25,000. The senior preferred
had an initial stated value of $10.00 per share. Accrued dividends that are not
paid in cash within 10 days of a payment date will automatically be added to the
stated value and the stated value, as adjusted, will be used for all future
dividend and conversion calculations. As of December 31, 2006 $295,286 in
dividends has been accrued to cover the Company’s obligations with regard to the
8% Cumulative Convertible Senior Preferred stock. No cash dividends have been
paid with respect to these shares. Non-cash dividends have increased the value
of the Senior Preferred shares by $1.52 to a stated value of $11.52 per
share
2006 Private
Placement of Series A Preferred Stock: On October 18, 2006, the
Company’s board of directors designated, from the Company’s total authorized
12,500,000 shares, a new series of preferred stock consisting of up to 2,000,000
shares designated Series A Convertible Preferred Stock (the “series A
preferred”). During the fourth quarter of 2006, the Company sold an aggregate of
782,997 shares of series A preferred at a price of $10 per share for net
proceeds of $7,722,470 including $4,352,500 in cash and $3,369,970 in liability
conversion. In connection with the private placement, the Company incurred total
offering expenses of $258,202, of which $107,500 was paid in cash, while the
remainder was paid through the issuance of options to acquire shares of the
Company’s common stock.
Under the
terms of this new series of preferred stock, no more than 1,000,000 shares may
be sold for cash and the remaining shares must be reserved for (i) issuance
upon exercise of the conversion rights of holders of secured and unsecured
short-term debt and (ii) to pay in-kind dividends on the series A
preferred. So long as any series A preferred shares are outstanding, the Company
cannot (i) issue any series of stock having rights senior to or on parity with
the series A preferred (ii) amend, alter or repeal any provision of its
Certificate of Incorporation or bylaws to adversely affect the relative rights,
preferences, qualifications, limitations or restrictions of the series A
preferred (iii) effect a reclassification of the series A preferred or (iv)
issue any additional shares of series A preferred, each without the consent of
the holders of a two-thirds majority of the outstanding shares. The holders of
series A preferred have no pre-emptive rights with respect to any other
securities of the Company and a liquidation preference equal to the stated value
on the payment date before any payment or distribution is made to the holders of
common stock.
79
Beginning
on April 23, 2007, the shares of series A preferred were convertible at the
option of the holders of record at an initial conversion price of $1.25 per
share. Holders of series A preferred are entitled to anti-dilution protection
for certain subsequent events, including the issuance of equity or debt
securities that may be converted into common stock at a conversion price that is
less than the conversion price of the series A preferred resulting in a
reduction in the conversion price of the series A preferred. No such other
securities have been issued through the date of this report which would require
the reduction of the conversion price of the series A preferred. In addition,
the effective conversion price of the series A preferred was at a price lower
than the market price of the common stock at the respective dates of issuance in
the fourth quarter of 2006, resulting in an aggregate non-cash beneficial
conversion feature of $6,709,970 recognized as additional non-cash dividends on
a straight line basis, which did not differ materially from the effective
interest method, from the respective dates of issuance of the series A preferred
in the fourth quarter of 2006 through the first date these shares are
convertible on April 23, 2007. As a result, $613,336 was recognized as
additional non-cash dividends in the fourth quarter of 2006 with the remaining
amount recognized in 2007. In addition, if all holders of the series A preferred
were to have exercised their conversion rights at their respective dates of
subscription, these holders would have received an additional $5,597,970 in fair
value in excess of the proceeds paid for their subscriptions to the series A
preferred. The Company further analyzed the embedded conversion feature and
determined that it is properly classified as an equity instrument and
accordingly, is not accounted for as a derivative, requiring fair value
accounting at each reporting period.
Holders
of the shares of series A preferred shall receive dividends at the annual rate
of 10% of the stated value of the series A preferred so long as the Company is
current with respect to its reporting obligations under the Securities Exchange
Act of 1934 on any dividend payment date. Dividends are payable quarterly on the
last day of March, June, September and December in each year. Dividends are
cumulative from the date of issuance and payable to holders of record. Any
accrued dividends that are not paid in cash will be added to the stated value of
the series A preferred.
Because
the Company was not current with respect to its reporting obligations through
December 31, 2007, the series A preferred annual dividend rate increased to 20%
of the stated value. All but one of the series A preferred shareholders elected
to reinvest their preferred dividends back into series A preferred shares. As of
December 31, 2006, $103,101 of dividends has been accrued, including $97,896 in
non-cash and $5,205 in cash dividends. No cash dividends have been paid with
respect to the series A preferred shares. Non-cash dividends have increased the
value of the series A preferred shares by $0.13 to a stated value of $10.13 as
of December 31, 2006.
The
series A preferred had an initial stated value of $10.00 per share. Non-cash
dividends are automatically added to the stated value and the stated value, as
adjusted, will be used for all future dividend and conversion
calculations. As of December 31, 2006 $103,101 in dividends has been
accrued to cover the Company’s obligations with regard to the Series A Preferred
stock. No cash dividends have been paid with respect to these shares. Non-cash
dividends have increased the value of the Series A Preferred shares by $0.13 to
a stated value of $10.13 per share
The
series A preferred is redeemable by the Company under certain conditions unless
the holders elect to exercise their conversion rights prior to the redemption
date. Twenty percent of the series A preferred will become redeemable when the
market price of the Company’s common stock exceeds $5.00 per share for at least
30 trading days within any period of 45 consecutive trading days. Thereafter, an
additional twenty percent of the series A preferred will become redeemable for
each $2.50 increase in the stabilized market price of the Company’s common
stock. In connection with any proposed redemption of series A preferred, the
Company will give each holder not less than 30 days notice of its intention to
redeem a portion of the shares.
Common
Stock & Private Placements. The common stock transactions
during the year ended December 31, 2006 are as follow:
·
|
Two unaffiliated individual
accredited investors purchased a total of 80,000 units for a purchase
price of $2.50 per unit or $200,000. Each unit consists of one
share of common stock and one common stock purchase warrant with an
exercise price of $4.00 per share. The warrants are exercisable up until
the first anniversary of the effective date of the common stock
registration statement and were valued at $26,354 on the date of
issuance
|
·
|
The Company’s chief executive
officer exercised his $2.00 warrants to purchase 56,700 shares for
$113,400
|
|
·
|
The Company’s Chief Technical
Officer received 6,000 unrestricted shares, valued at $24,000, pursuant to
his 2005 employment contract and an additional 250,000 restricted shares,
valued at $937,500, pursuant to his 2006 employment contract. The 250,000
shares will become fully vested on December 28, 2009. The expense related
to these shares will be recognized over this three-year requisite service
period and the shares will be considered issued and outstanding upon
vesting.
|
Subscriptions
Receivable: The balance sheet as of December 31, 2005 reflected $721,000
in subscriptions receivable. During the year ended December 31, 2006, the
Company received subscription payments of $588,900, settled $107,100 against
open invoices for legal services, and cancelled the unsettled balance of the
subscription receivable for preferred stock amounting to $25,000.
80
Warrants: 741,613 warrants were
issued to related parties in conjunction with the financing of debt issued
during 2006. See the “Related Party” footnote within ‘Debt Financing “above. In
April, 2006, the Company’s chief executive officer exercised his $2.00 warrants
to purchase 56,700 shares for $113,400. In October 2006,
200,000 3-year warrants were issued in payment for consulting services. These
$3.00 warrants valued at $74,437 are scheduled to expire in October 2009. In
December 2006, a former director of the Company received 9,000 $6.00 warrants
valued at $12,411, and are scheduled to expire December 29, 2010. Additionally,
80,000 warrants were issued to accredited investors in connection with a private
placement of units comprised of one share of the Company’s common stock and one
stock purchase warrant, as discussed above.
On June
9, 2006 the Board of Directors extended the life of 1,562,900 warrants issued to
the original shareholders of C&T along with 91,700 capital warrants issued
to Sally Fonner in recognition of the Company’s difficulty in establishing a
public trading market for its common stock. These $2 warrants scheduled to
expire in 2006 and early 2007 were modified to a December 31, 2007 expiration.
The warrants, valued at $521,642 prior to the extension, were revalued at the
date of modification using the Black-Scholes-Merton option-pricing model. The
incremental expense in 2006 resulting from the revaluations was recorded into
R&D ($342,131) and SG&A ($50,680).
Equity
Transactions –Year ended December 31, 2007
Senior
Preferred: At December 31, 2007, 137,500 shares of 8% Cumulative
Convertible Senior Preferred stock were issued and outstanding. As of December
31, 2007 $425,852 in dividends has been accrued to cover the Company’s
obligations with regard to the 8% Cumulative Convertible Senior Preferred stock.
No cash dividends have been paid with respect to these shares. Non-cash
dividends have increased the value of the Senior Preferred shares by $2.72 to a
stated value of $12.72 per share.
Series A
Preferred: 782,997 shares of Series A Preferred were issued during 2006.
In January 2007, the Company sold 40,000 additional shares of Series A Preferred
to accredited investors for gross cash proceeds of $400,000. On the date of
issuance, the effective conversion price of the Series A Preferred was at a
price lower than the market price of the common stock resulting in a non-cash
beneficial conversion feature of $400,000 recognized as additional non-cash
dividends on a straight line basis through the first date these shares are
convertible, being April 23, 2007. This straight line calculation did not differ
materially from the effective yield method. With the 2007 subscription, the
aggregate non-cash beneficial conversion feature attributable to the Series A
Preferred shares is valued at $7,109,970. $613,336 was recognized as additional
non-cash dividends in the fourth quarter of 2006, with the remaining balance of
$6,496,634 recognized as additional non-cash dividends during the year ending
December 31, 2007. Beginning on April 23, 2007, the shares of Series A Preferred
became convertible at the option of the holders of record at an initial
conversion of $1.25 per share. The conversion price is subject to adjustment if
Axion issues any shares less than the then existing conversion
price.
The
holders of the shares of Series A Preferred receive dividends at the annual rate
of 20% of the Stated Value of the Series A Preferred so long as the Company is
behind with respect to its reporting obligations under the Securities Exchange
Act of 1934 on any dividend payment date. Once the company is current with
respect to these reporting obligations, the dividend rate will be reduced to an
annual rate of 10% of the Stated Value. As of December 31, 2007, $1,893,855 in
dividends has been accrued. No cash dividends have been paid with respect to the
Series A Preferred shares. Non-cash dividends have increased the value of Series
A Preferred shares by $3.46 to a stated value of $13.46 per share. As of
December 31, 2007, 822,997 shares of Series A Convertible Preferred stock were
issued and outstanding.
Equity
Transactions –Year ended December 31, 2008
Senior
Preferred: At December 31, 2008, 137,500 shares of 8% Cumulative
Convertible Senior Preferred stock were issued and outstanding. As of December
31, 2008, $567,181 in dividends has been accrued to cover the Company’s
obligations with regard to the 8% Cumulative Convertible Senior Preferred stock.
No cash dividends have been paid with respect to these shares. Non-cash
dividends have increased the value of the Senior Preferred shares by $3.50 to a
stated value of $13.50 per share.
Series A
Preferred: With the Company becoming current with respect to its
reporting obligations under the Securities Exchange Act of 1934, the dividend
rate on its Series A Preferred reduced to an annual rate of 10% of the Stated
Value. During the year ended December 31, 2008, 104,000 Series A Preferred
shares along with accrued dividends of $298,875 were converted into 1,071,099
common shares. As of December 31, 2008, $2,571,321in dividends have been
accrued. No cash dividends have been paid with respect to the Series A Preferred
shares. Non-cash dividends have increased the value of Series A Preferred shares
by $3.58 to a stated value of $13.58 per share. As of December 31, 2008, 718,997
shares of Series A Convertible Preferred stock were issued and
outstanding.
81
Equity
Transactions –Year ended December 31, 2009
Senior
Preferred: On September 22, 2009, the agreement to reset the Quercus
warrants triggered the anti-dilutive protection of this instrument and the
conversion price was reduced from $1.86 to approximately $1.43 per share.
Effective October 30, 2009, all of the outstanding 137,500 shares of 8%
Cumulative Convertible Senior Preferred stock were converted into 1,390,944
common shares, with certificates physically issued on December 23,
2009. During 2009, $126,497 in dividends has been accrued to cover
the Company’s obligations through October 30, 2009. No cash dividends have been
paid with respect to these shares. Non-cash dividends have increased the value
of the Senior Preferred shares by $4.42 to a stated value of $14.42 per share
through the conversion date.
The
following table summarizes the stated value through 2009, and there are no
senior preferred outstanding as of December 31, 2009.
Quarter
Ended
|
Adjusted Stated
Value
|
|||
31-Mar-09
|
$ | 13.77 | ||
30-Jun-09
|
$ | 14.04 | ||
30-Sep-09
|
$ | 14.32 | ||
30-Oct-09
|
$ | 14.42 |
Series A
Preferred: With the Company becoming current with respect to its
reporting obligations under the Securities Exchange Act of 1934, the dividend
rate on its Series A Preferred was reduced to an annual rate of 10% of the
Stated Value. During the year ended December 31, 2009, 88,100 Series A Preferred
shares along with accrued dividends of $399,308 were converted into 1,149,201
common shares.
On
September 22, 2009, the agreement to reset the Quercus warrants triggered the
anti-dilutive protection of this instrument and the conversion price was reduced
from $1.25 to approximately $1.07 per share. On November 30, 2009 the
Corporation’s board of directors passed resolutions approving Amendments to the
Certificate to provide that the remaining 630,897 issued and outstanding
shares of Series A Preferred, including any dividends otherwise owing with
respect thereto, shall be automatically converted into
8,785,483 shares of Common Stock without any further action required
on the part of the holders of its Series A Preferred, and the powers,
designations, preferences and rights of holders of Series A Preferred shall
automatically become null and void. The Amendments were approved by
the requisite number of shareholders of Series A Preferred and Common Stock on
December 10, 2009, and the Definitive Information Statement has been filed on
Schedule 14C with the Securities and Exchange Commission on January 11, 2010.
Our Series A Convertible Preferred Stock has been converted into 8,785,483
shares of common stock pursuant to an amendment to the Series A Certificate of
Designation filed with the Delaware Secretary of State on February 24,
2010. $909,819 in dividends have been accrued through the date of the
November 30, 2009 resolution. No cash dividends have been paid with respect to
the Series A Preferred shares. Non-cash dividends have increased the value of
Series A Preferred shares by $4.88 to a stated value of $14.88 per share. As of
December 31, 2009, 630,897 shares of Series A Convertible Preferred stock were
issued and outstanding.
The
following table summarizes the stated value through December 31,
2009.
Quarter
Ended
|
Adjusted Stated
Value
|
|||
31-Mar-09
|
$ | 13.92 | ||
30-Jun-09
|
$ | 14.26 | ||
30-Sep-09
|
$ | 14.63 | ||
31-Dec-09
|
$ | 14.88 |
82
Common Stock
Issuances: The
following table represents per share issuances of common stock from inception
through December 31, 2009, pursuant to FASB ASC 915, “Development Stage
Enterprises”:
2003
|
||||||||||
Description:
|
Date
|
Shares
|
Per share
valuation
|
Business reason:
|
||||||
Shares
issued to founders
|
9/18/2003
|
1,360,000 | $ | 0.00 |
original
capitalization-no contributed capital
|
|||||
APC
Founder
|
9/18/2003
|
170,000 | $ | 0.29 |
services
rendered with respect to formation
|
|||||
Seed
debt financing
|
12/31/2003
|
500,000 | $ | 1.00 |
conversion
of debt and accrued interest to common stock
|
|||||
Series
I convertible debt
|
12/31/2003
|
533,334 | $ | 1.50 |
conversion
of debt and accrued interest to common stock
|
|||||
Series
II convertible debt
|
12/31/2003
|
75,000 | $ | 2.00 |
conversion
of debt and accrued interest to common stock
|
|||||
Mega-C
Trust
|
12/31/2003
|
6,147,484 | $ | 0.00 |
In
lieu of shares issuable to founders
|
|||||
Tamboril
shareholders
|
12/31/2003
|
1,875,000 | $ | 0.00 |
recapitalization
measured at fair market value of Tamboril assets
|
|||||
2003
Totals
|
10,660,818 | $ | 0.14 |
2004
|
||||||||||
Description:
|
Date
|
Shares
|
Per share
valuation
|
Business reason:
|
||||||
Shares
issued to founders
|
1/9/2004
|
445,000 | $ | 0.00 |
In
lieu of shares issuable to founders
|
|||||
Mega-C
Trust
|
1/9/2004
|
180,000 | $ | 0.00 |
adjustment
is shares issuable to founders
|
|||||
Officer
|
1/9/2004
|
45,000 | $ | 1.60 |
services
rendered by former officer
|
|||||
Series
I convertible debt-Igor Filipenko
|
1/9/2004
|
50,000 | $ | 1.00 |
conversion
of debt and accrued interest to common stock
|
|||||
Series
II convertible debt-Turitella
|
1/9/2004
|
133,333 | $ | 1.50 |
conversion
of debt and accrued interest to common stock
|
|||||
Series
III convertible debt-Turitella
|
1/9/2004
|
100,000 | $ | 2.00 |
conversion
of debt and accrued interest to common stock
|
|||||
Series
II common stock offering
|
2/1/2004
|
175,000 | $ | 2.00 |
common
stock & warrants issued for cash
|
|||||
Series
III common stock offering
|
3/31/2004
|
288,100 | $ | 3.00 |
common
stock & warrants issued for cash
|
|||||
Exercise
of Series I warrants
|
various
|
316,700 | $ | 1.50 |
warrants
exercised pursuant to original terms
|
|||||
Exercise
of Series II warrants
|
various
|
125,000 | $ | 2.28 |
warrants
exercised pursuant to original terms
|
|||||
Exercise
of Series II warrants
|
various
|
33,500 | $ | 3.23 |
warrants
exercised pursuant to original terms
|
|||||
November
emergency funding
|
11/1/2004
|
314,000 | $ | 1.50 |
common
stock & warrants issued for cash
|
|||||
December
emergency funding
|
12/1/2004
|
46,700 | $ | 1.50 |
common
stock & warrants issued for cash
|
|||||
Fractional
shareholders
|
12/31/2004
|
48,782 | $ | 0.00 |
shares
issued due to reverse split rounding formula
|
|||||
2004
Totals
|
2,301,115 | $ | 1.37 |
83
2005
|
||||||||||
Description:
|
Date
|
Shares
|
Per share
valuation
|
Business reason:
|
||||||
Mega-C
Trust
|
2/28/2005
|
500,000 | $ | 3.05 |
Trust
augmentation
|
|||||
Banca
di Unionale
|
3/18/2005
|
30,000 | $ | 2.00 |
conversion
of Preferred and accrued dividends
|
|||||
Banca
di Unionale
|
4/20/2005
|
20,000 | $ | 2.00 |
conversion
of Preferred and accrued dividends
|
|||||
C&T
employees
|
4/1/2005
|
219,000 | $ | 2.50 |
employee
incentive share grants
|
|||||
7
individuals
|
6/10/2005
|
29,565 | $ | 3.57 |
Exercise
of Director options
|
|||||
3
individuals
|
7/11/2005
|
190,000 | $ | 1.58 |
conversion
of Preferred and accrued dividends
|
|||||
Banca
di Unionale
|
7/11/2005
|
10,000 | $ | 1.60 |
exercise
of preferred warrants
|
|||||
3
individuals
|
8/28/2005
|
150,000 | $ | 1.67 |
conversion
of Preferred and accrued dividends
|
|||||
James
Smith
|
9/7/2005
|
30,000 | $ | 1.67 |
conversion
of Preferred and accrued dividends
|
|||||
2
individuals
|
9/28/2005
|
1,050,000 | $ | 1.69 |
conversion
of Preferred and accrued dividends
|
|||||
2
individuals
|
various
|
226,900 | $ | 1.79 |
exercise
of Series I warrants
|
|||||
3
individuals
|
various
|
91,200 | $ | 2.40 |
exercise
of Series III warrants
|
|||||
2
individuals
|
various
|
25,000 | $ | 1.60 |
exercise
of Preferred warrants
|
|||||
Officer
|
10/20/2005
|
446,000 | $ | 1.00 |
exercise
of warrants and options
|
|||||
Officer
|
10/20/2005
|
25,000 | $ | 2.00 |
exercise
of warrants
|
|||||
6
individuals
|
12/1/2005
|
600,000 | $ | 2.00 |
common
stock and warrants
|
|||||
2005
Totals
|
3,642,665 | $ | 1.94 |
84
2006
|
||||||||||
Description:
|
Date
|
Shares
|
Per share
valuation
|
Business reason:
|
||||||
2
individuals
|
4/21/06
|
80,000 | 2.50 |
Common
stock and warrants issued for cash
|
||||||
Officer
|
4/21/06
|
56,700 | 2.00 |
Exercise
of non-plan incentive option granted to CEO
|
||||||
Officer
|
4/21/06
|
6,000 | 4.00 |
Unrestricted
share grant to CTO
|
||||||
Mega-C
Trust
|
11/28/06
|
(500,000 | ) | 2.25 |
Return
of shares per settlement agreement
|
|||||
2006
Totals
|
(357,300 | ) | $ | 2.20 |
2007
|
||||||||||
Description:
|
Date
|
Shares
|
Per share
valuation
|
Business reason:
|
||||||
Officer
|
12/01/07
|
1,000 | 2.30 |
Unrestricted
share grant to VP Mfg Engineering
|
||||||
2007
Totals
|
1,000 | $ | 2.30 |
2008
|
||||||||||
Description:
|
Date
|
Shares
|
Per share
valuation
|
Business reason:
|
||||||
The
Quercus Trust
|
1/14/2008
|
1,904,762 | 2.10 |
Securities
purchase agreement
|
||||||
1
individual
|
3/31/2008
|
106,659 | 2.10 |
2007
Bridge Loan Conversion
|
||||||
The
Quercus Trust
|
4/08/2008
|
1,904,762 | 2.10 |
Securities
purchase agreement
|
||||||
1
individuals
|
4/21/2008
|
25,000 | 2.10 |
2007
Bridge Loan Conversion
|
||||||
Lichtensteiniche
Landsbank
|
5/06/2008
|
508,512 | 1.25 |
Series
A Preferred Conversions
|
||||||
Director
|
5/29/2008
|
2,000 | 2.10 |
2007
Bridge Loan Conversion
|
||||||
The
Quercus Trust
|
6/30/2008
|
4,761,905 | 2.10 |
Securities
purchase agreement
|
||||||
Director
|
6/30/2008
|
380,952 | 2.10 |
2007
Bridge Loan Conversion
|
||||||
1
individual
|
8/20/2008
|
520,787 | 1.25 |
Series
A Preferred Conversion
|
||||||
1
individual
|
9/11/2008
|
41,800 | 1.25 |
Series
A Preferred Conversion
|
||||||
V.P.
Mfg Engineering
|
01/01/2008-12/01/2008
|
12,000 | 1.85 |
Unrestricted
share Grant
|
||||||
2008
Totals (as of December 31, 2008)
|
10,169,139 | $ | 2.01 |
85
2009
|
||||||||||
Description:
|
Date
|
Shares
|
Per share
valuation
|
Business reason:
|
||||||
V.P.
Mfg Engineering
|
01/01/2009-12/01/2009
|
23,000 | 1.55 |
Unrestricted
share Grant
|
||||||
CFO
|
06/16/2009
|
30,000 | 1.41 |
Unrestricted
share Grant
|
||||||
New
Energy Fund
|
07/21/2009
|
286,735 | 1.25 |
Series
A Preferred Conversions
|
||||||
Fursa
Global Event Driven Fund LP
|
11/04/2009
|
862,466 | 1.07 |
Series
A Preferred Conversions
|
||||||
Director
|
12/23/2009
|
252,912 | 1.43 |
Senior
Preferred Conversion
|
||||||
Director
|
12/23/2009
|
431,297 | 1.43 |
Senior
Preferred Conversion
|
||||||
8
individuals
|
12/23/2009
|
706,735 | 1.43 |
Senior
Preferred Conversion
|
||||||
11
individuals
|
12/23/2009
|
719,664 | 0.57 |
Common
stock placement fees
|
||||||
48
investors
|
12/22/2009
|
45,106,052 | 0.57 |
Securities
purchase agreement, net of 2009 Bridge Loan conversion
|
||||||
Director
|
12/22/2009
|
300,620 | 0.57 |
2009
Bridge Loan conversion
|
||||||
1
individual
|
12/22/2009
|
350,900 | 0.57 |
2009
Bridge Loan conversion
|
||||||
CTO
|
12/29/2009
|
280,000 | 1.50 |
Unrestricted
share Grant
|
||||||
2009
Totals (as of December 31, 2009)
|
49,350,381 | $ | 0.61 |
Warrants:
The
following table provides summary information on warrants outstanding as of
December 31, 2009. The table provides summary information on the various
warrants issued by the Company in private placement transactions; the warrants
exercised to date; the warrants that are presently exercisable and the current exercise
prices of such warrants.
86
|
2009
|
2008
|
||||||||||||||
|
Shares
|
Weighted Average
Exercise price
|
Shares
|
Weighted Average
Exercise price
|
||||||||||||
Warrants
outstanding January 1
|
14,278,772 | $ | 1.44 | 2,588,391 | $ | 4.39 | ||||||||||
Granted
during year
|
45,661 | 2.00 | 12,163,881 | $ | 2.60 | |||||||||||
Exercised
|
- | 0.00 | - | 0.00 | ||||||||||||
Lapsed
|
(359,000 | ) | 4.33 | (473,500 | ) | $ | 2.00 | |||||||||
Outstanding
at December 31
|
13,965,433 | $ | 1.36 | 14,278,772 | $ | 2.94 | ||||||||||
Weighted
average years remaining
|
3.1 | 3.9 |
As of
December 31, 2009, 1,485,714 of these warrants were classified as derivative
liabilities. Each reporting period the warrants are re-valued and adjusted
through the caption “derivative revaluation” on the statement of
operations.
On
September 22, 2009, we entered into an Amendment to Warrants and Securities
Purchase Agreement with Quercus Trust, amending the January 14, 2008 Warrant and
Securities Purchase Agreement. The Amendment resets the exercise price for
warrants previously issued to Quercus from $2.60 per share to $0.75 per share,
and is reflected in this table by reducing the weighted average exercise price
of warrants outstanding as of January 1, 2009 from $2.94 to $1.44 per
share. In Amendment No. 2 to the Securities Purchase Agreement
dated December 15, 2009, The Quercus Trust agreed to waive further anti-dilution
rights on its warrants to purchase our common stock below an exercise price
of $0.75 per share. On December 22, 2009 the 1,485,714 warrants issued in
payment of services related to Quercus offering, were reset from $2.60 to $0.57
per share. The reset in the exercise price of the Quercus related warrants
decreased the weighted average exercise price for warrants outstanding at
December 31, 2009 from $2.90 to $1.36 per share
The Board
of Directors on August 21, 2009 approved the issuance of warrants to purchase
not more than 1,600,000 shares of common stock at an exercise price of $2.00 per
share and a term of two years to the C&T Group. On December 31, 2009 these
warrants have not yet been issued pending "mutual understanding" between the
parties.
Registration
Rights
General:
In June 2008 and May 2009, the Company filed resale registration statements for
2,632,700 common shares held by the Quercus Trust and 788,336 of the shares of
common stock held by the Mega-C Trust. On December 22, 2009, in connection with
the execution of the Securities Purchase Agreement , The Quercus Trust agreed
to waive further registration rights on shares owned by The Quercus Trust
that have not yet been registered. See the discussion in the note titled
“Mega-C Power (Mega-C), Mega-C Trust (the Trust), The Taylor
Litigation.”
Warrants: The Company has registered
the resale of the shares of common stock issuable upon exercise of all warrants
that were issued and outstanding in June 2005 and is required to maintain an
effective registration statement until the expiration dates of the warrants. It
is also obligated to file a resale registration statement for the warrants
issued after June 2005. The recently issued warrants generally provide that they
will be exercisable for terms of two to three years after the effective date of
the required registration statements. However there are no cash penalties or
exercise price adjustments associated with registration delays.
Note
8 - Equity Compensation
In
December 2004, FASB issued FASB 123R, “Share-Based Payment (now ASC
718 “Compensation – Stock Compensation”). On January 1, 2006, the
Company adopted the provisions of FASB 123R using the modified prospective
transition method. Under this method, compensation expense is recorded for all
stock based awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding as of the beginning
of the adoption. Under ASC 718, employee-compensation expense related
to stock based payments is recorded over the requisite service period based on
the grant date fair value of the awards.
87
Prior to
the adoption of FASB 123R, the Company accounted for employee stock options
using the intrinsic value method in accordance with APB 25. Accordingly, no
compensation expense was recognized for stock options issued to employees as
long as the exercise price was greater than or equal to the market value of the
common stock at the date of grant. In accordance with FASB 123, the Company
disclosed the summary of pro forma effects to reported net loss as if the
Company had elected to recognize compensation costs based on the fair value of
the awards at the grant date.
The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of ASC 505-50
“Equity-Based Payments to
Non-Employees” (formerly EITF 96-18, “Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services ” and EITF 00-18, “Accounting Recognition for Certain
Transactions Involving Equity Instruments granted to Other Than
Employees.”). The measurement date for fair value of the
equity instruments is determined by the earlier of (i) the date at which
commitment for performance by the vendor or consultant is reached or (ii) the
date at which the consultant or vendor’s performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting
agreement.
The
compensation cost that has been charged against income for options granted was
$411,204 for the year ended December 31, 2009. The impact of these expenses to
basic and diluted loss per share was approximately $0.02 per share during the
year. For stock options issued as non-qualified stock options, a tax deduction
is not allowed until the options are exercised. The amount of this deduction
will be the difference between the fair value of the Company’s common stock and
the exercise price at the date of exercise. Accordingly, there is a deferred tax
asset recorded for the tax effect of the financial statement expense recorded.
The tax effect of the income tax deduction in excess of the financial statement
expense will be recorded as an increase to additional paid-in capital. Due to
the uncertainty of the Company’s ability to generate sufficient taxable income
in the future to utilize the tax benefits of the options granted, the Company
has recorded a valuation allowance to reduce gross deferred tax assets to zero.
As a result, for the year ended December 31, 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.
The
Company has two stockholder approved equity compensation plans and occasionally
enters into employment and other contracts that provide for equity compensation
arrangements other than those contemplated by the stockholder approved plans.
The following sections summarize the Company’s equity compensation
arrangements.
Incentive Stock
Plan Approved by Stockholders: The Company’s stockholders have adopted an
incentive stock plan for the benefit of its employees, consultants and advisors.
Under the terms of the original plan, the Company was authorized to grant
incentive awards for up to 1,000,000 shares of common stock. At the Company’s
2005 annual meeting, its shareholders increased the authorization under the
incentive stock plan to 2,000,000 shares.
The
incentive stock plan authorizes a variety of awards including incentive stock
options, non-qualified stock options, shares of restricted stock, shares of
phantom stock and stock bonuses. In addition, the plan authorizes the payment of
cash bonuses when a participant is required to recognize income for federal
income tax purposes because of the vesting of shares of restricted stock or the
grant of a stock bonus.
The plan
authorizes the grant of incentive awards to full-time employees of the Company
who are not eligible to receive awards under the terms of their employment
contract or another specialty plan. The plan also authorizes the grant of
incentive awards to directors who are not eligible to participate in the
Company’s outside directors’ stock option plan, independent agents, consultants
and advisors who have contributed to the Company’s success.
The
Compensation Committee administers the plan. The Committee has absolute
discretion to decide which employees, consultants and advisors will receive
incentive awards, the type of award to be granted and the number of shares
covered by the award. The committee also determines the exercise prices,
expiration dates and other features of awards.
The
exercise price of incentive stock options must be equal to the fair market value
of such shares on the date of the grant or, in the case of incentive stock
options granted to the holder of more than 10% of the Company’s common stock, at
least 110% of the fair market value of such shares on the date of the grant. The
maximum exercise period for incentive stock options is ten years from the date
of grant, or five years in the case of an individual who owns more than 10% of
the Company’s common stock. The aggregate fair market value determined at the
date of the option grant, of shares with respect to which incentive stock
options are exercisable for the first time by the holder of the option during
any calendar year, shall not exceed $100,000.
88
The
following awards have been granted under the Plan since its
inception:
In
February 2004, Igor Filipenko, a Director of the Company at that time, was
granted options to purchase 6,300 shares of common stock at a price of $3.20 per
share. In June 2004, Mr. Filipenko was granted options to purchase 10,800 shares
of common stock at a price of $5.60 per share. The options are fully vested and
may be exercised at any time during the five-year period commencing one year
after the date of grant. The market value of the Company stock at the date of
grant was less than the exercise price; therefore there was no intrinsic value
in accordance with APB 25. Options for 7,200 shares were cancelled in April 2005
after Mr. Filipenko was issued additional options in March 2005 as part of the
offering to the former employees of C&T discussed below.
In
February 2004, John Petersen, a Director of the Company (and general corporate
counsel), and Kirk Tierney, each were granted options to purchase 6,300 shares
of common stock at a price of $3.20 per share. In June 2004, Messrs. Petersen
and Tierney were each granted options to purchase 3,600 shares of common stock
at a price of $5.60 per share. The options are fully vested and may be exercised
at any time during the five-year period commencing one year after the date of
grant. The market value of the Company stock at the date of grants was less than
the exercise price; therefore there was no intrinsic value in accordance with
APB 25.
In
February 2004, an advisor to the board was granted an option to purchase 6,300
shares of common stock at a price of $3.20 per share as compensation for
services. In June 2004, Mr. the advisor was granted options to purchase 3,600
shares of common stock at a price of $5.60 per share. The options are fully
vested and may be exercised at any time during the five-year period commencing
one year after the date of grant. The options were valued at $17,067 using the
Black-Scholes-Merton option pricing model and were included as expense in
2004.
In
November 2004, the Company’s President and Chief Operating Officer at that time,
Charles Mazacatto, was granted options to purchase 6,250 shares of common stock
at an exercise price of $3.20. This option vested in 2004 and is exercisable
until November 2010. The market value of the Company stock at the date of grant
was less than the exercise price; therefore there was no intrinsic value in
accordance with APB 25.
In March
2005, the Compensation Committee authorized stock bonuses to the former
employees of C&T for an aggregate of 219,000 shares of common stock. These
stock grants are fully vested and unrestricted, subject to compliance with the
Company’s insider trading policies. The fair value of these shares, as
determined by the Company’s stock price on the date of grant, amounted to
$565,202 and was recorded as compensation during the year ended December 31,
2005.
In April
2005, the former employees of C&T were granted options to purchase an
aggregate of 744,500 shares of common stock at an exercise price of $2.50. These
options vest at a rate of 20% per year beginning in April 2006. The market value
of the Company stock at the date of grant was less than the exercise price which
resulted in no intrinsic value in accordance with APB 25. On January 1, 2006,
the Company adopted the provisions of FASB 123R as noted above which resulted in
the Company recording compensation expense of $86,954 during the year ended
December 31, 2006. Various options lapsed when several individuals terminated
their employment with the Company in 2005 and 2006. During the years ended
December 31, 2005 and 2006, an aggregate of 157,700 and 454,000 options,
respectively, forfeited unvested as a result of these terminations.
In
September 2005, the Compensation Committee awarded 6,000 shares of restricted
common stock to the Company’s Chief Technical Officer, Edward Buiel, pursuant to
his 2005 employment agreement, which were valued at $24,000 on the date of grant
and became fully vested in April 2006. The Company recorded $8,000 and $16,000
of compensation in 2005 and 2006, respectively, related to this
award.
In
December 2006, the Company issued 250,000 shares of restricted common stock to
the Company’s Chief Technical Officer, Edward Buiel, pursuant to his 2006
employment agreement, which were valued at $937,500 on the date of grant and
will become fully vested on December 2009. The Company will recognize this as
compensation over the requisite service period. No compensation expense was
recorded for the year ended December 31, 2006.
89
In
December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert
Nelson, was granted 36,000 shares of restricted common stock pursuant to his
2007 employment agreement which were valued at $82,800 on the date of grant. The
shares vest at a rate of 1,000 shares per month, with provision for immediate
vesting based on significant changes in the relative ownership of the company.
The Company will recognize this as compensation over the 2 year employment
contract, with $3,450 of compensation expense recorded for the year ended
December 31, 2007.
In June
2008, the Company issued 80,000 shares of restricted common stock to the
Company’s Chief Technical Officer, Edward Buiel, pursuant to his 2008 employment
agreement, which were valued at $143,500 on the date of grant. 30,000 will vest
on December 29, 2009, and 50,000 will vest on May 31, 2011. The Company will
recognize this as compensation over the requisite service period. $35,063 in
compensation expense was recorded for the year ended December 31,
2008.
In June
2008, the Company issued 90,000 shares of restricted common stock to the
Company’s Chief Financial Officer, Donald Hillier, pursuant to his 2008
employment agreement, which were valued at $166,500 on the date of grant, which
will vest in equal 30,000 share amounts on June 16 of each of 2009,
2010 and 2011. The Company will recognize this as compensation over the
requisite service period. $30,062 in compensation expense was recorded for the
year ended December 31, 2008.
In June
2008, the Company issued 50,000 shares of restricted common stock to an
employee, pursuant to his 2008 employment agreement, which were valued at
$92.500 on the date of grant, which cliff vest on June 15, 2011. The
Company will recognize this as compensation over the requisite service period.
$16,701 in compensation expense was recorded for the year ended December 31,
2008.
Outside
Directors' Stock Option Plan Approved by Stockholders: The Company’s
stockholders have adopted an outside directors' stock option plan for the
benefit of its non-employee directors in order to encourage their continued
service as directors. Under the terms of the original plan, the Company was
authorized to grant incentive awards for up to 125,000 shares of common stock.
At the 2005 annual meeting, the Company’s shareholders increased the
authorization under the incentive stock plan to 500,000 shares.
Each
eligible director who is, on or after the effective date, appointed to fill a
vacancy on the Board or elected to serve as a member of the Board may
participate in the plan. Each eligible director shall automatically be granted
an option to purchase the maximum number of shares having an aggregate fair
market value on the date of grant of twenty thousand dollars ($20,000). The
option price of the stock subject to each option is required to be the fair
market value of the stock on its date of grant. Options generally expire on the
fifth anniversary of the date of grant. Any option granted under the plan shall
become exercisable in full on the first anniversary of the date of grant,
provided that the eligible director has not voluntarily resigned or been removed
"for cause" as a member of the Board of Directors on or prior to the first
anniversary of the date of grant (qualified option). Any qualified option shall
remain exercisable after its first anniversary regardless of whether the
optionee continues to serve as a member of the Board.
The
following awards have been granted under the Plan since its
inception:
During
the year ended December 31, 2004, the Company issued 54,000 5-year options to
four of its directors vesting in one year from the date of issuance. The market
value of the Company stock at the date of grant was less than the exercise price
which resulted in no intrinsic value in accordance with APB 25. During the year
ended December 31, 2005, these directors waived an aggregate of $105,542 in
accrued compensation as full payment of the exercise price of 29,565 options. An
additional 14,400 options were forfeited in 2005.
During
the year ended December 31, 2005, the Company issued 70,000 5-year options to
five of its directors vesting 1/3 per year over three years from the date of
grant. The market value of the Company stock at the date of grant was less than
the exercise price which resulted in no intrinsic value in accordance with APB
25. On January 1, 2006, the Company adopted the provisions of FASB 123R as noted
above and recorded compensation of $41,024 during the year ended December 31,
2006.
During
the year ended December 31, 2006, the Company issued 60,000 5-year options to
two of its directors vesting 1/3 per year over the next three years. These
options are exercisable at a price of $2.00 per share, expiring five years from
vest date and are valued at $71,680 utilizing the Black-Scholes-Merton option
pricing model, of which $20,230 was expensed in 2006.
During
the year ended December 31, 2008, the Company issued 179,555 5-year options to
five of its directors. Of this amount 5,555 with an exercise price of $3.60 per
share vested in November 2008 and the remainder vest 1/3 per year over the next
three years. These options are exercisable at a price of $1.38 per share,
expiring five years from vest date and are valued at $130,150 utilizing the
Black-Scholes-Merton option pricing model, of which $16,230 was expensed in
2008.
90
During
the year ended December 31, 2009, the Company issued 128,565 5-year options to
three of its directors, vesting 1/3 per year over the next three years. These
options are exercisable at a price of $1.40 per share, expiring five years from vest date and are valued at
$100,188 utilizing the Black-Scholes-Merton option pricing model, of which
$29,916 was expensed in 2009.
Non-plan Equity
Incentives Not Approved by Stockholders: The Company has
issued 36,000, 789,500, 228,000, 1,131,000, 300,000 and 629,300 stock purchase
options in the fiscal years ended December 31, 2009, 2008, 2007, 2006, 2005 and
2004, respectively, to officers, employees, attorneys and consultants in
connection with contractual agreements that do not reduce the shares available
under the shareholder’s approved plans. The following paragraphs summarize these
contractual stock options.
In
January 2004, members of the law firm of Fefer, Petersen & Cie, general
corporate counsel (of which one member was a director of the Company at the
time) were granted two-year contractual options to purchase 189,300 shares of
common stock at a price of $2.00 per share as partial compensation for services
rendered, valued at $68,296. As represented in the note captioned “Stockholders’
Equity”, these members also received 116,700 warrants as consideration of
pre-merger Tamboril debt (the amount cited in “Stockholders’ Equity” is actually
233,400 because another party received the same number of warrants for a total
of 233,400 warrants). In August 2004, $1.00 of the exercise price of the total
306,000 options and warrants owned by these members was considered paid in
advance in consideration of unbilled legal services provided by the firm. The
Company recorded $306,000 related to this reduction. All of the warrants and
options were exercised in the fourth quarter of 2005, however; $306,000 of the
amount is included in stock subscription receivable as of December 31, 2005 and
was received in 2006.
In July
2004, the Company’s President and Chief Operating Officer at that time, Charles
Mazzacato, was granted a contractual option to purchase 240,000 shares of common
stock at a price of $4.00 per share. This option vests on a monthly basis at the
rate of 60,000 shares per year commencing July 31, 2005 and is exercisable for
five years after each vesting date. The market value of the Company stock at the
date of grant was greater than the exercise price which resulted in a total
intrinsic value of $180,000. In accordance with APB 25 the Company expensed the
intrinsic value over the vesting period which resulted in expense of $18,750 and
$45,000 during the years ended December 31, 2004 and 2005, respectively. On
January 1, 2006, the Company adopted the provisions of FASB 123R as noted above
and recorded compensation of $124,364 during the year ended December 31, 2006.
During the year ended December 31, 2006 the options were forfeited as a result
of his termination of employment from the Company in 2006.
In July
2004, the Company’s Chief Financial Officer at that time, Peter Roston, was
granted a contractual option to purchase 200,000 shares of common stock at a
price of $4.00 per share. This option will vest on a monthly basis at the rate
of 50,000 shares per year commencing July 31, 2005 and is exercisable for five
years after each vesting date. The market value of the Company stock at the date
of grant was greater than the exercise price which resulted in a total intrinsic
value of $150,000. In accordance with APB 25 the Company has expensed the
intrinsic value over the vesting period which resulted in expense of $15,625 and
$37,500 during the years ended December 31, 2004 and 2005, respectively. On
January 1, 2006, the Company adopted the provisions of FASB 123R as noted above
and recorded compensation of $138,182 during the year ended December 31, 2006.
During the year ended December 31, 2006 the options were forfeited as a result
of his termination of employment from the Company in 2006.
In April
2005, the Company’s Chief Executive Officer, Thomas Granville, was granted a
contractual option to purchase 180,000 shares of common stock at a price of
$2.50 per share. This option vests at the rate of 7,500 shares per month
commencing May 1, 2005 and is exercisable for five years after each vesting
date. The market value of the Company stock at the date of grant was less than
the exercise price which resulted in no intrinsic value in accordance with APB
25. On January 1, 2006, the Company adopted the provisions of FASB 123R as noted
above and recorded compensation of $112,500 during the year ended December 31,
2006.
In April
2005, a European financial advisor was granted a contractual option to purchase
30,000 shares of common stock at a price of $2.50 per share. Options for an
aggregate of 20,000 shares vested during the year ended December 31, 2005 and
will be exercisable for two years. On December 31, 2005, a total of 10,000
unvested options were forfeited when the advisory agreement was terminated. The
options were valued at $35,998 using the Black-Scholes-Merton option pricing
model and included as expense in 2005.
In
September 2005, the Company’s Chief Technical Officer, Edward Buiel, was granted
a contractual option to purchase 90,000 shares of common stock at a price of
$4.00 per share. This option vests at the rate of 2,500 shares per month
commencing October 2005 and is exercisable for five years after each vesting
date. The market value of the Company stock at the date of grant was less than
the exercise price which resulted in no intrinsic value in accordance with APB
25. On January 1, 2006, the Company adopted the provisions of FASB 123R as noted
above and recorded compensation of $68,100 during the year ended December 31,
2006.
91
In
February 2006, the Company’s Chief Executive Officer, Thomas Granville, was
granted an option to purchase 500,000 shares of common stock at an exercise
price of $6.00. Of this total 300,000 options vested immediately and the balance
is expected to vest, subject to the attainment of certain specified objectives,
over the next one to three years. These options are valued at $300,187 utilizing
the Black-Scholes-Merton option pricing model with $259,027 of compensation
recorded in 2006.
In
February 2006, the Company’s, Chief Technical Officer, Edward Buiel, was granted
an option to purchase 35,000 shares of common stock at an exercise price of
$6.00. Of this total 10,000 options vested immediately and the balance is
expected to vest, subject to the attainment of certain specified objectives,
over the next two to three years. These options are valued at $20,994 utilizing
the Black-Scholes-Merton option pricing model with $13,330 of compensation
recorded in 2006.
In
February 2006, members and affiliates of the law firm of Fefer, Petersen &
Cie, general corporate counsel (of which one member was a director of the
Company at the time) were granted an option to purchase 360,000 shares of common
stock at an exercise price of $6.00. Of this total 240,000 options vested
immediately and the balance will vest at the rate of 10,000 shares per month
during the year ended December 31, 2006. These options are valued at $193,449
utilizing the Black-Scholes-Merton option pricing model and are recorded as
legal expense in 2006.
In
February 2006, the Company’s external bankruptcy counsel, Cecilia Rosenauer, was
granted an option to purchase 15,000 shares of common stock at an exercise price
of $6.00. The options vested on the effective date of Mega-C’s Chapter 11 plan
of reorganization, which took place in November 2006. These options are valued
at $2,483 utilizing the Black-Scholes-Merton option pricing model and are
recorded as legal expense in 2006.
In March
2006, two employees were granted options to purchase a total of 24,000 shares of
common stock at an exercise price of $4.00 and $6.00. The options vest at a rate
of 2,500 per month over the first 6 months and 1,500 per month thereafter. These
options are valued at $28,257 utilizing the Black-Scholes-Merton option pricing
model with $24,408 of compensation recorded in 2006.
In
December 2006, the Company’s Chief Technical Officer, Edward Buiel, was granted
a contractual option to purchase an additional 100,000 shares of our common
stock at a price of $3.75 per share. A total of 50,000 options will vest on
December 29, 2009 and the remaining 50,000 will vest on December 29,
2010. The options will be exercisable for a period of six years from the
vesting date. These options are valued at $267,372, utilizing the
Black-Scholes-Merton option pricing model with $6,481 of compensation recorded
in 2006.
In
February 2006, a consultant, Trey Fecteau, was granted an option to purchase
97,000 shares of common stock at an exercise price of $4.00. The options vested
upon completion of contractual services in December 2006. These options are
valued at $150,702 utilizing the Black-Scholes-Merton option pricing model. This
amount reduced the proceeds of the Series A Preferred Stock offering in
2006.
In
January 2007, Walker Wainwright, a director of the Company, was granted an
option to purchase 40,000 shares of common stock at an exercise price of $5.00
as compensation for services related to due diligence, negotiation and sale of
the 2006 Series A Preferred Stock offering. These three-year options were
immediately vested on the date of grant, and are valued at $52,230 utilizing the
Black-Scholes-Merton option pricing model and are recorded as offering costs in
2007.
In August
2007, the Company’s Chief Financial Officer at that time, Andrew Carr Conway,
Jr., was granted a contractual option to purchase 80,000 shares of common stock
at an exercise price of $4.50. 20,000 vested immediately upon contract inception
and the remainder vest at a rate of 10,000 per month over the life of his
six-month employment contract. These two-year options are valued at $37,356
utilizing the Black-Scholes-Merton option pricing model with $24,904 recorded as
compensation in 2007.
In
December 2007, the Company’s Vice-President of Manufacturing Engineering, Robert
Nelson, was granted a contractual option to purchase 108,000 shares of common
stock at an exercise price of $5.00. The options vest at a rate of 3,000 per
month over a three year period, but are being amortized over the term of his two
year employment contract. These five-year options are valued at $108,504
utilizing the Black-Scholes-Merton option pricing model with $4,521 recorded as
compensation in 2007.
92
In March
and June 2008, the Company’s Chief Financial Officer at that time, Andrew Carr
Conway, Jr., was granted a contractual option to purchase 40,000 shares of
common stock at an exercise price of $4.50. All of these options were vested by
June 2008. These options are valued at $20,625 utilizing the
Black-Scholes-Merton option pricing model with $20,625 recorded as compensation
in 2008.
In June
2008, our Chief Executive Officer, Thomas Granville, was granted a contractual
option to purchase an additional 90,000 shares of our common stock at a price of
$2.50 per share. The options vest prorated over the 24-month term of his
contract, and are exercisable for a period of five years from the vesting date.
These options are valued at $79,872, utilizing the Black-Scholes-Merton option
pricing model with $23,296 of compensation expected to be recorded in
2008.
In June
2008, our Chief Technical Officer, Edward Buiel, was granted a contractual
option to purchase an additional 100,000 shares of our common stock at a price
of $2.50 per share. The options cliff vest on May 31, 2011, and are exercisable
for a period of five years from the vesting date. These options are valued at
$95,436, utilizing the Black-Scholes-Merton option pricing model with $18,557 of
compensation expected to be recorded in 2008.
In June
2008, our Chief Financial Officer at that time, Donald Hillier, was granted
an option to purchase 180,000 shares of our common stock. The exercise price of
the option is $2.50 per share and the option vests at the rate of 5,000 shares
per month through the term of the Employment Agreement and are exercisable for a
period of 5 years from the vesting date. These options are valued at $179,244,
utilizing the Black-Scholes-Merton option pricing model with $34,853 of
compensation expected to be recorded in 2008.
In June
2008, three employees were granted contractual options to purchase 200,000
shares of our common stock at a price of $2.50 per share. 5,000 of these options
vested in June upon execution of the employment contracts, with the balance
cliff vesting on June 15, 2011, and are exercisable for a period of three years
from the vesting date. These options are valued at $165,041, utilizing the
Black-Scholes-Merton option pricing model with $34,222 of compensation expected
to be recorded in 2008.
In
December 2008, seven employees were granted contractual options to purchase an
additional 179,500 shares of our common stock at a price of $2.50 per share.
43,500 of these options vested in December upon execution of the employment
contracts, with the balance vesting over the life of these contracts and are
exercisable for a period of three years from the vesting date. These options are
valued at $36,171, utilizing the Black-Scholes-Merton option pricing model with
$5,330 of compensation recorded in 2008.
In
January 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 2009 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 of expense recorded during
2009.
The
Company uses the Black-Scholes-Merton Option Pricing Model to estimate the fair
value of awards on the measurement date using the weighted average assumptions
noted in the following table:
Year
|
Interest Rate
|
Dividend Yield
|
Expected Volatility
|
Expected Life
|
|||||||||||
2004
|
3.8 | % | 0.0 | % | 59.1 | % |
60
months
|
||||||||
2005
|
4.0 | % | 0.0 | % | 52.0 | % |
100
months
|
||||||||
2006
|
4.7 | % | 0.0 | % | 53.6 | % |
45
months
|
||||||||
2007
|
3.9 | % | 0.0 | % | 54.4 | % |
62
months
|
||||||||
2008
|
2.8 | % | 0.0 | % | 51.4 | % |
58
months
|
||||||||
2009
|
2.0 | % | 0.0 | % | 53.0 | % |
80
months
|
Expected
volatilities are calculated based on the historical volatility of the Company’s
stock since its listing on the public markets. Management has determined that it
cannot reasonably estimate a forfeiture rate given the insufficient amount of
time and activity of share option exercise and employee termination patterns.
The expected life of options represents the period of time that options granted
are expected to be outstanding was determined using the contractual term. The
risk-free interest rate for periods within the expected life of the option is
based on the interest rate for a similar time period of a U.S. Treasury note in
effort on the date of the grant.
93
The
following table provides consolidated summary information on the Company’s
equity compensation plans for the years ended December 31, 2004, 2005, 2006,
2007, 2008, and 2009.
2004
|
||||||||||||||||||||
Weighted Average
|
||||||||||||||||||||
All Plan & Non-
Plan Compensatory Options
|
Number of
Options
|
Exercise
|
Fair Value
|
Remaining
Life (years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||||
Options outstanding at December 31,2003
|
- | $ | 0.00 | $ | $0.00 | |||||||||||||||
Granted
|
736,350 | $ | 3.53 | $ | $2.87 | |||||||||||||||
Exercised
|
- | $ | 0.00 | $ | $0.00 | |||||||||||||||
Forfeited
or lapsed
|
- | $ | 0.00 | $ | $0.00 | |||||||||||||||
Options
outstanding at December 31,2004
|
736,350 | $ | 3.53 | $ | $2.87 | 6.34 |
2005
|
||||||||||||||||||||
Weighted Average
|
||||||||||||||||||||
All Plan & Non-
Plan Compensatory Options
|
Number of
Options
|
Exercise
|
Fair Value
|
Remaining
Life (years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||||
Options
outstanding at December 31,2004
|
736,350 | $ | 3.53 | $ | $2.87 | |||||||||||||||
Granted
|
1,254,500 | $ | 2.48 | $ | $1.34 | |||||||||||||||
Exercised
|
(358,865 | ) | $ | 1.65 | $ | $2.32 | ||||||||||||||
Forfeited
or lapsed
|
(182,100 | ) | $ | 3.04 | $ | $1.44 | ||||||||||||||
Options
outstanding at December 31,2005
|
1,449,885 | $ | 3.12 | $ | $1.86 | 7.73 |
2006
|
||||||||||||||||||||
Weighted Average
|
||||||||||||||||||||
All Plan & Non-
Plan Compensatory Options
|
Number of
Options
|
Exercise
|
Fair Value
|
Remaining
Life (years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||||
Options
outstanding at December 31,2005
|
1,449,885
|
$
|
3.12
|
$
|
1.86
|
|||||||||||||||
Granted
|
1,191,000
|
$
|
5.42
|
$
|
0.82
|
|||||||||||||||
Exercised
|
-
|
$
|
0.00
|
$
|
0.00
|
|||||||||||||||
Forfeited
or lapsed
|
(894,000
|
)
|
$
|
3.24
|
$
|
1.94
|
||||||||||||||
Options
outstanding at December 31,2006
|
1,746,885
|
$
|
4.65
|
$
|
1.035
|
3.70
|
$
|
634,903
|
||||||||||||
Options
exercisable at December 31,2006
|
1,192,385
|
$
|
5.11
|
$
|
0.97
|
2.90
|
$
|
254,903
|
2007
|
||||||||||||||||||||
Weighted Average
|
||||||||||||||||||||
All Plan & Non-Plan Compensatory
Options
|
Number of
Options
|
Exercise
|
Fair Value
|
Remaining
Life
(years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||||
Options
outstanding at December 31,2006
|
1,746,885
|
$
|
4.65
|
$
|
1.03
|
|||||||||||||||
Granted
|
228,000
|
$
|
4.82
|
$
|
0.87
|
|||||||||||||||
Exercised
|
-
|
$
|
0.00
|
$
|
0.00
|
|||||||||||||||
Forfeited
or lapsed
|
(124,000
|
)
|
$
|
2.50
|
$
|
1.14
|
||||||||||||||
Options
outstanding at December 31,2007
|
1,850,885
|
$
|
4.81
|
$
|
1.00
|
1.5
|
$
|
18,000
|
||||||||||||
Options
exercisable at December 31,2007
|
1,442,385
|
$
|
4.88
|
$
|
0.93
|
2.0
|
$
|
6,000
|
94
2008
|
||||||||||||||||||||
Weighted Average
|
||||||||||||||||||||
All Plan & Non-Plan Compensatory
Options
|
Number of
Options
|
Exercise
|
Fair Value
|
Remaining
Life
(years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||||
Options
outstanding at December 31,2007
|
1,850,885
|
$
|
4.81
|
$
|
1.00
|
|||||||||||||||
Granted
|
969,055
|
$
|
2.38
|
$
|
0.73
|
|||||||||||||||
Exercised
|
-
|
$
|
0.00
|
$
|
0.00
|
|||||||||||||||
Forfeited
or lapsed
|
-
|
$
|
0.00
|
$
|
0.00
|
|||||||||||||||
Options
outstanding at December 31,2008
|
2,819,940
|
$
|
3.98
|
$
|
0.91
|
3.1
|
$
|
0
|
||||||||||||
Options
exercisable at December 31,2008
|
1,831,690
|
$
|
4.75
|
$
|
0.90
|
1.4
|
$
|
0
|
2009
|
||||||||||||||||||||
Weighted Average
|
||||||||||||||||||||
All Plan & Non-Plan Compensatory
Options
|
Number of
Options
|
Exercise
|
Fair Value
|
Remaining
Life
(years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||||
Options
outstanding at December 31,2008
|
2,819,940
|
$
|
3.98
|
$
|
0.91
|
|||||||||||||||
Granted
|
164,565
|
$
|
1.64
|
$
|
0.70
|
|||||||||||||||
Exercised
|
-
|
$
|
-
|
$
|
-
|
|||||||||||||||
Forfeited
or lapsed
|
(1,101,035)
|
$
|
5.71
|
$
|
0.68
|
|||||||||||||||
Options
outstanding at December 31, 2009
|
1,883,470
|
$
|
2.77
|
$
|
1.02
|
4.1
|
$
|
51,890
|
||||||||||||
Options
exercisable at December 31, 2009
|
1,077,155
|
$
|
3.16
|
$
|
1.14
|
2.9
|
$
|
10,440
|
The
following table summarizes the status of the Company’s non-vested
options:
All non-vested stock options as of December 31, 2009
|
Shares
|
Fair Value
|
||||||
Options
subject to future vesting at December 31,2008
|
988,250
|
$
|
0.93
|
|||||
Options
granted
|
164,565
|
$
|
0.70
|
|||||
Options
forfeited or lapsed
|
-
|
$
|
0.00
|
|||||
Options
vested
|
(346,500
|
)
|
$
|
0.96
|
||||
Options
subject to future vesting at December 31,2009
|
806,315
|
$
|
0.87
|
As of
December 31, 2009, there was $387,767 of unrecognized compensation related to
non-vested options. The Company expects to recognize the cost over a weighted
average period of 1.1 year. The total fair value of options vested during the
year ended December 31, 2009 was $334,201 ($300,061 during the year ended
December 31, 2008).
Note 9—Earnings/Loss Per
Share
Basic
earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
outstanding (the denominator) for the period. Diluted earnings per share 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 market price exceeds the exercise price, less shares which could have
been purchased by us with the related proceeds. In periods of losses, diluted
loss per share is computed on the same basis as basic loss per share as the
inclusion of any other potential shares outstanding would be
anti-dilutive.
Had the
Company recorded income applicable to common shareholders for the periods ended
December 31, 2003, 2004, 2005, 2006, 2007, 2008, and 2009, weighted-average
number of common shares outstanding would have increased by 785,897, 1,386,612,
2,970,730, 2,135,938, 8,975,643, 9,566,738 and 15,825,589 respectively, for the
fiscal years, reflecting the addition of dilutive securities in the calculation
of diluted earnings per share. The increase in weighted average common shares
for the cumulative period since inception (September 18, 2003 to December 31,
2009) is 7,248,564 shares.
95
Note
10 — Income Taxes Expense (Benefit)
Following
is a summary of the components giving rise to the income tax expense (benefit)
for the periods ended December 31, 2009 and 2008.
Currently
payable:
|
2009
|
2008
|
||||||
Federal
|
$
|
-
|
$
|
-
|
||||
State
|
-
|
(79,170)
|
||||||
Foreign
|
-
|
-
|
||||||
Total
currently payable
|
-
|
(79,170)
|
||||||
Deferred:
|
||||||||
Federal
|
(2,890,000)
|
2,477,000
|
||||||
State
|
(603,000)
|
821,000
|
||||||
Foreign
|
(280,000)
|
(404,000)
|
||||||
Total
deferred
|
(3,773,000)
|
2,894,000
|
||||||
Less
increase in allowance
|
3,773,000
|
(2,894,000
|
)
|
|||||
Net
deferred
|
-
|
|||||||
Total
income tax expense (recovery)
|
$
|
-
|
$
|
(79,170)
|
Individual
components giving rise to the deferred tax asset are as follows:
2009
|
2008
|
|||||||
Future
tax benefit arising from net operating loss carry forwards
|
$
|
11,502,000
|
$
|
7,927,000
|
||||
Future
tax benefit arising from available tax credits
|
1,035,000
|
734,000
|
||||||
Future
tax benefit arising from options/warrants issued for
Services
|
665,000
|
775,000
|
||||||
Other
|
78,000
|
37,000
|
||||||
Total
|
13,280,000
|
9,473,000
|
||||||
Less
valuation allowance
|
(13,280,000)
|
(9,473,000
|
)
|
|||||
Net
deferred
|
$
|
-
|
$
|
-
|
The
components of pretax net loss are as follows:
2009
|
2008
|
|||||||
United
States
|
$
|
(14,574,274)
|
$
|
(9,538,115
|
)
|
|||
Foreign
|
(4,153)
|
(35,714
|
)
|
|||||
$
|
(14,578,427)
|
$
|
(9,573,829
|
)
|
The
Company has net operating loss carry forwards of approximately $24,800,000 and
$2,800,000 available to reduce future income taxes in United States and Canada,
respectively. The United States carry forwards expire at various dates between
2024 and 2029. The Canadian carry forwards expire at various dates between 2010
and 2029. The Company also has generated Canadian tax credits related to
research and development activities. The credit, amounting to
$734,000, is available to offset future taxable income in Canada and expires at
various dates between 2024 and 2026. The Company has adopted FASB ASC 740 (Prior
Authoritative Literature: SFAS No. 109, Accounting for Income Taxes), which
provides for the recognition of a deferred tax asset based upon the value
certain items will have on future income taxes and management's estimate of the
probability of the realization of these tax benefits. The Company has determined
it more likely than not that these timing differences will not materialize and
have provided a valuation allowance against the entire net deferred tax asset.
The utilization of NOL and tax credit carry forwards from Tamboril prior to the
reorganization may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986, as
amended and similar state provisions. Accordingly, these amounts have not been
included in the gross deferred tax asset number above. In addition, due to
equity transactions that have occurred subsequent to the reorganization with
Tamboril, the utilization of NOL carry forwards may be subject to further change
in control limitations that generally restricts the utilization of the NOL per
year.
The
reconciliation of the United States statutory federal income rate and the
effective income tax rate in the accompanying consolidated statements of
operations is as follows:
96
2009
|
2008
|
|||||||
Statutory
U.S. federal income tax rate
|
(34.0)
|
%
|
(34.0
|
)%
|
||||
State
taxes, net
|
(4.1)
|
%
|
(5.5
|
)%
|
||||
Equity
based compensation
|
-
|
%
|
-
|
%
|
||||
Foreign
tax credits
|
-
|
%
|
1.9
|
%
|
||||
Foreign
currency fluctuation
|
(1.9)
|
%
|
2.5
|
%
|
||||
U.S.
tax credits
|
(0.5)
|
%
|
-
|
%
|
||||
Revaluation
of Derivatives
|
14.7
|
%
|
-
|
%
|
||||
Other
|
0.1
|
%
|
4.6
|
%
|
||||
Change
in valuation allowance
|
25.9
|
%
|
30.5
|
%
|
||||
Effective
income tax rate
|
0.0
|
%
|
0.0
|
%
|
The
Company adopted the provisions of FASB ASC 740-10 (Prior Authoritative
Literature: FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes) on January 1, 2008. As the result of the assessment the
Company has recognized no material adjustments to unrecognized tax benefits. At
the adoption date of January 1, 2008 and as of December 31, 2009, the Company
has no unrecognized tax benefits. By statute, tax years ending
December 31, 2008 through 2004 remain open to examination by the major taxing
jurisdictions to which the Company is subject.
Note
11 — Related Party Transactions
Trust for the
Benefit of the Shareholders of Mega-C Power Corp: The Trustee for The
Trust for the Benefit of the Shareholders of Mega-C Power Corp. served as an
officer of one of our consolidated companies in 2004. See discussion of the
transactions with the trust in the note captioned “Mega-C Power Corp (Mega-C),
Mega-C Trust (the Trust), The Taylor Litigation.” Effective
December 22, 2009 with the
private placement, the percentage beneficial ownership held by the Mega-C Trust
fell below 5% and is no longer a Related Party.
Transactions with
C&T: A former board member of the Company, Dr. Igor Filipenko, was
the former majority shareholder of C&T prior to the acquisition by the
Company. The Board of Directors on August 21, 2009 approved the issuance of
warrants to purchase not more than 1,600,000 shares of common stock at an
exercise price of $2.00 per share and a term of two years to the C&T Group.
On December 31, 2009 these warrants have not yet been issued pending "mutual
understanding" between the parties. On January 11, 2010, Dr. Igor
Filipenko gave notice of his resignation as a director of the Company, effective
immediately.
Related party
notes payable: During the year ending December 31, 2009, the Company
borrowed certain amounts from related parties; certain of these borrowings were
extinguished through the issuance of the Company’s common stock during the
fourth quarter of 2009. Refer to Notes captioned “Related Party Debt Financing”
and “Stockholders’ Equity” for discussion on these matters.
Senior Preferred
conversions: On December 23, 2009, based on agreements received to
convert shares using an October 30, 2009 conversion amount, two directors and
the wife of a director, converted 67,633 shares of their 8% Cumulative
Convertible Senior Preferred stock into 684,209 common shares.
Warrants:
On September 22, 2009, we entered into an Amendment to Warrants and
Securities Purchase Agreement with The Quercus Trust, amending the January 14,
2008 Warrant and Securities Purchase Agreement. The Amendment resets the
exercise price for warrants previously issued to Quercus from $2.60 per share to
$0.75 per share. On December 15, 2009 In Amendment No. 2 to the Securities
Purchase Agreement, The Quercus Trust agreed to waive further anti-dilution
rights on its warrants to purchase our common stock below an exercise price
of $0.75 per share subject to the close of the Private Placement which occurred
on December 22, 2009.
Note 12-
Supplemental Cash Flow Information
The
following table provides summary information on our significant non-cash
investing and financing transactions during the twelve-month periods ended
December 31, 2009 and 2008.
97
2009
|
2008
|
|||||
Dividend
accrued to preferred stock – Senior
|
$
|
126,497
|
$
|
141,359
|
||
Dividend
accrued to preferred stock – Series A
|
$
|
909,819
|
$
|
976,341
|
||
Beneficial
conversion feature on preferred stock
|
$
|
3,010,517
|
$
|
-
|
||
Warrants
issued for commission on sale of stock
|
$
|
-
|
$
|
1,193,735
|
||
Warrants
issued in lieu of liquidated damages
|
$
|
45,380
|
$
|
-
|
||
Placement
fees payable in shares
|
$
|
410,209
|
$
|
-
|
||
Interest
converted to common stock
|
$
|
13
|
$
|
7,768
|
||
Origination
fees issued with related party note
|
$
|
105,666
|
$
|
7,500
|
||
Notes
payable converted to common stock
|
$
|
371,366
|
$
|
1,072,916
|
||
Satisfaction
of 2006 Liability to issue stock
|
$
|
-
|
$
|
103,340
|
||
Fair
value of warrants issued with related party note
|
$
|
34,002
|
$
|
563,868
|
Cash
payments for interest during the year ended December 31, 2009 were $46,382. Cash
payments for interest during the year ended December 31, 2008 were
$269,274.There were no payments of income taxes during the years ended December
31, 2009 and 2008.
Note 13— Mega-C Power Corp (Mega-C), Mega-C Trust (the Trust), The Taylor
Litigation
Mega-C Power Corp
Business and Trust rationale: Mega-C Power Corporation was a Nevada
corporation that previously held limited and non-exclusive license rights to the
technology that APC licensed from C&T and that the Company purchased from
C&T [as discussed in the note captioned “Transactions with a related party
(C&T). Mega-C had ceased substantive operations as a result of the
investigation of the promoters and management by the Ontario Securities
Commission (OSC) in the spring of 2003 and was placed into an involuntary
bankruptcy in April, 2004, as further described below.
Trust
Creation: The Trust was created on December 31, 2003, in connection with
a reverse acquisition between APC and the Company, through its public shell then
known as Tamboril Cigar Company, in response to the potential perceived equities
of the Mega-C shareholders and risks of the situation. APC’s founders believed
that the investors in Mega-C might be able to assert a variety of equitable
claims to the energy storage technology the Company acquired from C&T. The
Trust document required that when the Trust made its distribution, the
beneficiary released any claims against all parties. Therefore, while Axion had
no control over the Trust, its mandates were believed to be an effective way to
eliminate conflicting claims to the technology. The Company’s founders were also
shareholders in Mega-C for the most part.
Trust
corpus: The original corpus of the Trust was 7,327,500 shares of the
common stock that APC’s shareholders had rights to in connection with the
reverse acquisition on December 31, 2003. In connection with the execution of
the Amended and Restated Trust Agreement in February 2005, which formally
recognized the jurisdiction of the bankruptcy court on all matters, Axion issued
500,000 additional shares to the Trust. There was no contingency surrounding the
issuance of these shares at that time. This issuance was intended to be Axion’s
contribution to the Trust to obtain clear title to the technology and resolve
all related matters and was charged to operating expense during the year ended
December 31, 2005. The stock issuance transaction was valued at $1,525,000,
which was the value of the shares on the date of issuance.
As a
result of the bankruptcy court’s confirmation of a Chapter 11 Plan and the
substantial consummation of the confirmed plan in November 2006 the settlement
disclosed below became effective and 1,500,000 shares were returned to the
Company for cancellation in 2006, of which 1,000,000 represented a retroactive
adjustment to the shares issued in the reverse acquisition in December 31, 2003
and 500,000 shares represented a return of the 2005 augmentation. The return in
2006 was the result of a negotiated settlement and there were no contingencies
surrounding the Trust shares in 2005 or 2006. The 500,000 shares recovered were
recorded as a reversal of the expense at fair value on the date of return in
2006 amounting to $1,125,000 and were promptly cancelled as were the 1,000,000
shares.
98
Trust
Operations: The Trust did not conduct any substantive operations because,
as described below, Mega-C was placed into involuntary bankruptcy shortly after
the Trust’s inception. As a result of the confirmation of Mega-C’s plan of
reorganization by an order entered on November 8, 2008 and the substantial
consummation of the confirmed plan on November 21, 2006, as described below, the
Trust is now governed by a court appointed Trustee along with a court appointed
Board from the Trust’s beneficiaries.
The Trust for the
Benefit of the Shareholders of Mega-C Power Corp. Analysis of
Consolidation: Under FASB Interpretation No. 46 (revised December 2003)
Consolidation of Variable
Interest Entities an interpretation of ARB No. 51, (FIN 46R), reporting
companies are required to consolidate a related variable interest entity (“VIE”)
when the reporting company is the “primary beneficiary” of that entity and holds
a variable interest in the VIE. The determination of whether a reporting company
is the primary beneficiary of a VIE ultimately stems from whether the reporting
entity will absorb a majority of the VIE’s anticipated losses or receive a
majority of the VIE’s anticipated gains.
Variable Interest
Entity: The Trust may be a variable interest entity because it has
required outside infusions of cash over its existence.
Variable
Interest: The Company analyzed its transactions with and relationship to
the Trust and concluded that it may have had a very small variable interest in
the Trust based on its obligation to perform the acts necessary to have the SEC
declare a registration statement effective. Further, Axion appeared to have had
a limited variable interest based on its obligation, pursuant to the
requirements in the Trust instrument that Axion pay Trust expenses until the
required registration statement was declared effective. However, in reality,
Axion never paid any significant Trust expenses for three reasons: (1) while the
Trust included a provision for payment of expenses, no significant expenses were
ever paid, (2) the Trust suspended operations on April 4, 2004 when Mega-C Power
Corp. entered bankruptcy; and (3) the explicit obligation the Company had to pay
certain expenses of the Trust ended on January 7, 2005 when the required
registration statement was declared effective. The Company’s relationship to and
transactions with the Trust, based on actual transactions, constituted a very
small variable interest, if any, compared to other entities who provided much
larger amounts of support to the Trust, for which the Company had no
responsibility. Further no shares were expected to be returned to Axion at the
time these assessments were made. The relative size of the variable interest is
relevant to the determination of the primary beneficiary, as discussed
below.
Primary
Beneficiary: Axion did not and will not absorb a majority of the Trust’s
anticipated losses or derive the benefit of a majority of the Trust’s gains, if
any, at any time. The primary beneficiary, at the time of assessment, based on
an assessment of what entity (entities) absorbs a majority of the entity’s
expected losses, receives a majority of its expected residual returns, or both,
as a result of holding variable interests, was the creditors and shareholders of
Mega-C Power Corp, as a group. These were the entities, as groups, who would be
affected by increases and decreases in the Trust’s primary asset, the Axion
stock. These two groups will also suffer a diminution in assets available for
distribution to them because of the expenses the Trust incurs. The increases and
decreases in the value of the Axion stock in the Trust will have no effect on
Axion. Axion may have had a very limited obligation in the first quarter of 2004
but few, if any, expenses were incurred by the Trust in that quarter. In the
second quarter, Mega-C Power Corp. entered bankruptcy and the Trust became
dormant and, effectively, under the jurisdiction of the Bankruptcy Court. Upon
registration of the Trust shares in January 2005 Axion’s obligation to the Trust
ended except as described below relative to possible registration of
shares.
Based on
the above, Axion was not the primary beneficiary and accordingly, Axion is not
required to consolidate the Trust. Axion’s relationship with the Trust ended
when the Bankruptcy Court in Reno confirmed the bankruptcy plan in 2006 except
as described below relative to possible registration of shares. (See “Settlement
Agreement” below)
Trust
Registration Rights: The Company registered
7,327,500 shares of common stock held by the Mega-C Trust by a registration
statement the SEC declared effective January 7, 2005. Pursuant to the
confirmed Chapter 11 Plan (See footnote captioned “Subsequent Events”), as
referenced above, the Company may be required to register 5,700,000 of those
shares (the "Plan Funding Shares") which fund the Chapter 11 Plan. The
Company filed a post-effective amendment relating to the resale or other
disposition of 1,627,500 shares, of which, 1 million represent a portion of the
Plan Funding Shares and 627,500 represent shares to pay expenses of the Trust.
In paragraph 1(d) of the Settlement Agreement, the Company further agreed to
file such additional registration statements or post-effective amendments as may
be necessary or desirable to facilitate or accommodate the sale or distribution
of 4,700,000 of those shares. The Settlement Agreement was incorporated and
approved in its entirety in paragraph 6.1 of the Second Amended Plan, which
further provided in paragraph 6.12 that the Second Amended Shareholder Trustee
and the Liquidation Trustee have the right and power to request that the Company
file such amendments to the registration statement for the Plan Funding
Shares.
99
Taylor
Litigation: On February 10, 2004, Lewis “Chip” Taylor, Chip Taylor in
Trust, Jared Taylor, Elgin Investments, Inc. and Mega-C Technologies, Inc.
(collectively the “Taylor Group”) filed a lawsuit in the Ontario Superior Court
of Justice Commercial List (Case No. 04-CL-5317) that named Tamboril, APC, Rene
Pardo, Marvin Winick, Kirk Tierney, Joseph Piccirilli, Ronald Bibace, Robert
Averill, James Smith, James Eagan, Thomas Granville, Joseph Souccar, Glenn W.
Patterson, Canadian Consultants Bureau Inc., Robert Appel, Harold Rosen, Igor
Filipenko, Valeri Shtemberg, Yuri Volfkovich, Pavel Shmatko, Michael
Kishinevsky, Mega-C Power Corporation (Nevada), Mega-C Power Corporation
(Ontario), C&T, Turitella Corporation, Gary Bouchard, Fogler Rubinoff LLP,
Netprofitetc Inc., 503124 Ontario Ltd., HAP Investments LLC, Infinity Group LLC,
James Keim, Benjamin Rubin and John Doe Corporation as defendants. Although the
complaint alleges a number of complex and intersecting causes of action, it
appears that with respect to the Company and certain of its directors, officers
and stockholders, the lawsuit alleged a conspiracy to damage the value of the
Taylor Group’s investment in Mega-C and deprive the Taylor Group of its alleged
interests in the technology based on an alleged “oral” agreement, as well as
damages of $250,000,000.
Based on
orders entered in the Bankruptcy Court on February 11, 2008, management believes
that this litigation against the Company is resolved, as set forth more fully in
the section entitled “Settlement Agreement and Confirmed Chapter 11
Plan.”
Mega-C Bankruptcy
Court Litigation:
As described above, shortly after the formation of the Trust, Lewis “Chip”
Taylor, Chip Taylor in Trust, Elgin Investments, Jared Taylor and Mega-C
Technologies filed suit against Axion and APC’s founders (the “Taylor
Litigation”). The Company, APC and Thomas Granville filed an involuntary Chapter
11 petition against Mega-C in the U.S. Bankruptcy Court for the District of
Nevada (Case No. BK-N-04-50962-gwz).
In
February 2005, the Bankruptcy Court stayed the Taylor Litigation pending
resolution of Mega-C’s Chapter 11 bankruptcy case. In March 2005, the Bankruptcy
Court appointed William M. Noall to serve as Chapter 11 Trustee for the Mega-C
case. On June 7, 2005, the Chapter 11 Trustee commenced an adversary proceeding
against Sally Fonner, the trustee of the Trust (Adversary Proceeding No.
05-05042-gwz), demanding, among other things, the turnover of at least 7,327,500
shares of the Company’s stock held by the Trust as property of the bankruptcy
estate.
On July
27, 2005, the Company commenced an adversary proceeding against the Chapter 11
Trustee and Ms. Fonner (Adversary Proceeding No. 05-05082-gwz) for the purpose
of obtaining a judicial determination that as of the petition
date:
·
|
Mega-C's license to commercialize
the technology was
terminated;
|
·
|
Mega-C does not have any interest
in the technology;
|
·
|
Mega-C did not transfer any
property to the Company with the intent to damage or defraud any
entity;
|
·
|
Mega-C did not transfer any
property to the Company for less than reasonably equivalent value;
and
|
|
·
|
If the court ultimately decides
that Mega-C has a valid legal interest in the technology, then the Company
is entitled to terminate the Trust. Further, Axion amended its complaint
in September 2005 to assert its legal right to have the Trustee of the
Mega-C Trust hold the assets of the Trust for the benefit of the Company
in the event the bankruptcy court were to grant the Chapter 11 Trustee's
request for turnover of the Trust assets and to set aside the
Trust. Among other things these theories made it necessary to name
Sally A. Fonner as a defendant in the
lawsuit.
|
Settlement
Agreement and Confirmed Chapter 11 Plan: On December 12, 2005, the
Company entered into a settlement agreement with Mega-C, represented by its
Chapter 11 Trustee William M. Noall ("Noall"), and the Trust, represented by its
trustee Sally A. Fonner ("Fonner"). Additional signatories to the settlement
agreement include: (a) the Company's subsidiaries APC and C&T; (b)
Fonner in both her capacity as Mega-C's sole officer and director and as trustee
of the Trust; (c) certain former stockholders of APC including Robert
Averill, Joe Piccirilli, Canadian Consultants Bureau Inc., James Smith, James
Eagan, Tom Granville, Joe Souccar, HAP Investments, LLC, Glenn Patterson, Igor
Filipenko, Ron Bibace, Kirk Tierney, Infinity Group, LLC, James Keim and
Turitella Corporation; (d) Paul Bancroft, and (e) certain former
stockholders of C&T including, Yuri Volkovich, Pavel Shmatko, Albert
Shtemberg, Edward Shtemberg, C&T Co., Inc. in Trust, Oksana Fylypenko,
Andriy Malitskiy, Valeri Shtemberg, Yuri Shtemberg, Victor Eshkenazi, Miraslav
E. Royz, and Rimma Shtemberg.
100
The
settlement agreement was approved by the Bankruptcy Court after a hearing in an
order dated February 1, 2006. Certain terms were subject to confirmation and
effectiveness of Mega-C's Chapter 11 plan of reorganization. On November 8,
2006, the Bankruptcy Court entered an order confirming the plan which was
subsequently substantially consummated on November 21, 2006. The settlement
agreement was fully incorporated in the confirmed Chapter 11 plan. At the date
of these financial statements, the plan is fully effective and substantially
consummated. Accordingly, all pending and potential disputes between the
parties to the Settlement Agreement have been resolved. In summary, the
following steps have been accomplished:
|
·
|
The Company has compromised and
withdrawn its notes receivable from Mega-C to an allowed unsecured
claim of $100;
|
|
·
|
Mega-C
has assigned all of its right, title and interest, if any, in the
technology and any and all tangible and intangible personal property in
the Company's possession to the
Company;
|
|
·
|
The Trust has been restated and
retained 4,700,000 shares that will be sold to pay creditor claims that
remain unsatisfied from the Liquidation Trust described below, with the
balance to be proportionately distributed to the holders of allowed equity
interests in Mega-C in connection with the implementation of Mega-C's
Chapter 11 plan. It is also the owner of 685,002 share certificates
which serve as collateral for loans paid to the newly created Liquidation
Trust in the amount of
$2,055,000;
|
|
·
|
A newly created Liquidation Trust
received the proceeds of loans in the amount of $2,055,000, secured by
685,002 shares and has legal title to 314,998 shares that will be sold to
pay creditor claims and Liquidation Trust
expenses.
|
|
·
|
The former trustee of the Trust
has received 627,500 shares as compensation by the Trust through the
effective date of Mega-C's plan;
and
|
|
·
|
The Trust surrendered 1,500,000
shares to the Company which were promptly cancelled as discussed under
“Trust corpus” above.
|
The
litigation settlement and releases provided by the plan, which are as broad as
the law allows, are now binding on Mega-C, the Chapter 11 trustee, the Taylor
Group and all other parties described in the plan of reorganization. The plan
requires the Liquidation Trustee or the Second Amended Shareholders Trustee to
seek dismissals of the Taylor litigation to the extent the litigation asserts
derivative or other causes of action that belong to the Chapter 11 estate of
Mega-C.
While
certain aspects of the litigation discussed above are on appeal to the Ninth
Circuit Court of Appeals and to the United States District Court for the
District of Nevada, management believes the possibility of any adverse decision
to the Company to be remote.
In orders
entered on February 11, 2008, the Bankruptcy Court held that the alleged “oral”
agreement creating rights or interests in the Technology in favor of the Taylor
Group never existed and, even if it had, the Taylor Group transferred any such
rights to the Debtor which were then transferred to the Company by the confirmed
Chapter 11 Plan. The Bankruptcy Court held that the Taylor Group has no interest
in or rights to the Technology. The Bankruptcy Court held that the only rights
the Taylor Group has are as putative creditors or shareholders of Mega-C and
that any attempts to claim an interest in or contest the Company’s title to the
Technology are contrary to the permanent injunction of the Chapter 11
Plan.
Future Litigation
Costs: No amounts have been accrued in the accompanying balance sheet
related to future litigation costs. Protracted litigation or higher than
anticipated costs could significantly reduce available working capital and have
a material adverse impact on the company’s financial condition.
Notes
Receivable-Mega-C: The Company advanced funds to Mega-C over the years
from 2003 to 2005. The Company considered these notes impaired, by recording an
allowance for doubtful accounts, in an amount equal to the aggregate of the
advances, net of certain repayments, against the Mega-C advances as the advances
were made.
Because
of the uncollectibility of the Mega-C receivable, as confirmed by the above
described transactions and events, the Company recorded a recovery of notes
receivable previously written off in November of 2006 in the amount of $100 as
well as other assets received from Mega-C Power Corp. The other assets received,
primarily miscellaneous fixed assets, have been determined to be negligible in
value and no attempt has been made to secure an appraisal or record any amounts
for these assets. Most importantly, the confirmation of the plan of
reorganization conveyed all of Mega C’s right, title and interest, if any, in
the technology to the Company, thereby resolving a significant challenge to the
Company’s ownership of the technology.
101
Note 14 — Commitments and
Contingencies and Significant Contracts
Facilities
In April of 2008, the Company signed a new lease that added to our existing
space at our manufacturing plant in New Castle, Pennsylvania. Rent expense for
this plant amounted to approximately $194,000 and $202,000 for the years ended
December 31, 2009 and 2008, respectively. On March 28, 2010, we entered into a
new lease for the space for the period commencing April 3, 2010 with a monthly
rental payment of $16,700 (fixed for the initial term of the lease) and a term
of three years, with two successive five-year renewal options and with future
rent to be negotiated at a commercially reasonable rate. In addition to the
monthly rental, we are obligated to pay all required maintenance costs, taxes
and special assessments, maintain public liability insurance in the amount of $1
million, and maintain fire and casualty insurance for an amount equal to 100% of
the replacement value of the leased premises.
In
December 2008, we signed a letter agreement to sublease from a current tenant on
a month-to-month basis a building consisting of 54,000 square feet in New
Castle, Pennsylvania. Monthly rental for this space is $19,300 on a monthly
basis, subject to an annual inflation adjustment in January of each
year. In addition to the monthly rental, we are obligated to pay all
required maintenance costs, taxes and special assessments, maintain public
liability insurance, and maintain fire and casualty insurance for an amount
equal to 100% of the replacement value of the leased premises. Rent
expense for this facility amounted to $232,000 and $53,000 for the years ended
December 31, 2009 and 2008, respectively. This month-to-month rental agreement
continues until the earlier of (1) purchase of the building by the Company or a
third party; (2) termination of the letter agreement by either party; or (3)
December 31, 2010.
Employment
Agreements: We have entered into executive employment
agreements with Thomas Granville, Edward Buiel, Andrew Carr Conway, Jr., Robert
Nelson and Donald T. Hillier, however our agreement with Mr. Conway terminated
on July 4, 2008 and the agreement with Mr. Hillier terminated on February 5,
2010. These agreements generally require each executive to devote substantially
all of his business time to our affairs, establish standards of conduct,
prohibit competition with our company during their term, affirm our rights
respecting the ownership and disclosure of patents, trade secrets and other
confidential information, provide for the acts and events that would give rise
to termination of such agreements and provide express remedies for a breach of
the agreement. Each of our executives will participate, without cost, in our
standard employee benefit programs, including medical/hospitalization insurance
and group life insurance, as in effect from time to time. Each of the covered
executives will generally receive an automobile allowance and reimbursement for
all reasonable business expenses incurred by him on behalf of the Company in the
performance of his duties. The provisions of the individual agreements set forth
in the following table:
Name
|
Position
|
Date
|
Term
|
Salary
|
Options
|
Price
|
Vesting
|
Stock
|
|||||||||||||||
Thomas Granville
(1)
|
CEO
|
6/23/08
|
2-year
|
$
|
324,000
|
90,000
|
$
|
2.50
|
Monthly
|
0
|
|||||||||||||
Donald
T. Hillier
(2)
|
CFO
|
6/18/08
|
3-year
|
$
|
150,000
|
180,000
|
$
|
2.50
|
Monthly
|
90,000
|
|||||||||||||
Dr.
Edward Buiel
(3)
|
VP
and CTO
|
6/23/08
|
2-year
|
$
|
180,000
|
100,000
|
$
|
2.50
|
05/31/10
|
80,000
|
|||||||||||||
Andrew
Carr
Conway,
Jr. (4)
|
Former
CFO
|
8/31/07
|
6 months
|
$
|
180,000
|
120,000
|
$
|
4.50
|
Monthly
|
0
|
|||||||||||||
Dr.
Robert Nelson
(5)
|
VP
Mfg. Eng.
|
12/1/07
|
2-year
|
$
|
132,000
|
108,000
|
$
|
5.00
|
Monthly
|
36,000
|
1.
|
Thomas
Granville. On June
23, 2008, we entered into an Executive Employment Agreement with Thomas
Granville as Chief Executive Officer. Pursuant to this agreement, Mr.
Granville receives a monthly base salary of $27,000 for the period
commencing June 1, 2008, and terminating May 31, 2010. Mr. Granville’s
base salary is subject to annual review, and such salary is subject to
renegotiation on the basis of Mr. Granville’s and the Company’s
performance. In addition, Mr. Granville received a signing bonus of
$250,000, paid 50% within ten (10) days of the execution of the agreement
and 50% upon receipt of the final $10,000,000 investment from the Quercus
Trust. The Company also granted Mr. Granville an option to purchase 90,000
shares of our common stock at a price of $2.50 per share at a vesting rate
of 3,750 shares per month through the term of the agreement. Mr. Granville
is eligible to participate in any executive compensation plans adopted by
the shareholders of the Company and the Company's standard employee
benefit programs.
|
102
2.
|
Donald T.
Hillier.
On June 18, 2008, we entered into an Executive Employment Agreement with
Donald T. Hillier as Chief Financial Officer. Pursuant to this
agreement, Mr. Hillier received a monthly base salary of $12,500 for the
period commencing June 16, 2008, and terminating June 15, 2011. Mr.
Hillier’s employment with the Company was terminated on February 5,
2010. The Company is in the process of working out the details
of the separation with Mr. Hiller so that the termination costs, if any,
are yet to be determined. 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.
|
3.
|
Edward Buiel,
Ph.D. On June 23,
2008, we entered into an Executive Employment Agreement with Dr. Edward
Buiel as Vice President and Chief Technology Officer. Pursuant to this
agreement, Dr. Buiel receives a monthly salary of $15,000 for the period
commencing June 1, 2008 and terminating May 31, 2010. Dr. Buiel’s base
salary is subject to annual review, and such salary is subject to
renegotiation on the basis of Dr. Buiel’s and the Company’s performance.
In addition, Dr. Buiel received a signing bonus of $110,000, paid 90%
within ten (10) days of the execution of the agreement and 10% upon the
receipt of the final $10,000,000 investment from the Quercus
Trust. Also, if Dr. Buiel is still employed with the Company on
June 1, 2011, he will receive a bonus of $50,000, notwithstanding any
other bonus arrangement. The Company also reconfirmed Dr. Buiel’s option
to purchase 100,000 shares of our common stock, which had been previously
granted in his prior Executive Employment Agreement dated December 29,
2006. These existing options remain exercisable at a price of $3.75 per
share and shall vest 50% on December 29, 2009 and 50% on December 29, 2010
assuming Dr. Buiel is still employed by the company on each of those
respective dates. In addition, Dr. Buiel was granted an option to purchase
100,000 shares of our common stock in recognition of the opportunity cost
associated with the one year extension of his new Executive Employment
Agreement. These options are exercisable at a price of $2.50 per share and
shall vest on May 31, 2011. Dr Buiel was also granted 80,000shares of
common stock, of which 30,000 vests on December 29, 2009, and 50,000 will
vest on May 31, 2011. Dr. Buiel is eligible to participate in
any executive compensation plans adopted by the shareholders of the
Company and the Company's standard employee benefit programs. Certain of
these equity awards were awarded under Dr. Buiel’s 2006 employment
agreement and the terms of such awards have been incorporated into his new
Executive Employment
Agreement.
|
4.
|
Andrew C.
Conway, Jr. Under the terms of his
employment agreement effective August 2007, which had an original term of
six months, Mr. Conway received an annualized salary of $180,000, bonuses
as determined by the compensation committee and an option to purchase
10,000 shares of our common stock at a price of $4.50 per share for each
month of service. 30,000 options vested with the execution of the
contract, and the balance vest periodically over the remainder of the
contract. The contract automatically renewed for an additional six month
term ending August 31, 2008. A total of 120,000 options were awarded
under the extended contract. Mr. Conway served as the Company’s CFO
through June 2008, and his employment agreement terminated, as mutually
agreed, on July 4, 2008.
|
5.
|
Dr. Robert F.
Nelson. Under the
terms of his employment agreement effective December 2007, which has a
term of two years, Dr. Nelson receives an annual salary of $132,000 and
bonuses as determined by the compensation committee. In addition, Dr.
Nelson receives an option to purchase 108,000 shares of our common stock
at a price of $5.00 per share and 36,000 shares of restricted common
stock, each that vest over three years from the effective date of his
employment agreement.
|
We have
no retirement plans or other similar arrangements for any directors, executive
officers or employees, other than a noncontributory 401(k)
plan.
103
Purchase
Orders
On
November 3, 2008, the Company received the first release order for toll contract
manufacturing of standard flooded lead acid batteries for a large North American
lead acid battery company. The initial three types of batteries covered in this
order have successfully completed customer testing, and shipment was expected to
begin late in the fourth quarter of 2008. The order calls for the shipment of
92,250 batteries, spread fairly equally over 11 months, with a total aggregate
base purchase price of $6,400,000. Raw materials will have an agreed upon base
price with regular adjustments (not less than monthly) to account for market
price fluctuations, which could cause fluctuations in the final purchase
invoice. Due to economic conditions caused by the steep downturn in the economy,
our customer was unable to accept product based on their original delivery
schedule, resulting in only 1,500 batteries being shipped before the end of
2008. The Company, however, continued to make product and store it at our
facility. The customer has informed the Company that it intends to honor its
purchase order commitment, but in view of the current economic conditions there
is no guarantee it will be able to do so. In early March 2009, the customer
began taking delivery of the manufactured product and set up a schedule to
accept all of the remaining manufactured inventory, (approximately 13,500
batteries), by the end of April 2009. All existing production, and
future production, will take place on an ancillary "flooded battery line" so the
production will not reduce capacity from the Company’s development of its
proprietary PbC technologies, which will utilize the primary "AGM battery line"
for production. During 2009, this contract was subsequently terminated or
abandoned by the Company. The remaining inventory is being sold at
prices in excess of those which would have been paid under the
contract.
Note
15 — Subsequent Events
On
January 11, 2010, Dr. Igor Filipenko gave notice of his resignation as a
director of the Company, effective immediately.
On
January 26, 2010, a shareholder converted 100,000 Series A Preferred shares
along with accrued dividends of $525,277 into 1,426,900 shares of the Company’s
common stock.
On
February 3, 2010, 100,000 warrants issued to placement agents were exercised
pursuant to the revised terms with a total exercise price of
$57,000.
Effective
February 5, 2010, Donald Hillier was terminated as the Chief Financial Officer
of the Company. The parties are working out the terms of the
separation, and the Registrant is engaged in an active search for a new Chief
Financial Officer.
At
December 31, 2009, 630,897 shares of Series A Convertible Preferred Stock were
issued and outstanding. Our remaining 530,897 shares of Series A
Convertible Preferred Stock has been converted into 7,358,524 shares of common
stock pursuant to an amendment to the Series A Certificate of Designation filed
with the Delaware Secretary of State on February 24, 2010.
In a
press release dated February 22, 2010, it was announced that Axion Power Battery
Manufacturing, Inc. will receive a $298,605 solar energy program grant to assist
with solar power energy storage research and development. This grant, along with
proceeds from the December 22, 2009 Pennsylvania Energy Development Authority
award will contribute funding to our development program with an estimated total
project cost of $1 million.
On March
3, 2010, David Gelbaum gave notice of his resignation as a director of the
Company, effective immediately.
On or
about March 15, 2010 Axion Power International, Inc., Traci and William Ahearn,
Sally Fonner and Dr. James Smith (“Axion and the Four Shareholders”) have
entered into a settlement agreement with Banca M.B., Sp.A. under which Banca
M.B. Sp.A. has paid to Axion and the Four Shareholders the sum of $490,000 in
full settlement of all claims from the issue of stock relating to the exercise
of 301,700 warrants. These warrants with a price of $2.00 per share were
exercised on a cashless basis and sold to Banca M.B., Sp.A in December 2005 with
expected proceeds of $758,290. The division of the settlement proceeds among
Axion and the Four Shareholders has as yet to be agreed upon. The Company will
continue to treat the 301,700 shares of stock previously issued upon exercise of
these warrants as unpaid pending an agreed upon settlement.
On March 28, 2010, we entered into a new lease for our
manufacturing plant in New Castle, Pennsylvania. Details of this lease are set
forth in Note 14 to these financial statements.
The
Company is in the final stages of negotiating arrangements with several new
officers, including a new Chief Financial Officer, a new Chief Operating Officer
and a new Vice President of Engineering. Upon consummation of these
new hires, the Company will file a Form 8-K, disclosing the applicable
arrangements and attaching copies of the contracts as exhibits
thereto.
104
45,757,572
Shares of Common Stock
PART
II – INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13. Other Issuance and Distribution
We
estimate that our expenses in connection with this offering, other than
underwriting discounts and commissions, will be as follows:
Securities
and Exchange Commission registration fee (1)
|
$
|
4,470
|
||
Printing
and engraving expenses
|
$
|
1,000
|
||
Legal
fees and expenses
|
$
|
30,000
|
||
Accountant
fees and expenses
|
$
|
2,500
|
||
Total
|
$
|
37,970
|
(1) Paid
in connection with the original filing of this registration
statement.
Item
14. Indemnification of Directors and Officers
Section
102 of the Delaware General Corporation Law allows a corporation to eliminate
the personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except where the
director breached his or her duty of loyalty to the corporation or its
stockholders, failed to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend or approved a
stock purchase or redemption in violation of the Delaware General Corporation
Law or obtained an improper personal benefit.
Our
amended and restated certificate of incorporation specifically limits each
director’s personal liability, as permitted by Section 102 of the Delaware
General Corporation Law, and provides that if the Delaware General Corporation
Law is hereafter amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law as so amended.
105
Section
145 of the Delaware General Corporation Law provides, among other things, that a
corporation may indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors of otherwise both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person. Our amended and restated
certificate of incorporation provides for indemnification of our directors,
officers, employees and agents to the fullest extent permitted by the Delaware
General Corporation Law.
Item
15. Recent Sales of Unregistered Securities
Since
January 1, 2007, Axion has issued and sold the following securities in
transactions exempt from registration under Section 4(2) of the Securities Act
of 1933:
Equity
Transactions - Year ended December 31, 2007:
During
2007, 40,000 shares of Series A Preferred Stock were issued to two unaffiliated
accredited investors at a purchased price of $10.00 per share for aggregate
proceeds to the Company of $400,000.
Restricted
stock transactions during the year ended December 31, 2007 are as
follows:
|
·
|
The Company’s Vice President of
Manufacturing and Engineering received 36,000 restricted shares, valued at
$82,800, pursuant to his 2007 employment contract. The shares will vest at
a rate of 1,000 shares per month. The expense related to these shares will
be recognized over this three-year requisite service period and the shares
will be considered issued and outstanding upon
vesting.
|
Equity
Transactions – Year ended December 31, 2008:
At the
first Quercus closing on January 14, 2008, we issued and sold 1,904,762 first
closing units (a unit is one share of common stock, and a 5-year warrant to
purchase 1.5 additional shares of common stock at an exercise price of $2.60 per
share) issuable to Quercus for an aggregate purchase price of $4,000,000, or
$2.10 per Unit.
On March
31, 2008, an accredited investor under the terms of his 2007 Bridge Loan
agreement, converted $223,984 of his Bridge Loan to purchase 106,659 first
closing units under the same terms and conditions as was offered to Quercus, at
$2.10 per Unit
At the
second Quercus closing on April 8, 2008, we issued and sold 1,904,762 second
closing units (a unit is one share of common stock, and a 5-year warrant to
purchase 1.25 additional shares of common stock at an exercise price of $2.60
per share) issuable to Quercus for an aggregate purchase price of $4,000,000, or
$2.10 per Unit.
On April
21, 2008, an accredited investor under the terms of his 2007 Bridge Loan
agreement, converted $52,500of their Bridge Loans to purchase 25,000 first
closing units under the same terms and conditions as was offered to Quercus, at
$2.10 per Unit.
On May 6,
2008, one accredited investor under the terms of the 2006 Series A Preferred
private placement offering, converted 50,000 preferred shares with a stated
value of $635,641 to purchase 508,512 shares of the Company’s common stock at
the stated conversion price of $1.25 per share.
On May
29, 2008, a director under the terms of his 2007 Bridge Loan agreement,
converted $4,200 of his Bridge Loan to purchase 2,000 second closing units under
the same terms and conditions as was offered to Quercus, at $2.10 per
Unit.
106
At the
third and final Quercus closing on June 30, 2008, we issued and sold 4,761,905
third closing units (a unit is one share of common stock, and a 5-year warrant
to purchase 1 additional shares of common stock at an exercise price of $2.60
per share) issuable to Quercus for an aggregate purchase price of $10,000,000,
or $2.10 per Unit.
On June
30, 2008, a director under the terms of his 2007 Bridge Loan agreement,
converted $800,000 of his Bridge Loan to purchase 380,952 third closing units
under the same terms and conditions as was offered to Quercus, at $2.10 per
Unit.
On August
20, 2008, one accredited investor under the terms of the 2006 Series A Preferred
private placement offering, converted 50,000 preferred shares with a stated
value of $650,984 to purchase 520,787 shares of the Company’s common stock at
the stated conversion price of $1.25 per share.
On
September 11, 2008, one accredited investor under the terms of the 2006 Series A
Preferred private placement offering, converted 4,000 preferred shares with a
stated value of $52,250 to purchase 41,800 shares of the Company’s common stock
at the stated conversion price of $1.25 per share.
During
2008, an officer vested in 12,000 shares of his 2007 restricted stock
award.
Restricted
stock transactions during the year ended December 31, 2008 are as
follows:
|
·
|
The Company’s chief financial
officer received 90,000 restricted shares, valued at $166,500, pursuant to
his 2009 employment contract. The shares will vest in equal 30,000 share
amounts on June 16 of each of 2009, 2010 and 2011. The expense related to
these shares will be recognized over this three-year requisite service
period and the shares will be considered issued and outstanding upon
vesting.
|
|
·
|
The Company’s chief technical
officer received 50,000 restricted shares, valued at $90,500 and an
additional 30,000 restricted shares, valued at $51,000, pursuant to his
2009 employment contract. The 50,000 shares will become fully vested on
May 31, 2011. The expense related to these shares will be recognized over
this three-year requisite service period and the shares will be considered
issued and outstanding upon vesting. The
30,000 shares vest December 29, 2009. The expense related to these shares
will be recognized over this eighteen month requisite service period and
the shares will be considered issued and outstanding upon
vesting.
|
|
·
|
An employee received 50,000
restricted shares, valued at $92,500, pursuant to his 2009 employment
contract. The 50,000 shares will become fully vested on June 15, 2011. The
expense related to these shares will be recognized over this three-year
requisite service period and the shares will be considered issued and
outstanding upon vesting.
|
Equity
Transactions – Year ended December 31, 2009:
During
2009, an officer vested in 23,000 shares of his 2007 restricted stock
award.
On June
16, 2009, an officer vested in 30,000 shares of his 2008 restricted stock
award.
On July
21, 2009 an accredited investor under the terms of the 2006 Series A Preferred
private placement offering, converted 25,000 preferred shares with a stated
value of $358,418 to purchase 286,735 shares of the Company’s common stock at
the stated conversion price of $1.25 per share.
On
November 4, 2009 an accredited investor under the terms of the 2006 Series A
Preferred private placement offering, converted 63,100 preferred shares with a
stated value of $921,890 to purchase 862,466 shares of the Company’s common
stock at the stated conversion price of $1.07 per share.
On
December 22, 2009, we issued and sold 45,106,052 of the Company’s common stock
under a Securities purchase agreement for an aggregate purchase price of $
25,710,450, or $0.57 per share.
107
On
December 22, 2009, a director under the terms of his 2009 Bridge Loan agreement,
converted $171,353 of his Bridge Loan to purchase 300,620 of the Company’s
common stock under the same terms and conditions offered to investors in the
December 22,2009 Securities purchase agreement at $0.57.
On
December 22, 2009, an accredited investor under the terms of his 2009 Bridge
Loan agreement, converted $200,013 of his Bridge Loan to purchase 350,900 of the
Company’s common stock under the same terms and conditions offered to investors
in the December 22,2009 Securities purchase agreement at $0.57.
On
December 23, 2009 a director under the terms of the 2005 8% Convertible Senior
Preferred private placement offering, converted 25,000 preferred shares with a
stated value of $360,440 to purchase 252,912 shares of the Company’s common
stock at the stated conversion price of $1.43 per share.
On
December 23, 2009 a director and his wife under the terms of the 2005 8%
Convertible Senior Preferred private placement offering, converted 42,633
preferred shares with a stated value of $614,665 to purchase 431,297 shares of
the Company’s common stock at the stated conversion price of $1.43 per
share.
On
December 23, 2009 eight individuals under the terms of the 2005 8% Convertible
Senior Preferred private placement offering, converted 69,867 preferred shares
with a stated value of $1,007,210 to purchase 706,735 shares of the Company’s
common stock at the stated conversion price of $1.43 per share.
On
December 23, 2009 eleven individuals under the terms of their Placement Agency
Agreements received 719,664 shares of the Company’s common stock as Placement
fees for their assistance in the financing attributed to the December 22, 2009
Securities Purchase Agreement at a price of $410,208, or $0.57 per share
.
On
December 29, 2009, an officer vested in 280,000 shares of his 2006 and 2008
restricted stock awards.
Common Stock
Issuances: The following table represents per share issuances of common
stock from May 1, 2005 through December 31, 2009.
2005
Description:
|
Date
|
|
Shares
|
|
|
Per share
Valuation
|
|
Business reason:
|
|||
7
individuals
|
6/10/2005
|
29,565
|
$
|
3.57
|
Exercise
of Director options
|
||||||
3
individuals
|
7/11/2005
|
190,000
|
$
|
1.58
|
Conversion
of Preferred and accrued dividends
|
||||||
Banca
di Unionale
|
7/11/2005
|
10,000
|
$
|
1.60
|
Exercise
of preferred warrants
|
||||||
3
individuals
|
8/28/2005
|
150,000
|
$
|
1.67
|
Conversion
of Preferred and accrued dividends
|
||||||
James
Smith
|
9/7/2005
|
30,000
|
$
|
1.67
|
Conversion
of Preferred and accrued dividends
|
||||||
2
individuals
|
9/28/2005
|
1,050,000
|
$
|
1.69
|
Conversion
of Preferred and accrued dividends
|
||||||
2
individuals
|
various
|
226,900
|
$
|
1.79
|
Exercise
of Series I warrants
|
||||||
3
individuals
|
various
|
91,200
|
$
|
2.40
|
Exercise
of Series III warrants
|
||||||
2
individuals
|
various
|
25,000
|
$
|
1.60
|
Exercise
of Preferred warrants
|
||||||
Officer
|
10/20/2005
|
446,000
|
$
|
1.00
|
Exercise
of warrants and options
|
||||||
Officer
|
10/20/2005
|
25,000
|
$
|
2.00
|
Exercise
of warrants
|
||||||
6
individuals
|
12/1/2005
|
600,000
|
$
|
2.00
|
Common
stock and warrants
|
||||||
2005
Totals
|
3,642,665
|
$
|
1.94
|
108
2006
|
|||||||||||
2
individuals
|
4/21/06
|
80,000
|
2.50
|
Common
stock and warrants issued for cash
|
|||||||
Officer
|
4/21/06
|
56,700
|
2.00
|
Exercise
of non-plan incentive option granted to CEO
|
|||||||
Officer
|
4/21/06
|
6,000
|
4.00
|
Unrestricted
share grant to CTO
|
|||||||
Mega-C
Trust
|
11/28/06
|
(500,000
|
)
|
2.25
|
Return
of shares per settlement agreement
|
||||||
2006
Totals
|
(357,300
|
)
|
$
|
2.20
|
2007
|
|||||||||||
Officer
|
12/01/07
|
1,000
|
2.30
|
Unrestricted
share grant to VP Mfg Engineering
|
|||||||
2007
Totals
|
1,000
|
$
|
2.30
|
||||||||
2008
|
|||||||||||
The
Quercus Trust
|
1/14/2008
|
1,904,762
|
2.10
|
Securities
purchase agreement
|
|||||||
1
individual
|
3/31/2008
|
106,659
|
2.10
|
2007
Bridge Loan Conversion
|
|||||||
The
Quercus Trust
|
4/08/2008
|
1,904,762
|
2.10
|
Securities
purchase agreement
|
|||||||
1
individuals
|
4/21/2008
|
25,000
|
2.10
|
2007
Bridge Loan Conversion
|
|||||||
Lichtensteiniche
Landsbank
|
5/06/2008
|
508,512
|
1.25
|
Series
A Preferred Conversions
|
|||||||
Director
|
5/29/2008
|
2,000
|
2.10
|
2007
Bridge Loan Conversion
|
|||||||
The
Quercus Trust
|
6/30/2008
|
4,761,905
|
2.10
|
Securities
purchase agreement
|
|||||||
Director
|
6/30/2008
|
380,952
|
2.10
|
2007
Bridge Loan Conversion
|
|||||||
1
individual
|
8/20/2008
|
520,787
|
1.25
|
Series
A Preferred Conversion
|
|||||||
1
individual
|
9/11/2008
|
41,800
|
1.25
|
Series
A Preferred Conversion
|
|||||||
V.P.
Mfg Engineering
|
01/01/2008-12/01/2008
|
12,000
|
1.85
|
Unrestricted
share Grant
|
|||||||
2008
Totals (as of December 31, 2008)
|
10,169,139
|
$
|
2.01
|
109
2009
|
|||||||||||
V.P.
Mfg Engineering
|
01/01/2009-12/01/2009
|
23,000
|
1.55
|
Unrestricted
share Grant
|
|||||||
CFO
|
06/16/2009
|
30,000
|
1.41
|
Unrestricted
share Grant
|
|||||||
New
Energy Fund
|
07/21/2009
|
286,735
|
1.25
|
Series
A Preferred Conversions
|
|||||||
Fursa
Global Event Driven Fund LP
|
11/04/2009
|
862,466
|
1.07
|
Series
A Preferred Conversions
|
|||||||
Director
|
12/23/2009
|
252,912
|
1.43
|
Senior
Preferred Conversion
|
|||||||
Director
|
12/23/2009
|
431,297
|
1.43
|
Senior
Preferred Conversion
|
|||||||
8
individuals
|
12/23/2009
|
706,735
|
1.43
|
Senior
Preferred Conversion
|
|||||||
11
individuals
|
12/23/2009
|
719,664
|
0.57
|
Common
stock placement fees
|
|||||||
48
investors
|
12/22/2009
|
45,106,052
|
0.57
|
Securities
purchase agreement, net of 2009 Bridge Loan conversion
|
|||||||
Director
|
12/22/2009
|
300,620
|
0.57
|
2009
Bridge Loan conversion
|
|||||||
1
individual
|
12/22/2009
|
350,900
|
0.57
|
2009
Bridge Loan conversion
|
|||||||
CTO
|
12/29/2009
|
280,000
|
1.50
|
Unrestricted
share Grant
|
|||||||
2009
Totals (as of December 31, 2009)
|
49,350,381
|
$
|
0.61
|
All of
the above equity transactions were made in reliance on Section 4(2) of the
Securities Act and/or Regulation D promulgated under the Securities
Act.
Item
16. Exhibits and Financial Statement Schedules
2.1
|
Reorganization
Agreement (without exhibits) between Tamboril Cigar Company, Axion Power
Corporation and certain stockholders of Axion Power Corporation dated
December 31, 2003.
|
(1)
|
||
2.2
|
First
Addendum to the Reorganization Agreement between Tamboril Cigar Company,
Axion Power Corporation and certain stockholders of Axion Power
Corporation dated January 9, 2004.
|
(1)
|
||
3.1
|
Amended
and Restated Certificate of Incorporation of Tamboril Cigar Company dated
February 13, 2001.
|
(2)
|
||
3.3
|
Amendment
to the Certificate of Incorporation of Tamboril Cigar Company dated June
4, 2004.
|
(3)
|
||
3.4
|
Amendment
to the Certificate of Incorporation of Axion Power International, Inc.
dated June 4, 2004.
|
(3)
|
||
3.5
|
Amended
By-laws of Axion Power International, Inc. dated June 4, 2004. (3)
|
|||
4.1
|
Specimen
Certificate for shares of Company’s $0.00001 par value common
stock.
|
(9)
|
||
4.2 |
Trust
Agreement for the Benefit of the Shareholders of Mega-C Power Corporation
dated December 31, 2003.
|
(1) |
110
4.3
|
Succession
Agreement Pursuant to the Provisions of the Trust Agreement for the
Benefit of the Shareholders of Mega-C Power Corporation dated March 25,
2004.
|
(4)
|
||
4.4
|
Form
of Warrant Agreement for 1,796,300 capital warrants.
|
(9)
|
||
4.5
|
Form
of Warrant Agreement for 667,000 Series I investor
warrants.
|
(9)
|
||
4.6
|
Form
of Warrant Agreement for 350,000 Series II investor
warrants.
|
(9)
|
||
4.7
|
Form
of Warrant Agreement for 313,100 Series III investor
warrants.
|
(9)
|
||
4.8
|
Form
of 8% Cumulative Convertible Senior Preferred Stock
Certificate
|
(D)
|
||
4.9
|
First
Amended and Restated Trust Agreement for the Benefit of the Shareholders
of Mega-C Power Corporation dated February 28, 2005.
|
(11)
|
||
4.10
|
Second
Amendment and Restated Trust Agreement for the Benefit of the Shareholders
of Mega-C Power Corporation dated November 21, 2006
|
(19)
|
4.11
|
Certificate
of Powers, Designations, Preferences and Rights of the 8% Convertible
Senior Preferred Stock of Axion Power International, Inc. dated March 17,
2005.
|
(12)
|
||
4.12
|
Certificate
of Powers, Designations, Preferences and Rights of the Series A
Convertible Preferred Stock, Par Value $0.0001 Per Share, of Axion Power
International, Inc. dated October 23, 2006.
|
(13)
|
||
4.13
|
Amended
Certificate of Powers, Designations, Preferences and Rights of the Series
A Convertible Preferred Stock, Par Value $0.0001 Per Share, of Axion Power
International, Inc. dated October 26, 2006.
|
(13)
|
||
5.1
|
Opinion
of Jolie Kahn, Esq.
|
(25)
|
||
9.1
|
Agreement
respecting the voting of certain shares beneficially owned by the Trust
for the Benefit of the Shareholders of Mega-C Power
Corporation.
|
Included
in Exhibit 4.2
|
||
10.1
|
Development
and License Agreement between Axion Power Corporation and C and T Co.
Incorporated dated November 15, 2003.
|
(1)
|
||
10.2
|
Letter
Amendment to Development and License Agreement between Axion Power
Corporation and C and T Co. Incorporated dated November 17,
2003.
|
(1)
|
||
10.3
|
Tamboril
Cigar Co. Incentive Stock Plan dated January 8, 2004
|
(A)
|
||
10.4
|
Tamboril
Cigar co. Outside Directors Stock Option Plan dated February 2,
2004
|
(A)
|
||
10.5
|
Stock
Purchase & Investment Representation Letter among John L. Petersen,
Sally A. Fonner and C and T Co. Incorporated dated January 9,
2004
|
(1)
|
||
10.6
|
Letter
Amendment to Development and License Agreement between Axion Power
Corporation and C and T Co. Incorporated dated January 9,
2004.
|
(1)
|
||
10.7
|
First
Amendment to Development and License Agreement between Axion Power
Corporation and C and T Co. Incorporated dated as of January 9,
2004.
|
(5)
|
||
10.8
|
Definitive
Incentive Stock Plan of Axion Power International, Inc. dated June 4,
2004.
|
(3)
|
||
10.9
|
Definitive
Outside Directors’ Stock Option Plan of Axion Power International, Inc.
dated June 4, 2004.
|
(3)
|
||
10.10
|
Executive
Employment Agreement of Charles Mazzacato.
|
(9)
|
||
10.11
|
Executive
Employment Agreement of Peter Roston.
|
(9)
|
||
10.12
|
Amended
Retainer Agreement between the law firm of Fefer, Petersen & Cie dated
March 31, 2005
|
(C)
|
||
10.13
|
Retainer
Agreement dated January 2, 2004 between the law firm of Fefer, Petersen
& Cie and Tamboril Cigar Company.
|
(10)
|
111
10.14
|
Bankruptcy
Settlement Agreement Between Axion Power International, Inc.
and Mega-C Power Corporation dated December,
2005
|
(E)
|
||
10.15
|
Second
Amendment to Development and License Agreement between Axion Power
International, Inc. and C and T Co. Incorporated dated as of March 18,
2005.
|
(12)
|
||
10.16
|
Executive
Employment Agreement of Thomas Granville dated June 23,
2008.
|
(20)
|
||
10.17
|
Loan
agreement dated January 31, 2006 between Axion Battery Products, Inc. as
borrower, Axion Power International, Inc. as accommodation party and
Robert Averill as lender respecting a $1,000,000 purchase money and
working capital loan.
|
(14)
|
||
10.18
|
Security
agreement dated January 31, 2006 between Axion Battery Products, Inc. as
debtor and Robert Averill as secured party.
|
(14)
|
||
10.19
|
Security
agreement dated January 31, 2006 between Axion Power International, Inc.
as debtor and Robert Averill as secured party.
|
(14)
|
||
10.20
|
Promissory
Note dated February 14, 2006 between Axion Battery Products, Inc. as maker
and Robert Averill as payee.
|
(14)
|
||
10.21
|
Form
of Warrant Agreement between Axion Power International, Inc. and Robert
Averill.
|
(14)
|
||
10.22
|
Commercial
Lease Agreement dated February 14, 2006 between Axion Battery Products,
Inc. as lessee and Steven F. Hoye and Steven C. Warner as
lessors.
|
(14)
|
||
10.23
|
Asset
Purchase Agreement dated February 10, 2006 between Axion Battery Products,
Inc. as buyer and National City Bank of Pennsylvania as
seller.
|
(14)
|
||
10.24
|
Escrow
Agreement dated February 14, 2006 between Axion Battery Products, Inc. and
National City Bank of Pennsylvania as parties in interest and William E.
Kelleher, Jr. and James D. Newell as escrow agents.
|
(14)
|
||
10.25
|
Executive
Employment Agreement of Edward Buiel dated June 23, 2008.
|
(21)
|
||
10.26
|
Consulting
Agreement, dated as of September 27, 2007, by and between Axion Power
International, Inc. and Andrew Carr Conway, Jr.
|
(16)
|
||
10.27
|
Amendment
No. 1 to Consulting Agreement, dated as of October 31, 2007, by and
between Axion Power International, Inc. and Andrew Carr Conway,
Jr.
|
(16)
|
||
10.28
|
Securities
Purchase Agreement dated as of January 14, 2008, by and between Axion
Power International, Inc. and Quercus Trust.
|
(17)
|
||
10.29
|
Common
Stock Purchase Warrant dated January 14, 2008, executed by Axion Power
International, Inc.
|
(17)
|
||
10.30
|
Executive
Employment Agreement of Donald T. Hillier dated June 18,
2008.
|
(19)
|
||
10.31
|
Amendment
to Warrants and Securities Purchase Agreement dated as of September 22,
2009, by and between Axion Power International, Inc. and Quercus
Trust.
|
(22)
|
||
10.32
|
Securities
Purchase Agreement dated as of December 18, 2009, by and between Axion
Power International, Inc. and the Investors named therein.
|
(23)
|
||
10.33
|
Registration
Rights Agreement, executed by Axion Power International Inc. and the
Investors named therein.
|
(23)
|
||
10.34
|
Amendment
No. 2 to Securities Purchase Agreement dated as of January 14, 2008, by
and between Axion Power International, Inc. and Quercus
Trust.
|
(23)
|
||
10.35
|
Lock-Up
Agreement executed by Quercus Trust and David Gelbaum and Monica Chavez
Gelbaum.
|
(23)
|
||
10.36
|
Lease
Agreement, dated March 28, 2010, by and between Steven F. Hoye and Steven
C. Warner, Lessor, and Axion Power Battery Manufacturing, Inc.,
Lessee.
|
(24)
|
||
10.37
|
Executive
Employment Agreement, dated as of April 1, 2010, between Charles R. Trego
and the Company
|
(26) | ||
10.38
|
Executive
Employment Agreement, dated as of April 1, 2010 between Philip S. Baker
and the Company
|
(26) | ||
14.1
|
Code
of Business Conduct and Ethics
|
(6)
|
||
16.1
|
Letter
from Predecessor Independent Registered Public Accounting
Firm
|
(25)
|
112
23.1
|
Consent
of Jolie Kahn, Esq. (included in Exhibit 5.1)
|
(25)
|
||
23.2
|
Consent
of EFP Rotenberg, LLP
|
(1)
|
Incorporated by reference from
our Current Report on Form 8-K dated January 15,
2004.
|
(2)
|
Incorporated by reference from
our Current Report on Form 8-K dated February 5,
2003.
|
(3)
|
Incorporated by reference from
our Current Report on Form 8-K dated June 7,
2004.
|
(4)
|
Incorporated by reference from
our Current Report on Form 8-K dated April 13,
2004.
|
(5)
|
Incorporated by reference from
our Form S-3 registration statement dated May 20,
2004.
|
(6)
|
Incorporated by reference from
our Annual Report on Form 10-KSB dated March 30,
2004
|
(7)
|
Incorporated by reference from
our Current Report on Form 8-K dated April 13,
2003.
|
(8)
|
Incorporated by reference from
our Current Report on Form 8-K dated February 16,
2004.
|
(9)
|
Incorporated by reference from
our Form S-1 registration statement dated September 2,
2004.
|
(10)
|
Incorporated by reference from
our Form S-1 registration statement dated December 17,
2004.
|
(11)
|
Incorporated by reference from
our Current Report on Form 8-K dated February 28,
2005.
|
(12)
|
Incorporated by reference from
our Current Report on Form 8-K dated March 21,
2005.
|
(13)
|
Incorporated by reference from
our Current Report on Form 8-K dated November 8,
2006.
|
(14)
|
Incorporated by reference from
our Current Report on Form 8-K dated February 16,
2006.
|
(15)
|
Incorporated by reference from
our Current Report on Form 8-K dated January 3,
2007.
|
(16)
|
Incorporated by reference from
our Current Report on Form 8-K dated November 6,
2007.
|
(17)
|
Incorporated by reference from
our Current Report on Form 8-K dated January 17,
2008.
|
(18)
|
Incorporated by reference from
our Current Report on Form 8-K dated January 31,
2008.
|
(19)
|
Incorporated by reference from
our Registration Statement on Form S-1 dated July 3,
2008.
|
(20)
|
Incorporated by reference from
our Current Report on Form 8-K dated June 27,
2008.
|
(21)
|
Incorporated by reference from
our Current Report on Form 8-K dated July 2,
2008.
|
(22)
|
Incorporated by reference from
our Current Report on Form 8-K dated September 22,
2009.
|
(23)
|
Incorporated by reference from
our Current Report on Form 8-K dated December 18,
2009.
|
(24)
|
Incorporated
by reference from our Form 10-K for the year ended December 31, 2009 filed
on March 30, 2010
|
(25)
|
Incorporated
by reference from our Registration Statement on Form S-1, dated January
15, 2010.
|
(26) |
Incorporated
by reference from our Current Report on Form 8-K, filed on April 6,
2010.
|
(A)
|
Incorporated by reference from
our Current Report on Form 8-K/A dated February 2,
2004.
|
(B)
|
Incorporated by reference from
our Current Report on Form 8-K dated April 4,
2005.
|
(C)
|
Incorporated by reference from
our Registration Statement on Form SB-2 dated April 26,
2005.
|
(D)
|
Incorporated by reference from
our Current Report on Form 8-K dated December 13,
2005.
|
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
1.
|
To file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
|
i.
|
To include any prospectus
required by section 10(a)(3) of the Securities
Act;
|
ii.
|
To reflect in the prospectus any
facts or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate offering price
set forth in the “Calculation of Registration Fee” table in the effective
registration statement.
|
113
iii.
|
To include any material
information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration
statement.
|
2.
|
That, for the purpose of
determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
|
3.
|
To remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the
offering.
|
4.
|
That, for the purpose of
determining liability under the Securities Act to any
purchaser:
|
i.
|
If the registrant is relying on
Rule 430B (Section 430B of this
chapter):
|
A.
|
Each prospectus filed by the
registrant pursuant to Rule 424(b)(3)shall be deemed to be part of the
registration statement as of the date the filed prospectus was deemed part
of and included in the registration statement;
and
|
B.
|
Each prospectus required to be
filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a
registration statement in reliance on Rule 430B relating to an offering
made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act
shall be deemed to be part of and included in the registration statement
as of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in
the offering described in the prospectus. As provided in Rule 430B, for
liability purposes of the issuer and any person that is at that date an
underwriter, such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of
the registration statement will, as to a purchaser with a time of contract
of sale prior to such effective date, supersede or modify any statement
that was made in the registration statement or prospectus that was part of
the registration statement or made in any such document immediately prior
to such effective date; or
|
ii.
|
If the registrant is subject to
Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made
in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to
such first use, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of
first use.
|
5.
|
That, for the purpose of
determining liability of the registrant under the Securities Act to any
purchaser in the initial distribution of the securities: The undersigned
registrant undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser,
if the securities are offered or sold to such purchaser by means of any of
the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities
to such purchaser:
|
114
i.
|
Any preliminary prospectus or
prospectus of the undersigned registrant relating to the offering required
to be filed pursuant to Rule
424;
|
ii.
|
Any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned
registrant or used or referred to by the undersigned
registrant;
|
iii.
|
The portion of any other free
writing prospectus relating to the offering containing material
information about the undersigned registrant or its securities provided by
or on behalf of the undersigned registrant;
and
|
iv.
|
Any other communication that is
an offer in the offering made by the undersigned registrant to the
purchaser.
|
6.
|
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1933, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in New Castle, Pennsylvania, on the 6th
day of April, 2010.
AXION
POWER INTERNATIONAL, INC.
By: /s/
Thomas Granville
|
Thomas
Granville, Principal Executive
Officer
|
Date:
April 6th, 2010
By:
/s/ Charles Trego
|
|
Charles
Trego, Principal Financial Officer and Principal Accounting
Officer.
|
Date:
April 6th, 2010
115
Pursuant
to the requirements of the Securities Act, this Registration Statement has been
signed by the following persons in the capacities and on the dates
indicated:
Signature
|
Title
|
Date
|
||
/s/
Stanley A. Hirschman
|
Director
|
April
6, 2010
|
||
Stanley
A. Hirschman
|
||||
/s/
Robert G. Averill
|
Director
|
April
6, 2010
|
||
Robert
G. Averill
|
||||
/s/
Glenn Patterson
|
Director
|
April
6, 2010
|
||
Glenn
Patterson
|
||||
/s/
David Anthony
|
Director
|
April
6, 2010
|
||
David
Anthony
|
||||
/s/
Joseph Bartlett
|
Director
|
April
6, 2010
|
||
Joseph
Bartlett
|
||||
/s/
Michael Kishinevsky
|
Director
|
April
6, 2010
|
||
Michael
Kishinevsky
|
116