Attached files
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EX-32.1 - Axion Power International, Inc. | v201905_ex32-1.htm |
EX-32.2 - Axion Power International, Inc. | v201905_ex32-2.htm |
EX-31.1 - Axion Power International, Inc. | v201905_ex31-1.htm |
EX-31.2 - Axion Power International, Inc. | v201905_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
AXION
POWER INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
65-0774638
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or organization)
|
Identification
No.)
|
|
3601
Clover Lane
|
||
New
Castle, Pennsylvania
|
16105
|
|
(Address of principal executive offices)
|
(Zip
Code)
|
|
(724)
654-9300
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No
¨
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No
þ
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Title of Each Class
|
Outstanding Shares at November 1,
2010
|
Common
Stock, $0.0001 par value
|
85,155,002
|
Cautionary
Note Regarding Forward-Looking Information
This
Report on Form 10-Q, in particular Part I Item 2 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” contains certain
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
forward-looking statements represent our expectations, beliefs, intentions or
strategies concerning future events, including, but not limited to, any
statements regarding our assumptions about financial performance; the
continuation of historical trends; the sufficiency of our cash balances for
future liquidity and capital resource needs; the expected impact of changes in
accounting policies on our results of operations, financial condition or cash
flows; anticipated problems and our plans for future operations; and the economy
in general or the future of the electrical storage device industry, all of which
are subject to various risks and uncertainties.
When used
in this Report on Form 10-Q and other reports, statements, and information we
have filed with the Securities and Exchange Commission (the “Commission” or
“SEC”), in our press releases, presentations to securities analysts or
investors, in oral statements made by or with the approval of an executive
officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,”
“continue,” “anticipates,” “intends,” “will likely result,” “estimates,”
“projects” or similar expressions and variations thereof are intended to
identify such forward-looking statements. However, any statements contained in
this Report on Form 10-Q that are not statements of historical fact may be
deemed to be forward-looking statements. We caution that these statements by
their nature involve risks and uncertainties, certain of which are beyond our
control, and actual results may differ materially depending on a variety of
important factors. 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 operating profit in the future to achieve
or sustain profitability;
|
|
·
|
our
planned level of operations depends upon increased revenues, operating
profit and additional capital infusion, which may be
difficult to generate given the current economic
environment;
|
|
·
|
we
may be unable to enforce or defend our ownership of proprietary
technology;
|
|
·
|
we
must make significant investments in capital equipment in order to
manufacture carbon electrode assemblies in large commercial
quantities;
|
|
·
|
we
have never manufactured carbon electrode assemblies in large commercial
quantities;
|
|
·
|
we
may be unable to develop a cost effective alternative to conventional lead
electrodes;
|
|
·
|
our
technology may be rendered obsolete as a result of technological changes
in the battery industry or other storage
technologies;
|
|
·
|
we
may not be able to establish reliable supply channels for the raw
materials and components that will be used in our commercial proprietary
lead/carbon (“PbC”) batteries;
|
|
·
|
other
manufacturers may not be able to modify established lead-acid battery
manufacturing processes to replicate our processes to accommodate
differences between their products and our commercial PbC battery
technology;
|
|
·
|
we
will have limited market opportunities based on our anticipated
manufacturing capacity;
|
|
·
|
our
shareholders may suffer significant dilution in the event that our
outstanding warrants and options are ever
exercised;
|
|
·
|
we
depend on key personnel and consultants, and our business may be severely
disrupted if we lose the services of our key executives, consultants, 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
TABLE OF CONTENTS
3
AXION
POWER INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(A
Development Stage Company)
September
30, 2010
|
December
31, 2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 16,283,708 | $ | 23,279,466 | ||||
Accounts
receivable
|
427,039 | 194,315 | ||||||
Other
receivables
|
366,451 | 208,179 | ||||||
Prepaid
expenses
|
83,872 | 79,987 | ||||||
Inventory,
net
|
1,626,058 | 1,008,092 | ||||||
Total
current assets
|
18,787,128 | 24,770,039 | ||||||
Property
& equipment, net
|
5,926,372 | 4,216,080 | ||||||
Other
receivables
|
68,000 | 34,601 | ||||||
TOTAL
ASSETS
|
$ | 24,781,500 | $ | 29,020,720 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 1,248,722 | $ | 1,375,292 | ||||
Other
liabilities
|
204,125 | 82,326 | ||||||
Notes
payable
|
101,684 | 101,684 | ||||||
Total
current liabilities
|
1,554,531 | 1,559,302 | ||||||
Deferred
revenue
|
1,314,135 | 856,237 | ||||||
Derivative
liabilities
|
313,886 | 1,616,788 | ||||||
Notes
payable
|
573,383 | 649,549 | ||||||
Total
liabilities
|
3,755,935 | 4,681,876 | ||||||
Stockholders'
Equity:
|
||||||||
Convertible
preferred stock-12,500,000 shares authorized
|
||||||||
Series
A preferred – 2,000,000 shares designated 0 shares issued and outstanding
(630,897 in 2009)
|
- | 9,069,871 | ||||||
Common
stock-125,000,000 shares authorized $0.0001 par value
|
||||||||
85,155,002
issued & outstanding (75,767,818 in 2009)
|
8,515 | 7,576 | ||||||
Additional
paid in capital
|
86,152,005 | 76,372,520 | ||||||
Deficit
accumulated during development stage
|
(64,883,369 | ) | (60,859,150 | ) | ||||
Cumulative
foreign currency translation adjustment
|
(251,586 | ) | (251,973 | ) | ||||
Total
Stockholders' Equity
|
21,025,565 | 24,338,844 | ||||||
TOTAL
LIABILITIES & STOCKHOLDERS' EQUITY
|
$ | 24,781,500 | $ | 29,020,720 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
4
AXION
POWER INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(A
Development Stage Company)
UNAUDITED
Three
Months Ended
|
Nine
Months Ended
|
Inception
|
||||||||||||||||||
September
30
|
September
30
|
9/18/2003 to
|
||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
9/30/2010
|
||||||||||||||||
Product
|
$ | 256,898 | $ | 962,833 | $ | 1,084,360 | $ | 1,567,816 | $ | 4,416,799 | ||||||||||
Service
|
337,056 | - | 494,433 | - | 494,433 | |||||||||||||||
Net
sales
|
593,954 | 962,833 | 1,578,793 | 1,567,816 | 4,911,232 | |||||||||||||||
Costs
and expenses
|
||||||||||||||||||||
Product
Costs
|
142,203 | 981,273 | 677,481 | 1,380,923 | 3,581,457 | |||||||||||||||
Research
& development
|
1,175,945 | 869,892 | 3,762,054 | 3,327,676 | 22,140,680 | |||||||||||||||
Selling,
general & administrative
|
63,518 | 873,213 | 2,284,550 | 2,887,597 | 24,137,457 | |||||||||||||||
Interest
expense - related party
|
5,170 | 44,881 | 16,144 | 44,881 | 2,354,130 | |||||||||||||||
Impairment
of assets
|
- | - | - | - | 1,391,485 | |||||||||||||||
Derivative
revaluations (income)
|
(67,414 | ) | 12,048,203 | (1,132,257 | ) | 13,592,717 | (1,354,524 | ) | ||||||||||||
Mega
C Trust share augmentation
|
- | - | - | - | 400,000 | |||||||||||||||
Interest
& other income
|
(2,464 | ) | (1,341 | ) | (4,960 | ) | (14,039 | ) | (553,753 | ) | ||||||||||
Loss
before income taxes
|
(723,004 | ) | (13,853,288 | ) | (4,024,219 | ) | (19,651,939 | ) | (47,185,700 | ) | ||||||||||
Income
Taxes
|
- | - | - | - | 4,300 | |||||||||||||||
Accumulated
deficit
|
(723,004 | ) | (13,853,288 | ) | (4,024,219 | ) | (19,651,939 | ) | (47,190,000 | ) | ||||||||||
Less
preferred stock dividends and beneficial conversion
feature
|
- | (3,302,428 | ) | - | (3,871,570 | ) | (17,693,369 | ) | ||||||||||||
Net
loss applicable to common shareholders
|
$ | (723,004 | ) | $ | (17,155,716 | ) | $ | (4,024,219 | ) | $ | (23,523,509 | ) | $ | (64,883,369 | ) | |||||
Basic
and diluted net loss per share
|
$ | (0.01 | ) | $ | (0.64 | ) | $ | (0.05 | ) | $ | (0.89 | ) | $ | (2.64 | ) | |||||
Weighted
average common shares outstanding
|
85,050,137 | 26,676,678 | 83,180,368 | 26,508,643 | 24,619,467 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
5
AXION
POWER INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(A
Development Stage Company)
UNAUDITED
Nine
Months Ended
|
Inception
|
|||||||||||
September
30
|
9/18/2003 to
|
|||||||||||
2010
|
2009
|
9/30/2010
|
||||||||||
Cash
Flows from Operating Activities:
|
||||||||||||
Accumulated
deficit
|
$ | (4,024,219 | ) | $ | (19,651,939 | ) | $ | (47,190,000 | ) | |||
Adjustments
to reconcile deficit accumulated for non cash items
|
||||||||||||
Depreciation
|
448,690 | 306,906 | 1,432,981 | |||||||||
Interest
expense
|
- | 30,536 | 1,970,251 | |||||||||
Impairment
of assets
|
- | - | 1,391,486 | |||||||||
Derivative
revaluations (income)
|
(1,132,257 | ) | 13,592,717 | (1,354,524 | ) | |||||||
Mega
C Trust share augmentation
|
- | - | 400,000 | |||||||||
Share
based compensation expense
|
293,507 | 747,441 | 5,630,988 | |||||||||
Changes
in operating assets & liabilities
|
||||||||||||
Accounts
receivable
|
(232,724 | ) | (635,828 | ) | (433,908 | ) | ||||||
Other
receivables
|
(158,272 | ) | 51,419 | (344,491 | ) | |||||||
Prepaid
expenses
|
(3,885 | ) | 25,347 | (81,284 | ) | |||||||
Inventory,
net
|
(617,966 | ) | 63,109 | (1,626,057 | ) | |||||||
Accounts
payable
|
(126,570 | ) | 586,263 | 2,903,366 | ||||||||
Other
liabilities
|
121,799 | (65,019 | ) | 225,257 | ||||||||
Liability
to issue equity instruments
|
- | - | 178,419 | |||||||||
Deferred
revenue and other
|
457,928 | (63,043 | ) | 1,401,654 | ||||||||
Net
cash used by operating activities
|
(4,973,969 | ) | (5,012,091 | ) | (35,495,862 | ) | ||||||
Cash
Flows from Investing Activities
|
||||||||||||
Escrow
deposits for foreign patent applications
|
- | (20,375 | ) | - | ||||||||
Short
term investments
|
- | 2,193,920 | - | |||||||||
Other
receivables
|
(33,399 | ) | (13,511 | ) | (1,285,016 | ) | ||||||
Purchases
of property & equipment
|
(2,158,982 | ) | (996,792 | ) | (7,356,064 | ) | ||||||
Investment
in intangible assets
|
- | - | (167,888 | ) | ||||||||
Net
cash provided (used) by investing activities
|
(2,192,381 | ) | 1,163,242 | (8,808,968 | ) | |||||||
Cash
Flow from Financing Activities
|
||||||||||||
Net
proceeds from related party debt
|
- | 736,000 | 5,445,458 | |||||||||
Repayment
of notes payable
|
(76,166 | ) | 776,244 | 675,068 | ||||||||
Net
proceeds from sale of common stock
|
(55,894 | ) | - | 45,058,334 | ||||||||
Net
proceeds from exercise of warrants
|
302,266 | - | 1,957,766 | |||||||||
Net
proceeds from sale of preferred stock
|
- | - | 7,472,181 | |||||||||
Net
cash provided by financing activities
|
170,206 | 1,512,244 | 60,608,807 | |||||||||
Net
change in cash and cash equivalents
|
(6,996,145 | ) | (2,336,605 | ) | 16,303,977 | |||||||
Effect
of exchange rate on cash
|
387 | (2,807 | ) | (20,269 | ) | |||||||
Cash
and cash equivalents – beginning
|
23,279,466 | 3,124,168 | - | |||||||||
Cash
and cash equivalents - ending
|
$ | 16,283,708 | $ | 784,756 | $ | 16,283,708 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
6
AXION
POWER INTERNATIONAL, INC.
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Basis of
Presentation
|
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three month and nine month periods ended September 30, 2010 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2010. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
The
consolidated balance sheet at December 31, 2009 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
2.
|
Inventory
|
Net
inventories are stated at the lower of cost (computed in accordance with first
in first out method) or market. Elements of costs include materials, labor, and
overhead, and are as follows:
September
30, 2010
|
December
31, 2009
|
|||||||
Raw
materials
|
$ | 979,753 | $ | 345,784 | ||||
Work
in process, subassemblies
|
516,788 | 314,209 | ||||||
Finished
goods
|
378,292 | 469,175 | ||||||
Inventory
reserves
|
(248,775 | ) | (121,076 | ) | ||||
$ | 1,626,058 | $ | 1,008,092 |
Inventories
are assessed based on the estimated net realizable value and carrying value
reduced for components that are obsolete or in excess of our forecasted
usage. The Company estimates the net realizable value of such inventories
based on analyses and assumptions including, but not limited to, historical
usage, future demand, and market requirements. The carrying value of
inventory is also reviewed and compared to the estimated selling price less
costs to sell and we adjust our inventory carrying value accordingly. Reductions
to the carrying value of inventories are recorded in cost of goods sold. If
future demand for our products is less favorable than our forecasts, inventories
may need to be reduced, which would result in additional expense.
3.
|
Derivative
liabilities
|
The
Company has issued certain warrants which contain conventional anti-dilution
provisions and down round protection for adjustment of the exercise price should
the Company issue additional shares of common stock or securities convertible
into common stock (subject to certain specified exclusions) at a price less than
the current exercise price of these outstanding warrants. On December 31, 2009,
1,485,714 warrants were classified as derivative liabilities consistent with the
provisions of ASC 815-40.
On
February 9, 2010, 100,000 warrants valued at $78,213 were exercised at $0.57 per
share. On April 19, 2010, 100,000 warrants valued at $66,053 were exercised at
$0.57 per share. On July 12, 2010, 100,000 warrants valued at $26,379 were
exercised at $0.57 per share. Using the Black-Scholes-Merton stock option
valuation model, the reduction in the fair value of the Company’s remaining
1,185,714 derivative liabilities was primarily driven by the decrease in stock
price from $1.56 per share on December 31, 2009 to $0.60 per share on September
30, 2010, yielding a gain of $1,132,257 for the nine months ended September 30,
2010.
The
assumptions noted in the following table were used for the derivative
revaluations on September 30, 2010.
Risk-free
interest rate
|
0.53 | % | ||
Dividend
yield
|
$ | - | ||
Expected
volatility
|
70.02 | % | ||
Expected
term (in years)
|
2.52 |
7
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4.
|
Warrants
|
The following table provides summary
information on warrants outstanding as of September 30, 2010. There were no new
warrants issued during 2010.
Shares
|
Weighted
average
exercise
price
|
Weighted
average remaining
contract
term (years)
|
||||||||||
Warrants
outstanding at December 31,2009
|
13,965,433 | $ | 1.36 | 3.1 | ||||||||
Granted
|
- | - | - | |||||||||
Exercised
|
(601,700 | ) | 0.50 | - | ||||||||
Forfeited
or lapsed
|
301,700 | 0.44 | - | |||||||||
Warrants
outstanding at September 30, 2010
|
13,665,433 | $ | 1.38 | 2.3 |
On
December 9, 2005, in connection with a prospective offering, four holders of
warrants to purchase the Company’s common stock agreed to exercise their
warrants to purchase, in the aggregate, 301,700 common shares of stock (the
“Incompletely Exercised Warrant Shares”) for the purpose of selling them to a
foreign partnership in a transaction that was substantially similar to one the
Company 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 took possession of a stock certificate
representing these shares without tendering the purchase price to either
the Company or to the warrant holders and transferred the shares to two of its
creditors who hold the shares as holders-in-due-course. As such, the
Incompletely Exercised Warrant Shares were not considered duly issued and were
excluded from all calculations of the issued and outstanding shares of common
stock in the financial statements. The Company included the Incompletely
Exercised Warrant Shares as outstanding warrants, pending receipt of the
exercise price from the four warrant holders, and these warrants have since
expired. On October 6, 2007 the Company retained counsel to cause the
parties who then had possession of the Incompletely Exercised Warrant shares to
return the shares absent payment. On July 28, 2010, all litigation
with respect to the Incompletely Exercised Warrant Shares was fully settled and
dismissed, and recoveries of $131,296, the amount in excess of legal fees and
accrued liabilities to two shareholders, was applied toward the financing of
301,700 shares issued on the exercise of warrants and now reported as exercised
and outstanding. See Note captioned “Commitments and
Contingencies” for further discussion.
On August
21, 2009, the Board of Directors 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. As of September 30, 2010,
these warrants have not yet been issued pending "mutual understanding" between
the parties.
As of
September 30, 2010, 1,185,714 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.
5.
|
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
September 30, 2009, 137,500 shares of 8% Cumulative Convertible Senior Preferred
stock were issued and outstanding. These shares were fully converted during
2009. For the nine months ended September 30, 2009, $113,652 in dividends was
accrued. No shares of 8% Cumulative Convertible Senior Preferred stock were
outstanding and no dividends were accrued for the same period in
2010.
At
September 30, 2010, no shares of Series A Convertible Preferred stock were
issued and outstanding and no dividends were accrued. At September
30, 2009, 693,997 shares of Series A Convertible Preferred stock were issued and
outstanding, with $747,399 in dividends accrued. On November 30, 2009, holders
of Series A Convertible Preferred stock elected to convert the remaining shares
into the Company’s common stock, therefore no dividends accrued subsequent to
this election. On January 26, 2010, a shareholder converted 100,000 shares of
Series A Convertible Preferred stock along with accrued dividends of $525,277
into 1,426,960 shares of the Company’s common stock, and the remaining 530,897
shares of Series A Convertible Preferred stock were 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.
8
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6.
|
Equity
Compensation
|
The
Company has adopted ASC 718 “Compensation – Stock
Compensation” whereby employee-compensation expense related to stock
based payments is recorded over the requisite service period based on the grant
date fair value of the awards.
The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of ASC 505-50
“Equity-Based Payments to
Non-Employees”. The measurement date for fair value of the
equity instruments is determined by the earlier of (i) the date at which
commitment for performance by the vendor or consultant is reached, or (ii) the
date at which the consultant or vendor’s performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement.
The
Company has adopted an incentive stock option plan covering an aggregate of
2,000,000 shares of common stock that authorizes a variety of awards including
incentive stock options, non-qualified stock options, shares of restricted
stock, shares of phantom stock and stock bonuses. The Company has also adopted
an outside directors’ stock option plan covering an aggregate of 500,000 shares
of common stock which provides that each eligible director will automatically be
granted an option to purchase shares having an aggregate fair market value on
the date of grant of twenty thousand dollars ($20,000) for each year of his term
in office. From time to time, based on the recommendations of the compensation
committee of the board of directors, the Company enters into non-plan equity
incentive agreements with officers, employees, attorneys and third party
consultants.
The
following awards granted under the Plan were forfeited during the nine months
ended September 30, 2010:
In May
2010, the Company’s former employee and Chief Technical Officer, Edward Buiel,
forfeited 50,000 shares of restricted stock pursuant to the terms of his 2008
employment agreement. These shares valued at $90,500 on the date of grant and
scheduled to vest on May 31, 2011, were forfeited in May 2010 due to the
expiration of Dr. Buiel’s employment contract. During 2010, the Company
recognized $47,764 in income from this forfeiture.
In
February 2010, the Company’s former employee and Chief Financial Officer, Donald
Hillier, forfeited 60,000 shares of restricted stock pursuant to the terms of
his 2008 employment agreement. These shares valued at $111,000 on the date of
grant and scheduled to vest in equal 30,000 share amounts in June of 2010 and
2011, were forfeited upon Mr. Hillier’s termination from employment.
During 2010, the Company recognized $30,062 in income from this
forfeiture.
During
the nine months ended September 30, 2010, the Company granted a total of
1,894,946 contractual stock options:
|
·
|
During
2010, the Company issued 77,922 5-year options to one of its directors,
vesting 1/3 per year over the next three years. These options are
exercisable at a price of $0.77 per share, expiring five years from vest
date and are valued at $34,860 utilizing the Black-Scholes-Merton option
pricing model, with $12,152 expected to be recorded during 2010, and the
Company issued 8,000 4-year options to one of its directors, vesting
immediately. These options are exercisable at a price of $3.60 per share,
expiring June 25, 2014 and are valued at $14,882 utilizing the
Black-Scholes-Merton option pricing model, with $14,882 recorded during
2010.
|
|
·
|
During
March 2010, the Company granted a total of 272,000 contractual stock
options to two employees at an exercise price of $1.50 per share. 8,000 of
these options vested in March 2010 upon execution of their employment
contracts, with the balance vesting at a rate of 8,000 per month beginning
June 30, 2010. These options are exercisable for a period of
five years from vesting date. These options are valued at $189,396,
utilizing the Black-Scholes-Merton model with $52,610 of expense expected
to be recorded during 2010.
|
|
·
|
On
April 1, 2010, our Chief Financial Officer, Charles R. Trego was
granted an option to purchase 265,000 shares of our common stock. The
exercise price of the option is $1.50 per share. 27,000 of these options
vested upon signing the employment contract and the remainder vests at the
rate of 7,000 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 $185,364, utilizing the
Black-Scholes-Merton model with $46,341 expected to be recorded during
2010.
|
|
·
|
On
April 1, 2010, our Chief Operating Officer, Philip S. Baker was
granted an option to purchase 230,000 shares of our common stock. The
exercise price of the option is $1.50 per share. 26,000 of these options
vested upon signing the employment contract and the remainder vests at the
rate of 6,000 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 $160,884, utilizing the
Black-Scholes-Merton model with $40,221 expected to be recorded during
2010.
|
9
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
|
·
|
On
April 1, 2010, an employee was granted an option to purchase 195,000
shares of our common stock at an exercise price of $1.50 per
share. 25,000 of these options vested upon execution of the
employment contract and beginning in June 2010 and 5,000 options will vest
monthly through the remainder of the contract and are exercisable for a
period of 5 years from the vesting date. These options are valued at
$136,404, utilizing the Black-Scholes-Merton model with $34,101 expected
to be recorded during 2010.
|
|
·
|
On
May 25, 2010, an employee was granted an option to purchase 108,000 shares
of our common stock at an exercise price of $1.50 per
share. 6,000 of these options vested upon execution of the
employment contract and beginning in June 2010, 3,000 options will vest
monthly through the remainder of the contract and are exercisable for a
period of 5 years from the vesting date. These options are valued at
$43,344, utilizing the Black-Scholes-Merton model with $8,428 expected to
be recorded during 2010.
|
|
·
|
On
June 22, 2010, an employee was granted an option to purchase 102,000
shares of our common stock at an exercise price of $1.50 per
share. 3,000 of these options vested in June 2010, 3,000
options will vest monthly through the remainder of the contract and are
exercisable for a period of 5 years from the vesting date. These options
are valued at $37,125, utilizing the Black-Scholes-Merton model with
$6,750 expected to be recorded during
2010.
|
|
·
|
On
June 22, 2010, an employee was granted an option to purchase 102,000
shares of our common stock at an exercise price of $1.50 per
share. 3,000 of these options vested in June 2010, 3,000
options will vest monthly through the remainder of the contract and are
exercisable for a period of 3 years from the vesting date. These options
are valued at $30,426, utilizing the Black-Scholes-Merton model with
$5,532 expected to be recorded during
2010.
|
|
·
|
On
June 29, 2010, our Chief Executive Officer, Thomas Granville was
granted an option to purchase 360,000 shares of our common stock. The
exercise price of the option is $1.50 per share. 10,000 of these options
vested upon signing the employment contract and the remainder vests at the
rate of 10,000 shares per month beginning August 2010 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 $113,112, utilizing the
Black-Scholes-Merton model with $18,852 expected to be recorded during
2010.
|
|
·
|
During
August 2010, the Company granted a total of 175,024 stock options to three
employees at an exercise price of $1.50 per share. 30,000 of
these options vested in August 2010, and 4,532 options will vest monthly
from January 2011 through September 2013, and are exercisable for a period
of five years from vesting date. These options are valued at $36,963,
utilizing the Black-Scholes-Merton model with $4,335 expected to be
recorded during 2010.
|
The
assumptions noted in the following table were used for the options granted for
the quarter ended September 30, 2010.
Risk-free
interest rate
|
1.4 | % | ||
Dividend
yield
|
$ | - | ||
Expected
volatility
|
57.7 | % | ||
Expected
term (in years)
|
6.2 |
The
compensation cost that has been charged against income for options was $348,207
for the nine months ended September 30, 2010. The impact of this expense was to
increase basic and diluted loss per share by $.004 for the nine months ended
September 30, 2010.
A tax
deduction is recognized for non-qualified stock options when the options are
exercised. The amount of this deduction will be the excess of the fair value of
the Company’s common stock over the exercise price on the date of exercise.
Accordingly, there is a deferred tax asset recorded related to the tax effect of
the financial statement expense recorded. The tax effect of the income tax
deduction in excess of the financial statement expense will be recorded as an
increase to additional paid-in capital. Due to the uncertainty of the Company’s
ability to generate sufficient taxable income in the future to utilize the tax
benefits of the options granted, the Company has recorded a valuation allowance
to reduce gross deferred tax asset to zero. As a result for the nine months
ended September 30, 2010, there is no income tax expense impact from recording
the fair value of options granted. There is no tax deduction allowed by the
Company for incentive stock options held to term.
10
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The
following table provides summary information on all outstanding options as of
September 30, 2010, based on the grant date for options:
2010
|
||||||||||||||||||||
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, 2009
|
1,883,470
|
$
|
2.77
|
$
|
1.02
|
4.1
|
||||||||||||||
Granted
|
1,894,946
|
$
|
1.48
|
$
|
0.51
|
|||||||||||||||
Exercised
|
-
|
$
|
-
|
$
|
-
|
|||||||||||||||
Forfeited
or lapsed
|
(303,670)
|
$
|
3.27
|
$
|
1.04
|
|||||||||||||||
Options
outstanding at September 30, 2010
|
3,474,746
|
$
|
2.02
|
$
|
0.74
|
4.9
|
$
|
0
|
||||||||||||
Options
exercisable at September 30, 2010
|
1,494,160
|
$
|
2.51
|
$
|
0.95
|
3.4
|
$
|
0
|
The
weighted-average grant date fair value of options granted during the nine months
ended September 30, 2009 was $0.40. There were no options exercised during the
nine months ended September 30, 2009.
The
following table provides summary information on all non-vested stock options as
of September 30, 2010:
All
Plan & Non-Plan
Compensatory
Options
|
||||||||
Shares
|
Weighted
average
grant
date fair value
|
|||||||
Options
subject to future vesting at December 31,2009
|
806,315 | $ | 0.87 | |||||
Options
granted
|
1,894,946 | 0.51 | ||||||
Options
forfeited or lapsed
|
(128,070 | ) | 0.93 | |||||
Options
vested
|
(592,605 | ) | 0.65 | |||||
Options
subject to future vesting at September 30, 2010
|
1,980,586 | $ | 0.59 |
As of
September 30, 2010, there was $924,466 of unrecognized compensation related to
non-vested options granted under the plans. The Company expects to recognize the
cost over a weighted average period of 1.3 years. The total fair value of
options which vested during the nine months ended September 30, 2010 was
$384,651 ($183,118 during the nine months ended September 30,
2009).
7.
|
Earnings/Loss Per
Share
|
Basic
earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
outstanding (the denominator) for the period. Diluted earnings per share are
computed by assuming that any dilutive convertible securities outstanding were
converted, with related preferred stock dividend requirements and outstanding
common shares adjusted accordingly. It also assumes that outstanding common
shares were increased by shares issuable upon exercise of those stock options
for which the market price exceeds the exercise price, less shares which could
have been purchased by us with the related proceeds. In periods of losses,
diluted loss per share is computed on the same basis as basic loss per share as
the inclusion of any other potential shares outstanding would be
anti-dilutive.
If the
Company had generated earnings during the nine months ended September 30, 2010,
the Company would have added 2,720,167 common equivalent shares to the weighted
average shares outstanding to compute the diluted weighted average shares
outstanding. If the Company had generated earnings during the nine months ended
September 30, 2009, the Company would have added 102,295,181 common equivalent
shares to the weighted average shares outstanding to compute the diluted
weighted average shares outstanding.
11
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8.
|
Comprehensive Income and
Significant Non-Cash
Transactions
|
ASC 220
“Comprehensive Income”
establishes standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources.
The
components of comprehensive loss for the year-to-date periods ended September
30, 2010 and 2009 are as follows:
2010
|
2009
|
|||||||
Net loss applicable to common
shareholders
|
$ | (4,024,219 | ) | $ | (23,523,509 | ) | ||
Foreign
currency translation adjustment
|
$ | 387 | $ | (2,807 | ) | |||
Comprehensive
Income/(loss)
|
$ | (4,023,832 | ) | $ | (23,526,316 | ) |
The
following table provides summary information on our significant non-cash
investing and financing transactions during the year-to-date periods ended
September 30, 2010 and 2009.
2010
|
2009
|
|||||||
Beneficial
conversion feature on preferred stock
|
$ | - | $ | 3,010,517 | ||||
Dividend
accrued to preferred stock - Senior
|
$ | - | $ | 113,652 | ||||
Dividend
accrued to preferred stock - Series A
|
$ | - | $ | 747,399 | ||||
Fair
value of warrants issued with related party note
|
$ | - | $ | 20,308 | ||||
Origination
fees issued with related party note
|
$ | - | $ | 64,000 |
9.
|
Commitments and
Contingencies
|
Contingent
Shares
We agreed
to sell 1,000,000 shares of common stock to a foreign partnership, Mercatus
& Partners Limited at a price of $2.50 per share as part of a group of
comparable transactions where the purchaser planned to contribute a portfolio of
small public company securities to a pair of offshore funds in exchange for fund
units, and then use the fund units as security for bank financing that would be
used to pay for the underlying securities. Contrary to the terms and conditions
of our agreement, the foreign partnership was in possession of a stock
certificate representing these 1,000,000 shares; however, completion of the
transaction was contingent upon receipt of the proceeds from the foreign
partnership, which were not received. The 1,000,000 shares were recovered on
December 4, 2007 and forwarded to Continental Stock Transfer Agency for
cancellation, which took place that same month.
In
connection with the offering described above, four holders of warrants to
purchase shares of our common stock agreed to exercise their warrants to
purchase, in the aggregate, 301,700 shares of common stock (the “Incompletely
Exercised Warrant Shares”) for the purpose of selling them to the foreign
partnership in a transaction that was substantially similar to the one we
entered into with the same foreign partnership. These shares were to be issued
to the foreign partnership upon receipt of payment, which was in turn contingent
upon the foreign partnership tendering the payment of the purchase price for
these shares. Contrary to the terms and conditions of their agreements, the
foreign partnership transferred the shares to two of its creditors who both hold
the shares as holders-in-due-course.
As of
July 28, 2010, all remaining litigation with respect to the foregoing was fully
settled and dismissed with a total amount of settlement proceeds of $860,000
recorded as a reduction of current period selling general and administrative
expenses in offset of legal expenses incurred to pursue this
matter.
Employment
Agreements:
The
Company has entered into executive employment agreements with Thomas Granville,
Edward Buiel, Jr. (contract expired May 31, 2010 and a new contract is currently
being negotiated), Charles R. Trego, and Phillip S. Baker. Donald T. Hillier,
the former CFO, was terminated from employment on February 5, 2010. These
agreements generally require each executive to devote substantially all of his
business time to the Company’s affairs, establish standards of conduct, prohibit
competition with our company during their term, affirm our rights respecting the
ownership and disclosure of patents, trade secrets and other confidential
information, provide for the acts and events that would give rise to termination
of such agreements and provide express remedies for a breach of the agreement.
Each of the executives is allowed to participate 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, reimbursement for all reasonable
business expenses incurred by him on behalf of the Company in the performance of
his duties, and a severance package that guarantees continued remuneration equal
to the executives base salary for a total of 23 months so long as the company
elects to enforce the provisions of the Non-Competition Agreement,
should the executive be unable to find employment or
accepts employment at a reduced rate of pay due solely to the
Non-Competition Agreement. The provisions of the individual agreements are set
forth in the following table:
12
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Name
|
Position
|
Date
|
Term
|
Salary
|
Options
|
Price
|
Vesting
|
Stock
|
|||||||||||||||
Thomas Granville
(1)
|
CEO
|
6/29/10
|
3-year
|
$ | 380,000 | 360,000 | $ | 1.50 |
Monthly
|
0 | |||||||||||||
Charles
R. Trego (2)
|
CFO
|
4/01/10
|
3-year
|
$ | 225,000 | 265,000 | $ | 1.50 |
Monthly
|
0 | |||||||||||||
Philip
S. Baker (4)
|
COO
|
4/01/10
|
3-year
|
$ | 199,800 | 230,000 | $ | 1.50 |
Monthly
|
0 | |||||||||||||
Dr.
Edward Buiel (3)
|
VP
and CTO(former)
|
||||||||||||||||||||||
Donald
T. Hillier (5)
|
CFO(former)
|
1.
|
Thomas Granville. On
June 29, 2010, the Company entered into an Executive Employment Agreement
with Thomas Granville as Chief Executive Officer. Pursuant to this
agreement, Mr. Granville receives an annual salary of $380,000, and an
annual car allowance of $9,000 for the period commencing June 29, 2010,
and terminating June 30, 2013. 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 $270,000 and was paid on July 9, 2010. The
Company also granted Mr. Granville an option to purchase 360,000 shares of
our common stock at a price of $1.50 per share at a vesting rate of 10,000
shares per month through the term of the agreement. Mr. Granville is
eligible to participate in any executive compensation plans adopted by the
shareholders of the Company and the Company's standard employee benefit
programs.
|
2.
|
Charles R. Trego. On April 1, 2010,
the Company entered into an Executive Employment Agreement with Charles R.
Trego as Chief Financial Officer. Under the terms of
his employment agreement, which has a term of three years, Mr. Trego
receives an annual salary of $225,000, which is subject to review after
the initial six month term of the agreement and annually thereafter, an
annual car allowance of $9,000, bonuses as determined by the compensation
committee, and a 5-year option to purchase 265,000 shares of our common
stock at a price of $1.50 per share. 27,000 options shall vest upon
execution of this contract and, beginning in June 2010, 7,000 options will
vest monthly through the remaining 34 months of this
contract.
|
3.
|
Dr. Edward
Buiel. On June 23,
2008, the Company entered into an Executive Employment Agreement with Dr.
Edward Buiel as Vice President and Chief Technology Officer which contract
terminated on May 31, 2010. Upon expiration of his status as employee,
50,000 shares of restricted stock were forfeited pursuant to the terms of
his 2008 employment agreement. On June 7, 2010 the Company
agreed to engage Dr. Buiel as an interim independent
contractor with compensation at $10,000 per week, plus travel expenses to
and from all work sites, meals, administrative expenses, other travel
related expenses, and health care benefits. Payments continue to be made
under this agreement which expired on June 22, 2010 and has been extended
on a weekly basis to present although there is no written consulting
agreement in place. As of November 12, 2010 the Company intends
to continue to negotiate with Dr. Buiel regarding a new employment
contract; however, the time period of negotiations has materially exceeded
the originally intended time period. There can be no assurance
as to whether his employment will be reinstated, and if so, under what
terms. If Dr. Buiel's contract is not renewed, there would be
the transition and training expense of a replacement either as an internal
promotion or outside hire as well as the loss of Dr. Buiel’s personal
experience with the
technology.
|
4.
|
Philip S. Baker. On April 1, 2010,
the Company entered into an Executive Employment Agreement with Philip S.
Baker as Chief Operating Officer. Under the terms of his employment
agreement, which has a term of three years, Mr. Baker receives an annual
salary of $199,800,which is subject to review after the initial six month
term of the agreement and annually thereafter, an annual car allowance of
$6,000, and a 5-year option to purchase 230,000 shares of our common stock
at a price of $1.50 per share, of which 26,000 options shall vest upon
execution of this contract and, beginning in June, 2010, 6,000 options
will vest monthly through the remaining 34 months of this
contract.
|
5.
|
Donald T.
Hillier. 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. However,
60,000 of these shares were forfeited upon termination. 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 the
separation agreement, Mr. Hillier received $35,000 in cash, health
insurance through April 30, 2010, and waived his right to receive the
30,000 vested common shares owing to him under his 2008 contract in
exchange for 30,000 vested common shares valued at $23,400 on June 22,
2010, the physical stock issuance
date.
|
13
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The
Company has no retirement plans or other similar arrangements for any directors,
executive officers or employees.
Purchase
Orders:
On May
11, 2010, the Company was awarded federal contract number N00014-10-C-0094.
Under the terms of the agreement, Axion shall furnish personnel and facilities
to conduct the research effort for the development of new lightweight,
high-powered batteries for use in vehicles operated by the U.S. Marine Corps.
This cost-plus-fixed-fee completion contract requires scientific or technical
reports to be delivered, inspected and accepted prior to reimbursement. Costs
incurred during the performance period, will be reimbursed quarterly. The
contract spans a twelve month period, providing $1,004,747 to us for this
project, and is subject to defined reporting requirements and financial audit
upon contract completion.
Selling
price is determined by periodic spending using the hourly labor, overhead, and
G&A rates submitted with the proposal. The rates are subject to adjustment
at the end of contract, and secured by the unpaid fixed fee. Revenue
based on the proportionate performance of the work performed is recognized from
inception to completion when collection of the reimbursement is reasonably
assured. Recognition of the fixed fee is postponed to contract completion. Fixed
fee billings are recorded under deferred revenue. This contract
is not expected to have a significant impact in 2010.
Amendment
No. 3 to Securities Purchase Agreement, dated as of September 30,
2010
On
September 28, 2010, both Stanley A. Hirschman and Joseph Bartlett gave
notice of their resignations as directors of the Company, effective
immediately. In connection with Mr. Bartlett’s resignation, Quercus
has executed Amendment No. 3 to Securities Purchase Agreement, dated as of
September 30, 2010, pursuant to which it has waived its right to have three
directors appointed to the Company’s Board and instead will reserve the right to
have one director appointed. These actions are consistent with the
Company’s overall goal of reducing the size of its Board.
10.
|
Subsequent
Events
|
On
October 1, 2010, 100,000 warrants issued to placement agents were exercised with
an exercise price of $57,000.
On
November 4, 2010, the Company entered into a Commercial Lease
(“Lease”) with Becan Development, LLC (“Lessor”) to lease a 45,000 square foot
building, located at 209 Green Ridge Road in New Castle PA, (the “Property”),
which the Company currently occupies to house various offices and manufacturing
facilities. The salient terms of the Lease are as
follows:
|
·
|
The
Lease term commences on January 1, 2011, and the term expires on December
31, 2015.
|
|
·
|
The
Lease may be extended for two 5-year terms, by giving notice not less than
30 nor more than 120 days before the expiration of the initial term or
first renewal term (as applicable). The renewal leases shall be
on terms substantially similar to the terms of this Lease except for any
adjustment to rent, if warranted, as mutually agreed upon by Lessor and
the Company.
|
|
·
|
The
rental amount for the initial term is $19,296.83 per month and is on a
“triple net” basis.
|
|
·
|
If
the Company is able to obtain sufficient funding from either the federal
or state government or agencies, and it enters into a binding agreement to
purchase the Property, the Lease shall be immediately terminated and
Lessor shall credit the most recent 6 months of actual rental payments
made to Lessor against the purchase price of the
Property
|
|
·
|
The
Company also has a right of first refusal to purchase the property within
30 days of receipt of notice of a third party offer from Lessor upon
substantially the same terms as those offered by the third
party.
|
|
·
|
The
Lease contains market terms on standard provisions such as defaults and
maintenance.
|
14
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11.
|
Recent Accounting
Pronouncements
|
In
October 2009, the FASB issued authoritative guidance on ASC 605-25 “Revenue Recognition -
Multiple-Deliverable Revenue Arrangement” that became effective
on July 1, 2010. 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. Adoption of this new guidance did not have a material
impact on the consolidated financial statements.
In
January 2010, the Company adopted ASU No. 2010-06, “Fair Value Measurements and
Disclosures (Topic 820)-Improving Disclosures about Fair Value
Measurements)”, which 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 3 method, which
is used to price the hardest to value instruments. The guidance is effective for
any fiscal year that begins after December 15, 2009, and it should be used for
quarterly and annual filings. Adoption of this new guidance did not have a
material impact on the consolidated financial statements.
In April
2010, the FASB issued ASU 2010-17, “Milestone Method of Revenue
Recognition”. This update provides guidance on defining a milestone
under Topic 605, Revenue Recognition – Milestone Method, and determining when it
may be appropriate to apply the milestone method of revenue recognition for
research or development transactions. Consideration that is contingent on
achievement of a milestone in its entirety may be recognized as revenue in the
period in which the milestone is achieved only if the milestone is judged to
meet certain criteria to be considered substantive. Milestones should be
considered substantive in their entirety and may not be bifurcated. An
arrangement may contain both substantive and non-substantive milestones that
should be evaluated individually. ASU 2010-17 is effective on a prospective
basis for milestones achieved beginning on or after June 15, 2010. Adoption
of this new guidance did not have a material impact on the consolidated
financial statements.
15
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are a
development stage company that was formed in September 2003 to acquire and
develop certain innovative battery technology. Since inception we have been
engaged in research and development of new technology to manufacture carbon
electrode assemblies for our lead-acid-carbon energy storage devices that we
refer to as our PbC devices.
Since
inception, we have received $60.6 million in cash generated from financing
activities of which $44.3 million was used to fund research and development
activities, capital expenditures, infrastructure and working
capital.
During
2010, we have continued to make improvements to our production processes
including capital acquisitions and enhancement of quality control systems. We
continue to engineer and improve our first automated electrode manufacturing
line. Manufacturing activity for 2010 has consisted of continued production of
PbC prototype and test batteries, as well as manufacturing traditional batteries
pursuant to sales orders. Manufacturing traditional batteries enables us to
train factory personnel, test systems and make production and quality
improvements that we believe will ultimately benefit future PbC battery
production. Additionally, some of the proceeds from the December 2009
private placement are being used to complete our first electrode production line
and add the proper automated quality control process. This basic line will then
be duplicated and improved as additional electrode production lines are added to
allow us to achieve meaningful commercialization levels. We will also use the
proceeds from sales of our prototype batteries to fund our ongoing operations
including working capital.
Key
Performance Indicators, Material Trends and Uncertainties
Because
we are a development stage company, typical investor financial measures are not
particularly relevant or helpful in the assessment of company
operations.
We
utilize appropriate non-financial measures to evaluate the performance of our
R&D activities 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. Working capital is necessary to fund our capital expenditures,
infrastructure and processes required to progress from demonstration projects to
commercial deployment of our proprietary product. We believe we can maintain our
current level of operations, R&D activities, production levels and required
capital expenditures through 2011 without further capital
infusions.
We
believe we need to continue to characterize and perfect our products in house
and through a limited number of demonstration projects before moving into
commercial production. While the results of this work are moving toward that
goal, we cannot provide assurance 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 carbon electrode assemblies for 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 commercially
produce our product.
Financing
Activities
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 and an additional
$541,666 on December 8, 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. $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.
16
The December 2009 Private
Placement. On December 18, 2009, we entered into a Securities
Purchase Agreement pursuant to which we issued 45,757,572 shares of 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, and on April 19, 2010 the
registration statement covering these shares was declared
effective.
On
February 9, 2010, April 19, 2010, and again on July 12, 2010 a total of 300,000
warrants (100,000 warrants from each transaction) were exercised for a total of
$171,000.
Award
Activities: Grants and Contracts
On
February 9, 2009, we received notice that we were the recipient of 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 project was completed in July 2010 and a
total of $763,404 has been recovered against this award.
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 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
have begun design work on this project.
On June
16, 2010, Axion Power Battery Manufacturing, Inc. received 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 May
11, 2010, we were awarded a federal contract number N00014-10-C-0094 for the
development of new lightweight, high-powered batteries for use in vehicles
operated by the U.S. Marine Corps. This final contract provides $1,004,747 to us
for this project. The
project initially proposed in December 2006 and January 2007 was presented to
branches of the Armed Forces. In February 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, but not approved in the 2008 federal budget. We were chosen for the
award once the project was approved by the U.S. Congress in their 2009
budget. Under the program, we will be working with the U.S. Navy and
Marine Corps to study the feasibility of utilizing one of our PbC ® products in
their assault and silent watch vehicles. During 2010, we have invoiced and
collected $307,150 against this project, deferring the fixed fee of $20,094 from
revenue, pending project completion.
Summary
of the unbilled award balances as of September 30, 2010:
Award Balance
|
||||
DOD
Office of Naval Research (Contract)
|
$ | 697,597 | ||
Pennsylvania
Energy Development Authority Grant
|
248,650 | |||
Pennsylvania
Department of Community and Economic Development Grant
|
298,605 | |||
$ | 1,244,852 |
17
Results
of Operations
Overview
The
following Management’s Discussion and Analysis (“MD&A”) is written to help
the reader understand our Company. The MD&A is provided as a supplement to,
and should be read in conjunction with, our unaudited condensed financial
statements, the accompanying condensed financial statement notes appearing
elsewhere in this report and our Annual Report on Form 10-K for the year
ended December 31, 2009.
|
·
|
Our
primary activity in our current development stage consists of R&D
efforts for advanced battery applications and PbC carbon electrode
devices.
|
|
·
|
Net
Sales are derived from the sale of lead acid batteries to specialty
collector and racing cars, AGM batteries, and flooded batteries, and from
the sale of product and services related to advanced battery applications,
including PbC test batteries sold to a battery
manufacturer.
|
|
·
|
Product
Costs include raw materials, components, labor and allocated manufacturing
overhead to produce batteries sold to customers. Due to the development
stage of our business, current product costs represented in our current
financial statements may not be indicative of the future costs to produce
batteries. Product costs also include provisions for inventory valuation
and obsolescence reserves.
|
|
·
|
Research
& development includes expenses to design, develop, and test advanced
batteries and carbon electrode assemblies for our energy storage products
based on our patented lead carbon technology. Also included are the
materials consumed in production of pilot products, manufacturing costs
not assigned to product sales, and costs attributable to service
sales.
|
|
·
|
Selling, general and
administrative expenses include employee compensation, legal, auditing and
other costs associated with our Securities and Exchange Commission
filings, selling and marketing, investor public relations, and legal costs
associated with litigation and protection of our intellectual property
rights.
|
Statements
of Operations
Summarized
selected financial data for the three months and nine months ended September 30,
2010 and 2009.
Three
Months Ended
|
Nine
months Ended
|
|||||||||||||||
September
30
|
September
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Product
sales
|
$ | 256,898 | $ | 962,833 | $ | 1,084,360 | $ | 1,567,816 | ||||||||
Service sales
|
$ | 337,056 | $ | - | $ | 494,433 | $ | - | ||||||||
Product
costs
|
142,203 | 981,273 | 677,481 | 1,380,923 | ||||||||||||
Research
& development expenses
|
1,175,945 | 869,892 | 3,762,054 | 3,327,676 | ||||||||||||
Selling,
general & administrative expenses
|
63,518 | 873,213 | 2,284,550 | 2,887,597 | ||||||||||||
Derivative
revaluations (income)
|
(67,414 | ) | 12,048,203 | (1,132,257 | ) | 13,592,717 | ||||||||||
Loss
before income taxes
|
(723,004 | ) | (13,853,288 | ) | (4,024,219 | ) | (19,651,939 | ) |
18
Summary
of Condensed Consolidated Results for the three and nine months ended September
30, 2010 compared with September 30, 2009
Product
Sales
Product sales
for the three months ended September 30, 2010 were $0.3 million compared to $1.0
million in 2009. Product sales
for the nine months ended September 30, 2010 were $1.1 million compared to $1.6
million in 2009. We have one customer that accounted for approximately 26%
of product sales for the nine month period in 2010 and two customers which
accounted for approximately 49% and 13% of the sales generated for the nine
month period in 2009. The decrease in product net sales for the three and
nine month periods ending September 30, 2010 compared to the same periods ended
September 30, 2009 was primarily due the sales of traditional batteries to a
large scale buyer group in the third quarter of 2009 that did not reoccur in the
third quarter of 2010.
Service
Sales
Service sales for the three
months ended September 30, 2010 were $0.3 million compared to $0.0 million in
2009. Service sales for the nine
months ended September 30, 2010 were $0.5 million compared to $0.0 million in
2009. We have two customers that accounted for 100% of service sales for
the nine month period in 2010.
Product
Cost
Product
costs for the three months ended September 30, 2010 were $0.1 million compared
to $1.0 million in 2009. Product costs for the nine months ended
September 30, 2010 were $0.7 million compared to $1.4 million in 2009. The
decrease in product costs for the three month and nine month periods ending
September 30, 2010 compared to the same periods ended September 30, 2009
resulted from decreases in product net sales and product mix.
Research
& Development Expenses
Research
and development expenses for the three months ended September 30, 2010 were $1.2
million compared to $0.9 million in 2009. Research and development
expenses for the nine months ended September 30, 2010 were $3.8 million compared
to $3.3 million in 2009. During the three and nine month period ended
September 2009, research and development expenses were reduced by $0.3 in grant
proceeds. For the nine month period ending September 30, 2010
compared to the same period in 2009, increased labor and
R&D testing costs were offset by grant proceeds.
Selling,
General & Administrative Expenses
Selling,
general & administrative expenses for the three months ended September 30,
2010 were $0.1 million compared to $0.9 million in 2009. Selling,
general & administrative expenses for the nine months ended September 30,
2010 were $2.2 million compared to $2.9 million in 2009. The three and
nine month periods ending September 30, 2010 included a reduction of legal
expenses of $0.8 million resulting from the settlement of the Mercatus matter as
discussed in Legal Proceedings caption “Contingent
Shares”.
Derivative
Revaluation
Income
from derivative revaluation for the three months ended September 30, 2010 was
$0.1 million compared to a loss of $12.0 million in 2009. Income from derivative
revaluation for the nine months ended September 30, 2010 was $1.1 million
compared to a loss of $13.6 million in 2009. Income from derivative
revaluation results from a decrease in the fair value of derivative liabilities.
Derivative revaluations are 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.
Liquidity
and Capital Resources
Our
primary source of liquidity since inception has been cash generated from
issuances of our equity or debt securities. From inception through September 30,
2010, we generated insignificant revenue from operations. Given the receipt of
financing proceeds from our December 2009 equity private placement that
generated net cash proceeds of $25.0 million, we believe we can maintain our
current level of operations, R&D activities, production levels and required
capital expenditures through 2011 without further capital
infusions.
19
Cash,
Cash Equivalents and Working Capital
At September 30, 2010 working capital
was $17.2 million compared to working capital of $23.2 million at December 31,
2009. Cash equivalents consist of short-term liquid investments with original
maturities of no more than six months and are readily convertible into cash.
Cash
Flows from Operating Activities
Net cash
used in operations for the nine months ended September 30, 2010 was $5.0 million
compared to $5.0 million for the nine months ended September 30, 2009. Our
negative cash flow is consistent with the development stage of our
business.
Cash Flows used by
Investing Activities
Net cash
used by investing activities for the nine months ended September 30, 2010 was
$2.2 million compared to net cash provided by investing activities of $1.2
million for the same period in 2009. Activities in 2009 included cash provided
by the maturity of $2.2 million of short term investments deposited into cash
equivalents. Activities in 2010 focused on the procurement of equipment used in
PbC development.
Cash
Flows from Financing Activities
Net cash
provided by financing activities for the nine months ended September 30, 2010
was $0.2 million and $1.5 million in 2009.
Financing
Activities
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, which was fully paid off in
December 2009. In connection with the loan, we issued 3,405 warrants to
purchase our common stock, for each $100,000 invested and exercisable at $2.00
per share until August 12, 2014.
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
February 9, 2010, April 19, 2010, and again on July 12, 2010 a total of 300,000
warrants (100,000 warrants from each transaction) were exercised for a total of
$171,000.
20
Critical
Accounting Policies, Judgments and Estimates
Our
significant accounting policies are fundamental to understanding our results of
operations and financial condition. Some accounting policies require
that we use estimates and assumptions that may affect the value of our assets or
liabilities and financial results. These policies are described in “Critical
Accounting Policies, Judgments and Estimates” and Note 2 (Accounting Policies)
to Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2009. The following represents a summary of
modifications to our critical accounting policies defined on Form 10-K for the
year ended December 31, 2009.
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.
·
|
Products
are generally shipped 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 products and
services sold through September 30,
2010.
|
|
·
|
Research
or development contract revenue from cost plus fixed fee contracts with
the Federal Government is recorded on the basis of periodic spending and
billable expenditures, when collection of the reimbursement is reasonably
assured. Recognition of the fixed fee is postponed to contract completion
consistent with the provisions of ASC 912-605-25-16 “Cost plus Fixed Fee
contracts” and fixed fee billings are netted from unbilled contract
costs pending contract completion. These contracts generally
include a statement defining the work we are to complete and the total fee
we will earn from the contract.
|
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.
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by our quarterly report, management performed, with
the participation of our Chief Executive Officer and Chief Financial Officer, an
evaluation of the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s forms, and that such information is accumulated and
communicated to our management including our Chief Executive Officer and our
Chief Financial Officer, to allow timely decisions regarding required
disclosures.
During
the three months ended September 30, 2010, the Company continued to permit Dr.
Edward Buiel to hold himself out as our CTO, and we continued to refer to him as
our CTO in various Company literature such as press releases and on our
website. The continued representation of Dr. Buiel as CTO continued
despite the fact that Dr. Buiel’s employment contract expired on May 31, 2010,
and there has been no interim consulting agreement with Dr. Buiel since June 22,
2010.
Based
upon the foregoing situation regarding Dr. Buiel and upon the evaluation and the
identification of the material weaknesses in our internal control over financial
reporting described in our Annual Report on Form 10-K for the year ended
December 31, 2009, our Chief Executive Officer and our Chief Financial Officer
concluded that, as of September 30, 2010, our disclosure controls and procedures
were not effective.
21
Remediation
of Material Weaknesses in Internal Control over Financial Reporting
During
the three months ended September 30, 2010, to address certain of the weaknesses
identified in our Annual Report on Form 10-K for the year ended December 31,
2009:
|
·
|
We
strengthened our Accounting organization by recruiting a Staff
Accountant and a Plant
Controller,
|
|
·
|
We
strengthened our Information
Technology organization team by
recruiting a Director of Information
Technology
|
|
·
|
We
have identified certain weaknesses in our internal controls and have taken
appropriate action to rectify these weaknesses; however, testing of the
actions taken has is yet to be
completed.
|
Other
than as discussed above, during the three months ended September 30, 2010, there
were no changes in internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
LEGAL
PROCEEDINGS
|
From time
to time, we are involved in lawsuits, claims, investigations and proceedings,
including pending opposition proceedings involving patents that arise in the
ordinary course of business. There are no matters pending that we expect to have
a material adverse impact on our business, results of operations, financial
condition or cash flows. We do reflect the final settlement of a
material litigation herein below.
Contingent
Shares
We agreed
to sell 1,000,000 shares of common stock to a foreign partnership, Mercatus
& Partners Limited at a price of $2.50 per share as part of a group of
comparable transactions where the purchaser planned to contribute a portfolio of
small public company securities to a pair of offshore funds in exchange for fund
units, and then use the fund units as security for bank financing that would be
used to pay for the underlying securities. Contrary to the terms and conditions
of our agreement, the foreign partnership was in possession of a stock
certificate representing these 1,000,000 shares; however, completion of the
transaction was contingent upon receipt of the proceeds from the foreign
partnership, which were not received. The 1,000,000 shares were recovered on
December 4, 2007 and forwarded to Continental Stock Transfer Agency for
cancellation, which took place that same month.
In
connection with the offering described above, four holders of warrants to
purchase shares of our common stock agreed to exercise their warrants to
purchase, in the aggregate, 301,700 shares of common stock (the “Incompletely
Exercised Warrant Shares”) for the purpose of selling them to the foreign
partnership in a transaction that was substantially similar to the one we
entered into with the same foreign partnership. These shares were to be issued
to the foreign partnership upon receipt of payment, which was in turn contingent
upon the foreign partnership tendering the payment of the purchase price for
these shares. Contrary to the terms and conditions of their agreements, the
foreign partnership transferred the shares to two of its creditors who both hold
the shares as holders-in-due-course.
As of
July 28, 2010, all remaining litigation with respect to the foregoing was fully
settled and dismissed with a total amount of settlement proceeds of
$860,000.
The
settlement proceeds are allocated as follows:
$ 214,000
|
to
legal counsel for fees and expenses
|
|
$ 646,000
|
to
us (which consists mainly of reimbursement of legal fees and
expenses)
|
|
|
||
$ 860,000
|
We have
reached an understanding with the two remaining plaintiffs in the Mercatus
matter each of whom provided free trading shares to the transaction. The two
plaintiffs will be issued restricted shares of our common stock in settlement of
their right to a portion of the proceeds subject to execution of the
agreements.
22
RISK
FACTORS
|
Set forth
below is an update to our risk factors as set forth in our Annual Report on Form
10-K for the year ended December 31, 2009 and supplemented by our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30,
2010. For full comprehension of the risks affecting our Company, you
are encouraged to review the risk factors set forth in our 2009 Annual and
quarterly Reports in their entirety.
Risks
related to our business
We
have incurred net losses from inception and do not expect to introduce our first
commercial PbC products in 2010.
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 and to build an infrastructure to support the business. Our
operating losses have had, and will continue to have, an adverse impact on our
working capital, total assets and stockholders’ equity. For the nine months
ended September 30, 2010, we had a net loss applicable to common shareholders of
approximately $4.0 million. In addition, we had cumulative losses
from inception (September 18, 2003) to September 30, 2010 of $64.9 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. 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.
We
depend on key personnel, and our business may be severely disrupted if we lose
the services of our key executives employees, and consultants.
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 that include non-compete
provisions. Dr. Buiel
is not currently an employee or officer of the Company, and there is no
employment contract with him.
We
no longer have a written contractual arrangement with our former CTO, Dr. Buiel,
and his current status as a consultant without a written agreement poses risks
for us.
On June
23, 2008, the Company entered into an Executive Employment Agreement with Dr.
Edward Buiel as Vice President and Chief Technology Officer which contract
terminated on May 31, 2010. On June 7, 2010 the Company agreed
to engage Dr.
Buiel as an interim independent contractor, and this agreement expired on June
22, 2010 and has been extended on a weekly basis to present. Despite
his status as independent contractor, Dr. Buiel continued to serve as the
Company’s interim CTO. As of November 12, 2010, the Company intends to continue
to negotiate with Dr. Buiel regarding a new employment contract; however, the
time period of negotiations has materially exceeded the originally intended time
period.
|
·
|
There
can be no assurance as to whether Dr. Buiel’s employment will be
reinstated, and if so, under what
terms.
|
As Dr.
Buiel is under no written obligation to continue to perform services on behalf
of the Company and can cease to provide services with no advance notice, The
Company could face the immediate loss of Dr. Buiel.
|
·
|
We
may be unable to find a suitable replacement with Dr. Buiel’s
qualifications in a timely manner and the lack of a CTO with the requisite
experience could disrupt its business operations, delay its scheduled
progress in the development of our PbC technology, and jeopardize any
strategic Company relationships for which Dr. Buiel was the primary
contact.
|
23
Risks
relating to our common stock
We
have issued a large number of warrants and options that may increase, perhaps
significantly, the number of common shares outstanding.
On
September 30, 2010, we had 85,155,002 shares of common stock outstanding, and
(a) we have 50,000 unvested common shares that have been granted and not issued,
(b) we have warrants outstanding and that, if exercised, would generate proceeds
of $$18,865,625 and cause us to issue up to an additional 13,665,433 shares
of common stock, with 1,185,714 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 $7,018,687 and result in
the issuance of an additional 3,474,746 shares of common stock.
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.
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 November 1, 2010, the latest practicable date, was $0.65 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.
24
EXHIBITS
|
10.39
|
Executive
Employment Agreement of Thomas Granville dated June 29, 2010
(1)
|
10.40
|
Amendment
No. 3 to Securities Purchase Agreement dated September 30, 2010
(2)
|
10.41
|
Commercial
Lease with Becan Development, LLC dated November 4, 2010
(3)
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a)
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a)
|
32.1
|
Statement
of Chief Executive Officer Pursuant to Section 1350 of Title 18 of
the United States Code
|
32.2
|
Statement
of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the
United States Code
|
(1) Incorporated
by reference from our Current Report on Form 8-K dated July 6,
2010.
(2) Incorporated
by reference from our Current Report on Form 8-K dated October 4,
2010.
(3) Incorporated
by reference from our Current Report on Form 8-K dated November 10,
2010.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AXION
POWER INTERNATIONAL, INC.
/s/
Thomas Granville
Thomas
Granville,
|
|
Chief
Executive Officer
|
|
Dated:
November 12, 2010
|
/s/
Charles R. Trego
Charles
R. Trego, Principal Financial Officer and
|
|
Principal
Accounting Officer
|
|
Dated:
November 12, 2010
|
25