Attached files
file | filename |
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EX-32.1 - AXION INTERNATIONAL HOLDINGS, INC. | v207926_ex32-1.htm |
EX-31.1 - AXION INTERNATIONAL HOLDINGS, INC. | v207926_ex31-1.htm |
EX-31.2 - AXION INTERNATIONAL HOLDINGS, INC. | v207926_ex31-2.htm |
EX-22.1 - AXION INTERNATIONAL HOLDINGS, INC. | v207926_ex22-1.htm |
EX-32.2 - AXION INTERNATIONAL HOLDINGS, INC. | v207926_ex32-2.htm |
EX-10.18 - AXION INTERNATIONAL HOLDINGS, INC. | v207926_ex10-18.htm |
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Fiscal Year ended September 30, 2010
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 0-13111
Axion
International Holdings, Inc.
(Exact
name of registrant as specified in its charter)
Colorado
|
84-0846389
|
(State
or other jurisdiction of incorporation or
organization)
|
(IRS
Employer Identification Number)
|
180 South
Street, New Providence, NJ 07974
(Address
of principal executive offices)
(908)
542-0888
(Registrant’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act:
Title
of each class
|
Name
of each exchange on which registered
|
None
|
None
|
Securities
registered under Section 12(g) of the Exchange Act:
Title
of each class
|
Common
Stock, no par value
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes ¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨.
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 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
(Do not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was $29,563,351 based on the average bid and
asked price of the Common Stock on January 10, 2011.
The
number of shares outstanding of the registrant’s Common Stock, as of January 10,
2011, was 23,305,704.
DOCUMENTS
INCORPORATED BY REFERENCE
TABLE
OF CONTENTS
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|
|
Page
|
PART
I.
|
|||
Item
1.
|
Business
|
1
|
|
Item
1A
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Risk
Factors
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12
|
|
Item
2.
|
Property
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17
|
|
Item
3.
|
Legal
Proceedings
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17
|
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Item
4.
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[Removed
& Reserved]
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17
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PART
II.
|
|||
Item
5.
|
Market
for Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
|
18
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Item
6.
|
Selected
Financial Data
|
18
|
|
Item
7.
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Management’s
Discussion and Analysis or Plan of Operations
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19
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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25
|
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Item
8.
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Financial
Statements
|
25
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
25
|
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Item
9A(T).
|
Controls
and Procedures
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25
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Item
9B.
|
Other
Information
|
26
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PART
III.
|
|||
Item
10.
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Directors,
Executive Officers, Promoters and Corporate Governance
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27
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Item
11.
|
Executive
Compensation
|
30
|
|
Item
12.
|
Security
Ownership of Beneficial Owners and Management and Related Stockholder
Matters
|
32
|
|
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
39
|
|
Item
14.
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Principal
Accountant Fees and Services
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40
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PART
IV.
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|||
Item
15.
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Exhibits,
Financial Statement Schedules
|
41
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|
Signatures
and Certifications
|
44
|
i
PART
I
Item
1. Business
Overview
Axion
International Holdings, Inc. (“Axion”), formerly Analytical Surveys, Inc., was
formed in 1981 and operated several different businesses until November 2007,
when Axion entered into an Agreement and Plan of Merger, among Axion, Axion
Acquisition Corp., a Delaware corporation and newly created direct wholly-owned
subsidiary of Axion (the “Merger Sub”), and Axion International, Inc., a
Delaware corporation which incorporated on August 6, 2006 with operations
commencing in November 2007 (“Operating Entity”). On March 20, 2008
(the “Effective Date”), Axion consummated the merger (the “Merger”) of Merger
Sub into Operating Entity, with Operating Entity continuing as the surviving
corporation and a wholly-owned subsidiary of Axion. Each issued and
outstanding share of Operating Entity became 47,630 shares of Axion’s common
stock (“Common Stock”), or 9,190,630 shares in the aggregate constituting
approximately 90.7% of Axion’s issued and outstanding Common Stock as of the
Effective Date of the Merger. The Merger resulted in a change of
control, and as such, Axion (“we”, “our” or “Company”) is the surviving
entity.
Business
Axion is
the exclusive licensee of patented and patent-pending technologies developed for
the production of structural plastic products such as railroad crossties,
pilings, I-beams, T-Beams, and various size boards including a tongue and groove
design that are utilized in multiple engineered design solutions such as rail
track, rail and tank bridges (heavy load), pedestrian/ park and recreation
bridges, marinas, boardwalks and bulk heading to name a few. This
technology is licensed and products are sold in several territories including
North and South America, the Caribbean, South Korea, Saudi Arabia, The United
Arab Emirates, and Russia; additionally, China is a shared country with our
strategic partner, Micron. We believe these technologies, which were developed
by scientists at Rutgers University (“Rutgers”), can transform recycled consumer
and industrial plastic wastes that would otherwise be discarded into landfills,
into superior structural products which are more durable, have a substantially
greater useful life and offer more flexible design features than traditional
products made from wood, steel and concrete. Our products also resist
rot and damaging insects without the use of chemical treatments and require
significantly less maintenance throughout their lifecycles than traditional
products. In addition, we believe our recycled composite products are
environmentally friendly, in part because they sequester carbon, reduce the
number of trees needing to be harvested and do not contain creosote, a
carcinogen used to coat conventional wood crossties.
We are
currently marketing our structural products to both the U.S. domestic and
international railroad industry, the U.S. military, and industrial engineering
and contracting firms. Our initial products consist of: (1) structural composite
railroad crossties, (2) structural composite I-beams along with tongue and
groove planking and (3) various sizes of boards.
In 2009,
we sold our products for use in construction of two bridges commissioned by the
military at Fort Bragg, NC to help facilitate troop movements, which were
engineered to carry the extreme tonnage requirements for armored military
vehicles that would not be possible with currently existing wooden
bridges. We believe these bridges are the first structures of their
kind made almost exclusively of recycled thermoplastic materials to support
loads in excess of 70 tons.
1
Products
Our
patented technology allows for the replacement of standard building materials,
not with engineered resins, but with our recycled material formulations. This
advantage secures not only a less expensive input material but also improved
performance.
Benefits
include:
|
·
|
Initial
up-front cost savings based on design
improvements
|
|
·
|
Life
cycle savings based on lower maintenance and
longevity
|
|
·
|
Improved
performance
|
|
·
|
Green
technology
|
|
·
|
Positive
Environmental impact
|
|
·
|
Potential
Carbon and Leed Credits as a green
material
|
Table
2.1 Weight Advantage and Material Properties of ThermoPlastics:
Thermoplastic
|
55
pounds per cubic foot
|
Wood
|
60
pounds per cubic foot
|
Concrete
|
150
pounds per cubic foot
|
Steel
|
490
pounds per cubic foot
|
Specific
Gravity (ASTM D6111)
|
0.85-0.90
|
Elastic
Modulus (ASTM D6108)
|
350,000
psi
|
Allowable
Tensile Stress (ASTM D638)
|
600
psi (Ultimate
= 3,000 psi)
|
Allowable
Flexural Stress (ASTM D6109)
|
600
psi (Ultimate
= 2,500 psi)
|
Allowable
Compressive Stress (ASTM D695)
|
600
psi (Ultimate
= 2,500 to 4,300 psi)
|
Allowable
Shear Stress (ASTM D6109)
|
350
psi (Ultimate
= 1,500 psi)
|
Coefficient
of Thermal Expansion (ASTM D696)
|
0.0000282
in/in/deg F
|
We are
selling cross ties to both freight and transit railroads whose cost-benefit
analysis determined the utility of installing recycled structural composite
(“RSC”) crossties in high stress, overhead and moisture-laden
areas.
2
The
structural composite I-beams (patent pending) and tongue and groove planking
(patent pending) are innovative products that we believe have the potential to
revolutionize the structural material marketplace. These products were
successfully installed for a vehicular bridge over the Mullica River in the New
Jersey Pine Barrens in 2003. The design features that made this
installation unique were the use of less material and ease of interoperability
of the construction parts. In addition, an earlier bridge
construction was successfully completed at Ft. Leonard Wood, Missouri in
1998. Based on a 2007 analysis conducted by the U.S. Corps of Army
Engineers, we believe that these bridges were then substantially as durable as
they were when first installed and required virtually no maintenance. Axion
supplied the materials for and participated in the installation of the first two
structural composite bridges ever designed for use by military tanks. These
bridges, constructed in 2009, hold over 70 tons for track vehicles and over 85
tons for wheeled vehicles. In 2010, we again participated in a ground breaking
project, supplying the materials and helping in the design and build of two
bridges. These bridges were developed for train use and are specified to hold
130 tons. Both the tank and rail bridge projects were constructed almost
entirely from Axion materials including pilings, pile caps, girders, decking,
ties (where applicable), rub rails and railings. The Company has recently
secured a purchase order for a bill of materials to be used in the construction
of a third tank bridge. We anticipate supplying product for the
construction of additional bridges and as a solution for waterfront bulkhead
projects. We intend to continue to develop new products that will be utilized in
many engineered solutions that will serve to not only expand our market
capabilities but also serve as barriers to entry by others. We are currently
engaged in two major product line expansion initiatives that will provide
structural products (sizes and shapes) that will allow us to compete in the
pedestrian/park & recreation bridge market and the marine solutions
market.
Sales
and Marketing
In 2011,
we anticipate entering the next phase of our development. Over the
last three years, we have accomplished a great deal in advancing the development
of our technology and products. Additionally we have completed the
deployment of these products (proof of concept) across multiple customers,
applications and industries. In all cases our products have performed
above expectations. Now it is time to begin the process of taking our
products to mass markets. We have commenced our sales efforts
of our crossties and other recycled structural composite products to railroads
and other public- and private-sector buyers (our first sales focus). Since these
sales are important to our early success, initial sales are largely being
handled by our management team whose members, through their prior activities,
have a background in and connections with this industry. In addition,
strategic engineering and sales relationships are being established to generate
further sales penetration. The Company’s initial objectives are to secure
sales orders for composite crossties from railroads and transit line railroads
as well as, platforms and boardwalks from both the US Army and civilian
contracts. We believe our initial sales and marketing efforts have
been positively received in the marketplace and our initial success with the US
Army is an indication of the acceptance of our technology and products in the
market.
Our
strategic focus is on the continued growth of sales and the expansion of our
technology within and across markets. We have kept our management
staff extremely lean during our initial years and focused on developing and
confirming the performance of our RSC product. With adequate funding,
we anticipate expanding our sales organization and focus on increasing our sales
pipeline.
We
anticipate we will deploy varied sales strategies and organizational structures
based on the unique market segments. For example, the class 1 freight
rail lines may be handled by an Axion direct sales representative whereas, a
portion of the short and transit lines business may be handled with third-party
commissioned representative firms.
We expect
that the sales organization will eventually be led by a vice president of sales,
with regional sales managers responsible for all sales activity (direct or in
support of a partner) within a given region. In addition, this sales
approach will be aligned with structural/civil engineering firms around the
world to encourage them to utilize our recycled structural composites (“RSC”)
products in their designs and bids.
Internally,
we anticipate deploying a team with specific market expertise in bridges,
marina, rail, and building materials. They will provide the primary technical
support for company-wide sales efforts. These individuals will be eighty percent
sales engineering support, ten percent product managers and ten percent category
champions. This team will be compensated based on the profitability
of their individual category. Separately, the government sector
effort will be managed in collaboration with a strategic government and
contracting business partner.
We may
also explore potential collaborations with companies that will expedite sales
efforts into a given sales channel, for example, creating joint ventures with a
marine distribution firm, whereby we will contribute our products, research and
development and technology and our partner will contribute the sales and
marketing knowledge and effort.
3
The
Company will continue to use traditional methods of marketing to the major trade
magazines, internet, green social networking and trade shows.
The
international markets present many options for us. We are currently
exploring business structures, including licensing, franchising or creating
joint venture relationships. We intend to always be in control of the licensing
of our intellectual property and of the formulation and the manufacturing
process we employ. Currently, we are engaged in discussions with government
officials and other organizations within Morocco, South America, Russia, China,
France, India, Mexico and the Caribbean Islands. To date, we
have successfully shipped products to Morocco, India, Canada and
Italy.
Manufacturing
We do not
own manufacturing facilities in which to produce our
products. Instead we believe that our outsourcing model to
third-party manufacturing operations provides us the business flexibility to
maximize utilization of manufacturing capacity available in the market, respond
to the geographic diversity of our customers and minimize our capital
requirements.
The
Company’s various patented material formulations lend themselves to various
production styles and opportunities. We currently produce through both (i) a
continuous extrusion molding and (ii) a flow or intrusion molding process. These
differing processes are run at separate facilities and are dictated by the size
and complexity of the parts being manufactured. In addition, we have also
explored compression and sheet molding processes as we look to develop and
promote our technology and expand market acceptance.
Rather
than designing and recreating our manufacturing processes when seeking to
explore a different production process, we have seized the opportunity provided
by the growing level of excess capacity left behind by manufacturing leaving the
US. We thereby increase our production flexibility; eliminate the costly need to
maintain our own facilities; and allow these underutilized facilities to provide
for the creation or maintenance of jobs that would be otherwise lost
overseas.
This
manufacturing and production model also allows us to take advantage of
production facilities located near key customers, reducing freight costs to
those customers and making our products more cost effective. Finally, this model
allows us to utilize material sources in various regions of the country and help
promote recycling collection and broaden our supply base.
All of
our products are currently manufactured by third-party manufacturers, currently
with one in Pennsylvania and one in Indiana. In addition, we have
contacted and discussed the production of our products with multiple third-party
manufacturers who have the skills and capabilities to manufacture our products
according to need and requirements. Additional production facilities
are being analyzed in Florida, Arkansas and a second location in Pennsylvania
(both locations in order to take advantage of differing manufacturing
techniques), and in Texas to better serve a customer looking to potentially
expand its use of our products.
Third-party
production facilities utilized by us tend to be located on direct industrial
rail links or spur to allow for efficient material deliveries to customers and,
particularly to rail customers. Flatbed and container trucks are also used to
transport product. Facility size is dictated by the number of machines that
Axion is utilizing in that plant but is seldom less than 30,000 sq ft. Because
of the properties inherent in our products, outside storage is an important
consideration and extensively used. With a product that is all but immune to
changing weather conditions, there is no reason to waste valuable indoor
storage. Facilities that support the manufacture of large products
and are in involved the recycling business, lend well to our
requirements.
We
provide the necessary raw materials and place one or more of our own employees
in the third-party contract facility to serve as production consultants and
quality control experts. We require our third-party contract manufacturers to
enter into our non-compete, non-disclosure agreement.
4
We design
and retain ownership of certain production equipment such as molds and dies that
are provided to the third-party contract manufacturers during production
runs. For the Company’s most basic intrusion/flow molding process,
there is approximately a 15-20:1 return on the molds built and placed in a
facility. For approximately $500,000 invested in molds, a machine will generate
products of between $7.5 and $10 million in annual sales, depending on the
product mix. All molds and manifolds are designed as component parts and can be
transferred between facilities or used interchangeably in a plug-and-play system
as production needs dictate. We also provide and train the third-party contract
molders with specific, internally-designed quality control (“QC”) equipment and
procedural manual. All molders are required to maintain extensive QC records.
Once a process is systemized, the Company may rely on a cost per piece basis,
thereby eliminating returns risk and maximizing incentives to the third-party
contract manufacturer to meet or exceed production goals.
The
Company maintains a small corporate office in New Providence, NJ. The office is
convenient to both Newark Airport and New York City and allows reasonably quick
access to certain manufacturing facilities.
Materials
Supply
The
Company’s licensed material patents are for immiscible polymer blends which,
when mixed and processed according to proprietary knowledge, yield structural
grade properties in the resulting product. The concept is relatively straight
forward. Rather than mixing materials with similar properties together to yield
a third material (a commonly accepted industry practice), our technology blends
two separate materials in a manner that allows them to physically bind together
while still retaining their original properties. In effect, a tough, rugged,
weather resistant material is mixed with a stiff and rigid material to yield
both strength and stiffness properties whose sum of the parts is greater than
their individual components. Adding to the uniqueness of the products
manufactured is that recycled plastic wastes materials are used to achieve the
desired results. Rather than using virgin, engineering grade materials that
might be marketed and sold for tens or even hundreds of dollars per pound, the
materials used in our recycled structural composites are diverted from landfills
or collected as industrial scrap, and sell for less than one dollar per pound.
The performance achieved at this price differential makes it virtually
impossible for large virgin material suppliers, such as Dow, DuPont, or Shell to
compete in our sector as a large scale industrial product.
The raw
materials we utilized are widely available, collected in most communities. Only
a portion of the billions of pounds of recyclable-eligible materials generated
each year are actually collected, and an even smaller percentage is actually
used in recycled products. The materials can be sourced directly through
municipal recycling facilities, major waste haulers, material grinders or
recyclers, or brokers depending on the volume required. Recycled material prices
are listed on a commodity-style basis in industry periodicals or on-line.
Long-term contracts actually benefit us as a buyer as they will allow us to more
accurately project our material requirements, seek more competitive pricing from
suppliers, and lock in that pricing (within limits) over time. An additional
benefit inherent in the recycled material market is that it offers far greater
pricing stability than does the virgin material market. The primary costs
associated with recycled resins rest with the collection and grinding process.
They are not directly tied to fluctuations and increases in oil prices as are
virgin materials.
Exclusive
License Agreement from Rutgers University
Pursuant
to a License Agreement with Rutgers (the “License Agreement”), we
have acquired an exclusive royalty-bearing license in specific but broad global
territories to make, have made, use, sell, offer for sale, modify, develop,
import and export products made using patent and patent pending applications
owned by Rutgers. As a result of the License Agreement, we have been
granted the right to grant sublicenses. We use these patented technologies in
the production of structural plastic products, such as railroad crossties,
I-beams, T-beams, various boards including our tongue–in-groove design, that are
utilized in the construction of bridges, marinas and marine bulk heading, There
is an ongoing - flow of new patent applications from Rutgers University that we
will have the ability to utilize under our License Agreements, such as the
patent pending on a new piling design.
We are
obligated to pay Rutgers royalties ranging from 1.5% to 3.0%, on various product
sales, subject to certain easily attainable minimum payments and to reimburse
Rutgers for certain patent defense costs. We also pay annual membership
dues to AIMPP, a department of Rutgers, as well as consulting fees for research
and development processes.
The
License Agreement runs until the expiration of the last to expire issued patent
within the Rutgers’ technologies licensed under the License Agreement, unless
terminated earlier.
5
Intellectual
Property
Our
licensed technologies are based on materials/composition of matter, processing
and use and design patents. The compositions are used to produce structural
products from waste materials. The processing capacity allows the production of
efficient shapes from these blends such as I-beams and pilings. Our patents
cover multiple material compositions including HDPE (high density polyethylene)
a polymer commonly available from post-consumer and post-industrial waste
streams, together with either stiffer polymers or polymer composites. Since our
most completely tested and accepted product solution is presently railroad
crossties, it is important to note that each of these polymer combinations can
be used in railroad crosstie manufacturing. We have a license from
Rutgers for a pending patent on a unique processing technology that produces
finer microstructures in the blends, and may lead to even tougher and stronger
end products. Included in our license are three pending patents covering
manufactured shapes. One of the patents covers both I-beams and tongue-in-groove
planking. Another patent covers a method to produce even longer I-beams with
variable shapes. The third patent covers a newly designed railroad crosstie that
obviates the need for the expensive steel tie plate. We also have
licenses from Rutgers for two pending fire retardant patents. One retardant is
designed to be sprayed onto plastic lumber and render it unable to sustain a
fire. This technology is designed to coat thermoplastics. The other fire
retardant coating was developed for the U.S. Military, specifically to be used
to protect other standard materials.
Patents
or Patents Pending
|
·
|
Axion’s
intellectual property in the form of licenses, patents and technologies
include:
|
|
·
|
Method
of deriving polystyrene and polyolefin plastics composite from recycled
plastics, U.S. Patent 5,298,214 — (This is a composition of matter patent
that covers blends of Polyethylene (PE) and Polystyrene (PS). The
properties when blended properly yield a product that is stiffer than PE
and tougher than PS.)
|
|
·
|
Composite
Building Materials from Recyclable Waste, U.S. Patent
5,789,477;
|
|
·
|
Composite
Building Materials from Recyclable Waste, U.S. Patent 5,916,932 —
composition of matter patents for a)PS coated fiberglass and High Density
Polyethylene (HDPE) blends and b)Polypropylene (PP) coated fiberglass and
HDPE blends. PP coated fiberglass is broadly used in auto
bumpers.)
|
|
·
|
Structural
Plastic I-Beams, Patent Pending — (This is the concept of making I-beam
structures along with Tongue & Groove decking from materials listed in
#1 to #3.)
|
|
·
|
Structural
Material composed of Polymethylmethacrylate (PMMA) with HDPE, Patent
Pending — (This is another composition of matter patent for blends of
PMMA, an acrylic, and HDPE, to form another excellent structural
material. Axion observe PMMA trending toward being the cheapest
polymer known.)
|
|
·
|
Processing
Technology to Increase Toughness, Patent Pending — (This is a processing
patent that increases the toughness of #1 to #3 and
#5.)
|
|
·
|
Railroad
Tie Not Needing a Tie Plate, Patent
Pending
|
|
·
|
Damage
Resistant Fire Retardant and Intumescent Coatings for the Protection of
Substrates from Heat Flux, Patent Pending — (This is a fire retardant
developed for plastics.)
|
|
·
|
Emissivity
Based Silicone/Glass Fiber Composites for the Protection of Substrates
from Heat Flux and Fire, Patent Pending — (This fire retardant is
presently being tested by the U. S. Army on its ammo
boxes.)
|
|
·
|
Method
of Producing Long I-Beams with Capability of Variable Tapers from
Structural Polymer Based Materials, Patent Pending — (This is a method
patent for the manufacturing of tapered I-beams of varied
lengths.)
|
6
Market
Opportunities
The
deteriorating state of the infrastructure in the United States presents an
enormous opportunity for us. Conditions affecting standard building materials
such as corrosion, crumbling, material rot, the application of toxic chemicals
to retard product failure and maintenance and repair concerns such as painting,
staining, rust treatments and, of course, replacement and downtime costs are all
estimated to be reduced or eliminated by the use of our recycled structural
composites (“RSC”).
We are
focused on development and commercialization of products utilizing our patented
technology. These products will be tested, and may be certified and
used across multiple segments and engineered solutions. The diversity of our
technology portfolio again comes into play in supporting our position as a
solutions provider to the infrastructure market. We are focused on
infrastructure solutions and have identified five major U.S. vertical markets,
which total billions of dollars in annual expenditures:
|
§
|
Railroads
– railroad ties, bridges and switch
ties;
|
|
§
|
Bridges
– short span, pedestrian, vehicular,
DOT/highway
|
|
§
|
Military
– bridges,
|
|
§
|
Marine
– marinas, bulkheads, docks and
boardwalks
|
|
§
|
General
industrial – supports for solar power; wind turbine poles; sound barriers;
boardwalk super structure, structural components for portable
houses
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Within
each of these markets, we have manufactured product, or we have products in
development, utilizing our technology, some of which has been tested, sold and
installed. Products utilizing our technology, such as over 100,000
railroad ties, have been successfully installed with favorable review by our
customers including Burlington Northern Santa Fe, Union Pacific, Florida East
Coast, CSX, Norfolk Southern, Washington Metropolitan Area Transit Authority,
Chicago Transit Authority, New York City Transit Authority, New Jersey Transit
and Toronto Transit and multiple vehicular bridges.
Railroads
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The
major North American railroads purchase between 15-20 million crossties
annually. These numbers are based on fifty years of data and have been
trending up over the past several years (Railway Tie Association
Data).
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Of
the approximate 20 million crossties installed annually, approximately 30%
were installed in areas considered most conducive to alternative,
non-wooden, crossties. The alternative crosstie market is therefore
approximately six million crossties per year, or is approximately a $600
million per year market for the Class I railroads
alone.
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Additional
opportunities in the rail market include rail bridges; switch sets
(turnouts), rail crossings, and the addition of fire retardant materials
as a safety feature.
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Bridges
The
annual cost to maintain and repair highways and bridges was estimated at
approximately $79 billion over the next 20 years (Federal Highway Administration
Conditions and Performance Report (2006)).
According
to the U.S. Federal Highway Administration’s Oversight of Structurally Deficient
Bridges study released in September 2007 before the Committee of Transportation
and Infrastructure U.S. House of Representatives, “the National Bridge Inventory
comprises data on 599,976 bridges, including 116,086 bridges on the National
Highway System, as well as bridges maintained and operated by various state and
local entities…..almost 80,000 bridges are considered functionally obsolete and
nearly 72,500 are structurally deficient.”
According
to the U.S. DOT/FHA, “the Nation spends at least $5 billion per year for highway
bridge design, construction, replacement, and rehabilitation.”
7
In
pursuit of an attractive market opportunity and also as a segue to future DOT
contract needs, we have participated in a U.S. Army design and supply program,
transferring the knowledge of how to build vehicular bridges to U.S. Army
Engineers in Training at Fort Leonard Wood, MO., which has already installed our
technology in vehicular bridges.
Our
technology partner, Rutgers University, is also at the forefront of bridge
performance design. The Federal Highway Administration awarded Rutgers a
contract of up to $25 million for its Long-Term Bridge Performance
program.
Figure
3.1 Commercially
Successful Bridges utilizing Axion’s products and technology
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8
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Military/Government
Contracts
Overall,
the U.S. Military historically has allocated substantial sums of money for
infrastructure improvement: Military Budget (2007) - $12.6 billion;
R&D - $73.2 billion.
The Department of Defense spends
$22.5 billion dollars annually on equipment and infrastructure as an impact of
corrosion. For the Army, this number is approximately $5.8 billion annually...
The Army estimates that [it] will receive a 34 to 1 return on investment by
using this technology. This bridge is less expensive to build than its
alternative, it provides greater corrosion resistance, and it’s practically
maintenance free. – (Dr. Roger Hammerlinck, U.S. Military,
September 2009).
This thermoplastic bridge, able to
withstand heavy loads with little to no maintenance, expected to last at least
50 years, is no longer the bridge of the future – it’s the bridge for today. It
also meets national environmental goals of being completely recyclable. This
technology is not only good for DoD, but should be immediately transferred to
state departments of transportation for use with short-span bridges wherever
possible. – (Daniel J. Dunmire, Director of Office of the
Secretary of Defense Corrosion Policy and Oversight).
Marine
Our
products resist corrosion to harsh water environments and present compelling
solutions to common marine applications such as:
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Public
and private boat docks and marinas;
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Piers
and bulk heading along any seaboard, river, or
estuary.
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“Thirteen
Federal agencies spent an average of $3.9 billion annually … on construction and
maintenance of federally authorized projects.” (GAO Report on Marine
Transportation (2002)).
General
Industrial
The long
term opportunities for recyclable structural components to replace standard
building materials across a variety of industries is substantial, including
bridges, cell towers & wind turbine poles, sound barriers, boardwalk and
residential decking super structure The Transportation market segment could also
be expanded to include highway guard rails and posts, sign posts, and other
products for State and Federal Departments of Transportation. We continue to
work with world leading structural and civil engineering firms to further
develop applications and set standards for our products.
9
Competition
We
believe our competitors in the various infrastructure verticals are the
suppliers of existing historical materials such as wood, steel and concrete.
These materials have gained widespread acceptance over time. Our challenge as
well as that of other alternative material manufactures and developers, is to
break the inertia associated with the familiarity surrounding “standard”
products.
Our
ability to break into these markets and overcome this inertia, is built around
the following solutions:
Documenting successful
projects and results
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White
papers have and are being published by the U.S. Army Corps of Engineers
and various respected engineering firms documenting the performance of our
products.
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Repeat
orders are being placed by multiple concerns for both railroad ties and
bridges.
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Key
engineering firms are initiating work on establishing standard design
criteria for various repeat
projects.
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Proving safety margins of
our products (equal or better than that of historical
materials)
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The
U.S. Army Corps of Engineers has supported monitoring of certain bridge
projects and has reported that our products “have exceeded
expectations.”
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Civil
engineering firms are certifying our products based on establishing design
provisions that allow them a greater safety factor in their designs than
would be available with standard materials. For example, the Ft. Bragg
bridges have been designed to allow a 70 ton tank to be parked and left on
the bridge for a 25 year period without causing the bridge to suffer from
long term creep or sagging.
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Documenting cost
benefits
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As
confirmed by the U.S. military and various military contractors, our
products used to construct bridges are designed to present significant
upfront cost savings.
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Our
products represent life cycle cost savings as the very nature of the
material prevents corrosion, rusting, moisture absorption, etc., thereby
reducing maintenance costs.
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our
products are lighter in weight and often feature quick assembly designs
that allow for projects to be built quickly reducing downtime and
inconvenience.
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Unique Component
Benefits
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We
have the ability to engineer and manufacture highly specialized
components.
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We
work closely with customers to deliver products that are engineered
specifically to meet the challenges of each job or
project.
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With
regard to competition from within the composite or alternative building material
markets, we maintain some significant advantages. Our diverse patent portfolio
and ongoing think-tank relationship with Rutgers encourages solutions that are
tailored to whatever challenges may be presented. The straight forward
formulations and detailed quality control focus stressed by our processes and
procedures, allows us to produce commercially viable, cost efficient solutions
with little if any waste. Further, the ability to perform across varying market
segments yields us a significant advantage against other
competitors.
Rail: TieTek LLC (a wholly
owned subsidiary of North American Technologies Group Inc.; NAMC.OB) was a
leader in the composite tie industry and helped document the enthusiasm of the
railroad market for composites by receiving an order for one million crossties
from a major freight carrier. TieTek, however, experienced a number of quality
control issues, a high rejection rate in the field, and significant management
turnover. In spite of establishing the potential volume that the rail industry
could generate, TieTek declared bankruptcy earlier in 2010. Recycle Technologies
International (“RTI”), a privately held crosstie manufacturer based in Florida,
remains active in the industry though with limited production capacity. Both
TieTek, when active, and RTI produce only railroad crossties and do not compete
in any other industry. Composite crossties to date make up less than 5% of the
replacement crossties ordered in the US.
10
Bridges: No other composite
manufacturer has constructed an entire bridge utilizing recycled plastic wastes
as we have all but created this market segment through our efforts with the U.S.
Army Corps of Engineers and work with various engineering firms. Certain virgin
polymer manufacturers exist internationally but seem to focus more on decking
materials to the exclusion of pilings, girders, etc. while being far higher
priced based on higher material costs. A U.S. manufacturer of
composite girders, concrete, steel, and virgin plastic also exists but does not
make other supporting products.
Marine: The largest composite
marine supplier is the Seaward division of Trelleborg. This supplier has a
system of virgin fiberglass rods which are inserted in a polymer shell to create
pilings and related marine products. While a solid performance product, the
multi-stage manufacturing process and the use of virgin materials can lead this
to be an extremely high priced system.
Sales
Growth Drivers
Market
demand for products incorporating plastic composites is growing and the number
of competitive suppliers of structural building products utilizing recycled
plastics is very limited.
We are
one of only a few commercial suppliers of high integrity HDPE composite
components and products within the primary infrastructure markets it
serves. In almost all market verticals, we compete with only one or
two key competitors and hold a leading technological position in each business
or market served. Barriers to entry are high and the likelihood of
new entrants is low. Therefore, we have the potential to assert a
leadership position in many of our product lines due to our simplified
manufacturing approach and consistent product quality control.
The
substantial increase in demand for composite crossties within the U.S. has
created a potential void in order fulfillment. Major railroad
companies have adopted a preference for composite crossties to replace formerly
wooden crossties which cannot stand up to harsh environments as well as
composite crossties. This preference has resulted in prior purchase
agreements being reissued by rail companies to purchase composite
crossties. We have now been qualified to supply our composite
crossties to these potential purchasers and recently begun negotiations for a
multiyear supply agreement with an industry-leading rail line.
The
Company intends to expand its international sales efforts in order to capture a
larger proportion of the global crosstie market. The increase in
international sales will be achieved by increasing sales focus on specific
foreign countries, such as Mexico and Morocco. Each of these
countries lacks a forestry industry to provide wooden railroad
crossties. Additionally, each has a punishing desert environment
which subjects crossties to daily temperature fluctuations that can accelerate
the deterioration of traditional wooden rail crossties. The Company
believes it can successfully expand its international market share by tailoring
its products to meet regional requirements and by strengthening sales
channels.
Benefits:
Environmental Impact, Performance and Cost
Utilizing
virtually 100% recycled plastics, our structural products have the distinct
advantage of being environmentally friendly. Our products form a
nearly perfect Green Circle. We start by diverting plastic from the waste
stream; use less energy to manufacture and transport our products than standard
building materials; our products enjoy a long life with low maintenance
requirements; and, our products are fully sustainable as they can be recycled
again at the eventual end of their useful life. Our products address
the increasing worldwide environmental concerns for deforestation coupled with
the specific goals for recycling, reducing greenhouse gases and manufacturing
products without toxic materials. We believe that our products in
certain installations will last longer than conventional creosote treated wooden
ties, offering significant cost savings in maintenance and product replacement,
and will have freedom from biological attack (including
termites).
11
Employees
On
January 10, 2011, we had four full time employees and three part-time
employees.
Item
A. Risk Factors
In
addition to the other information set forth in this Form 10-K the issues and
risks described below should be considered carefully in evaluating our outlook
and future. If any of these risks or uncertainties actually occurs,
our business, financial condition or operating results could be materially
harmed. In that case, the trading price of our Common Stock could
decline and you could lose all or part of your investment.
We
have generated limited operating revenues. If we are unable to
commercially develop and sell our structural plastic products, we will not be
able to generate profits and we may be forced to curtail
operations.
As of the
date hereof, we have generated limited revenues. As a result,
we have limited operating revenue and we anticipate that, for at least the near
future, we will operate at a loss. Our ultimate success will depend
on our ability to commercially develop and sell our structural plastic
products. If we are unable to commercially develop and sell our
structural plastic products, we will not be able to generate profits and we may
be forced to curtail operations.
We
are dependent on our ability to raise capital from external funding
sources. If we are unable to continue to obtain necessary capital
from outside sources, we will be forced to reduce or curtail
operations.
We have
not generated any cash flow from operations and we will not be cash flow
positive for some time. We have limited financial
resources. As a result we may need to obtain additional capital from
outside sources to continue operations and commercialize our business
plan. We cannot assure that adequate additional funding will be
available, especially given the current financial turmoil. If we are
unable to continue to obtain needed capital from outside sources, we will be
forced to reduce or curtail our operations.
Our
ability to execute our business plan depends upon our ability to obtain
financing through
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bank or other debt
financing,
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equity
financing,
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strategic relationships,
and/or
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other
means
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At
September 30, 2010, we had substantial convertible debt outstanding with
maturities over the next twelve months.
We had approximately $1.2 million in
convertible debt at September 30, 2010, with maturities ranging from February
2011 to May 2012. Currently, we do not have the capability to repay these
obligations when they become due, and will either need to raise additional
capital from other sources or negotiate with the debt holder to extend the
maturity to allow us to commercialize our business plan and generate the
necessary capital for ultimate repayment. If we are unable to obtain the
necessary capital or renegotiate the terms accordingly, we will be forced to
curtail or cease operations.
Our
independent auditors have expressed that there is substantial doubt about our
ability to continue as a going concern.
Our
independent auditors issued an explanatory paragraph expressing substantial
doubt about our ability to continue as a going concern on our financial
statements for fiscal year ended September 30, 2010 and 2009, based on the
significant operating losses and a lack of external financing. Our
financial statements do not include any adjustments that resulted from the
outcome of this uncertainty. Our inability to continue as a going
concern would require a restatement of assets and liabilities on a liquidation
basis, which would differ materially and adversely from the going concern basis
on which our consolidated financial statements have been prepared.
12
Our
products are new and, for the most part, have limited acceptance in the
marketplace. If our products do not receive market acceptance, our
ability to execute our business plan most likely will be adversely
affected.
Although
earlier versions of our structural composite railroad crossties, I-beams and
bridge decking were sold by Polywood over four years ago, only a limited amount
of our other products, including our fire retardant composite railroad
crossties, have been sold and are new and untested in the
marketplace. Potential customers are often resistant to trying new
untested products. If our products do not receive market acceptance,
our ability to commercialize our business plan most likely will be adversely
affected.
Our
business is highly reliant on third-party manufacturers. If one or more
third-party manufacturers that we engage do not meet our manufacturing
requirements, our ability to manufacture and sell our products will be
materially impaired.
We plan
on relying on third-parties to manufacture our products and have entered into
agreements with several third-parties to manufacture our products. Consequently,
we are dependent on third-party outsourcing for the manufacture of our products.
Our business is dependent upon our retention of manufacturers and the
development and deployment by third-parties of their manufacturing abilities.
There can be no assurance that we will obtain the requisite manufacturers or,
once retained, that these manufacturers will be able to meet our manufacturing
needs in a satisfactory and timely manner, or that we can obtain additional
manufacturers when and if needed. Although we believe there are a number of
potential manufacturers available, if we are unable to retain manufacturers
quickly or cost effectively, our ability to manufacture and sell our products
will be materially impaired. Our reliance on third-party manufacturers involves
a number of additional risks, including the absence of guaranteed capacity and
reduced control over the manufacturing process, delivery schedules, production
yields and costs, and early termination of, or failure to renew, contractual
arrangements. Although we believe that these manufacturers will have an economic
incentive to perform such manufacturing for us, the amount and timing of
resources to be devoted to these activities is not within our control, and there
can be no assurance that manufacturing problems will not occur in the future. A
significant price increase, an interruption in supply from one or more of such
manufacturers, or the inability to obtain additional manufacturers when and if
needed, could have a material adverse effect on our business, results of
operations and financial condition.
If
we are unable to develop substantial sales and marketing capabilities, we most
likely will not be able to generate adequate sales.
Initially,
sales and marketing will be conducted by our senior management team, who through
their prior activities, have backgrounds and relationships in our
industry, and who initially will be supported by a limited number of internal
sales and marketing staff. Eventually, with incremental funding, we
plan on hiring additional engineers, sales and marketing staff and implementing
a detailed marketing program. However, there can be no assurance that
we will develop a sales and marketing force or that our sales and marketing
efforts will be successful.
If,
as our international sales operations increase, our employees or agents violate
the U.S. Foreign Corrupt Practices Act or anti-bribery laws in other
jurisdictions, we may incur substantial fines or penalties, or experience other
adverse consequences.
In the
quarter ended June 30, 2010, we received our first significant international
order and increased our efforts to arrange international selling
activities. We are subject to the U.S. Foreign Corrupt Practices Act,
or the FCPA, and other laws that prohibit improper payments or offers of
payments to foreign governments and their officials and political parties by the
United States and other business entities for the purpose of obtaining or
retaining business. As we begin to operate and sell internationally, there is an
increasing risk of unauthorized payments or offers of payments by one of our
employees, consultants, sales agents or distributors that could be in violation
of various laws including the FCPA, even though these parties are not always
subject to our effective control. Our attempts to implement
safeguards may not be effective in preventing employees, consultants, sales
agents or distributors from engaging in conduct for which we might be held
responsible. Violations of the FCPA may result in severe criminal or civil
sanctions, and we may be subject to other liabilities, which could negatively
affect our business, operating results and financial condition.
13
Our
ability to effect and sustain our business plan and generate profitable
operations most likely will be materially adversely affected if we are unable to
purchase raw materials of acceptable quality or cost.
We
believe that the raw materials that we will need to manufacture our products are
available from multiple sources at relatively stable prices, except for recycled
plastic, which has cyclical variation in supply, quality and cost. Our inability
to secure supplies of raw materials of acceptable quality and costs could have a
material adverse effect on our ability to effect and sustain our business plan
and generate profitable operations.
Because
our competitors may have greater financial, marketing and research and
development resources, we may not be able to successfully compete in our
industry.
We
compete with traditional construction material suppliers and at least one
composite company, North American Technology Group, which offers a polymer
composite product that competes in the railroad tie market. Most of
our potential competitors have substantially greater financial and marketing
resources and capabilities. These companies and others may independently develop
technology for the production of structural plastic products similar or superior
to our technology, which may result in our products becoming less competitive or
obsolete. Competition from other companies, and possibly from universities and
research institutions, may increase as advances in technology are
made.
We
depend upon senior management and key personnel. Any loss of their services
could negatively affect our business. Our failure to retain and attract such
personnel could harm our business, operations and product development
efforts.
Our
success will depend to a significant extent, on the performance of James
Kerstein, our CEO, and Steve Silverman, our President, and others who we may
hire. To the extent that the services of any of our key personnel become
unavailable, we will be required to retain other qualified persons. We may not
be able to find a suitable replacement for any such person. The loss of the
services of key persons could have a material adverse effect on our business,
financial condition and results of operations.
Our
products require sophisticated research and development, quality-assured
manufacturing and a significant marketing and sales effort. Our success will
depend on our ability to attract, train and retain qualified personnel for these
functions and responsibilities. Competition for personnel in all these areas is
intense and we may not be able to hire sufficient personnel to achieve our
goals. If we fail to attract and retain qualified personnel, our business,
operations and product development efforts most likely would
suffer.
We
may not have adequate protection for the intellectual property rights on which
our business depends.
Our
success depends, in part, on our ability to protect our important intellectual
property rights (including those licensed from Rutgers). The steps we have taken
may not be adequate to deter misappropriation or unauthorized use of our
proprietary information or to enable us to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights. We and/or Rutgers
have obtained and continue to seek patents with respect to newly developed
technologies. We also rely on a combination of trade secret, nondisclosure and
other contractual arrangements, and copyright laws to protect our proprietary
rights. We will enter into confidentiality agreements with our employees and
limit access to and distribution of our proprietary information, and if it is
necessary to disclose proprietary information to third parties for business
reasons, we will require that such third parties sign a confidentiality
agreement prior to any disclosure. However, these confidentiality agreements
cannot guarantee there will not be disclosure or misappropriation of such
proprietary information. In addition, litigation may be necessary to enforce our
intellectual property rights, protect trade secrets, determine the validity and
scope of the proprietary rights of others, or defend against claims of
infringement or invalidity. Intellectual property laws provide limited
protection. Moreover, the laws of some foreign countries do not offer the same
level of protection for intellectual property as the laws of the United States.
Litigation may result in substantial costs and diversion of resources, which may
limit the development of our business.
14
If we or
our third-party manufacturers were found to be infringing any third-party
patents, we or they could be required to pay damages, alter our or their
products or processes, obtain licenses or cease certain activities. We cannot be
certain that if we or they required licenses for patents held by third-parties
that they would be made available on terms acceptable to us or them, if at
all.
Management
and affiliates own enough shares to have a substantial impact on shareholder
vote which may limit shareholders’ ability to influence various corporate
actions.
Our
executive officers, directors, affiliates and entities controlled by them own
approximately 10.9% of the outstanding Common Stock. As a result, these
executive officers and directors may have a substantial impact on the vote on
matters that require stockholder approval such as election of directors,
approval of a corporate merger and reorganization, increasing or decreasing the
number of authorized shares, adopting corporate benefit plans, affecting a stock
split, amending our Articles of Incorporation or other material corporate
actions.
Environmental
liabilities and environmental regulations may have an adverse effect on our
business.
Previously,
we held minority and non-operating interests in oil and gas
properties. The oil and gas business is subject to environmental
hazards such as spills, leaks or discharges of petroleum products and hazardous
substances. Although no claims have been made to date and we no
longer have any such interests, potential environmental liability may not be
extinguished with regard to a holder, such as us, of oil and gas interests
during the period in which the interests were held. Accordingly, these
environmental hazards could expose us to material liabilities for property
damage, personal injuries and/or environmental harms, including the costs of
investigating and rectifying contaminated properties.
We
have outstanding options, warrants and convertible debentures, and we are able
to issue “blank check” preferred stock, that could be issued resulting in the
dilution of Common Stock ownership.
As of
September 30, 2010, we had outstanding options, warrants and convertible
debentures that, when exercised and converted, could result in the issuance of
up to approximately 8.5 million additional shares of Common Stock. In
addition, our Articles of Incorporation allow the board of directors to issue up
to 2,500,000 shares of preferred stock and to fix the rights, privileges and
preferences of those shares without any further vote or action by the
shareholders. We currently have no preferred stock outstanding. To the extent
that outstanding options, warrants and convertible debentures or similar
instruments or convertible preferred stock issued in the future are exercised or
converted, these shares will represent a dilution to the existing
shareholders. The preferred stock could hold dividend priority and a
liquidation preference over shares of our Common Stock. Thus, the
rights of the holders of Common Stock are and will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that we
may issue in the future. Any such issuance could be used to discourage an
unsolicited acquisition proposal by a third party.
Future
sales of our Common Stock may cause the price of our Common Stock to
decline.
Sales of
substantial amounts of our Common Stock in the public market, or the perception
that these sales may occur, could cause the market price of our Common Stock to
decline. In addition, the sale of our Common Stock could impair our
ability to raise capital through the sale of additional common or preferred
stock.
The
price of our Common Stock, as quoted on the Over-the-Counter Bulletin Board, is
highly volatile and the purchase or sale of relatively few shares can
disproportionately influence the share price.
The
trading price and volume of our Common Stock has been and may continue to be
subject to significant fluctuations in response to:
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our ability to execute
our business plan;
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actual or anticipated quarterly
variations in our operating
results;
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the success of our business and
operating strategy; and
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the operations and stock price
performance of other comparable
companies.
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15
The
trading price of our Common Stock may vary without regard to our operating
performance. Historically, we have been a thinly traded stock, therefore
relatively few shares traded can disproportionately influence share
price.
We
have limited operating history with regard to our new business and, as a result,
there is a limited amount of information about us on which to make an investment
decision.
We
commenced our current operations in November 2007 and have recognized limited
revenues to date. Accordingly, there is very little operating history upon which
to judge our current operations or financial results.
Our
Common Stock is deemed to be a "penny stock" and trading of our shares is
subject to special requirements that could impede our stockholders' ability to
resell their shares.
Our
shares are subject to the Penny Stock Reform Act of 1990 which may potentially
decrease your ability to easily transfer our shares. Broker-dealer practices in
connection with transactions in "penny stocks" are regulated. Penny stocks
generally are equity securities with a price of less than $5.00. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction, and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules generally require that prior to a transaction in
a penny stock, the broker-dealer make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock rules.
Material
weaknesses in our disclosure controls and procedures or our failure to remediate
such material weaknesses could result in a material misstatement in our
financial statements not being prevented or detected and could affect investor
confidence in the accuracy and completeness of our financial statements, as well
as our Common Stock price.
We have
identified material weaknesses in our disclosure controls and procedures,
including a lack of sufficient internal accounting resources, formal procedures
and segregation of duties necessary to ensure that adequate review of our
financial statements and notes thereto is performed, and have concluded that our
internal control over financial reporting is not effective as of September 30,
2010. These material weaknesses and our remediation plans are described further
in Item 9A(T). "Controls and Procedures" of this Report. Material weaknesses in
our disclosure controls and procedures could result in material misstatements in
our financial statements not being prevented or detected. We may experience
difficulties or delays in completing remediation or may not be able to
successfully remediate material weaknesses at all. Any material weakness or
unsuccessful remediation could affect our ability to file periodic reports on a
timely basis and investor confidence in the accuracy and completeness of our
financial statements, which in turn could harm our business and have an adverse
effect on our stock price and our ability to raise additional
funds.
Because
the risk factors referred to above could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements made by
us, you should not place undue reliance on any such forward-looking
statements. Further, any forward-looking statement speaks only as of
the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is
not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
16
Item
2. Properties
Axion
owns no real property and rents approximately 2,000 square feet of space in New
Providence, New Jersey pursuant to a lease with the initial term expiring
October 31, 2012, at a monthly rent of approximately $3,400. The
lease provides for one renewal option for an additional three years with
customary rent increases.
These
premises serve as our corporate headquarters.
Item
3. Legal Proceedings
In April
2006, Holdings commenced an action against Tonga Partners, L.P. (“Tonga”),
Cannell Capital, L.L.C. and J. Carlo Cannell in the United States District Court
of New York, for disgorgement of short-swing profits pursuant to Section 16 of
the Securities Exchange Act of 1934, as amended. On November 10,
2004, Tonga converted a convertible promissory note into 1,701,341 shares of
Common Stock, and thereafter, between November 10 and November 15, 2004, sold
such shares for short-swing profits. In September 2008, the District
Court granted Holdings summary judgment against Tonga for disgorgement of
short-swing profits in the amount of $4,965,898. The defendants are
appealing from the order granting Holdings summary judgment.
We may
also be subject to various other routine litigation incidental to our business.
Management does not believe that any of these routine legal proceedings would
have a material adverse effect on our financial condition or results of
operations.
Item
4. [Removed & Reserved]
17
PART
II.
Item
5. Market For Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
As of
September 30, 2010, there were approximately 1,500 record holders of our Common
Stock, and there were 22,854,037 shares of our Common Stock
outstanding. Our Common Stock has been traded on the Over-the-Counter
Bulletin Board since June 1, 2007. From June 1, 2007 to August 3,
2008, our Common Stock was traded under the symbol “ANLT”, and then following
the name change, since August 4, 2008, the date of the reverse split, our Common
Stock was traded under the symbol “AXIH”. From April 3, 2007, until
June 11, 2007, our Common Stock was traded on the OTC Pink
Sheets. Prior to April 3, 2007, our Common Stock was traded on the
NASDAQ Capital Market. Our business changed to that of Axion’s on
March 20, 2008, the date of the merger. The following table sets
forth the high and low bid quotations for our Common Stock (on a post-reverse
split basis) as reported on the Over-the-Counter Bulletin Board by quarter
during each of our last two fiscal years. The high and low bid
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual transactions.
|
High
|
Low
|
||||||
Year
Ended September 30, 2010
|
||||||||
First
quarter
|
$ | 3.20 | $ | 2.10 | ||||
Second
quarter
|
3.10 | 1.55 | ||||||
Third
quarter
|
1.80 | 0.66 | ||||||
Fourth
quarter
|
1.29 | 0.75 | ||||||
Year
Ended September 30, 2009
|
||||||||
First
quarter
|
$ | 1.50 | $ | 0.75 | ||||
Second
quarter
|
1.20 | 0.85 | ||||||
Third
quarter
|
1.17 | 0.80 | ||||||
Fourth
quarter
|
3.25 | 0.65 |
Dividends
Since
becoming a public company, we have not declared or paid cash dividends on our
Common Stock and do not anticipate paying cash dividends in the foreseeable
future. We presently expect that we will retain all future earnings,
if any, for use in our operations and the expansion of our
business.
Item
6. Selected Financial Data
Because
we are a smaller reporting company, we are not required to provide the
information called for by this item.
18
Item
7. Management’s Discussion and Analysis or Plan of
Operations
The
discussion of our financial condition and results of operations set forth below
should be read in conjunction with the consolidated financial statements and
related notes thereto included elsewhere in this Form 10-K. This Form 10-K
contains forward-looking statements that involve risk and uncertainties. The
statements contained in this Form 10-K that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. When used in
this Form 10-K, or in the documents incorporated by reference into this Form
10-K, the words “anticipate,” “believe,” “estimate,” “intend”, “expect”, “may”,
“will” and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements include, without limitation,
statements relating to competition, management of growth, our strategy, future
sales, future expenses and future liquidity and capital resources. All
forward-looking statements in this Form 10-K are based upon information
available to us on the date of this Form 10-K, and we assume no obligation to
update any such forward-looking statements. Our actual results, performance and
achievements could differ materially from those discussed in this Form
10-K.
Overview
Axion
International Holdings, Inc. (“Axion”) was formed in 1981 to provide data
conversion and digital mapping services to users of customized geographic
information systems. On March 20, 2008, Axion consummated an
Agreement and Plan of Merger (the “Merger”), among Axion, Axion Acquisition
Corp. (the “Merger Sub”), a Delaware corporation and direct wholly-owned
subsidiary of the Axion, and Axion International, Inc. (“Operating Entity”), a
Delaware corporation which incorporated on August 6, 2006 with operations
commencing in November 2007,. Pursuant to the Merger, the Merger Sub
was merged into Operating Entity, with Operating Entity continuing as the
surviving corporation and a wholly-owned subsidiary of Axion. Each
issued and outstanding share of Operating Entity became 47,630 shares of Axion
common stock (“Common Stock”), or 9,190,630 shares in the aggregate constituting
approximately 90.7% of Axion’s issued and outstanding Common Stock as of the
effective date of the Merger. The Merger resulted in a change of
control, and as such, Axion (“we”, “our” or the “Company”) is the surviving
entity.
Axion is
the exclusive licensee of revolutionary patented technologies developed for the
production of structural plastic products such as railroad crossties, bridge
infrastructure components, marine pilings and bulk heading. We
believe these technologies, which were developed by scientists at Rutgers
University (“Rutgers”), can transform recycled consumer and industrial plastics
into structural products which are more durable and have a substantially greater
useful life than traditional products made from wood, steel and
concrete. In addition, we believe our recycled composite products
will result in substantial reduction in greenhouse gases and also offer flexible
design features not available in standard wood, steel or concrete
products.
The
Merger has been accounted for as a reverse merger in the form of a
recapitalization with Axion as the successor. The recapitalization
has been given retroactive effect in the accompanying financial
statements. The accompanying consolidated financial statements
represent those of Axion for all periods prior to the consummation of the
Merger.
Critical
Accounting Policies
Management’s
Discussion and Analysis of Financial Condition and Results of Operations are
based upon our financial statements, which have been prepared in accordance with
generally accepted accounting principles (“GAAP”) in the U.S. The preparation of
financial statements in conformity with GAAP requires management to make
estimates, judgments and assumptions that affect the amounts reported in our
condensed consolidated financial statements and accompanying notes. Our critical
accounting policies are those that affect our financial statements materially
and involve difficult, subjective or complex judgments by
management.
An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used or changes in the accounting estimate that are reasonably likely to
occur could materially change the financial statements.
19
Use of Estimates. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date the financial statements and the
reported amount of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Revenue and Cost Recognition.
Revenue is recognized when persuasive evidence of an agreement with the customer
exists, products are shipped or title passes pursuant to the terms of the
agreement with the customer, the amount due from the customer is fixed or
determinable, collectability is reasonably assured, and when there are no
significant future performance obligations.
Our
business encompasses the production and sale of structural plastic products
(made from recycled plastic waste) and include products such as railroad
crossties, pilings, I beams, T-Beams, and various size boards including a tongue
and groove design that are utilized in multiple engineered design solutions such
as rail track, rail and tank bridges (heavy load), pedestrian/ park and
recreation bridges, marinas, boardwalks and bulk heading to name a few.
Typically, customers are billed based on terms of their purchase order which are
generally upon delivery.
In
certain situations where we provide services, such as engineering or other
consulting in addition to our products, customers are billed based on the terms
included in the contracts, which are generally upon delivery of certain products
or information, or achievement of certain milestones defined in the
contracts. When billed, such amounts are recorded as accounts
receivable. Revenue earned in excess of billings represents revenue
related to services completed but not billed, and billings in excess of revenue
earned represent billings in advance of services performed. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools and depreciation
costs. Losses on contracts are recognized in the period such losses
are determined. We do not believe warranty obligations on completed
contracts are significant. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined.
Inventories. Inventories are
priced at the lower of cost (first–in, first–out) or market and consist
primarily of finished products and production materials. No
adjustment has been made to the cost of finished goods inventories as of
September 30, 2010.
Property and Equipment.
Property and equipment is recorded at cost and depreciated over the
estimated useful lives of the assets using principally the straight-line method.
When items are retired or otherwise disposed of, income is charged or credited
for the difference between net book value and proceeds realized
thereon. Ordinary maintenance and repairs are charged to expense as
incurred, and replacements and betterments are capitalized. The range
of estimated useful lives to be used to calculate depreciation for principal
items of property and equipment are as follow:
Asset Category
|
Depreciation/
Amortization Period
|
||
Furniture
and fixtures
|
3
to 5 years
|
||
Computer
equipment and purchased software
|
3
years
|
||
Machinery
and equipment
|
2
to 5 years
|
||
Leasehold
improvements
|
Term
of lease
|
Goodwill and Intangible
Assets: We do not amortize intangible assets, and instead
annually we evaluate the carrying value of intangible assets for
impairment. We hold licenses and expect the cash flow generated by
the use of the licenses to exceed their carrying value.
20
Impairment of Long-Lived
Assets. Assets such as property, plant, and equipment, and
purchased intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Goodwill and other intangible assets are tested for impairment
annually. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. There were no events or changes in
circumstances that necessitated a review of impairment of long lived
assets.
Stock-based
Compensation. We record stock-based compensation for transactions in
which we exchange our equity instruments for services of employees, consultants
and others based on the fair value of the equity instruments issued at the date
of grant or other measurement date. The fair value of common stock
awards is based on the observed market value of our stock. We
calculate the fair value of options and warrants using the Black-Scholes option
pricing model. Expense is recognized, net of expected forfeitures,
over the period of performance. When the vesting of an award is
subject to performance conditions, no expense is recognized until achievement of
the performance condition is deemed to be probable.
Reverse Merger Purchase
Accounting. In connection with our Merger, we made estimates
regarding the fair value of the assets acquired and the liabilities
assumed. Adjustments to these estimates can be made during the
acquisition allocation period, which is generally up to twelve months from the
acquisition date. Subsequent to the allocation period, costs incurred
in excess of the recorded acquisition accruals are generally expensed as
incurred and if accruals are not utilized for the intended purpose, the excess
will be recorded as an adjustment to the cost of the acquired entity, which was
charged to paid in capital.
Litigation. We are subject to
various claims, lawsuits and administrative proceedings that arise from the
ordinary course of business. Liabilities and costs associated with
these matters require estimates and judgment based on professional knowledge and
experience of management and our legal counsel. When estimates of our
exposure for claims or pending or threatened litigation matters meet the
criteria of SFAS No. 5 “Accounting for
Contingencies”, amounts are recorded as charges to
operations. The ultimate resolution of any exposure may change as
further facts and circumstances become known. See Note 10 –
“Litigation and Other Contingencies”.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued Accounting Standards Update No. 2010-06
applicable to FASB ASC 820-10, “Improving Disclosures about Fair Value
Measurements”. The guidance requires entities to disclose significant transfers
in and out of fair value hierarchy levels and the reasons for the transfers and
to present information about purchases, sales, issuances and settlements
separately in the reconciliation of fair value measurements using significant
unobservable inputs (Level 3). Additionally, the guidance clarifies that a
reporting entity should provide fair value measurements for each class of assets
and liabilities and disclose the inputs and valuation techniques used for fair
value measurements using significant other observable inputs (Level 2) and
significant unobservable inputs (Level 3). This guidance is effective for
interim and annual periods beginning after December 15, 2009 except for the
disclosures about purchases, sales, issuances and settlements in the Level 3
reconciliation, which will be effective for interim and annual periods beginning
after December 15, 2010. As this guidance provides only disclosure
requirements, the adoption of this standard will not impact the Company’s
consolidated results of operations, cash flows or financial
positions.
In March
2010, the FASB issued Accounting Standard Update No. 2010-11 “Derivatives and
Hedging” (Topic 815). ASU No. 2010-11 provides amendments to subtopic 815-15,
“Derivatives and hedging”. The amendments clarify the scope exception in
paragraph 815-10-15-11 and section 815-15-25 as applicable to the embedded
credit derivatives. ASU No. 2010-11 is effective on the first day of the first
fiscal quarter beginning after June 15, 2010. Therefore, ASU No. 2010-11 becomes
effective on July 1, 2010. Early application is permitted at the beginning of
the first fiscal quarter beginning after March 5, 2010. The adoption of this
guidance has not had and is not expected to have a material impact on the
Company’s consolidated financial statements.
21
In April
2010, the FASB issued Accounting Standard Update No. 2010-12. “Income Taxes”
(Topic 740). ASU No.2010-12 amends FASB Accounting Standard Codification
subtopic 740-10 “Income Taxes” to include paragraph 740-10-S99-4. On March 30,
2010 the President signed the Health Care & Education Affordable Care Act
reconciliation bill that amends its previous Act signed on March 23, 2010. FASB
Codification topic 740, “Income Taxes”, requires the measurement of current and
deferred tax liabilities and assets to be based on provisions of enacted tax
law. The effects of future changes in tax laws are not anticipated. Therefore,
the different enactment dates of the Act and reconciliation measure may affect
registrants with a period-end that falls between March 23, 2010 (enactment date
of the Act), and March 30, 2010 (enactment date of the reconciliation measure).
However, the announcement states that the SEC would not object if such
registrants were to account for the enactment of both the Act and the
reconciliation measure in a period ending on or after March 23, 2010, but notes
that the SEC staff “does not believe that it would be appropriate for
registrants to analogize to this view in any other fact patterns.” The adoption
of this guidance has not had and is not expected to have a material impact on
the Company’s consolidated financial statements.
In April
2010, the FASB issued Accounting Standard Update No. 2010-13 “Stock
Compensation” (Topic 718). ASU No.2010-13 provides amendments to Topic 718 to
clarify that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the
entity's equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in ASU No. 2010-13 are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The amendments in ASU No. 2010-13 should be applied by recording a
cumulative-effect adjustment to the opening balance of retained earnings. The
cumulative-effect adjustment should be calculated for all awards outstanding as
of the beginning of the fiscal year in which the amendments are initially
applied, as if the amendments had been applied consistently since the inception
of the award. The cumulative-effect adjustment should be presented separately.
Earlier application is permitted. The adoption of this guidance has not had and
is not expected to have a material impact on the Company’s consolidated
financial statements.
In April
2010, the FASB issued Accounting Standard Update No. 2010-17. “Revenue
Recognition-Milestone Method” (Topic 605). ASU No.2010-17 provides guidance on
defining a milestone and determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development
transactions. An entity often recognizes these milestone payments as revenue in
their entirety upon achieving a specific result from the research or development
efforts. A vendor can recognize consideration that is contingent upon
achievement of a milestone in its entirety as revenue in the period in which the
milestone is achieved only if the milestone meets all criteria to be considered
substantive. Determining whether a milestone is substantive is a matter of
judgment made at the inception of the arrangement. ASU No. 2010-17 is effective
for fiscal years and interim periods within those fiscal years beginning on or
after June 15, 2010. Early application is permitted. Entities can apply this
guidance prospectively to milestones achieved after adoption. However,
retrospective application to all prior periods is also permitted. The adoption
of this guidance has not had and is not expected to have a material impact on
the Company’s consolidated financial statements.
In April
2010, the FASB issued Accounting Standard Update No. 2010-18. “Receivables”
(Topic 310). ASU No.2010-18 provides guidance on accounting for acquired loans
that have evidence of credit deterioration upon acquisition. Paragraph
310-30-15-6 allows acquired assets with common risk characteristics to be
accounted for in the aggregated as a pool. Upon establishment of the pool, the
pool becomes the unit of accounting. When loans are accounted for as a pool, the
purchase discount is not allocated to individual loans; thus all of the loans in
the pool accrete at a single pool rate (based on cash flow projections for the
pool). Under subtopic 310-30, the impairment analysis also is performed on the
pool as a whole as opposed to each individual loan. Paragraphs 310-40-15-4
through 15-12 establish the criteria for evaluating whether a loan modification
should be classified as a troubled debt restructuring. Specifically paragraph
310-40-15-5 states that “a restructuring of a debt constitutes a troubled debt
restructuring for purposes of this subtopic if the creditor for economic or
legal reasons related to the debtor’s financial difficulties grants a concession
to the debtor that it would not otherwise consider.” ASU No. 2010-18 is
effective for modification of loans accounted for within pools under subtopic
310-30 occurring in the first interim or annual period ending on or after July
15, 2010. The amendments are to be applied prospectively. Early application is
permitted. The adoption of this guidance has not had and is not expected to have
a material impact on the Company’s consolidated financial
statements.
22
In July
2010, the FASB issued Accounting Standard Update No. 2010-20 “Receivables”
(Topic 310). ASU No. 2010-20 provides financial statement users with
greater transparency about an entity’s allowance for credit losses and the
credit quality of its financing receivables. This update is intended
to provide additional information to assist financial statement users in
assessing an entity’s credit risk exposures and evaluating the adequacy of its
allowance for credit losses. The amendments in this update apply to
both public and nonpublic entities with financing receivables, excluding
short-term trade accounts receivable or receivables measured at fair value or
lower of cost or fair value. The objective of the amendments in ASU
No. 2010-20 is for an entity to provide disclosures that facilitate financial
statement users’ evaluation of (1) the nature of credit risk inherent in the
entity’s portfolio of financing receivables, (2) how that risk is analyzed and
assessed in arriving at the allowance for credit losses and (3) the changes and
reasons for those changes in the allowance for credit losses. The
entity must provide disclosures about its financing receivables on a
disaggregated basis. For public entities ASU No. 2010-20 is effective
for interim and annual reporting periods ending on or after December 15,
2010. For nonpublic entities ASU No. 2010-20 will become effective
for annual reporting periods ending on or after December 15,
2011. The Company is evaluating the impact ASU No. 2010-20 will have
on the financial statements.
In August
2010, the FASB issued Accounting Standard Updates No. 2010-21 “Accounting for
Technical Amendments to Various SEC Rules and Schedules” and No.
2010-22 “Accounting for Various Topics – Technical Corrections to SEC
Paragraphs”. ASU No 2010-21 amends various SEC paragraphs pursuant to
the issuance of Release no. 33-9026: Technical Amendments to Rules, Forms,
Schedules and Codification of Financial Reporting Policies. ASU No.
2010-22 amends various SEC paragraphs based on external comments received and
the issuance of SAB 112, which amends or rescinds portions of certain SAB
topics. Both ASU No. 2010-21 and ASU No. 2010-22 are effective upon
issuance. The amendments in ASU No. 2010-21 and No. 2010-22 will not
have a material impact on the Company’s financial statements.
Results
of Operations
Year
Ended September 30, 2010 Compared to the Year Ended September 30,
2009
Revenue and cost of sales -
For the years ended September 30, 2010
and 2009 we recognized revenue of $1,560,633 and $1,374,961,
respectively. During the year ended September 30, 2010, we fulfilled
the orders for two bridges at Ft. Eustis, in Virginia, for which we recognized
approximately $988,000 of revenue. In addition, we also recorded sales of
railroad ties and assorted other products of approximately $561,000, including
$257,000 from one customer, during that same period. During the year
ended September 30, 2009, we recognized approximately $784,000 in revenue
associated with two bridges and recorded sales of railroad ties of approximately
$591,000.
During
the past several years, we have focused on advancing the development of our
technology and products, including quality manufacturing processes and methods
and product enhancements and we have initiated the deployment of these products
in a proof-of-concept manner, across multiple customers, applications and
industries. Our focus has recently changed and is now on the commercial sale of
our products, including railroad crosstie products and components for bridges
and other structures.
Cost of
sales amounted to $1,504,095 and $995,218 for the years ended September 30, 2010
and 2009, respectively, resulting in gross margins of $56,538 and $379,743,
respectively. The lower gross profit for the year ended September 30, 2010
was a result of being in the early stages of our manufacturing and commercial
activities and included, among other factors, inefficient manufacturing
processes and methods and costs of additional materials supplied to the bridge
projects. Because we are in the early stages of commercial activities, cost of
sales may not be indicative of cost of sales in the future, which may vary
significantly and are highly dependent on the pricing of products, concurrent
production activities, use of subcontractors and timing and mix of the sales and
services.
Research and Development
Costs - Research and development costs totaled $242,605 and
$467,133 for the fiscal years ended September 30, 2010 and 2009, respectively.
This decrease reflects the completion of multiple projects with emphasis on
product development, prototype molds and other products. During the
fiscal year ended September 30, 2009 we initiated or continued studies with
Rutgers University and other third parties to enhance our product
formulations, develop new innovative products, and expand the reach of our
existing products.
23
As we
encounter new and innovative product solutions for our customers, we anticipate
continuing and possibly expanding our research and development
efforts.
Marketing and Sales
Expenses - Marketing and selling expenses decreased to $358,403
for the year ended September 30, 2010 from $497,961 for the year ended September
30, 2009. The decrease was primarily due to more emphasis on fulfilling our
projects and contracts and less emphasis and personnel effort on building our
sales pipeline.
Subsequent
to September 30, 2010, we hired senior staff with substantial experience in the
design, building and execution of a commercial strategic plan and anticipate
marketing and sales expenses to increase significantly in the
future.
General and
Administrative - General and administrative costs totaled
$5,620,137 and $3,398,509 for the fiscal years ended September 30, 2010 and
2009, respectively. This increase was primarily due to stock-based compensation
in the form of shares and warrants issued to consultants. During fiscal year
ended September 30, 2010 we recorded approximately $2.3 million in charges
related to the issuances of shares of our Common Stock or warrants providing the
right to purchase shares of our Common Stock at a predetermined price in the
future. We are evaluating the use of shares of our Common Stock and warrants as
compensation for consultants and other service providers, and may or may not
continue the process in the future.
Depreciation and
Amortization - Depreciation and amortization totaled $268,006
in the year ended September 30, 2010 compared to $179,547 in the fiscal year
ended September 30, 2009. This increase primarily reflects our
increased investments made in our inventory of molds and the related
depreciation.
Interest
Expense - Interest expense recognized during the fiscal years
ended September 30, 2010 and 2009 was approximately$ 672,000 and $589,000,
respectively. The increase in interest expense resulted from increased
amortization of discounts recorded on the notes during the fiscal year ended
September 30, 2010.
Debt Conversion Expense -
During the fiscal year ended September 30, 2009 we incurred approximately $1.0
million of debt conversion expense associated with the conversion and
restructuring of several debentures. There were no corresponding conversions or
restructurings during the fiscal year ended September 30, 2010.
Income Taxes - We have unused
net operating loss carry forwards, which included losses incurred from inception
through September 30, 2010. Due to the uncertainty that sufficient future
taxable income can be recognized to realize associated deferred tax assets, no
income tax benefit from inception through September 30, 2010 has been
recorded.
Liquidity,
Capital Resources and Plan of Operations
At September 30, 2010 we had
$1,491,368 in current assets and $2,076,932 in current liabilities resulting in
a deficit working capital position of $585,564 which compared to current assets
of $1,649,991 and current liabilities of $1,171,887, or a working capital
position of $478,104 at September 30, 2009. Working capital at September 30,
2010 was negatively impacted by the short-term maturities of our convertible
debt. Of the $1,182,500 in principal amount of our convertible debt at September
30, 2010, $832,500 is due by March 31, 2011. The remaining $350,000 is due by
May 2012.
We have
used approximately $3.0 million and $2.6 million in our operating activities
during fiscal years ended September 30, 2010 and 2009, respectively.
Financing activities, consisting primarily of the sale of shares of our Common
Stock and debt securities, have generated net cash proceeds net of repayments,
totaling approximately $2.8 million and $3.8 million during the fiscal years
ended September 30, 2010 and 2009, respectively. Our ability to pay principal
and interest on our outstanding debentures and to fund our planned operations
depends on our future operating performance and ability to raise capital. The
timing and amount of our financing needs will be highly dependent on the success
of our sales and marketing programs, our ability to obtain purchase commitments,
the size of such purchase commitments and any associated working capital
requirements.
24
We will
need to raise additional capital through equity or debt financing in the next
twelve months in order to fund our planned operations and repay, restructure or
refinance our debt obligations. Our current operating plans for the next fiscal
year are to meet our existing customer commitments, expand our marketing and
sales and engineering capabilities, and continue to develop innovative solutions
for our customers. Although we will have to raise additional funds through
the issuance of debt and/or equity during the next twelve months, there can be
no assurance that financing will be available, or if available, that such
financing will be upon terms acceptable to us. Please see the Risk Factor
“We are dependent on our ability to raise capital from external funding
sources. If we are unable to continue to obtain necessary capital
from outside sources, we will be forced to reduce or curtail operations” in
“Item 1A. Risk Factors” above.
Disclosure
About Off-Balance Sheet Arrangements
We do not
have any transactions, agreements or other contractual arrangements that
constitute off-balance sheet arrangements.
Item
7A. Quantitative and Qualitative Disclosure About Market
Risk
Because
we are a smaller reporting company, we are not required to provide the
information called for by this item.
Item
8. Financial Statement
The
information required by this item is included in pages F-1 through F-26 attached
hereto and incorporated by reference. The index to the consolidated financial
statements can be found on page F-1.
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item
9A (T). Controls and Procedures
Evaluation
of the Company's Disclosure Controls and Procedures
We
carried out an evaluation, under the supervision and with the participation of
the Company’s management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of our “disclosure controls and
procedures” (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30,
2010. Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that due to material weaknesses in our
internal control over financial reporting noted below, our disclosure controls
and procedures were not effective.
Our
disclosure controls and procedures are intended to ensure that the information
we are required to disclose in the reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported within the time
periods specified in the Securities Exchange Commission’s rules and forms and
(ii) accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer, as the principal executive and
financial officers, respectively, to allow final decisions regarding required
disclosures. In designing and evaluating our disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurances of
achieving the desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
25
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act. Internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation and fair presentation of financial statements for
external purposes, in accordance with generally accepted accounting
principles. The effectiveness of any system of internal control over
financial reporting is subject to inherent limitations and therefore, may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness of future periods are subject to the risk that the controls may
become inadequate due to change in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management conducted an evaluation of the effectiveness of internal control over
financial reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation,
our management concluded that as of September 30, 2010, our internal
controls over financial reporting were not effective due to the following
material weaknesses:
|
·
|
Insufficient
personnel or expertise in the accounting function to provide for adequate
segregation of duties surrounding the approval, processing and recording
of transactions, the proper recording of complex transactions, independent
review of journal entries and account analyses, an adequate monitoring
program and a robust risk assessment
function.
|
|
·
|
Missing
or non-operating controls and procedures over the recording of stock-based
compensation transactions, allocation of production costs, and the
preparation of account analyses.
|
|
·
|
Insufficient
formal documentation of accounting policies and procedures to ensure
continued operating effectiveness.
|
Management
intends to focus in the near term on formalizing policies and procedures
surrounding transaction processing and period-end account analyses and providing
for additional review and monitoring procedures and periodically assess the need
for additional accounting resources as the business
develops. Management will continue to monitor and evaluate the
effectiveness of our internal controls and procedures and our internal control
over financial reporting on an ongoing basis and are committed to taking further
action and implementing enhancements or improvements, as necessary.
Changes
In Internal Control Over Financial Reporting
There was
no change in our internal control over financial reporting (as defined in Rules
13a-13(f) and 15d-15(f) under the Exchange Act) that occurred during our fourth
fiscal quarter of the fiscal year ended September 30, 2010, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Effective
November 11, 2010, Mr. Donald Fallon was hired as our Chief Financial Officer to
replace Mr. Gary Anthony who resigned to pursue other business
opportunities. In addition, the Company engaged an accountant on a
part-time basis.
Item
9B. Other Information
None.
26
PART
III.
Item
10. Directors, Executive Officers and Corporate
Governance
Directors
and Executive Officers
The
following table sets forth the names and ages of all of our current directors
and executive officers along with their current positions. All
directors hold office until the next annual meeting of stockholders or until
their successors have been elected and qualified.
Name
|
Age
|
Position with the
Company
|
||
Perry
Jacobson
|
51
|
Chairman,
Board of Directors
|
||
Michael
Dodd
|
39
|
Director
|
||
Donald
Fallon
|
56
|
Chief
Financial Officer and Treasurer
|
||
Anthony
Hatch
|
50
|
Director
|
||
Peter
Janoff
|
54
|
Director
|
||
James
Kerstein
|
52
|
Chief
Executive Officer and Director
|
||
Steven
Silverman
|
46
|
President,
Chief Operating Officer and
Director
|
The
principal occupations of and certain other information about each of our
executive officers and directors are as follows:
Perry Jacobson. Mr. Jacobson
was appointed to our board of directors on September 20, 2010. He is
currently serving as a Managing Director at Brookstone Partners
(“Brookstone”). In his role at Brookstone, Mr. Jacobson is
responsible for managing B.P. Mezzanine Capital, LLC, a captive mezzanine fund
which primarily invests alongside Brookstone’s equity capital as well as working
with the firm's Limited Partners. Prior to joining Brookstone, Mr.
Jacobson was a specialist on the New York Stock Exchange from 1982 to
2004. He started his career with CMJ Partners and continued with
Wagner, Stott and Mercator after their merger. Mr. Jacobson became a
member of the managing committee at each firm where he was involved in both day
to day and policy decisions. Mr. Jacobson was also a NYSE Floor
Governor and a member of the NYSE Market Performance Committee which sets rules
and procedures for NYSE trading. Mr. Jacobson graduated from Boston
University with a B.S. in Business Administration in 1981.
Michael Dodd. Mr. Dodd,
appointed to our board of directors on September 20, 2010, is currently serving
as the Chief Executive Officer of 3D Global Solutions Inc. (“3D”). 3D
provides professional program management services to governments, corporations
and global organizations. His responsibilities at 3D include
providing senior leadership in all aspects of sales, marketing, production, and
administration. Prior to joining 3D, Mr. Dodd was a Managing Director of the
Federal Technology Group of Audio Visual Innovations, Inc., where he served as
an advisor to management and the Board of Directors in matters relating to
strategic growth in vertical market opportunities. Mr. Dodd graduated
from Catholic University of America with a B.A. in Political Science in
1994. He also served in the United States Military from September
1989 through October 2000.
Donald Fallon. Mr. Fallon was
appointed Chief Financial Officer and Treasurer effective November 11, 2010. Mr.
Fallon has served as a consultant providing chief financial officer services to
emerging high tech and non-profit organizations since November
2006. From December 2003 until October 2006, Mr. Fallon held the
positions of Senior Vice President, Chief Financial Officer and co-founder of
Ceptor Corporation, an OTCBB-listed development-stage biopharmaceutical company
which was engaged in the research and development of therapeutic products with a
focus on orphan diseases. Mr. Fallon has over 30 years of broad
senior-level financial and accounting management experience, having served as
Chief Financial Officers at both publicly and privately held
companies. Recently, he has provided financial, accounting and
operational advisory services primarily to early-stage ventures. Mr.
Fallon has co-founded several biotech companies, and has substantial experience
in SEC compliance issues, raising public and venture capital, strategic
partnering and planning, and operations. Mr. Fallon is a certified
public accountant, holds a MBA in Finance from Loyola University Maryland, and
received a BS in Accounting from University of Baltimore and is a member of the
American Institute of Certified Public Accountants and various other
professional organizations.
27
Anthony Hatch. Effective
December 6, 2010, Mr. Hatch was appointed to our board of directors. Mr. Hatch
is the founder of ABH Consulting which he started in 1999 to provide independent
analytical research and consulting services in the freight and railroad
industries to private equity funds, hedge funds and major
railroads. He is a frequent contributor to Progressive Railroading, a
leading railroad industry publication, and is the co-sponsor of RailTrends, a
railway industry conference held each Fall in New York City. Mr.
Hatch has been a senior transportation analyst on Wall Street for over twenty
years, having worked at Salomon Brothers, Argus Research, PainWebber and
NatWest. Mr. Hatch received his bachelor of arts, cum laude, from
Harvard University in 1982.
Peter Janoff. Mr. Janoff was
appointed to the board of directors effective November 11, 2010. Mr. Janoff is
currently serving as a Senior Asset Manager for DRA Advisors, LLC, a registered
investment advisor. He’s held that position since March
2009. From January 2008 to January 2009, Mr. Janoff held the position
of President and Chief Operating Officer of Brascan Property Management Company,
S.A., a property management company for Brookfield Asset Management’s retail
platform in Brazil. From August 2005 to December 2007, Mr. Janoff was
employed by Pyramid Management Group where he served as General Manager and
Senior Asset Manager of Palisades Center, one of the largest and most complex
retail entertainment and dining facilities in the United States. Mr.
Janoff earned his Juris Doctor degree from Hofstra Law School in 1981 and his
B.A. degree in Economics from the State University of New York in
1978.
James J. Kerstein. Mr.
Kerstein has served as one of our directors and as our Chief Executive Officer
since March 30, 2008, the date upon which we acquired Axion International, Inc.
pursuant to the Merger. He has served as the Chief Executive Officer
of Axion since 2007. Mr. Kerstein was the President of Plast-O-Matic
Valves Inc., a privately-held manufacturer of high end polymer valves focused on
the semiconductor and wastewater industries from December 2004 through May
2007. From 1996 to 2004, he was the founder, Chief Executive
Officer, President and Chairman of Polywood, Inc., a manufacturer of recycled
plastic resins utilizing the Rutgers University developed technologies for the
production of structural plastic products. Mr. Kerstein is credited as a
co-inventor on multiple patents dealing with formulations and uses of recycled
plastics. Mr. Kerstein received a BBA in Accounting from George Washington
University and a Master’s degree in Human Resources Management Development from
Chapman University.
Steven Silverman. Effective
October 11, 2010, Mr. Silverman assumed the position of President and Chief
Operating Officer of Axion International Holdings, Inc., and on November 2,
2010, he was appointed to our board of directors. Mr. Silverman served as
Executive Vice President of Archbrook Laguna, LLC (“Archbrook”) from 2006 until
he joined the Company and as Vice President of Operations and Business
Development of Archbrook from 2000 until 2005. From 1997 until
2000, he was Archbrook’s Vice President of Sales. Archbrook is a
total solution provider supplying consumer electronics and computer products to
retailers through state-of-the-art logistical services. As Executive
Vice President, Mr. Silverman was responsible for developing and implementing
strategic corporate policy as well as the day-to-day operational management of
Archbrook. As Vice President of Operations and Business Development,
Mr. Silverman assumed a diverse range of strategic and operational functions,
with a focus on business development. Mr. Silverman received a B.S. in Business
Administration from Widener University in 1986.
Family
Relationships
There are
no family relationships among our executive officers and directors.
Legal
Proceedings
During
the past five years, none of our executive officers, directors, promoters or
control persons has been involved in a legal proceeding material to an
evaluation of the ability or integrity of such person.
28
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and any persons who own more than 10 percent of a registered
class of our equity securities, to file reports of ownership and changes of
ownership on Forms 3, 4 and 5 with the Securities and Exchange
Commission. Officers, directors, and greater than 10% shareholders
are required to furnish us with copies of all such forms that they
file.
To our
knowledge, based solely on review of the copies of such reports furnished to us
during fiscal 2010, we did not receive copies of such reports for the following
events we are aware of:
|
o
|
Bradley
Love, award of option for 150,000 shares on August 26,
2010
|
|
o
|
Michael
Dodd, appointment to the board of directors, effective September 20,
2010
|
Code
of Ethics
We
adopted a code of ethics which our senior financial officers, executive
officers, and general and project managers are expected to adhere to and promote
throughout the organization. Our code of ethics may be found on our
website at www.axionintl.com. We
intend to disclose on our website any waivers or amendments to our code of
ethics within five business days of such action.
Director
Nominations
We do not
maintain a nominating committee of the board. Nominations for
election or appointment to the board are made by the full
board. Because of our small size we do not believe that a nominating
committee would significantly improve our nomination process. We do
not have in place procedures by which security holders may recommend nominees to
the board of directors and have not received any recommendations for nominee for
the board of directors from any security holders.
Audit
Committee
The
audit committee, with Peter Janoff as its sole member, is the only committee of
the Board of Directors. Mr. Janoff is an independent director and a financial
expert. Prior to Mr. Janoff’s appointment to the audit committee, Lori Jones was
the sole member of the committee and was not deemed an independent
director.
The
Audit Committee charter was filed as Appendix B to our Proxy on September 28,
2010.
29
Item
11. Executive Compensation
The
following Summary Compensation Table sets forth, for the years indicated, all
cash compensation, paid, distributed or accrued for services, including salary
and bonus amounts, rendered in all capacities by our Chief Executive Officer and
all other executive officers who received or are entitled to receive
compensation in excess of $100,000 during the stated periods.
Summary
Compensation Table
Name
and
|
Fiscal
|
Salary
|
Bonus
|
Option
Awards
|
All other
Compensation
|
Total
|
||||||||||||||||
Principal Position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||
James
Kerstein
|
2010
|
208,000 | - | - | 10,200 | (1) | 218,200 | |||||||||||||||
Chief
Executive Officer
|
2009
|
208,000 | - | - | 10,200 | (1) | 218,200 | |||||||||||||||
Marc
Green (2)
|
2010
|
73,848 | - | - | - | 73,848 | ||||||||||||||||
Former
President and Treasurer
|
2009
|
120,000 | - | - | - | 120,000 |
(1)
Includes an automobile allowance in the amount of $850.00 per
month.
(2) Mr.
Green resigned as President and Treasurer in May 2010.
Employment
Agreements
James
Kerstein
Axion
entered into an employment agreement, dated as of January 1, 2008, with Mr.
Kerstein that provides for his continued employment with Axion as Chief
Executive Officer through January 1, 2013. Under the terms of the employment
agreement, Mr. Kerstein receives annual base compensation in the amount of
$208,000, which will be increased to the following amounts upon reaching the
following revenue milestones: (i) $388,000 upon Axion achieving annual revenues
of $10,000,000, (ii) $488,000 upon Axion achieving annual revenues of
$15,000,000, and (iii) $508,000 upon Axion achieving annual revenues of
$25,000,000. Mr. Kerstein is also entitled to receive benefits
(including health insurance) provided to other senior executives and automobile
allowance of $850 per month.
In
addition, Mr. Kerstein was awarded options to purchase 16 shares of Common Stock
of Axion at an exercise price of $1.00 per share. As a result of the
Merger and the reverse stock split, such options were automatically converted
into the right to purchase 762,076 shares of Common Stock of the Company, at an
exercise price of $.00002 per share. The options are exercisable for
a term of five years, of which (i) 190,519 shares vest upon Axion achieving
annual revenues of $10,000,0000, (ii) 285,779 shares vest upon Axion achieving
annual revenues of $15,000,000 and (iii) 285,779 shares vest upon Axion
achieving annual revenues of $25,000,000; provided, all of the options vest in
the event of (i) a change of control, as defined in his employment agreement,
(ii) termination of Mr. Kerstein’s employment by Axion without cause, as defined
in his employment agreement, or (iii) termination of Mr. Kerstein’s employment
by Mr. Kerstein for good reason, as defined in the employment
agreement.
If
Mr. Kerstein is terminated without cause, as defined in his employment
agreement, or by Mr. Kerstein for good reason, as defined in his employment
agreement, he will receive (i) the remainder of his salary, (ii) benefits
provided to other senior executives and (iii) automobile allowance of $850 per
month, each through the normal expiration date of his employment
term. If Mr. Kerstein is terminated due to his permanent disability,
he will receive for a period of six months (i) his base salary, (ii) benefits
provided to other senior executives and (iii) automobile allowance of $850 per
month. In addition, if Mr. Kerstein is terminated due to his death,
he will receive base salary for a period of six months.
30
The
agreement also contains covenants governing confidentiality, non-competition and
non-solicitation upon the termination of his employment. The non-compete
continues for a period of 12 months following termination of
Mr. Kerstein’s employment.
Mr.
Kerstein’s agreement was amended in December 2008 solely for the purpose of
making it more compliant with provisions of Section 409A of the Internal Revenue
Code that took effect on December 31, 2008.
Steven
Silverman
Axion
entered into an employment agreement, dated September 23, 2010, with Mr.
Silverman that provides for his employment with Axion as President and Chief
Operating Officer. Under the terms of the employment agreement,
Mr. Silverman receives annual base compensation in the amount of $175,000,
which will be increased to the following amounts upon reaching the following
revenue milestones: (i) $250,000 upon Axion achieving $10,000,000 in sales
during any fiscal year (“1st
Milestone”), (ii) $300,000 upon Axion achieving $15,000,000 in sales during any
fiscal year (“2nd
Milestone”), and (iii) $375,000 upon Axion achieving $25,000,000 in sales during
any fiscal year (“ 3rd
Milestone”). Mr. Silverman is also entitled to receive benefits
(including health insurance) provided to other senior executives.
In
addition, Mr. Silverman was awarded an option pursuant to the Company’s 2010
Stock Plan, to purchase up to 1,000,000 shares of Common Stock of Axion. Such
option is exercisable for a term of seven years, of which (i) an option to
purchase up to 150,000 of Common Stock at $1.05 per share is immediately
exercisable, (ii) an option to purchase an additional 100,000 shares of Common
Stock at $1.25 per share is exercisable on October 11, 2011, (iii) an
option to purchase an additional 250,000 shares of Common Stock at $1.50 per
share is exercisable upon the Company achieving the 1st
Milestone (iv) an option to purchase an additional 250,000 shares of Common
Stock at $1.75 per share upon the Company achieving the 2nd
Milestone, and (v) an option to purchase an additional 250,000 shares of Common
Stock at $2.50 per share upon the Company achieving the 3rd
Milestone. In the event, following a change in control as defined in his
employment agreement, Mr. Silverman’s employment by Axion is terminated by the
Company for any reason other than (i) for cause, as defined in his employment
agreement, (ii) due to death, or (iii) due to a permanent disability, as defined
in his employment agreement, Mr. Silverman shall be entitled to receive
severance in the amount of $300,000, payable in a lump sum amount, plus, if such
termination occurs prior to October 11, 2011, his option to purchase an
additional 100,000 shares of Common Stock at $1.25 per share will be exercisable
on such date.
The
agreement also requires Mr. Silverman to enter into the Company’s
Confidentiality and Inventions Agreement.
Donald
Fallon
Pursuant
to the terms of our engagement letter with him, Mr. Fallon is compensated
on a part-time hourly basis.
31
Compensation
of Directors
The
following table shows compensation to all directors who were not also employees
or officers of the Company during fiscal year ended September 30,
2010.
Compensation
of Directors
Name
|
Option Awards
|
All Other Compensation
|
Total
|
||||||
Bradley
Love (1)
|
$ | 152,180 | $ | 152,180 |
(1)
Mr. Love was appointed to the Board of Directors in March 2010 and resigned as a
member of the Board of Directors in October 2010.
Outstanding
Equity Awards at Fiscal Year End
Option
Awards
Name
|
Number of Securities
Underlying
Unexercised Options
Unexercisable
|
Option Exercise Price
|
Option Expiration Date
|
||||||
James
Kerstein
|
762,076 | $ | 0.00002 |
1/1/2013
|
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The
following table sets forth information regarding the number of shares of our
Common Stock beneficially owned as of January 10, 2011, by each of our
directors, each of our executive officers, all of our executive officers and
directors as a group, and by any person or “group,” as that term is used in
Section 13(d)(3) of the Exchange Act, known to us to own beneficially more than
5% of the outstanding shares of our Common Stock. Except as otherwise set forth
below, the address of each of the persons listed below is c/o Axion
International Holdings, Inc., 180 South Street, Suite 104, New Providence, New
Jersey 07974.
Name and Address of Beneficial
Owner
|
Amount and Nature of
Beneficial Ownership
|
Percent
of Class (1)
|
||||||
James
Kerstein, CEO and Director (2)
|
2,000,450 | 8.6 | % | |||||
Perry
Jacobson, Chairman of Board (3)
|
288,575 | 1.2 | % | |||||
Steven
Silverman, President and Director (4)
|
150,000 | * | ||||||
Michael
Dodd, Director (5)
|
50,000 | * | ||||||
Anthony
Hatch, Director (5)
|
50,000 | * | ||||||
Peter
Janoff, Director (5)
|
50,000 | * | ||||||
Donald
Fallon, CFO and Treasurer
|
- | - | ||||||
Harborview
Master Fund, L.P. (6)(7)(8)
|
1,919,688 | 8.1 | % | |||||
Harborview
Advisors, LLC (6)(7)(8)(9)
|
1,919,688 | 8.1 | % | |||||
Richard
Rosenblum (6)(7)(8)(10)
|
2,506,638 | 10.6 | % | |||||
David
Stefansky (6)(7)(8)(11)
|
2,506,638 | 10.6 | % | |||||
Insight
Partners LLC
|
||||||||
4800
Hampden Lane
|
||||||||
7th
Floor
|
||||||||
Bethesda,
MD 20814 (12)
|
1,862,505 | 7.9 | % | |||||
All
directors and officers as a group
|
||||||||
(6
persons) (13)
|
2,589,025 | 10.9 | % |
* Less
than 1% of outstanding shares.
32
(1)
|
As
of January 11, 2011, we had 23,305,704 shares of common stock
outstanding. Unless otherwise indicated in these footnotes,
each stockholder has sole voting and investment power with respect to the
shares beneficially owned. All share amounts reflect beneficial ownership
determined pursuant to Rule 13d-3 under the Exchange Act. All information
with respect to beneficial ownership has been furnished by the respective
director, executive officer or stockholder, as the case may
be.
|
(2)
|
Excludes
options to purchase 762,076 shares of common stock, which options have not
yet vested.
|
(3)
|
Includes
options and warrants to purchase 100,000 shares of common stock and
excludes options to purchase 100,000 shares of common stock which have not
vested.
|
(4)
|
Includes
options to purchase 150,000 shares of common stock and excludes options to
purchase 850,000 shares of common stock which have not
vested.
|
(5)
|
Includes
options to purchase 50,000 shares of common stock and excludes options to
purchase 100,000 shares of common stock which have not
vested.
|
(6)
|
The
principal business address of the shareholder is c/o Harborview Advisors
LLC, 850 Third Avenue, Suite 1801, New York, NY 10022. Information for
this shareholder is based on the shareholder’s Schedule 13D filed with the
SEC.
|
(7)
|
Includes
warrants to purchase 200,000 shares of common stock and 150,000 shares of
common stock issuable on conversion of convertible
notes.
|
(8)
|
Excludes
138,000 shares issuable upon conversion of a convertible note that limits
conversion to the extent that the holder would own in excess of 9.9% of
our outstanding shares.
|
(9)
|
Includes
1,919,688 shares beneficially owned by Harborview Master Fund, L.P. as to
which shares Harborview Advisors, LLC, as general partner of Harborview
Master Fund, L.P., has sole power to vote, or to direct the vote, and sole
power to dispose, or direct the disposition.
|
(10)
|
Includes
1,919,688 shares beneficially owned by Harborview Master Fund, L.P. and
586,950 shares beneficially owned by Harborview Capital management, LLC,
as to which shares Mr. Rosenblum, as a managing member of Harborview
Advisors, LLC and Harborview Capital Management, LLC, has shared power to
vote, or to direct the vote, and shared power to dispose, or direct
disposition.
|
(11)
|
Includes
1,919,688 shares beneficially owned by Harborview Master Fund, L.P. and
586,950 shares beneficially owned by Harborview Capital management, LLC,
as to which shares Mr. Stefansky, as a managing member of Harborview
Advisors, LLC and Harborview Capital Management, LLC, has shared power to
vote, or to direct the vote, and shared power to dispose, or direct
disposition.
|
(12)
|
Includes
options to purchase 169,323 shares of common stock.
|
(13)
|
Includes
options and warrants to purchase 400,000 shares of common stock and
excludes options to purchase 2,012,076 shares of common stock which have
not vested.
|
33
Equity
Compensation Plan Information
The
following table provides information regarding the status of our existing equity
compensation plans at September 30, 2010.
Plan Category
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding option,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the second column)
|
|||||||||
Equity
compensation plans approved by security
holders (1)
|
55,000 | $ | 1.15 | 3,373,106 | ||||||||
Equity
compensation plans not approved by security holders (2) (3)
(4)
|
1,883,761 | $ | 0.59 | 8,750 | ||||||||
Total
|
1,938,761 | $ | 0.61 | 3,381,856 |
(1)
|
Does
not include 2010 Stock Option Plan, which was adopted by the Board of
Directors and approved by the shareholders subsequent to September 30,
2010.
|
(2)
|
Includes
an option to purchase 150,000 shares of Common Stock which was granted in
August 2010, pursuant to the 2010 Stock Option Plan, at an exercise price
of $1.22, with 50,000 shares vesting immediately upon grant and the
remaining vesting 50,000 each at the first anniversary of the grant date
and the second anniversary of the grant
date.
|
(3)
|
Includes
an option pursuant to an employment agreement with our Chief Executive
Officer, granting the right to purchase 762,076 shares of Common Stock, at
an exercise price of $0.00002 per share, under the terms of a certain
performance-based stock option.
|
(4)
|
Includes
options to purchase 971,685 shares of Common Stock with exercise prices
ranging from $0.04 to $1.15, pursuant to individual
arrangements.
|
2000
Stock Incentive Plan
In
September 2000, the Board of Directors adopted the 2000 Stock Incentive Plan
(the “2000 Plan”). Pursuant to applicable law, the 2000 Plan has not been
approved by our shareholders. The 2000 Plan provides for the granting
of incentive stock options and non-qualified stock options, as determined by a
committee appointed by the Board of Directors; however since the 2000 Plan has
not been approved by shareholders, only non-qualified stock options may be
granted pursuant to this plan.
Number of Shares Subject to the 2000
Plan. The 2000 Plan authorizes the grant of options relating
to an aggregate of 12, shares of Common Stock. If any corporate
transaction occurs which causes a change in our capitalization (for example, a
reorganization, recapitalization, stock split, stock dividend, or the like), the
number of shares of stock available and the number of shares of stock subject to
outstanding options granted under the 2000 Plan will be adjusted appropriately
and equitably to prevent dilution or enlargement of a participant’s
rights.
Eligibility for
Participation. Individuals eligible to participate in the 2000
Plan are our employees and employees of our subsidiaries, but not any of our or
our subsidiaries’ officers.
Terms of
Options. Options granted to employees may be either incentive
stock options (ISOs), which satisfy the requirements of Internal Revenue Code
Section 422, or nonstatutory stock options (NSOs), which are not intended to
satisfy such requirements. The exercise price for the grant of an NSO
under the 2000 Plan may be any price that is greater than or equal to 85% of the
fair market value of the Common Stock on the date the NSO is
granted. The exercise price of an ISO must be at least equal to 100%
(110% for 10%-shareholders) of the fair market value of our Common Stock on the
date the ISO is granted. Options expire at the times determined by
the committee, as specified in the applicable award agreement. However, no
option is exercisable later than the tenth anniversary of the grant date, and
any ISO granted to a 10%-shareholder must be exercisable on or before the fifth
anniversary of the grant date.
34
Vesting and
Acceleration. Options vest at the times determined by the
committee, as specified in the applicable award agreement. A participant’s
options become fully vested upon the termination of the participant’s employment
as a result of a reduction in force and upon the occurrence of our change in
control. In general, a change in control will be deemed to have
occurred upon the acquisition by any person of more than 50% of our outstanding
voting securities (or securities subject to conversion into voting securities),
the acquisition by any person of the power to elect a majority of our directors,
certain mergers and other corporate transactions if the holder’s of our voting
securities before the transaction receive less than 50% of the outstanding
voting securities of the reorganized, merged or consolidated entity, after the
transaction, and our complete liquidation or dissolution, or the sale of all or
substantially all of our assets, if approval of our shareholders is required for
the transaction.
Term. The 2000 Plan
expired on September 8, 2010.
2000
Officer and Employee Recruitment Stock Incentive Plan
In
September 2000, the Board of Directors adopted the Officer and Employee
Recruitment Stock Incentive Plan (the “2000 Plan”). Pursuant to applicable law,
the 2000 Plan has not been approved by our shareholders. The 2000
Plan provides for the granting of incentive stock options and non-qualified
stock options, as determined by a committee appointed by the Board of Directors;
however since the 2000 Plan has not been approved by shareholders, only
non-qualified stock options may be granted pursuant to this plan.
Number of Shares Subject to the 2000
Plan. The 2000 Plan authorizes the grant of options relating
to an aggregate of 12,500 shares of Common Stock. If any corporate
transaction occurs which causes a change in our capitalization (for example, a
reorganization, recapitalization, stock split, stock dividend, or the like), the
number of shares of stock available and the number of shares of stock subject to
outstanding options granted under the 2000 Plan will be adjusted appropriately
and equitably to prevent dilution or enlargement of a participant’s
rights.
Eligibility for
Participation. Individuals eligible to participate in the 2000
Plan are our new employees and officers of the company.
Terms of
Options. Options granted to employees may be either incentive
stock options (ISOs), which satisfy the requirements of Internal Revenue Code
Section 422, or nonstatutory stock options (NSOs), which are not intended to
satisfy such requirements. The exercise price for the grant of an NSO
under the 2000 Plan may be any price that is greater than or equal to 85% of the
fair market value of the Common Stock on the date the NSO is
granted. The exercise price of an ISO must be at least equal to 100%
(110% for 10%-shareholders) of the fair market value of our Common Stock on the
date the ISO is granted. Options expire at the times determined by
the committee, as specified in the applicable award agreement. However, no
option is exercisable later than the tenth anniversary of the grant date, and
any ISO granted to a 10%-shareholder must be exercisable on or before the fifth
anniversary of the grant date.
Vesting and
Acceleration. Options vest at the times determined by the
committee, as specified in the applicable award agreement. A participant’s
options become fully vested upon the termination of the participant’s employment
as a result of a reduction in force and upon the occurrence of our change in
control. In general, a change in control will be deemed to have
occurred upon the acquisition by any person of more than 50% of our outstanding
voting securities (or securities subject to conversion into voting securities),
the acquisition by any person of the power to elect a majority of our directors,
certain mergers and other corporate transactions if the holder’s of our voting
securities before the transaction receive less than 50% of the outstanding
voting securities of the reorganized, merged or consolidated entity, after the
transaction, and our complete liquidation or dissolution, or the sale of all or
substantially all of our assets, if approval of our shareholders is required for
the transaction.
35
2003
Stock Option Plan
In
September 2003, the Board of Directors adopted the Officer and Employee
Recruitment Stock Incentive Plan (the “2003 Plan”). Pursuant to applicable law,
the 2003 Plan has been approved by our shareholders. The 2003 Plan
provides for the granting of incentive stock options and non-qualified stock
options, as determined by a committee appointed by the Board of
Directors.
Number of Shares Subject to the 2003
Plan. The 2003 Plan authorizes the grant of options relating
to an aggregate amount equal to fifteen percent (15%) of the aggregate number of
shares of the Company’s outstanding Common Stock. If any corporate
transaction occurs which causes a change in our capitalization (for example, a
reorganization, recapitalization, stock split, stock dividend, or the like), the
number of shares of stock available and the number of shares of stock subject to
outstanding options granted under the 2003 Plan will be adjusted appropriately
and equitably to prevent dilution or enlargement of a participant’s
rights.
Eligibility for
Participation. Individuals eligible to participate in the 2003
Plan are our employees and employees of our subsidiaries, but not any of our or
our subsidiaries’ officers.
Terms of
Options. Options granted to employees may be either incentive
stock options (ISOs), which satisfy the requirements of Internal Revenue Code
Section 422, or nonstatutory stock options (NSOs), which are not intended to
satisfy such requirements. The exercise price for the grant of an NSO
under the 2003 Plan may be any price that is greater than or equal to 85% of the
fair market value of the Common Stock on the date the NSO is
granted. The exercise price of an ISO must be at least equal to 100%
(110% for 10%-shareholders) of the fair market value of our Common Stock on the
date the ISO is granted. Options expire at the times determined by
the committee, as specified in the applicable award agreement. However, no
option is exercisable later than the tenth anniversary of the grant date, and
any ISO granted to a 10%-shareholder must be exercisable on or before the fifth
anniversary of the grant date.
Vesting and
Acceleration. Options vest at the times determined by the
committee, as specified in the applicable award agreement. A participant’s
options become fully vested upon the termination of the participant’s employment
as a result of a reduction in force and upon the occurrence of our change in
control. In general, a change in control will be deemed to have
occurred upon the acquisition by any person of more than 50% of our outstanding
voting securities (or securities subject to conversion into voting securities),
the acquisition by any person of the power to elect a majority of our directors,
certain mergers and other corporate transactions if the holder’s of our voting
securities before the transaction receive less than 50% of the outstanding
voting securities of the reorganized, merged or consolidated entity, after the
transaction, and our complete liquidation or dissolution, or the sale of all or
substantially all of our assets, if approval of our shareholders is required for
the transaction.
2010
Stock Option Plan
In
September 2010, the Board of Directors adopted the 2010 Stock Plan (the “2010
Plan”). Pursuant to applicable law, the 2010 Plan has been approved by our
shareholders. The 2010 Plan provides for the granting of incentive
stock options, non-qualified stock options, stock grants and
stock-based awards, as determined by a committee appointed by the Board of
Directors.
Number of Shares Subject to the 2010
Plan. The 2010 Plan authorizes the grant of options relating
to 3,000,000 shares of the Company’s outstanding Common Stock. If any
corporate transaction occurs which causes a change in our capitalization (for
example, a reorganization, recapitalization, stock split, stock dividend, or the
like), the number of shares of stock available and the number of shares of stock
subject to outstanding options granted under the 2010 Plan will be adjusted
appropriately and equitably to prevent dilution or enlargement of a
participant’s rights.
Eligibility for
Participation. Individuals eligible to participate in the 2010
Plan are our employees , directors and certain of our consultants. Each Option
will be set forth in writing in an Option Agreement, duly executed by us and, to
the extent required by law or requested by us, by the Participant. The
Administrator may provide that Options be granted subject to such terms and
conditions, consistent with the terms and conditions specifically required under
the Plan, as the Administrator may deem appropriate including, without
limitation, subsequent approval by our shareholders of this Plan or any
amendments thereto.
36
Non-Qualified
Options.
Each Option Agreement shall state the number of Shares to which it pertains and
the option price (per share) of the Shares covered by each Option, which option
price shall be determined by the Administrator but shall not be less than the
Fair Market Value per share of Common Stock. The Option Agreement shall
also state the date or dates on which it is first exercisable and the date after
which it may no longer be exercised, and may provide that the Option rights
accrue or become exercisable in installments over a period of months or years,
or upon the occurrence of certain conditions or the attainment of stated goals
or events. Exercise of any Option may be conditioned upon the Participant’s
execution of a Share purchase agreement in form satisfactory to the
Administrator providing for certain protections for us and our other
shareholders, including requirements that the Participant’s or the Participant’s
Survivors’ right to sell or transfer the Shares may be restricted; and the
Participant or the Participant’s Survivors may be required to execute letters of
investment intent and must also acknowledge that the Shares will bear legends
noting any applicable restrictions. Each Option shall terminate not more
than ten years from the date of the grant or at such earlier time as the Option
Agreement may provide.
ISOs.
Each Option intended to be an ISO shall be issued only to an Employee and be
subject to the terms and conditions outlined below, with such additional
restrictions or changes as the Administrator determines are appropriate but not
in conflict with Section 422 of the Code and relevant regulations and rulings of
the Internal Revenue Service. The ISO shall meet the minimum standards
required of Non-Qualified Options, as described in Paragraph 6(A) of the Stock
Plan. Immediately before the ISO is granted, if the Participant owns,
directly or by reason of the applicable attribution rules in Section 424(d) of
the Code 10% or less of the total combined voting power of all classes of our
stock or an Affiliate, the Option price per share of the Shares covered by each
ISO shall not be less than 100% of the Fair Market Value per share of the Shares
on the date of the grant of the Option. However, if the Participant owns,
directly or by reason of the applicable attribution rules in Section 424(d) of
the Code more than 10% of the total combined voting power of all classes of our
stock or an Affiliate, the Option price per share of the Shares covered by each
ISO shall not be less than 110% of the Fair Market Value on the date of grant.
For Participants who own 10% or less of the total combined voting power of all
classes of our stock or an Affiliate, each ISO shall terminate not more than ten
years from the date of the grant or at such earlier time as the Option Agreement
may provide. For participants who own more than 10% of the total combined
voting power of all classes of our stock or an Affiliate, each ISO shall
terminate not more than five years from the date of the grant or at such earlier
time as the Option Agreement may provide. The Option Agreements shall
restrict the amount of ISOs which may become exercisable in any calendar year
(under the Plan or any other ISO plan of ours or an Affiliate) so that the
aggregate Fair Market Value (determined at the time each ISO is granted) of the
stock with respect to which ISOs are exercisable for the first time by the
Participant in any calendar year does not exceed
$100,000.
Stock Grants.
Each offer of a Stock Grant to a Participant shall state the date prior to which
the Stock Grant must be accepted by the Participant, and the principal terms of
each Stock Grant shall be set forth in an Agreement, duly executed by us and, to
the extent required by law or requested by us, by the Participant. The Agreement
shall be in a form approved by the Administrator and shall contain terms and
conditions which the Administrator determines to be appropriate and our best
interest, subject to the following minimum standards that each Agreement shall
state the purchase price (per share), if any, of the Shares covered by each
Stock Grant, which purchase price shall be determined by the Administrator but
shall not be less than the minimum consideration required by the Colorado
Business Corporation Act on the date of the grant of the Stock Grant; each
Agreement shall state the number of Shares to which the Stock Grant pertains;
and each Agreement shall include the terms of any of our right to restrict or
reacquire the Shares subject to the Stock Grant, including the time and events
upon which such rights shall accrue and the purchase price therefor, if
any.
Stock-Based
Awards.
The Board also has the right to grant other Stock-Based Awards based upon
our Common Stock having such terms and conditions as the Board may determine,
including, without limitation, the grant of Shares based upon certain
conditions, the grant of securities convertible into Shares and the grant of
stock appreciation rights, phantom stock awards or stock units. The principal
terms of each Stock-Based Award shall be set forth in an Agreement, duly
executed by us and, to the extent required by law or requested by us, by the
Participant. The Agreement shall be in a form approved by the Administrator and
shall contain terms and conditions which the Administrator determines to be
appropriate and in our best interest.
37
The
following is a brief summary of the U.S. federal income tax consequences of
certain transactions under the Stock Plan based on federal income tax laws in
effect on September 2, 2010. This summary applies to the Stock Plan as
normally operated and is not intended to provide or supplement tax advice to
eligible employees. The summary contains general statements based on
current U.S. federal income tax statutes, regulations and currently available
interpretations thereof. This summary is not intended to be exhaustive and
does not describe state, local or foreign tax consequences or the effect, if
any, of gift, estate and inheritance taxes.
Grants of
options or stock appreciation rights are generally not taxable income to the
grantees or deductible for tax purposes by us at the time of the grant. In
the case of non-qualified stock options, a grantee will be deemed to receive
ordinary income upon exercise of the stock option, and we will be entitled to a
corresponding deduction, in an amount equal to the amount by which the fair
market value of the common stock purchased on the date of exercise exceeds the
exercise price. The exercise of an ISO will not be taxable to the grantee
or deductible by us, but the amount of any income deemed to be received by a
grantee due to premature disposition of common stock acquired upon the exercise
of an ISO will be a deductible expense of ours for tax purposes. In the
case of stock appreciation rights, a grantee will be deemed to receive ordinary
income upon exercise of the right, and we will be entitled to a corresponding
deduction, in an amount equal to the cash or fair market value of shares payable
to the grantee. Grantees of restricted stock awards generally will recognize
ordinary income in an amount equal to the fair market value of the shares of
common stock granted to them at the time that the restrictions on the shares
lapse and the shares become transferable. At that time, we will be
entitled to a corresponding deduction equal to the amounts recognized as income
by the grantees in the year in which the amounts are included in the grantees’
income. Grantees of stock issued pursuant to other stock awards will generally
receive ordinary income, and we will be entitled to a corresponding deduction,
in an amount equal to the amount by which the fair market value of the common
stock on the date of issuance exceeds the grantee's cash or other payment to us,
if any.
Section
162(m) of the Code generally disallows a publicly held corporation’s tax
deduction for certain compensation in excess of $1 million per year paid to each
of the five most highly compensated executive officers, exclusive of
compensation that is “performance-based.” We have designed the Stock Plan
in a manner that is intended to qualify the options and any stock appreciation
rights granted under the Stock Plan as performance-based compensation that will
not be subject to the deduction limitation of Section 162(m). Any grant of
restricted stock or other stock award could (but is not required to) be designed
to avoid any such deduction limitation.
The Plan
may be amended by our shareholders. The Plan may also be amended by the
Administrator, including, without limitation, to the extent necessary to qualify
any or all outstanding Stock Rights granted under the Plan or Stock Rights to be
granted under the Plan for favorable federal income tax treatment (including
deferral of taxation upon exercise) as may be afforded incentive stock options
under Section 422 of the Code, and to the extent necessary to qualify the shares
issuable upon exercise or acceptance of any outstanding Stock Rights granted, or
Stock Rights to be granted, under the Plan for listing on any national
securities exchange or quotation in any national automated quotation system of
securities dealers. Any amendment approved by the Administrator which the
Administrator determines is of a scope that requires shareholder approval shall
be subject to obtaining such shareholder approval. Any modification or amendment
of the Plan shall not, without the consent of a Participant, adversely affect
his or her rights under a Stock Right previously granted to him or her. With the
consent of the Participant affected, the Administrator may amend outstanding
Agreements in a manner which may be adverse to the Participant but which is not
inconsistent with the Plan. In the discretion of the Administrator, outstanding
Agreements may be amended by the Administrator in a manner which is not adverse
to the Participant. In addition, if the stock exchange on which the Shares are
traded amends its corporate governance rules so that such rules no longer
require shareholder approval of “material amendments” of equity compensation
plans, then, from and after the effective date of such an amendment to those
rules, no amendment of the Plan which (i) materially increases the number of
shares to be issued under the Plan (other than to reflect a reorganization,
stock split, merger, spin- off or similar transaction); (ii) materially
increases the benefits to Participants, including any material change to: (a)
permit a re-pricing (or decrease in exercise price) of outstanding Options, (b)
reduce the price at which Shares or Options may be offered, or (c) extend the
duration of the Plan; (iii) materially expands the class of Participants
eligible to participate in the Plan; or (iv) expands the types of awards
provided under the Plan shall become effective unless shareholder approval is
obtained.
38
Item
13. Certain Relationships and Related Transactions
Harborview
Master Fund, L.P.
In July
2009, we issued an interest-free short-term note to Harborview in the amount of
$100,000 together with three-year warrants to purchase 100,000 shares of our
common stock at an exercise price of $0.90 per share. The amount of
the note was repaid during the fiscal year ended September 30,
2009.
In
February 2010, we issued a 10% short-term note in the amount of $300,000 to
Harborview Master Fund, LP (“Harborview”), convertible at the rate of $2.00 per
share, together with five-year warrants to purchase 100,000 shares of our common
stock at an exercise price of $2.50 per share. In addition we entered into a
consulting agreement with Harborview for financial consulting services for which
we issued 200,000 shares of common stock as compensation. The note was repaid in
August 2010.
Bradley
C. Love
Mr. Love,
who was a member of our board of directors from March 2010 until October 2010,
was issued in January 2009, three-year options to purchase 50,000 shares of our
common stock at $0.01 per share in consideration for business development and
financial consulting services he provided. Mr. Love subsequently exercised
these options.
In 2009,
as a consultant to Regal Capital LLC, Mr. Love received compensation from Regal
of $62,500 and warrants to purchase an aggregate of 138,281 shares of our common
stock at an exercise price of $0.88 per shares. Some of the warrants
expire on December 31, 2013 and the others expire on December 11, 2014 and
January 21, 2015. Also in 2009, as a registered representative with
Bedminster Financial Group, Mr. Love received $48,000 in commissions with regard
to our private placement.
In June
2009, Mr. Love and his spouse loaned us $100,000 pursuant to an interest-free
short-term promissory note (the "Note"). As consideration for the Note we
issued them a five year warrant to purchase 120,000 shares at $0.88 per
share. In September 2009, they rolled the principal amount of the Note
into a $100,000 18-month convertible debenture. Interest under the debenture is
10% per annum (or 12% per annum if paid in stock at a conversion rate of $0.90
per share, at their discretion). The conversion rate of the debenture is
$0.90 per share. The convertible debenture was issued together with five
year warrants to purchase 100,000 shares at an exercise price of $0.90 per
share. Mr. Love also has a security interest in all of the proceeds
payable to us arising out the action captioned Analytical Surveys, Inc. v. Tonga
Partners, L.P., Cannell Capital LLC and Carlo Cannell, pending in the United
States District Court, Southern District of New York, Civil Action No.
06-cv-2692. As of the date hereof, $3,078 had been paid in interest under
the debenture, and the principal amount of the debenture still owing was
$100,000.
In
September 2009, we entered into a financial consulting agreement with Mr. Love
pursuant to which Mr. Love provides consulting services related to assistance
with obtaining potential customers for our products in the U.S. and
internationally, promoting us and our products to potential investors and
identifying potential strategic partners, acquisition opportunities and joint
venture partners for the expansion and development of our business and
products. The Agreement was amended in March 2010 to provide for a five
year term. Under the agreement, Mr. Love will receive five year warrants
to purchase up to 360,000 shares of our common stock at an exercise price of
$0.90 per share, exercisable over the term of the agreement at the rate of
72,000 shares per year.
Pursuant
to his appointment to the board of directors, Mr. Love was granted, subsequent
to September 30, 2010, an option to purchase 150,000 shares of common stock at
$1.22 per share. The option expires five years from date of issuance
and the option vests as to 50,000 shares immediately, and the remaining 100,000
shares vest in equal parts one year and two years after grant.
39
Item
14. Principal Accountant Fees and Services.
Jewett,
Schwartz, Wolfe and Associates served as our independent registered public
accounting firm for fiscal years ended September 30, 2010 and 2009.
Audit Fees. For fiscal years
ended September 30,2010 and 2009, Jewett, Schwartz, Wolfe and Associates billed
us a total of $44,500 and $44,500, respectively for professional services
rendered for the audit of our annual consolidated financial statements, review
of our consolidated financial statements in our Forms 10-Q and services provided
in connection with regulatory filings.
Audit-Related Fees. For fiscal
years ended September 30, 2010 and 2009, Jewett, Schwartz, Wolfe and Associates
did not perform or bill us for any audit-related services.
Tax Fees. For fiscal year
ended September 30, 2009, Jewett, Schwartz, Wolfe and Associates billed us a
total of $15,000 for professional services rendered for tax
compliance.
All Other Fees. Jewett,
Schwartz, Wolfe and Associates did not perform or bill us for any services other
than those described above for fiscal years ended September 30, 2010 and
2009.
Policy on Audit Committee
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors. Consistent with SEC policies regarding auditor independence,
the Audit Committee, or the Board of Directors in the absence of the Audit
Committee, has responsibility for appointing, setting compensation
for and overseeing the work of the independent registered public accounting
firm. In recognition of this responsibility, the Audit Committee has established
a policy to pre-approve all audit and permissible non-audit services provided by
the independent registered public accounting firm.
40
PART
IV.
Item
15. Exhibits, Financial Statement Schedules
(a)
|
Financial
Statements
|
|
·
|
Consolidated
Balance Sheets as of September 30, 2010 and
2009
|
|
·
|
Consolidated
Statements of Operations for the years ended September 30, 2010 and
2009
|
|
·
|
Consolidated
Statements of Cash Flow for years ended September 30, 2010 and
2009
|
|
·
|
Consolidated
Statement of Stockholders’ Deficit as of September 30,
2010
|
(b)
|
Exhibits
|
Exhibit
No.
|
|
Description of Document
|
2.1
|
Agreement
and Plan of Merger by and among Analytical Surveys, Inc., Axion
Acquisition Corp, and Axion International, Inc. dated as of November
20, 2007 (incorporated by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K dated November 21, 2007)
|
|
2.2
|
Certificate
of Merger of the Merger Sub and Axion, dated March 20, 2008 (incorporated
by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K
filed on March 26, 2008)
|
|
3.1
|
Articles
of Incorporation, as amended (incorporated by reference to the Company’s
Registration Statement on Form S-18, (Registration No.
2-93108-D))
|
|
3.2
|
By-Laws
(incorporated by reference to the Company’s Registration Statement on Form
S-18 (Registration No. 2-93108-D))
|
|
3.3
|
Amendment
to By-laws (incorporated by reference to the Company’s Annual Report on
Form 10-K for the year ended September 30, 1998)
|
|
3.4
|
Articles
of Amendment, filed July 21, 2008 (incorporated by reference to Exhibit
3.1 to the Company’s Current Report on Form 8-K filed on August 6,
2008)
|
|
4.1
|
Form
of Class E Warrant dated May 31, 2006, (incorporated by reference to
Exhibit D of the Company’s Proxy Statement, filed June 29,
2006)
|
|
4.2
|
Securities
Purchase Agreement dated as of November 24, 2006, among the Company and
the Purchasers named therein, (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K dated November 30,
2006)
|
|
4.3
|
Form
of Warrant to be issued to Lincoln Park Capital Fund, LLC (incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated
February 26, 2010)
|
|
4.6
|
Form
of the Company’s Amended and Restated 13% Secured Convertible Debenture
due June 30, 2008 (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on March 26,
2008)
|
|
4.7
|
Form
of Company’s 10% Secured Convertible Debenture due March 11, 2011, with
form of Warrant as an exhibit (incorporated by reference to Exhibit 10.16
to the Company’s Current Report on Form 8-K filed on October 1,
2009)
|
|
4.8
|
Form
of Lincoln Park Capital Warrant dated February 23, 2010 (incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed
on February 26, 2010)
|
41
10.1
|
Analytical
Surveys, Inc. Officer and Employee Recruitment Stock Incentive Plan and
Form of Stock Option Agreement (incorporated by reference to the Company’s
Annual Report on Form 10-K/A for the year ended September 30, 2000).
(1)
|
|
10.2
|
Analytical
Surveys, Inc. Year 2000 Stock Incentive Plan and form of agreement
(incorporated by reference to the Company’s Annual Report on Form 10-K/A
for the year ended September 30, 2000). (1)
|
|
10.3
|
Analytical
Surveys, Inc. Year 2003 Stock Option Plan and form of agreement
(incorporated by reference to the Company’s Proxy Statement dated July 21,
2003). (1)
|
|
10.4
|
Registration
Rights Agreement entered into as of November 24, 2006, among the Company
and the Purchasers, (incorporated by reference to Exhibit 4.8 to the
Company’s Current Report on Form 8-K dated November 30,
2006).
|
|
10.5
|
Amendment
and Waiver Agreement entered into as of September 30, 2007, among the
Company and the Purchasers of the 13% Secured Convertible Debenture due
November 24, 2007 (incorporated by reference to Exhibit 99.1 to the
Company’s Current Report on Form 8-K dated October 3,
2007).
|
|
10.6
|
Amendment
and Waiver Agreement entered into as of December 31, 2007, among the
Company and the Purchasers of the 13% Secured Convertible Debenture due
November 24, 2007 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated January 4,
2008).
|
|
10.7
|
Employment
Agreement, dated as of January 1, 2008, between James Kerstein and Axion
International, Inc. (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed March 26, 2008).
(1)
|
|
10.8
|
Letter
Agreement, dated December 6, 2007, between Regal Capital, LLC and Axion
International, Inc. (incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed March 26,
2008).
|
|
10.9
|
Assignment
and Amendment Agreement, dated March 20, 2008, among the Assignors named
therein, ADH Ventures, LLC and the Company (incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 26,
2008).
|
|
10.10
|
License
Agreement, dated February 1, 2007, by and between Rutgers, the State
University of New Jersey, and Axion International, Inc. (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB
filed May 15, 2008) (2)
|
|
10.11
|
Securities
Purchase Agreement, dated September 25, 2008, by and among, Thor United
Corp., Berkshire International Finance, Divash Capital Partners LLC and
the Company (incorporated by reference to Exhibit 10.12 to the Company’s
Annual Report on Form 10-KSB filed January 13, 2009)
|
|
10.12
|
December
2008 Amendment to Employment Agreement between James Kerstein and Axion
International, Inc. (incorporated by reference to Exhibit 10.13 to the
Company’s Annual Report on Form 10-KSB filed January 13, 2009)
(1)
|
|
10.13
|
Securities
Purchase Agreement, dated as of January 9, 2009, by and between the
Company and Insight Partners, LLC (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed January 22,
2009).
|
42
10.14
|
Form
of Securities Purchase Agreement, dated as of September 25, 2009, by and
between the Company and Purchaser, with Warrant (incorporated by reference
to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed October
1, 2009)
|
|
10.15
|
Delivery
Order Authorizations dated October 29,2009 issued by Centennial
Contractors Enterprises, Inc. (incorporated by reference to Exhibit 10.17
to the Company’s Current Report on Form 8-K filed November 12,
2009)
|
|
10.16
|
Form
of Securities Purchase Agreement dated as of November 16, 2009 by and
between the Company and Purchaser, with Warrant (incorporated by reference
to Exhibit 10.18 to the Company’s Current Report on Form 8-K filed
November 20, 2009)
|
|
10.17
|
September
2009 Engagement Agreement and Warrant with Bradley C. Love (incorporated
by reference to Exhibit 10.21 to the Company’s Amendment No. 1 to Form S-1
dated April 19, 2010)
|
|
10.18
|
Employment
Agreement, dated September 23, 2010, between Steven Silverman and Axion
International Holdings, Inc. (1) *
|
|
22.1
|
Subsidiaries
of the Company *
|
|
31.1
|
Section
302 Certification of Chief Executive Officer *
|
|
31.2
|
Section
302 Certification of Chief Financial Officer *
|
|
32.1
|
Section
906 Certification of Chief Executive Officer *
|
|
32.2
|
Section
906 Certification of Chief Financial
Officer *
|
* Filed
herein
(1)
Indicates management contract of compensatory plan or arrangement
(2)
Portions have been deleted and filed separately with the Securities and Exchange
Commission. Confidential treatment has been requested with regard to
the deleted portions.
43
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
Date:
|
January
11, 2011
|
By:
|
/s/ James Kerstein
|
|
James
Kerstein
|
||||
Chief
Executive Officer
|
||||
Date:
|
January
11, 2011
|
|||
By:
|
/s/ Donald Fallon
|
|||
Donald
Fallon
|
||||
Chief
Financial Officer
|
In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
SIGNATURE
|
TITLE
|
|||
/s/ James Kerstein
|
Director
and Chief Executive Officer,
|
January
11, 2011
|
||
James
Kerstein
|
(principal
executive officer)
|
|||
/s/ Donald Fallon
|
Chief
Financial Officer
|
January
11, 2011
|
||
Donald
Fallon
|
(principal
financial and accounting officer)
|
|||
/s/ Steve Silverman
|
President
and Director
|
January
11, 2011
|
||
Steve
Silverman
|
||||
/s/ Michael Dodd
|
Director
|
January
11, 2011
|
||
Michael
Dodd
|
||||
/s/ Anthony Hatch
|
Director
|
January
11, 2011
|
||
Anthony
Hatch
|
||||
/s/ Perry Jacobson
|
Director
|
January
11, 2011
|
||
Perry
Jacobson
|
||||
/s/ Peter Janoff
|
Director
|
January
11, 2011
|
||
Peter
Janoff
|
|
|
44
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Audited
Consolidated Financial Statements as of and for the Years Ended September 30,
2010 and 2009
Index
to Consolidated Financial Statements
|
F-1 | ||
Report
of Independent Registered Public Accounting Firm
|
F-2 | ||
Consolidated
Balance Sheet
|
F-3 | ||
Consolidated
Statements of Operations
|
F-4 | ||
Consolidated
Statements of Cash Flows
|
F-5 | ||
Consolidated
Statements of Stockholder’s Deficit
|
F-6 | ||
Notes
to Consolidated Financial Statements
|
F-7 |
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
board of directors and stockholders of
Axion
International Holdings, Inc.
We have
audited the accompanying consolidated balance sheets of Axion International
Holdings, Inc. (A Development Stage Company) as of September 30, 2010 and 2009,
and the related consolidated statement of operations, changes in
consolidated stockholders' equity and cash flows for the years ended September
30, 2010 and 2009. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit 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. An audit
includes examining, on a test basis, evidence supporting the amounts in the
consolidated financial statement. An audit also includes 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 audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the financial position of Axion International
Holdings, Inc. (A Development Stage Company) as of September 30, 2010 and 2009,
and the results of its operations and its cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States
of America.
The
accompanying consolidated financial statements referred to above have been
prepared assuming that the Company will continue as a going concern. As more
fully described in Note 1, the Company’s need to seek new sources or methods of
financing or revenue to pursue its business strategy, raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans
as to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Jewett, Schwartz, Wolfe and
Associates
|
Hollywood,
Florida
January
__, 2011
200 South
Park Road, Suite 150 • Hollywood, Florida
33021 • Main 954.922.5885 • Fax
954.922.5957
• www.jsw-a.com
• www.jsw-a.com
Member -
American Institute of Certified Public Accountants • Florida Institute of
Certified Public Accountants
Private
Companies Practice Section of the AICPA • Registered with the Public Company
Accounting Oversight Board of SEC
F-2
AXION
INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
At
September 30
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 886,896 | $ | 1,257,516 | ||||
Accounts
receivable
|
409,292 | 314,027 | ||||||
Inventories
|
130,453 | 76,533 | ||||||
Prepaid
expenses
|
64,727 | 1,915 | ||||||
Total
current assets
|
1,491,368 | 1,649,991 | ||||||
Property,
equipment, and leasehold improvements, at cost:
|
||||||||
Equipment
|
13,754 | 9,838 | ||||||
Machinery
and equipment
|
520,035 | 406,639 | ||||||
Purchased
software
|
56,404 | 56,404 | ||||||
Furniture
and fixtures
|
13,090 | 9,322 | ||||||
Leasehold
improvements
|
950 | 29,300 | ||||||
604,233 | 511,503 | |||||||
Less
accumulated depreciation
|
(443,861 | ) | (205,156 | ) | ||||
Net
property and leasehold improvements
|
160,372 | 306,347 | ||||||
Long-term
and intangible assets
|
||||||||
License,
at acquisition cost,
|
68,284 | 68,284 | ||||||
Deposits
|
10,713 | 10,713 | ||||||
78,997 | 78,997 | |||||||
Total
assets
|
$ | 1,730,737 | $ | 2,035,335 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 1,102,882 | $ | 546,920 | ||||
Accrued
liabilities
|
277,935 | 357,172 | ||||||
Notes
payable
|
38,695 | 14,000 | ||||||
Current
portion of convertible debentures, net of discount
|
657,420 | 253,795 | ||||||
Total
current liabilities
|
2,076,932 | 1,171,887 | ||||||
Convertible
debentures, net of discount
|
92,894 | 157,347 | ||||||
Total
liabilities
|
2,169,826 | 1,329,234 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Stockholders'
equity (deficit):
|
||||||||
Additional
paid-in capital and common stock, no par value; authorized, 100,000,000
shares; 22,854,037 and 19,243,669 shares issued and outstanding at
September 30, 2010 and 2009, respectively
|
15,968,740 | 10,009,677 | ||||||
Accumulated
deficit
|
(16,407,829 | ) | (9,303,576 | ) | ||||
Total
stockholders' equity (deficit)
|
(439,089 | ) | 706,101 | |||||
Total
liabilities and stockholders' equity (deficit)
|
$ | 1,730,737 | $ | 2,035,335 |
See
accompanying notes to consolidated financial statements.
F-3
AXION
INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
Year ended
September 30,
|
Year Ended
September 30,
|
|||||||
2010
|
2009
|
|||||||
Revenue
|
$ | 1,560,633 | $ | 1,374,961 | ||||
Cost
of goods sold
|
1,504,095 | 995,218 | ||||||
Gross
profit
|
56,538 | 379,743 | ||||||
Operating
expenses:
|
||||||||
Research
and development costs
|
242,605 | 467,133 | ||||||
Marketing
and sales
|
358,402 | 497,961 | ||||||
General
and administrative expenses
|
5,620,137 | 3,398,509 | ||||||
Depreciation
and amortization
|
268,006 | 179,547 | ||||||
Total
operating costs and expenses
|
6,489,150 | 4,543,150 | ||||||
Loss
from operations
|
(6,432,612 | ) | (4,163,407 | ) | ||||
Total
other expense :
|
||||||||
Interest
expense, net
|
107,276 | 113,438 | ||||||
Amortization
of debt discount
|
564,365 | 475,744 | ||||||
Debt
conversion expense
|
- | 1,006,826 | ||||||
Total
other expense
|
671,641 | 1,596,008 | ||||||
Loss
before income taxes
|
(7,104,253 | ) | (5,759,415 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
Net
loss
|
$ | (7,104,253 | ) | $ | (5,759,415 | ) | ||
Weighted
average common shares - basic and diluted
|
20,752,217 | 15,873,361 | ||||||
Basic
and diluted net loss per share
|
$ | (0.34 | ) | $ | (0.36 | ) |
See
accompanying notes to consolidated financial statements.
F-4
AXION
INTERNATIONAL HOLDINGS, INC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year Ended
September 30,
|
Year Ended
September 30,
|
|||||||
2010
|
2009
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
loss
|
$ | (7,104,253 | ) | $ | (5,759,415 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation,
and amortization
|
268,005 | 179,547 | ||||||
Accretion
of interest expense on convertible debentures
|
564,364 | 475,745 | ||||||
Debt
conversion expense
|
- | 1,006,826 | ||||||
Issuance
of common stock and warrants for financial obligations
|
2,952,443 | 1,526,905 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(95,265 | ) | (314,027 | ) | ||||
Inventories
|
(53,920 | ) | 33,882 | |||||
Prepaid
expenses and other
|
(62,812 | ) | (19,675 | ) | ||||
Accounts
payable & accrued liabilities
|
476,725 | 314,849 | ||||||
Net
cash used in operating activities
|
(3,054,713 | ) | (2,555,363 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchase
of equipment and leasehold improvements
|
(122,030 | ) | (145,289 | ) | ||||
Net
cash used in investing activities
|
(122,030 | ) | (145,289 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from short term notes
|
63,126 | 1,124,000 | ||||||
Issuance
of common stock, net of expenses
|
2,371,428 | 3,205,343 | ||||||
Issuance
of convertible debenture
|
710,000 | 500,000 | ||||||
Repayment
of notes and convertible debentures
|
(338,431 | ) | (1,010,000 | ) | ||||
Net
cash provided by financing activities
|
2,806,123 | 3,819,343 | ||||||
Net
(decrease) increase in cash
|
(370,620 | ) | 1,118,691 | |||||
Cash
at beginning of period
|
1,257,516 | 138,825 | ||||||
Cash
at end of period
|
$ | 886,896 | $ | 1,257,516 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid for interest
|
$ | 69,469 | $ | 8,821 | ||||
Common
stock issued for consulting services
|
1,758,024 | 562,810 | ||||||
Conversion
of notes
|
278,236 | 275,000 | ||||||
Warrants
issued in connection with debt
|
147,515 | 820,238 |
See
accompanying notes to consolidated financial statements.
F-5
AXION
INTERNATIONAL HOLDINGS, INC
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
September
30, 2010
Common
Shares
|
Additional
Paid-in
Capital and
Common
Stock
|
Accumulated
Deficit
|
Total
|
|||||||||||||
Balance,
October 1, 2009
|
13,978,136 | $ | 3,029,334 | $ | (3,544,161 | ) | $ | (514,827 | ) | |||||||
Private
placements of common stock
|
3,115,055 | 3,205,343 | - | 3,205,343 | ||||||||||||
Shares
issued pursuant to conversion of debenture and interest accrued
thereon
|
1,330,621 | 1,355,327 | - | 1,355,327 | ||||||||||||
Shares
issued pursuant to exercise of options
|
297,857 | - | - | - | ||||||||||||
Stock-based
compensation
|
522,000 | 1,453,404 | - | 1,453,404 | ||||||||||||
Warrants
issued in connection with debt instruments
|
820,238 | - | 820,238 | |||||||||||||
Recognition
of beneficial conversion features
|
146,031 | - | 146,031 | |||||||||||||
Net
loss
|
(5,759,415 | ) | (5,759,415 | ) | ||||||||||||
Balance
September 30, 2009
|
19,243,669 | $ | 10,009,677 | $ | (9,303,576 | ) | $ | 706,101 | ||||||||
Private
placement of common stock
|
1,761,340 | 2,664,260 | - | 2,664,260 | ||||||||||||
Shares
issued pursuant to conversions of debentures and accrued
interest
|
1,005,330 | 647,716 | - | 647,716 | ||||||||||||
Shares
issued pursuant to exercise of warrants
|
18,972 | - | - | - | ||||||||||||
Stock-based
compensation
|
824,726 | 2,285,184 | - | 2,285,184 | ||||||||||||
Warrants
issued in connection with debt instruments
|
152,463 | - | 152,463 | |||||||||||||
Recognition
of beneficial conversion feature
|
209,440 | - | 209,440 | |||||||||||||
Net
loss
|
- | (7,104,253 | ) | (7,104,253 | ) | |||||||||||
Balance
September 30, 2010
|
22,854,037 | $ | 15,968,740 | $ | (16,407,829 | ) | $ | (439,089 | ) |
See
accompanying notes to consolidated financial statements.
F-6
AXION
INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(1)
|
Summary
of Significant Accounting Policies
|
(a)
|
Business
and Basis of Financial Statement
Presentation
|
Axion
International Holdings, Inc. (“Holdings”), formerly Analytical Surveys, Inc.,
was formed in 1981 to provide data conversion and digital mapping services to
users of customized geographic information systems. In fiscal 2006,
Holdings acted upon its belief that it would not be able to sustain the
operations of its historical business. Holdings focused on completing
its long-term contracts that would generate cash, sold certain operations and
briefly transitioned its principal business into that of an independent oil and
gas enterprise. In May 2007, Holdings terminated its oil and gas
executives and took steps to reduce expenses and commitments in oil and gas
investments.
As a
result, in November 2007, Holdings entered into an Agreement and Plan of Merger,
among Holdings, Axion Acquisition Corp., a Delaware corporation and a newly
created direct wholly-owned subsidiary of Holdings (the “Merger Sub”), and Axion
International, Inc., a Delaware corporation which incorporated on August 6, 2006
with operations commencing in November 2007 (“Axion”). On March 20,
2008 (the “Effective Date”), Holdings consummated the merger (the “Merger”) of
Merger Sub into Axion, with Axion continuing as the surviving corporation and a
wholly-owned subsidiary of Holdings. Each issued and outstanding
share of Axion became 47,630 shares of Holdings’ common stock (“Common Stock”),
or 9,190,630 shares in the aggregate constituting approximately 90.7% of
Holdings’ issued and outstanding Common Stock as of the Effective Date of the
Merger. The Merger resulted in a change of control, and as such,
Axion (“we”, “our” or the “Company”) is the surviving entity.
The
preparation of the financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Our
consolidated financial statements include the accounts of our majority-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Reverse
Merger. The Merger has been accounted for as a reverse merger
in the form of a recapitalization with Axion as the successor. The
recapitalization has been given retroactive effect in the accompanying financial
statements. The accompanying consolidated financial statements represent those
of Axion for all periods prior to the consummation of the Merger.
(b)
|
Statement
of Cash Flows
|
For
purposes of the statement of cash flows, we consider all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
(c)
|
Equipment
and Leasehold Improvements
|
Equipment
and leasehold improvements are recorded at cost and are depreciated and
amortized using the straight-line method over estimated useful lives of three to
ten years. Repairs and maintenance are charged directly to operations
as incurred.
F-7
(c)
|
Equipment
and Leasehold Improvements
(continued)
|
Depreciation expense for years ended
|
September 30, 2010
|
September 30, 2009
|
||||||
Machinery
& equipment
|
$ | 235,671 | $ | 137,351 | ||||
Furniture,
fixtures & equipment
|
28,434 | 27,546 | ||||||
Leasehold
improvements
|
3,901 | 14,650 | ||||||
Total
depreciation
|
$ | 268,006 | $ | 179,547 |
(d)
|
Allowance
for Doubtful Accounts
|
We accrue
a reserve on a receivable when, based upon the judgment of management, it is
probable that a receivable will not be collected and the amount of any reserve
may be reasonably estimated. As of September 30, 2010 and 2009 we had
an allowance for doubtful accounts of $0.
(e)
|
Inventories
|
Inventories
are priced at the lower of cost (first–in, first–out) or market and consist
primarily of production materials and finished goods. No material
adjustment has been made to the cost of finished goods inventories as of
September 30, 2010 and 2009.
Inventories as of September 30,
|
2010
|
2009
|
||||||
Finished
goods
|
$ | 108,001 | $ | 46,731 | ||||
Production
materials
|
22,452 | 29,802 | ||||||
Total
inventories
|
$ | 130,453 | $ | 76,533 |
(f)
|
Revenue
and Cost Recognition
|
Revenue
is recognized in accordance with FASB ASC 605 “Revenue
Recognition”, when persuasive evidence of an agreement with the customer exists,
products are shipped or title passes pursuant to the terms of the agreement with
the customer, the amount due from the customer is fixed or determinable,
collectability is reasonably assured, and when there are no significant future
performance obligations.
Customers
are billed based on the terms included in the contracts, which are generally
upon delivery of certain products or information, or achievement of certain
milestones defined in the contracts. When billed, such amounts are
recorded as accounts receivable. Revenue earned in excess of billings
represents revenue related to services completed but not billed, and billings in
excess of revenue earned represent billings in advance of services
performed.
Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools and
depreciation costs. Losses on contracts are recognized in the period
such losses are determined. We do not believe warranty obligations on
completed contracts are significant. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined.
(g)
|
Income
Taxes
|
The
Company uses the asset and liability method of accounting of income taxes
pursuant to the provisions of FASB ASC 740 “Income Taxes”, which establishes deferred
tax assets and liabilities to be recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
F-8
(g)
|
Income
Taxes (continued)
|
differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
On
November 1, 2007, the Company adopted the provisions of the Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”
(“FIN 48”) as codified in ASC 740. ASC 740 clarifies the accounting for
uncertainty in income taxes recognized and prescribes a recognition threshold
and measurement attributes for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC
740 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. ASC 740
requires a company to recognize the financial statement effect of a tax position
when it is “more-likely-than-not” (defined as a substantiated likelihood of more
than 50%), based on the technical merits of the position, that the position will
be sustained upon examination. A tax position that meets the
“more-likely-than-not” recognition threshold is measured to determine the amount
of benefit to be recognized in the financial statements based upon the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement with a taxing authority that has full knowledge of all
relevant information. The inability of the Company to determine that a tax
position meets the “more-likely-than-not” recognition threshold does not mean
that the Internal Revenue Service (“IRS”) or any other taxing authority will
disagree with the position that the Company has taken.
If a tax
position does not meet the “more-likely-than-not” recognition threshold, despite
the Company’s belief that its filing position is supportable, the benefit of
that tax position is not recognized in the statements of operations and the
Company is required to accrue potential interest and penalties until the
uncertainty is resolved. Potential interest and penalties are recognized as a
component of the provision for income taxes which is consistent with the
Company’s historical accounting policy. Differences between amounts taken in a
tax return and amounts recognized in the financial statements are considered
unrecognized tax benefits. The Company believes that it has a reasonable basis
for each of its filing positions and intends to defend those positions if
challenged by the IRS or another taxing jurisdiction. If the IRS or other taxing
authorities do not disagree with the Company’s position, and after the statute
of limitations expires, the Company will recognize the unrecognized tax benefit
in the period that the uncertainty of the tax position is
eliminated.
As of
September 30, 2010, the Company does not have any tax issues that require
disclosure or recognition under FIN 48.
(h)
|
Impairment
of Long-Lived Assets Other Than
Goodwill
|
We assess
the potential for impairment in the carrying values of our long-term assets
whenever events or changes in circumstances indicate such impairment may have
occurred. An impairment charge to current operations is recognized
when the estimated undiscounted future net cash flows of the asset are less than
its carrying value. Any such impairment is recognized based on the differences
in the carrying value and estimated fair value of the impaired
asset.
(i)
|
Stock-Based
Compensation
|
We record
stock-based compensation for transactions in which we exchange our equity
instruments for services of employees, consultants and others based on the fair
value of the equity instruments issued at the date of grant or other measurement
date. The fair value of common stock awards is based on the observed
market value of our stock. We calculate the fair value of options and
warrants using the Black-Scholes option pricing model. Expense is
recognized, net of expected forfeitures, over the period of
performance. When the vesting of an award is subject to performance
conditions, no expense is recognized until achievement of the performance
condition is deemed to be probable.
F-9
(j)
|
Earnings
(Loss) Per Share
|
Basic
earnings (loss) per share are computed by dividing earnings (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share includes the
effects of the potential dilution of outstanding options, warrants, and
convertible debt on our Common Stock as determined using the treasury stock
method. For the years ended September 30, 2010 and 2009, there were no dilutive
effects of such securities because we incurred a net loss in each
period. Potential dilutive common shares issuable under our
convertible instruments, warrant agreements and stock option plans amounted to
8,501,300 and 3,607,012, respectively as of September 30, 2010 and
2009.
Income
(Numerator)
|
Shares
(Denominator)
|
Per-share
Amount
|
||||||||||
Loss
from continuing operations
|
$ | (7,104,253 | ) | |||||||||
Less
preferred stock dividends
|
- | |||||||||||
Loss
available to common stockholders - basic earnings per
share
|
(7,104,253 | ) | 20,752,217 | $ | (0.34 | ) | ||||||
Effect
of dilutive securities - no dilutive securities
|
||||||||||||
Loss
available to common stockholders - diluted earnings per
share
|
$ | (7,104,253 | ) | 20,752,217 | $ | (0.34 | ) |
(k)
|
Financial
Instruments
|
The
Company records fair value of monetary and nonmonetary instruments in accordance
with ASC 820 Fair Value Measurements and Disclosures The ASC
establishes a framework for measuring fair value, establishes a fair value
hierarchy based on inputs used to measure fair value, and expands disclosure
about fair value measurements. Adopting this statement has not had an effect on
the Company’s financial condition, cash flows, or results of
operations.
In
accordance with ASC 820, the financial instruments have been categorized, based
on the degree of subjectivity inherent in the valuation technique, into a fair
value hierarchy of three levels, as follows:
|
·
|
Level
1. Inputs are unadjusted, quoted prices in active markets for
identical instruments at the measurement date (e.g. U.S. Government
securities and active exchange traded equity
securities.
|
|
·
|
Level
2. Inputs (other than quoted prices included within Level 1)
that are observable for the instrument either directly or indirectly (e.g.
certain corporate and municipal bonds and certain preferred
stocks). This includes (i) quoted prices for similar
instruments in active markets, (ii) quoted prices for identical or similar
instruments in markets that are not active, (iii) inputs other than quoted
prices that are observable for the instruments, and (iv) inputs that are
derived principally from or corroborated by observable market data by
correlation or other means.
|
|
·
|
Level
3. Inputs that are unobservable. Unobservable inputs
reflect the reporting entity’s subjective evaluation about the assumptions
market participants would use in pricing the financial instruments (e.g.
certain structured securities and privately held
investments).
|
We
measure certain liabilities, including our convertible debt with detachable
warrant features, at fair value on a nonrecurring basis. The fair
values of these estimates are considered level 3 inputs and are based on
valuations techniques using the best information available, and may include
quoted market prices, market comparables, and discounted cash flow
projections.
F-10
(k)
|
Financial
Instruments (continued)
|
The
carrying amounts of certain financial instruments approximate their estimated
fair values. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of cash, receivables, accounts payable, and accrued
liabilities approximate fair value due to the short maturity of these
instruments.
(l)
|
Concentration
of Credit Risk
|
We
maintain our cash primarily within one major U.S. domestic bank. The amounts
held in this bank exceed the insured limit of $250,000 from time to time and
were approximately $840,000 at September 30, 2010. We have not
incurred losses related to these deposits and we regularly monitor all of the
banks where we have deposit accounts and the respective balances.
(m)
|
Operating
Cycle
|
In
accordance with industry practice, we include in current assets and liabilities
amounts relating to long-term contracts, which generally have operating cycles
extending beyond one year. Other assets and liabilities are classified as
current and non-current on the basis of expected realization within or beyond
one year.
(n)
|
Use
of Estimates
|
The
preparation of the Company’s financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those
estimates.
(2)
|
Recent
Accounting Pronouncements
|
In
January 2010, the FASB issued Accounting Standards Update No. 2010-06
applicable to FASB ASC 820-10, Improving Disclosures about Fair Value
Measurements. The guidance requires entities to disclose significant transfers
in and out of fair value hierarchy levels and the reasons for the transfers and
to present information about purchases, sales, issuances and settlements
separately in the reconciliation of fair value measurements using significant
unobservable inputs (Level 3). Additionally, the guidance clarifies that a
reporting entity should provide fair value measurements for each class of assets
and liabilities and disclose the inputs and valuation techniques used for fair
value measurements using significant other observable inputs (Level 2) and
significant unobservable inputs (Level 3). This guidance is effective for
interim and annual periods beginning after December 15, 2009 except for the
disclosures about purchases, sales, issuances and settlements in the Level 3
reconciliation, which will be effective for interim and annual periods beginning
after December 15, 2010. As this guidance provides only disclosure
requirements, the adoption of this standard will not impact the Company’s
consolidated results of operations, cash flows or financial
positions.
In March
2010, the FASB issued Accounting Standard Update No. 2010-11 “Derivatives and
Hedging” (Topic 815). ASU No. 2010-11 update provides amendments to subtopic
815-15, Derivatives and hedging. The amendments clarify about the scope
exception in paragraph 815-10-15-11 and section 815-15-25 as applicable to the
embedded credit derivatives. The ASU is effective on the first day of the first
fiscal quarter beginning after June 15, 2010. Therefore, for a calendar-year-end
entity, the ASU becomes effective on July 1, 2010. Early application is
permitted at the beginning of the first fiscal quarter beginning after March 5,
2010. The adoption of this guidance has not had and is not expected to have a
material impact on the Company’s consolidated financial statements.
F-11
(2)
|
Recent
Accounting Pronouncements
(continued)
|
In April
2010, the FASB issued Accounting Standard Update No. 2010-12. “Income Taxes”
(Topic 740). ASU No.2010-12 amends FASB Accounting Standard Codification
subtopic 740-10 Income Taxes to include paragraph 740-10-S99-4. On March 30,
2010 The President signed the Health Care & Education Affordable Care Act
reconciliation bill that amends its previous Act signed on March 23, 2010. FASB
Codification topic 740, Income Taxes, requires the measurement of current and
deferred tax liabilities and assets to be based on provisions of enacted tax
law. The effects of future changes in tax laws are not anticipated.” Therefore,
the different enactment dates of the Act and reconciliation measure may affect
registrants with a period-end that falls between March 23, 2010 (enactment date
of the Act), and March 30, 2010 (enactment date of the reconciliation measure).
However, the announcement states that the SEC would not object if such
registrants were to account for the enactment of both the Act and the
reconciliation measure in a period ending on or after March 23, 2010, but notes
that the SEC staff “does not believe that it would be appropriate for
registrants to analogize to this view in any other fact patterns.” The adoption
of this guidance has not had and is not expected to have a material impact on
the Company’s consolidated financial statements.
In April
2010, the FASB issued Accounting Standard Update No. 2010-13 “Stock
Compensation” (Topic 718). ASU No.2010-13 provides amendments to Topic 718 to
clarify that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the
entity's equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The amendments in this Update should be applied by recording a
cumulative-effect adjustment to the opening balance of retained earnings. The
cumulative-effect adjustment should be calculated for all awards outstanding as
of the beginning of the fiscal year in which the amendments are initially
applied, as if the amendments had been applied consistently since the inception
of the award. The cumulative-effect adjustment should be presented separately.
Earlier application is permitted. The adoption of this guidance has not had and
is not expected to have a material impact on the Company’s consolidated
financial statements.
In April
2010, the FASB issued Accounting Standard Update No. 2010-17. “Revenue
Recognition-Milestone Method” (Topic 605) ASU No.2010-17 provides guidance on
defining a milestone and determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development
transactions. An entity often recognizes these milestone payments as revenue in
their entirety upon achieving a specific result from the research or development
efforts. A vendor can recognize consideration that is contingent upon
achievement of a milestone in its entirety as revenue in the period in which the
milestone is achieved only if the milestone meets all criteria to be considered
substantive. Determining whether a milestone is substantive is a matter of
judgment made at the inception of the arrangement. The ASU is effective for
fiscal years and interim periods within those fiscal years beginning on or after
June 15, 2010. Early application is permitted. Entities can apply this guidance
prospectively to milestones achieved after adoption. However, retrospective
application to all prior periods is also permitted. The adoption of this
guidance has not had and is not expected to have a material impact on the
Company’s consolidated financial statements.
In April
2010, the FASB issued Accounting Standard Update No. 2010-18. “Receivables”
(Topic 310). ASU No.2010-18 provides guidance on accounting for acquired loans
that have evidence of credit deterioration upon acquisition. Paragraph
310-30-15-6 allows acquired assets with common risk characteristics to be
accounted for in the aggregated as a pool. Upon establishment of the pool, the
pool becomes the unit of accounting. When loans are accounted for as a pool, the
purchase discount is not allocated to individual loans; thus all of the loans in
the pool accrete at a single pool rate (based on cash flow projections for the
pool). Under subtopic 310-30, the impairment analysis also is performed on the
pool as a whole as opposed to each individual loan. Paragraphs 310-40-15-4
through 15-12 establish the criteria for evaluating whether a loan modification
should be classified as a troubled debt restructuring. Specifically paragraph
310-40-15-5 states that “a restructuring of a debt constitutes a troubled debt
restructuring for purposes of this subtopic if the creditor for economic or
legal reasons related to the debtor’s financial difficulties grants a concession
to the debtor that it would not otherwise consider.” The ASU is effective for
modification of loans accounted for within pools under subtopic 310-30 occurring
in the first interim or annual period ending on or after July 15, 2010. The
amendments are to be applied prospectively. Early application is permitted. The
adoption of this guidance has not had and is not expected to have a material
impact on the Company’s consolidated financial statements.
F-12
(2)
|
Recent
Accounting Pronouncements
(continued)
|
In July
2010, the FASB issued Accounting Standard Update No. 2010-20 (ASU No. 2010-20)
“Receivables” (Topic 310). ASU No. 2010-20 provides financial
statement users with greater transparency about an entity’s allowance for credit
losses and the credit quality of its financing receivables. This
update is intended to provide additional information to assist financial
statement users in assessing an entity’s credit risk exposures and evaluating
the adequacy of its allowance for credit losses. The amendments in
this update apply to both public and nonpublic entities with financing
receivables, excluding short-term trade accounts receivable or receivables
measured at fair value or lower of cost or fair value. The objective
of the amendments in ASU No. 2010-20 is for an entity to provide disclosures
that facilitate financial statement users’ evaluation of (1) the nature of
credit risk inherent in the entity’s portfolio of financing receivables, (2) How
that risk is analyzed and assessed in arriving at the allowance for credit
losses and (3) The changes and reasons for those changes in the allowance for
credit losses. The entity must provide disclosures about its
financing receivables on a disaggregated basis. For public entities
ASU No. 2010-20 is effective for interim and annual reporting periods ending on
or after December 15, 2010. For nonpublic entities ASU No. 2010-20
will become effective for annual reporting periods ending on or after December
15, 2011. The Company is evaluating the impact ASU No. 2010-20 will
have on the financial statements.
In August
2010, the FASB issued Accounting Standard Updates No. 2010-21 (ASU No. 2010-21)
“Accounting for Technical Amendments to Various SEC Rules and Schedules” and No.
2010-22 (ASU No. 2010-22) “Accounting for Various Topics – Technical Corrections
to SEC Paragraphs”. ASU No 2010-21 amends various SEC paragraphs
pursuant to the issuance of Release no. 33-9026: Technical Amendments to Rules,
Forms, Schedules and Codification of Financial Reporting
Policies. ASU No. 2010-22 amends various SEC paragraphs based on
external comments received and the issuance of SAB 112, which amends or rescinds
portions of certain SAB topics. Both ASU No. 2010-21 and ASU No.
2010-22 are effective upon issuance. The amendments in ASU No.
2010-21 and No. 2010-22 will not have a material impact on the Company’s
financial statements.
(3)
|
Going
Concern
|
The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America, which
contemplates continuation of the Company as a going concern. However,
the Company has negative working capital and a stockholders’ deficit and has
losses to date of approximately $16,407,829. These matters raise
substantial doubt about the Company’s ability to continue as a going
concern. In view of these matters, realization of certain of the
assets in the accompanying balance sheet is dependent upon the Company’s ability
to meet its financing requirements, raise additional capital, and the success of
its future operations. The Company is seeking additional means of
financing to fund its business plan. There is no assurance that the
Company will be successful in raising sufficient funds to assure the eventual
profitability of the Company. Management believes that actions
planned and presently being taken to revise the Company’s operating and
financial requirements provide the opportunity for the Company to continue as a
going concern. The financial statements do not include any adjustments that
might result from these uncertainties.
(4)
|
Intangibles
and Exclusive Agreement
|
In
February 2007, we acquired an exclusive, royalty-bearing license in specific but
broad global territories to make, have made, use, sell, offer for sale, modify,
develop, import, export products made using patent applications owned by Rutgers
University(“Rutgers”). We are using these revolutionary patented
technologies in the production of structural plastic products such as railroad
crossties, bridge infrastructure, utility poles, marine pilings and bulk
heading.
F-13
(4)
|
Intangibles
and Exclusive Agreement (continued)
|
We paid
approximately $32,000 and issued 714,447 shares of our Common Stock as
consideration to Rutgers. We had estimated the fair market value of
the consideration received in exchange for the shares totaled approximately
$20,000. We recorded these amounts, as well as legal expenses we
incurred to acquire the license, as an intangible asset. The license
has an indefinite life and is tested for impairment on an annual
basis
We are
obligated to pay royalties on various product sales to Rutgers, and to reimburse
Rutgers for certain patent defense costs. We did not pay for any
Patent defense costs to Rutgers, for the years ended September 30, 2010 and
2009. Royalties incurred to Rutgers, for the years ended September 30, 2010 and
2009 totaled $60,000 and $23,762, respectively. We also pay annual membership
dues to AIMPP, a department of Rutgers, as well as consulting fees for research
and development processes. Membership dues and consulting fees for
the years ended September 30, 2010 and 2009 totaled $107,148 and $205,354,
respectively.
(5)
|
Accrued
liabilities
|
The
components of accrued liabilities are:
September 30, 2010
|
September 30, 2009
|
|||||||
Payable
to insurer for legal settlement
|
$ | 100,000 | $ | 100,000 | ||||
Refundable
oil and gas receipts
|
67,146 | 129,334 | ||||||
Accrued
interest
|
39,896 | 76,644 | ||||||
Accrued
payroll
|
70,312 | - | ||||||
Other
|
581 | 51,194 | ||||||
Total
accrued liabilities
|
$ | 277,935 | $ | 357,172 |
(6)
|
Debt
|
The
components of debt are summarized as follows:
September
30,
|
|||||||||
Due
|
2010
|
2009
|
|||||||
9%
convertible debentures
|
$ | - | $ | 278,236 | |||||
8.75%
convertible debenture
|
December
2010
|
172,500 | 172,500 | ||||||
10%
convertible debentures
|
February
2011
|
500,000 | 500,000 | ||||||
10%
convertible debenture
|
March
2011
|
100,000 | 100,000 | ||||||
7%
convertible note
|
May
2012
|
350,000 | |||||||
10%
convertible note
|
February
2011
|
60,000 | - | ||||||
Subtotal
- principal
|
$ | 1,182,500 | $ | 1,050,736 | |||||
Debt
discount
|
(432,186 | ) | (639,594 | ) | |||||
$ | 750,314 | $ | 411,142 | ||||||
Less,
current portion
|
657,420 | 253,795 | |||||||
$ | 92,894 | $ | 157,347 |
The
Company’s 9% convertible debentures were issued during the year ended September
30, 2008 pursuant to debt modifications, resulting in debt conversion expense
charged during that year. In March 2010, the debentures were converted,
prior to their maturity dates and in accordance with their terms, into an
aggregate of 927,453 shares of common stock. The unamortized debt discount
pertaining to these debentures, amounting to $12,488 in the aggregate, was
charged to interest expense upon conversion.
F-14
(6)
|
Debt
(continued)
|
The
Company’s 8.75% convertible debenture was issued during the year ended September
30, 2008 pursuant to a debt modification, resulting in debt conversion expense
charged during that year.
In
September 2009, pursuant to Securities Purchase Agreements, the Company received
$600,000 and issued to three accredited investors an aggregate of 600,000 units
comprised of (i) one dollar of principal amount of the Company’s 10% convertible
debenture and (ii) three 3-year common stock purchase warrants, for five hundred
thousand of the units, and one three-year common stock purchase warrants for one
hundred thousand of the units, all exercisable at $0.90 per share, for the
subscription price of $1.00 per unit. The debentures are due in February and
March 2011, may be converted, at the option of the holder into restricted common
shares of the Company at the conversion price of $0.90 per share, and earn
interest, at the holder’s election, in cash at the rate of 10% or in common
shares at the rate of 12% . The debentures are secured on a parri passu basis by
a court judgment rendered in favor of Holdings in the action entitled Analytical
Surveys, Inc. v. Tonga Partners, L.P., Cannell Capital, LLC, and Carlo Cannell,
Civil Action No. 06-cv-2692, pending in the U.S. District Court, Southern
District of New York. The total of the calculated fair value of the
warrants and the intrinsic value of beneficial conversion features contained in
the debentures exceeded the proceeds received. Accordingly, the Company
recorded a discount on the debentures of limited to the principal value of the
debentures, which is being amortized to interest expense through the maturity
dates. The unamortized discount on these debentures at September 30, 2010
is $172,222.
In
February 2010, we issued a 10% short-term note in the amount of $300,000,
convertible at the rate of $2.00 per share, together with a five-year warrant to
purchase 100,000 shares of Common Stock at an exercise price of $2.50 per share.
In addition we entered into a consulting agreement with an affiliate of the
purchaser for financial consulting services. Since the exercise price of
the warrant was more than the market price of our Common Stock as reported on
the OTC Bulletin Board on the date of issuance, no note proceeds were allocated
to the warrant. Since the conversion price of the note was less than the
reported market price of our Common Stock as reported on the OTC Bulletin Board
on the date of issuance, we allocated $45,000 of the proceeds to the beneficial
conversion feature, representing the difference between the fair value of common
stock issuable upon conversion at the date of purchase and the amount of
proceeds allocated to the note, and recorded this amount as a discount on the
note. The note discount was amortized to interest expense through the
maturity date of the note. The note was repaid in August 2010 upon
maturity.
In May
2010, we issued a 7% two-year note in the amount of $350,000, convertible
at the rate of $1.20 per share, together with 41,667 shares of our common stock
and a five-year warrant to purchase 166,667 shares of our common stock at an
exercise price of $1.40 per share. Of the total proceeds received, we
allocated $45,052to the shares of Common Stock and $152,463 to the warrant,
based upon the relative fair values of the note, shares of Common Stock and
warrant, as determined using the Black-Scholes pricing model, and recorded these
amounts as a discount on the note. We also allocated $161,012 of the
proceeds to the beneficial conversion feature, representing the difference
between the fair value of common stock issuable upon conversion at the date of
purchase and the amount of proceeds allocated to the note, and recorded this
amount as an additional discount on the note. The total discount of
$308,527 will be amortized to interest expense through the scheduled maturity
date of the note.
In August
2010, we issued a 10% short-term note in the amount of $60,000, convertible
at the rate of $1.05 per share and a five-year warrant to purchase 28,571 shares
of our Common Stock at an exercise price of $1.35 per share. Since the exercise
price of the warrant was more than the market price of our Common Stock as
reported on the OTC Bulletin Board on the date of issuance, no note proceeds
were allocated to the warrant. Since the conversion price of the note was
less than the reported market price of our Common Stock as reported on the OTC
Bulletin Board on the date of issuance, we allocated $3,429 of the proceeds to
the beneficial conversion feature, representing the difference between the fair
value of common stock issuable upon conversion at the date of purchase and the
amount of proceeds allocated to the note, and recorded this amount as a discount
on the note. The note discount is amortized to interest expense through
the maturity date of the note.
F-15
(6) Debt
(continued)
Each of
the debentures or notes above contains features that allow the Company to redeem
the debt instrument prior to their scheduled due dates under certain
circumstances. In certain events of default by the Company, the holders
may generally require the Company to redeem the debt instruments at 120% of
their principal amounts or their conversion value. Based on the life of
the notes and the likelihood and effect of substantive exercise of these
provisions the Company has determined that these features have minimal
value.
During
the quarter ended June 30, 2010, a former holder of a convertible note claimed
that additional compensation was payable by the Company in the form of warrants
related to a note conversion in 2008. The Company determined that issuance
of additional warrants based on the claim was justified and charged $292,962,
representing the fair value of the two-year warrant for the purchase of 287,500
shares of Common Stock based on the Black-Scholes pricing model, to general and
administrative expenses during the fiscal year ended September 30,
2010.
The
following table summarizes the issuances, repayments, and conversions of our
long-term debt during the years ended September 30, 2010 and 2009:
Year ended September
30, 2010
|
Year ended September
30, 2009
|
|||||||
Beginning
Balance
|
$ | 1,050,736 | $ | 725,736 | ||||
Repayments
|
(300,000 | ) | ||||||
Issuances
|
710,000 | 600,000 | ||||||
Conversion
|
(278,236 | ) | (275,000 | ) | ||||
Ending
Balance
|
$ | 1,182,500 | $ | 1,050,736 |
Required
principal payments on long-term debt at September 30, 2010 total $832,500 and
$350,000 for the year ending September 30, 2011 and 2012,
respectively.
(7) Stockholder’s
Equity
We are
authorized to issue up to 100,000,000 shares of Common Stock, no par value, and
up to 2,500,000 shares of Preferred Stock, no par value. There were 22,854,037
shares of Common Stock issued and outstanding at September 30,
2010. We have not issued any shares of Preferred Stock through
September 30, 2010.
We may
issue shares of preferred stock, with dividend requirements, voting rights,
redemption prices, liquidation preferences and premiums, conversion rights and
other terms without a vote of the shareholders.
Pursuant
to plans approved by our shareholders, we have granted options to purchase
205,000 shares of Common Stock and may grant options for up to an additional
6,223,105 shares of Common Stock. We also may issue up to an additional 971,685
shares of Common Stock pursuant to grants of options which were awarded outside
our approved plans and an additional 762,076 shares of Common Stock pursuant to
options that were awarded pursuant to an individual performance-based
arrangement.
From
inception through September 30, 2009, we have issued shares of Common Stock to
our founders, partners, and investors as follows:
F-16
(7) Stockholder’s
Equity (continued)
We issued
4,048,529 shares of our Common Stock to founding stockholders without
consideration and 714,447 shares of our Common Stock to Rutgers University as
partial consideration for issuance of an exclusive license agreement to the
Company. We estimated the fair market value of those shares to be
$20,000.
Pursuant
to a management consulting agreement, we issued 2,572,007 shares of our Common
Stock to the consultant as payment for management consulting
services. The consulting agreement also provides for a monthly fee of
$10,000 each during the term of the consulting services and an additional
payment of a $230,000 fee, which was paid in the year ended September 30,
2008. We accounted for the entire fee, other than the $10,000 monthly
fee, as a cost of raising capital and reduced the proceeds of the private
placement completed in December 2007 accordingly.
In
December 2007 and January 2008 we completed a private placement of 1,855,655
shares of Common Stock at $0.548 per share, with gross proceeds totaling
$1,019,064. Approximately 49,535 shares were to repay a $27,164 note
payable, with the balance received in cash.
In April,
2008, we issued 37,493 shares of our Common Stock to five former Holdings board
members in full settlement of all outstanding past due directors’
compensation. We also issued 25,000 shares to Holdings’ former Chief
Executive Officer in lieu of a cash bonus that she was entitled to receive as a
result of the Merger.
In April
2008, holders of the Debentures elected to convert $100,000 principal into
250,000 shares of Common Stock, and we repaid $200,000 of the outstanding
principal. In May 2008, we issued the Series B Debenture in the principal amount
of $200,000, with substantially the same terms as the Debentures. We also
completed an additional private placement of 536,250 common shares at $0.88 per
share during the period from June 2008 to September 2008.
In August
2008, one of the holders of the Debentures elected to convert $282,564 of
principal into 706,410 shares of Common Stock. In September 2008 the Debenture
holders converted an additional $714,200 into 2,109,834 shares of Common Stock.
They also agreed to amend and restructure the debentures to lower the interest
rate from 13% to 9% and extend the maturity date to September 30. 2010. In
September we issued the New Debenture in the principal amount of $172,500, with
a maturity date of September 30, 2010 and a conversion price of
$1.50
From
December 2008 to September 2009, we sold a total of 2,615,055 shares of common
stock for aggregate gross proceeds of $2,301,248. Options to purchase
an aggregate of 169,293 shares at $0.88 per share and warrants to purchase
50,000 shares at $3.13 per share were issued to investors in certain of these
transactions.
In
September 2009, we sold 500,000 shares of common stock, together with warrants
to purchase 50,000 shares of common stock at an exercise price of $3.13, to an
investor for gross proceeds of $975,000. We incurred $70,405 of fees
and issued warrants to purchase 50,000 shares of common stock at an exercise
price of $3.13 to finders in connection with the transaction.
During
the year ended September 30, 2009, we issued a total of 139,865 shares of common
stock to settle interest due on notes payable. In addition, during
the year ended September 30, 2009 we issued an aggregate of 522,000 to
consultants and advisors and recorded aggregate compensation expense of $646,810
in connection with the issuances.
In
October 2009, the Company issued 200,000 shares of its common stock to
consultants for services performed in the Company’s strategic planning and
financing activities. The shares had a fair value of $600,000 at issuance based
on the quoted market price of the Company’s stock on the OTC Bulletin Board and
that fair value was recognized in general and administrative expenses in the
three months ended December 31, 2009.
F-17
(7) Stockholder’s
Equity (continued)
In
November 2009, the Company sold 200,000 shares of common stock and 20,000
three-year warrants, exercisable at $2.91 per share, for aggregate proceeds of
$410,000. As a placement fee, the Company paid $8,200 and issued 20,000
three-year warrants, also at the exercise price of $2.91 per share.
In
November 2009, the Company issued 360,000 five-year warrants exercisable at
$0.90 per share to a consultant for strategic planning, business development and
investor relations services to be performed. The warrants had a fair value of
$506.136 at issuance based on the Black-Scholes pricing model, and will be
amortized to general and administrative expenses over the five year life of the
agreement. The first year amortization of $101,227 was recognized during the
fiscal year ended September 30, 2010.
Also in
November, the Company issued 74,726 shares of common stock to a consultant for
business development, marketing and sales services performed. The shares had a
fair value of $198,024 at issuance based on the quoted market price of the
Company’s stock on the OTC Bulletin Board, which was charged to general and
administrative expenses during the fiscal year ended September 30, 2010. Under
the agreement, which expires in 2011, the consultant may be granted options to
purchase up to 500,000 additional shares of common stock at an exercise price of
$0.01 per share contingent on attaining specified sales targets.
In
December 2009, the Company issued 104,554 five-year warrants exercisable at
$0.88 per share to a consultant for services performed in the Company’s
financing efforts. The warrants had a fair value of $283,788 at the date of
grant based on the Black-Scholes pricing model, which was recognized in general
and administrative expenses in the fiscal year ended September 30,
2010.
In
February 2010, we sold 122,000 shares of common stock and 12,200 five-year
warrants, exercisable at $2.50 per share, for aggregate proceeds of
$250,100.
In
February 2010, the Company issued 200,000 shares of its common stock to
consultants for services performed in the Company’s strategic planning and
financing activities. The shares had a fair value of $460,000 at issuance based
on the quoted market price of the Company’s stock on the OTC Bulletin Board and
that fair value was recognized in general and administrative expenses in the
three months ended March 31, 2010.
Also
during February 2010, the Company issued 10,000 three-year warrants exercisable
at $2.05 per share to a consultant for services performed. The warrants had a
fair value of $19,442 at issuance based on the Black-Scholes pricing model, and
was charged to general and administrative expenses during the fiscal year ended
September 30, 2010.
In
February 2010, we issued a 10% short-term note in the amount of $300,000,
convertible at the rate of $2.00 per share. Since the conversion price of
the note was less than the reported market price of our Common Stock as reported
on the OTC Bulletin Board on the date of issuance, we allocated $45,000 of the
note proceeds to the beneficial conversion feature, representing the difference
between the fair value of common stock issuable upon conversion at the date of
purchase and the amount of proceeds allocated to the note, and recorded this
amount as a discount on the note. The note discount was amortized to
interest expense through the maturity date of the note. The note was repaid in
August 2010 upon maturity.
During
February 2010, we executed a purchase agreement and a registration rights
agreement with Lincoln Park Capital, LLC (“LPC”), pursuant to which LPC agreed
to purchase 100,000 shares of our common stock at $2.05 per share together with
warrants to purchase 50,000 shares at an exercise price of $2.91 per share for
total consideration of $205,000. Upon entering into the purchase
agreement, we issued to LPC 85,000 shares of our common stock as consideration
for entering into the agreement. Pursuant to the registration rights
agreement, we filed a registration statement with the Securities and Exchange
Commission (the “SEC”) covering the shares issued to LPC under the purchase
agreement. The registration statement became effective and the initial
purchase of 100,000 shares and 50,000 warrants was completed in May 2010.
The aggregate value of the 85,000 commitment shares, $178,500, was charged to
paid-in capital, and $84,575 of other offering costs was charged to
financing expense in general and administrative expenses. After the
effective date, in May 2010, we sold an additional 20,000 shares under the
agreement and received proceeds of $30,067. In July 2010, we and LPC
mutually terminated the purchase agreement and related agreements.
F-18
(7) Stockholder’s
Equity (continued)
During
March 31, 2010, the remaining 9% convertible debentures of $278,236 were
converted, prior to their maturity dates and in accordance with their terms,
into an aggregate of 927,453 shares of common stock. The unamortized
discount pertaining to these debentures of $12,488 was charged to interest
expense upon conversion.
During
May 2010, the Company issued 300,000 shares of its common stock to a consultant
for services performed for the Company. The shares had a fair value of $450,000
at issuance based on the quoted market price of the Company’s stock on the OTC
Bulletin Board and that fair value was recognized in general and administrative
expenses in the three months ended June 30, 2010.
During
May 2010, we issued a 7% two-year note in the amount of $350,000,
convertible at the rate of $1.20 per share, together with 41,667 shares of our
common stock and a five-year warrant to purchase 166,667 shares of our common
stock at an exercise price of $1.40 per share. Of the total proceeds
received, we allocated $45,052 to the shares of Common Stock and $152,463 to the
warrant, based upon the relative fair values of the note, shares of Common Stock
and warrant, as determined using the Black-Scholes pricing model, and recorded
these amounts as a discount on the note. We also allocated $161,012 of the
proceeds to the beneficial conversion feature, representing the difference
between the fair value of common stock issuable upon conversion at the date of
purchase and the amount of proceeds allocated to the note, and recorded this
amount as an additional discount on the note. The total discount of
$308,527 will be amortized to interest expense through the scheduled maturity
date of the note.
During
the period May through September 2010, we received $1,431,209, and issued units
consisting of an aggregate of 1,192,673 shares of common stock and five-year
warrants to purchase 596,336 shares of common stock at an exercise price of
$1.40 per share. Certain of these warrants had a fair value of $94,890 at
issuance based on the Black-Scholes pricing model, and such fair value was
charged to general and administrative expenses during the fiscal year ended
September 30, 2010.
During
the quarter ended June 30, 2010, a former holder of a convertible note claimed
that additional compensation was payable by the Company in the form of warrants
related to a note conversion in 2008. The Company determined that issuance
of additional warrants based on the claim was justified and charged $292,962,
representing the fair value of the two-year warrant for the purchase of 287,500
shares of Common Stock based on the Black-Scholes pricing model, to general and
administrative expenses during the fiscal year ended September 30,
2010.
During
July 2010, we issued 50,000 shares of our common stock to a consultant for
services performed in the Company’s strategic planning and financing activities.
The shares had a fair value of $50,000 at issuance based on the quoted market
price of the Company’s stock on the OTC Bulletin Board and that fair value was
recognized in general and administrative expenses during the year ended
September 30, 2010.
During
August 2010, we issued a 10% short-term note in the amount of $60,000,
convertible at the rate of $1.05 per share and a five-year warrant to purchase
28,571 shares of our Common Stock at an exercise price of $1.35 per share.
Since the conversion price of the note was less than the reported market price
of our Common Stock as reported on the OTC Bulletin Board on the date of
issuance, we allocated $3,429 of the proceeds to the beneficial conversion
feature, representing the difference between the fair value of common stock
issuable upon conversion at the date of purchase and the amount of proceeds
allocated to the note, and recorded this amount as a discount on the note.
The note discount is amortized to interest expense through the maturity date of
the note.
F-19
(7) Stockholder’s
Equity (continued)
During
the fiscal year ended September 30,2010, we issued 77,877 shares of Common Stock
to certain holders of our convertible debentures in exchange for interest
accrued in lieu of cash payments of $76,518.
During
the fiscal year ended September 30, 2010, we recognized $142,145 of consulting
expenses representing the fair value of certain options, based on the
Black-Scholes pricing model, granted in prior fiscal years.
During
the fiscal year ended September 30, 2010, the Company issued 18,971 shares of
common stock upon cashless exercise of certain warrants.
The
following table sets forth the number of shares of Common Stock that were
issuable upon exercise of outstanding warrants as of September 30, 2010.
Net share settlement is available to warrant holders.
|
Expiration
|
Conversion/
Exercise Price
|
Common
Shares
Issuable
|
|||||||
Class
A Warrants
|
2011
|
$ | 5.36 | 95,473 | ||||||
Class
B Warrants
|
2011
|
5.96 | 95,473 | |||||||
Class
E Warrants
|
2011
|
4.74 | 188,018 | |||||||
Advisor
Warrants
|
2011
|
2.36 | 47,482 | |||||||
Warrants
issued in short-term borrowings
|
2012
|
1.00 | 100,000 | |||||||
Warrants
issued in short-term borrowings
|
2013
|
0.88 | 200,000 | |||||||
Warrants
issued in short-term borrowings
|
2014
|
0.88 | 671,000 | |||||||
Warrants
attached to 10% convertible notes
|
2014
|
0.90 | 1,600,000 | |||||||
September
2009 investor warrants
|
2012
|
3.13 | 50,000 | |||||||
September
2009 finder warrants
|
2012
|
3.13 | 50,000 | |||||||
November
2009 finder warrants
|
2012
|
2.91 | 20,000 | |||||||
November
2009 finder warrants
|
2012
|
2.91 | 20,000 | |||||||
November
2009 consultant warrants
|
2014
|
0.90 | 360,000 | |||||||
December
2009 consultant warrants
|
2012
|
0.88 | 104,554 | |||||||
February
2010 consultant warrants
|
2015
|
2.50 | 100,000 | |||||||
February
2010 investor warrants
|
2015
|
2.50 | 12,200 | |||||||
February
2010 consultant warrants
|
2015
|
2.05 | 20,000 | |||||||
LPC
warrants
|
2015
|
2.91 | 50,000 | |||||||
Warrants
attached to 7% convertible note
|
2015
|
1.40 | 166,667 | |||||||
May
2010 finder warrants
|
2015
|
1.40 | 14,286 | |||||||
May
2010 employment warrants
|
2015
|
1.65 | 340,000 | |||||||
July
2010 consultant warrants
|
2015
|
1.50 | 100,000 | |||||||
Warrants
attached to August 2010 short-term convertible note
|
2015
|
1.35 | 28,571 | |||||||
Warrants
issued as convertible debt compensation
|
2012
|
0.40 | 287,500 | |||||||
May
to September 2010 investor & finders warrants
|
2015
|
1.40 | 653,339 | |||||||
Weighted
average exercise price and total shares issuable
|
$ | 1.44 | 5,374,563 |
F-20
(7) Stockholder’s
Equity (continued)
The
following table sets forth the number of shares of Common Stock that were
issuable upon conversion of convertible debt as of September 30,
2010:
|
Principal
Amount
|
Conversion/
Exercise Price
|
Common
Shares
Issuable
|
|||||||||
8.75%
convertible debenture due in 2010
|
$ | 172,500 | 1.00 | 172,500 | ||||||||
10%
convertible debentures due in 2011
|
600,000 | 0.90 | 666,667 | |||||||||
7%
convertible note, due in 2012
|
350,000 | 1.20 | 291,667 | |||||||||
10%
convertible note, due 2011
|
60,000 | 1.05 | 57,142 | |||||||||
Total
|
$ | 1,182,500 | 1.03 | 1,187,976 |
The
following table summarizes stock option activity in the fiscal year ended
September 30, 2010:
|
Number of Shares
|
Weighted Average
Exercise Price
|
||||||
Outstanding
at beginning of period
|
2,219,799
|
$
|
0.47
|
|||||
Granted
|
150,000
|
1.22
|
||||||
Exercised
|
-
|
-
|
||||||
Cancelled
|
(431,038
|
)
|
$
|
0.13
|
||||
Outstanding
at end of period
|
1,938,761
|
$
|
0.61
|
The
Company has agreements with consultants which provide for the issuance of up to
650,000 shares of company common stock or warrants for common stock that are
contingent on the achievement of sales performance targets that are not
currently considered probable of achievement.
(8)
Stock–based compensation
We have
three nonqualified stock option plans with 3,373,106 shares remaining available
for grant as of September 30, 2010. The exercise price of the options
are established by the Board of Directors on the date of grant and are generally
equal to the market price of the stock on the grant date. The Board
of Directors may determine the vesting period for each new grant. Options issued
are exercisable in whole or in part for a period as determined by the Board of
Directors of up to ten years from the date of grant. Through September 30, 2010,
we have issued options to purchase 2,519,799 shares of Common Stock, to
employees, consultants and others.
F-21
(8)
Stock–based compensation (continued)
The
following table summarizes stock option activity for the fiscal years ended
September 30, 2010 and 2009:
Fiscal
Year Ended
|
Fiscal
Year Ended
|
|||||||||||||||
September 30, 2009
|
September 30, 2009
|
|||||||||||||||
Weighted-
|
Weighted-
|
|||||||||||||||
Average
|
Average
|
|||||||||||||||
Number
|
Exercise
|
Number
|
Exercise
|
|||||||||||||
of Shares
|
Price
|
of Shares
|
Price
|
|||||||||||||
Outstanding
at beginning of the fiscal year
|
2,219,799 | $ | 0.47 | 1,218,114 | $ | - | ||||||||||
Granted
during the fiscal year
|
150,000 | $ | 1.22 | 1,301,685 | $ | 0.81 | ||||||||||
Exercised
during the fiscal year
|
- | (300,000 | ) | $ | 0.01 | |||||||||||
Cancelled
during the fiscal year
|
(431,038 | ) | $ | 0.13 | - | |||||||||||
Outstanding
at end of the fiscal year
|
1,938,761 | $ | 0.61 | 2,219,799 | $ | 0.47 | ||||||||||
Exercisable
at end of fiscal year
|
892,724 | $ | 0.97 | 646,057 | $ | 0.91 | ||||||||||
Weighted
average fair value of options granted during the fiscal
year
|
$ | 0.87 | $ | 0.79 |
The
following table summarizes options outstanding at September 30,
2009:
Weighted-
|
Weighted-
|
||||||||||||
Average
|
Average
|
Aggregate
|
|||||||||||
Number
|
Exercise
|
Remaining
|
Intrinsic
|
||||||||||
of Shares
|
Price
|
Term
|
Value
|
||||||||||
Options
outstanding at end of fiscal year
|
1,938,761 | $ | 0.61 |
2.6
years
|
$ | 962,114 | |||||||
Options
vested at end of fiscal year
|
892,724 | $ | 0.97 |
2.6
years
|
$ | 122,995 | |||||||
Unvested
options expected to vest
|
1,046,037 | $ | 0.30 |
2.5
years
|
$ | 823,494 |
We
previously issued an option pursuant to an employment agreement with our Chief
Executive Officer, granting the right to purchase 762,076 shares of Common
Stock, at an exercise price of $0.00002 per share, under the terms of a certain
performance-based stock option. The right to exercise the option is based on the
Company’s achievement of specific sales levels on an annual basis. To
date, the Company has not met the sales levels stipulated in this
option.
F-22
(9) Income Taxes
We have
not recorded any income tax expense or benefit from inception to September 30,
2010 due to our substantial operating losses and the valuation allowance applied
against our deferred tax assets.
Income
tax benefit (expense) attributable to income (loss) before income taxes differed
from the amounts computed by applying the United States of America federal tax
rate of 40% to income (loss) before income taxes as a result of the
following:
September
30,
|
September
30,
|
|||||||
2010
|
2009
|
|||||||
Current:
|
||||||||
Federal
|
$ | - | $ | - | ||||
State
|
- | - | ||||||
$ | - | $ | - | |||||
Increase
in valuation allowance
|
(2,800,000 | ) | (901,000 | ) | ||||
Benefit
of operating loss carryforward
|
2,800,000 | 901,000 | ||||||
Provision
(benefit) for income taxes, net
|
$ | - | $ | - |
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Statutory
federal income tax rate
|
40.0 | % | 40.0 | % | ||||
Increase
in valuation allowance
|
(40.0 | )% | (40.0 | )% | ||||
Effective
tax rate
|
- | % | - | % |
Deferred
income taxes result from temporary differences in the recognition of income and
expenses for the financial reporting purposes and for tax purposes. The tax
effect of these temporary differences representing deferred tax asset and
liabilities result principally from the following:
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Net
operating loss carry-forward expiring after the year 2030
|
$ | 6,500,000 | $ | 3,700,000 | ||||
Deferred
income tax asset
|
$ | 6,500,000 | $ | 3,700,000 |
At
September 30, 2010, the Company has available net operating loss carry forwards
of approximately $16,400,000 that expire through 2030.
F-23
(9) Income
Taxes (continued)
The net
deferred tax assets and liabilities are comprised of the following:
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Deferred
tax assets
|
||||||||
Current
|
$ | - | $ | - | ||||
Non-current
|
4,400,000 | 1,661,000 | ||||||
4,400,000 | 1,661,000 | |||||||
Less
valuation allowance
|
(4,400,000 | ) | (1,661,000 | ) | ||||
Net
deferred income tax asset
|
$ | - | $ | - |
The
Company has not taken a tax position that, if challenged, would have a material
effect on the financial statements for the two months ended September 30,
2010.
(10) Leases
We leased
approximately 2,000 square feet of office space in New Providence, New Jersey
pursuant to a three-year lease agreement for office space which provides for an
initial monthly lease payment of $3,356 with customary annual
increases. These premises serve as the corporate headquarters. The
initial term of the lease expires on October 31, 2012 and the lease
provides one renewal option for an additional three-year term.
Facility rent expense totaled approximately $67,200 and $44,000 for the
years ended September 30, 2010 and 2009, respectively.
Future
minimum rental payments through the remainder of the initial lease term of
October 31, 2012:
Fiscal
year ending September 30, 2011
|
$ | 42,223 | ||
Fiscal
year ending September 30, 2012
|
$ | 44,343 | ||
Fiscal
year ending September 30, 2013
|
$ | 3,710 |
(11) Litigation
and Other Contingencies
In April
2006, the Company commenced an action against Tonga Partners, L.P. (“Tonga”),
Cannell Capital, L.L.C. and J. Carlo Cannell in the United States District Court
of New York, for disgorgement of short-swing profits pursuant to Section 16 of
the Securities Exchange Act of 1934, as amended. On November 10,
2004, Tonga converted a convertible promissory note into 1,701,341 shares of
Common Stock, and thereafter, between November 10 and November 15, 2004, sold
such shares for short-swing profits. In September 2008, the District
Court granted the Company summary judgment against Tonga for disgorgement of
short-swing profits in the amount of $4,965,898. The defendants are
appealing from the order granting the Company’s summary judgment.
The
Company is also subject to various other routine litigation incidental to our
business. Management does not believe that any of these routine legal
proceedings would have a material adverse effect on our financial condition or
results of operations.
F-24
12) Fair
Value of Financial Instruments
At year
end September 30, 2010, the Company had financial instruments, which in
accordance with ASC 820, were required to have their fair value measured on a
nonrecurring basis. The Company determined that these financial
instruments are classified within the Fair Value Hierarchy as a Level 3
input. The Company came to this conclusion based on the method to
measure the fair value of the discount associated with the convertible
debt. Due to detachable warrants being issued with the convertible
debt the Company used the Black-Scholes method for valuing the detachable
warrants.
The
inputs used in determining the fair value of the financial instrument were
details specific to each debt instrument, such as, date of issuance, length of
maturity, market price of stock at date of issuance, exercise price of warrant,
risk free rate for similar debt instrument and volatility of Company’s own
stock.
The
Company’s reconciliation of Level 3 inputs are as follows:
September 30,
2009
|
Additions
|
Amortization
|
September 30,
2010
|
|||||||||||||
Liabilities:
|
||||||||||||||||
Derivatives
not designated as hedging instruments:
|
||||||||||||||||
Convertible
debt discount
|
$ | 639,594 | $ | 356,957 | $ | (564,365 | ) | $ | 432,186 |
(13) Related
Party Transactions
Harborview
Master Fund, L.P.
Harborview
Master Fund, L.P. and affiliates (“Harborview”) beneficially own in excess of 5%
of our outstanding stock. In July 2009, we issued an interest-free short-term
note to Harborview in the amount of $100,000 together with three-year warrants
to purchase 100,000 shares of our common stock at an exercise price of $0.90 per
share. The amount of the note was repaid during the fiscal year ended
September 30, 2009.
In
February 2010, we issued a 10% short-term note in the amount of $300,000 to
Harborview, convertible at the rate of $2.00 per share, together with five-year
warrants to purchase 100,000 shares of our common stock at an exercise price of
$2.50 per share. In addition we entered into a consulting agreement with
Harborview for financial consulting services for which we issued 200,000 shares
of common stock as compensation. The note was repaid in August
2010.
Bradley
C. Love
Mr. Love,
who was a member of our board of directors from March 2010 until October 2010,
was issued in January 2009, three-year options to purchase 50,000 shares of our
common stock at $0.01 per share in consideration for business development and
financial consulting services he provided. Mr. Love subsequently exercised
these options.
In 2009,
as a consultant to Regal Capital LLC, Mr. Love received compensation from Regal
of $62,500 and warrants to purchase an aggregate of 138,281 shares of our common
stock at an exercise price of $0.88 per shares. Some of the warrants
expire on December 31, 2013 and the others expire on December 11, 2014 and
January 21, 2015. Also in 2009, as a registered representative with
Bedminster Financial Group, Mr. Love received $48,000 in commissions with regard
to our private placement.
F-25
(13) Related
Party Transactions (continued)
In June
2009, Mr. Love and his spouse loaned us $100,000 pursuant to an interest-free
short-term promissory note (the "Note"). As consideration for the Note we
issued them a five year warrant to purchase 120,000 shares at $0.88 per
share. In September 2009, they rolled the principal amount of the Note
into a $100,000 18-month convertible debenture. Interest under the debenture is
10% per annum (or 12% per annum if paid in stock at a conversion rate of $0.90
per share, at their discretion). The conversion rate of the debenture is
$0.90 per share. The convertible debenture was issued together with five
year warrants to purchase 100,000 shares at an exercise price of $0.90 per
share. Mr. Love also has a security interest in all of the proceeds
payable to us arising out the action captioned Analytical Surveys, Inc. v. Tonga
Partners, L.P., Cannell Capital LLC and Carlo Cannell, pending in the United
States District Court, Southern District of New York, Civil Action No.
06-cv-2692. As of the date hereof, $3,078 had been paid in interest under
the debenture, and the principal amount of the debenture still owing was
$100,000.
In
September 2009, we entered into a financial consulting agreement with Mr. Love
pursuant to which Mr. Love provides consulting services related to assistance
with obtaining potential customers for our products in the U.S. and
internationally, promoting us and our products to potential investors and
identifying potential strategic partners, acquisition opportunities and joint
venture partners for the expansion and development of our business and
products. The Agreement was amended in March 2010 to provide for a five
year term. Under the agreement, Mr. Love will receive five year warrants
to purchase up to 360,000 shares of our common stock at an exercise price of
$0.90 per share, exercisable over the term of the agreement at the rate of
72,000 shares per year.
Pursuant
to his appointment to the board of directors, Mr. Love was granted, subsequent
to September 30, 2010, an option to purchase 150,000 shares of common stock at
$1.22 per share. The option expires five years from date of issuance
and the option vests as to 50,000 shares immediately, and the remaining 100,000
shares vest in equal parts one year and two years after grant.
(14) Subsequent
Events
In
accordance with the guidance offered in ASC Topic 855, formerly SFAS 165 –
“Subsequent Events”, the Company has evaluated its activities through the date
the financial statements were available to be issued, and determined that there
were no reportable subsequent events, except as disclosed below:
(a)
|
Subsequent
to September 30, 2010, we sold $500,000 of Units to accredited investors,
with the investor receiving one share of Common Stock and a warrant to
purchase one-half of a share of Common Stock for $1.40 per full share. The
warrants expire five years from issuance. Pursuant to this transaction,
the Company issued 416,667 shares of Common Stock and warrants to purchase
208,333 shares of Common Stock at a purchase price of $1.40 per
share. In addition, the Company paid $40,000 and issued
warrants to purchase 33,333 shares of Common Stock to certain
broker-dealers.
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(b)
|
Subsequent
to September 30, 2010, we amended our 8.75% convertible debenture,
originally due on December 31, 2010 in the principal amount of $172,500,
to extend the maturity date to April 1, 2011. In addition, the
Company agreed to reduce the conversion rate of the debenture from $1.25
to $1.00 and adjust the exercise price of certain warrants held by the
debenture holder, to $1.25 per
share.
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F-26