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EX-32.2 - AXION INTERNATIONAL HOLDINGS, INC.v173101_ex32-2.htm
EX-31.1 - AXION INTERNATIONAL HOLDINGS, INC.v173101_ex31-1.htm
EX-32.1 - AXION INTERNATIONAL HOLDINGS, INC.v173101_ex32-1.htm
EX-31.2 - AXION INTERNATIONAL HOLDINGS, INC.v173101_ex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
Form 10-Q/A

  þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended June 30, 2009
   
 
OR
   
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from          to

Commission File Number:     0-13111

AXION INTERNATIONAL HOLDINGS, INC
(Exact name of registrant as specified in its charter)

Colorado
84-0846389
   
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

665 Martinsville Road, Basking Ridge, New Jersey 07920
(Address of principal executive offices)

908-542-0888
(Registrant’s telephone number, including area code)


 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o    No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

  Yes £  No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £
 
Accelerated filer £
     
Non-accelerated filer £
 
Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £  No þ

The number of outstanding shares of the registrant’s common stock, without par value, as of August 14, 2009 was 16,524,282

 
 

 

TABLE OF CONTENTS
 
   
PAGE
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
1
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
17
     
Item 4.
Controls and Procedures
17
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
18
     
Item 1A.
Risk Factors
18
     
Item 2.
Unregistered Sales of Securities and Use of Proceeds
18
     
Item 3.
Defaults Upon Senior Securities
18
     
Item 4.
Submissions of Matters to a Vote of Security Holders
18
     
Item 5.
Other Information
18
     
Item 6.
Exhibits
18
     
SIGNATURES
19

 
 

 
 

The consolidated financial statements for the three months ended June 30, 2009 and related disclosures in this Amendment No.1 to Quarterly Report on Form 10-Q have been restated in accordance with the changes described below.

In January 2010, we concluded that it was necessary to amend this Quarterly Report in order to restate its financial statements for the period ended June 30, 2009 to (1) record share-based compensation charges not previously recorded and (2) adjust recorded interest expense as a result of adjustments we made for the fiscal year ended September 30, 2008 to our accounting for debt discounts and debt modifications.

No attempt has been made in this Amendment No. 1 to modify or update the disclosures in the original Quarterly Report except for the changes to the financial statements described above and related changes to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 4. Controls and Procedures.


 
AXION INTERNATIONAL HOLDINGS. INC
CONSOLIDATED BALANCE SHEETS

   
Unaudited
   
Audited
 
   
June 30, 2009
   
September 30, 2008
 
Assets
 
(Restated)
   
(Restated)
 
Current assets:
           
Cash and cash equivalents
  $ 211,504     $ 138,826  
Accounts Receivable
    172,623       -  
Inventories
    264,288       110,416  
Prepaid expenses
    6,258       7,264  
Total current assets
    654,673       256,506  
                 
Property, equipment, and leasehold improvements, at cost:
               
Equipment
    9,838       9,838  
Machinery and equipment
    398,214       261,425  
Purchased software
    56,404       56,329  
Furniture and fixtures
    9,322       9,322  
Leasehold improvements
    29,300       29,300  
      503,078       366,214  
Less accumulated depreciation
    (142,164 )     (25,609 )
Net property and leasehold improvements
    360,914       340,605  
                 
Long-term and intangible assets
               
License, at acquisition cost,
    68,284       68,284  
Deposits
    4,000       4,000  
      72,284       72,284  
                 
Total assets
  $ 1,087,871     $ 669,395  
                 
Liabilities and Stockholders' Deficit
               
Current liabilities
               
Accounts payable
  $ 506,010     $ 326,511  
Accrued liabilities
    304,116       202,262  
Short-term notes, net of discount
    240,916       -  
Interest payable
    80,154       55,641  
Accrued payroll
    50,667       23,142  
Total current liabilities
    1,181,863       607,556  
                 
Senior secured convertible debenture, net of discount
    578,268       576,666  
                 
Total liabilities
    1,760,131       1,184,222  
                 
Commitments and contingencies
               
                 
Stockholders' deficit:
               
Common stock, no par value; authorized, 100,000,000 shares;
               
16,285,448 shares issued and outstanding
    6,198,341       3,029,334  
Deficit accumulated
    (6,870,601 )     (3,544,161 )
                 
Total stockholders' deficit
    (672,260 )     (514,827 )
                 
Total liabilities and stockholders' deficit
  $ 1,087,871     $ 669,395  

See accompanying notes to consolidated financial statements.

 
1

 

AXION INTERNATIONAL HOLDING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three Months Ending
   
Three Months Ending
   
Nine Months Ending
   
Nine Months Ending
 
   
June 30, 2009
   
June 30, 2008
   
June 30, 2009
   
June 30, 2008
 
   
(Restated)
         
(Restated)
       
Revenue
  $ 566,849     $ -     $ 1,004,411     $ -  
                                 
Cost of goods sold
    332,602       -       815,939       -  
                                 
Gross margin
    234,247       -       188,472       -  
                                 
Research and development costs
    19,057       30,726       180,819       92,831  
Marketing and sales
    149,109       23,410       306,420       45,377  
General and administrative expenses
    983,386       455,934       2,590,738       847,478  
Depreciation and amortization
    54,703       6,597       116,555       11,707  
                                 
Total operating costs and expenses
    1,206,255       516,667       3,194,532       997,393  
                                 
Loss from operations
    (972,008 )     (516,667 )     (3,006,060 )     (997,393 )
                                 
Other expense
                               
Interest expense, net
    109,440       241,632       274,303       284,858  
Debt conversion expense
    46,153       -       46,153       -  
                                 
Total other expense, net
    155,593       241,632       320,456       284,858  
                                 
Loss before income taxes
    (1,127,601 )     (758,299 )     (3,326,516 )     (1,282,251 )
                                 
Provision for income taxes
    -       -       -       -  
                                 
Net loss
    (1,127,601 )     (758,299 )     (3,326,516 )     (1,282,251 )
                                 
Weighted average common shares - basic and diluted
    15,035,526       10,464,366       14,753,006       8,577,098  
                                 
Basic and diluted net loss per share
  $ (0.07 )   $ (0.07 )   $ (0.23 )   $ (0.15 )

See accompanying notes to consolidated financial statements.

 
2

 

AXION INTERNATIONAL HOLDING INC
CONSOLIDATED STATEMENT OF CASH FLOWS

   
Nine Months ending
   
Nine Months ending
 
   
June 30, 2009
   
June 30, 2008
 
   
(Restated)
       
Cash flow from operating activities:
           
Net loss
  $ (3,326,516 )   $ (1,282,251 )
Adjustments to reconcile net loss to net
               
cash used in operating activities
               
Depreciation, and amortization
    116,555       11,707  
Accretion of interest expense on convertible debentures
    175,804       225,761  
Issuance of common stock, options and warrants for accrued interest
    69,990       -  
Issuance of common stock, options and warrants services
    1,075,579       20,000  
Debt conversion expense
    46,153       -  
Changes in operating assets and liabilities
               
Accounts receivable
    (172,623 )     58,042  
Inventory
    (153,872 )     -  
Prepaid expenses and other
    1,006       (5,968 )
Accounts payable
    260,534       (10,683 )
Accrued liabilities
    72,931       -  
Net cash used in operating activities
    (1,834,459 )     (983,392 )
                 
Cash flows from investing activities:
               
Purchase of equipment and leasehold improvements
    (136,863 )     (172,033 )
Cost to acquire license
    -       (48,284 )
Net cash provided by investing activities
    (136,863 )     (220,317 )
                 
Cash flows from financing activities:
               
Proceeds from short term note (net)
    1,004,000       -  
Issuance of common stock, net of expenses
    1,590,000       1,143,331  
Proceeds for sale of assets
    -       486,000  
Repayment of Short-term Notes
    (550,000 )     -  
Cash acquired in reverse merger
    -       43,011  
Net cash provided by financing activities
    2,044,000       1,672,342  
                 
Net increase in cash
    72,678       468,633  
                 
Cash at beginning of period
    138,826       -  
                 
Cash at end of period
  $ 211,504     $ 468,633  
                 
Non-cash financing activities:
               
Common stock, options and warrants for services
  $ 1,075,579     $ 20,000  
Common stock issued in lieu of cash interest
  $ 69,990     $ -  
Common stock issued for license agreement
  $ -     $ 20,000  
Common stock issued pursuant to merger
  $ -     $ 358,385  

See accompanying notes to consolidated financial statements.

 
3

 

AXION INTERNATIONAL HOLDING INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2009
(Unaudited)

(1)       Description of the Business and Basis of 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 system. 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.

Axion is the exclusive licensee of revolutionary patented technologies developed for the production of structural plastic products such as railroad crossties, bridge infrastructure, marine pilings and bulk heading.  We believe these technologies, which were developed by scientists at Rutgers University (“Rutgers”), can transform recycled consumer and industrial plastics into structural products which are more durable and have a substantially greater useful life than traditional products made from wood, steel and concrete.  In addition, we believe our recycled composite products will result in substantial reduction in greenhouse gases and also offer flexible design features not available in standard wood, steel or concrete products.

Effective as of August 4, 2008, Holdings effected a 1-for-4 reverse split of its outstanding shares of Common Stock.  All references to the number of shares of Holding’s Common Stock have been retroactively adjusted and are on a post-reverse split basis.

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.

Going Concern.  We have incurred significant losses in the three months and nine months ended June 30, 2009, and we have a working capital deficit. These conditions raise doubt about our ability to continue as a going concern.  We must raise additional capital through the sale of equity and/or debt securities or through borrowings from financial institutions.

(2) Summary of Significant Accounting Policies

Cash and Cash Equivalents: We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Equipment and Leasehold Improvements: Equipment and leasehold improvements are recorded at cost and are depreciated and amortized using the straight-line method over estimated useful lives of three to ten years.  Repairs and maintenance are charged directly to operations as incurred.

Allowance for Doubtful Accounts: We accrue a reserve on a receivable when, based upon the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated.  As of June 30, 2009 we had an allowance for doubtful accounts of $0.

Inventories:  Inventories are priced at the lower of cost (first–in, first–out) or market and consist primarily of raw materials.  No adjustment has been to the cost of inventories as of June 30, 2009. 

 
4

 

Revenue and Cost Recognition: Our revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition.”   Revenue is recognized when persuasive evidence of an agreement with the customer exists, products are shipped or title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed or determinable, collectability is reasonably assured, and when there are no significant future performance obligations.  

Customers are billed based on the terms included in the contracts, which are generally upon delivery of certain products or information, or achievement of certain milestones as defined in the contracts.  When billed, such amounts are recorded as accounts receivable.  Revenue earned in excess of billings represents revenue related to services completed but not billed, and billings in excess of revenue earned represent billings in advance of services performed.

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and depreciation costs.  Losses on contracts are recognized in the period such losses are determined.  We do not believe warranty obligations on completed contracts are significant.  Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

Income Taxes: Income taxes are reflected under the liability method, which establishes deferred tax assets and liabilities to be recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

U.S. generally accepted accounting principles require that we record a valuation allowance against deferred tax assets if it is “more likely than not” that we will not be able to utilize it to offset future taxes.  Due to the size of the net operating loss carry forward in relation to our recent history of unprofitable operations and due to the continuing uncertainties surrounding our future operations as discussed above, we have not recognized any of this net deferred tax asset.  We currently provide for income taxes only to the extent that we expect to pay cash taxes (primarily state taxes and the federal alternative minimum tax) on current taxable income.

Impairment of Long-Lived Assets Other Than Goodwill: We account for the impairment and disposition of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that our long-lived assets be assessed for potential impairment in their carrying values whenever events or changes in circumstances indicate such impairment may have occurred.  An impairment charge to current operations is recognized when the estimated undiscounted future net cash flows of the asset are less than its carrying value. Any such impairment is recognized based on the differences in the carrying value and estimated fair value of the impaired asset.

Stock-Based Compensation: We have three nonqualified stock option plans with 2,117,970 shares available for grant as of June 30, 2009.  The exercise price of the options are established by the Board of Directors on the date of grant and are generally equal to the market price of the stock on the grant date.  The Board of Directors may determine the vesting period of any option issued. The options issued are exercisable in whole or in part for a period of up to ten years from the date of grant. All outstanding options pursuant to such plans on the date of the Merger became fully vested pursuant to the change of control that occurred in connection with the Merger.  Subsequent to the Merger the all options granted to the former Analytical Surveys employees under the provisions of these plans have expired.
 
We have also issued stock options pursuant to employment agreements with our Chief Executive Officer and our President, granting the right to 762,076 and 381,038 shares of Common Stock, respectively, at an exercise price of $.00002 per share, under the terms of certain performance-based stock options. We have not recorded any stock based compensation pursuant to these options as they are subject to future performance goals.

Earnings (Loss) Per Share: Basic earnings (loss) per share are computed by dividing earnings (loss) available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted earnings (loss) per share include the effects of the potential dilution of outstanding options, warrants, and convertible debt on our Common Stock as determined using the treasury stock method. Additionally, for the three month period ended June 30, 2009, potential dilutive common shares under our convertible instruments, warrant agreements and stock option plans of 3,607,012 were not included in the calculation of diluted earnings per share as they were antidilutive.

 
5

 

Financial Instruments: The carrying amounts of financial instruments are estimated to approximate estimated fair values. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of cash, receivables, accounts payable, and accrued liabilities approximate fair value due to the short maturity of these instruments. The carrying amounts of debt approximate fair value due to the variable nature of the interest rates and short-term maturities of these instruments.

Concentration of Credit Risk: We maintain our cash with a major U.S. domestic bank. The amounts held in this bank exceed the insured limit of $250,000 from time to time.  The terms of these deposits are on demand to minimize risk.  We have not incurred losses related to these deposits.

Operating Cycle: In accordance with industry practice, we include in current assets and liabilities amounts relating to long-term contracts, which generally have operating cycles extending beyond one year. Other assets and liabilities are classified as current and non-current on the basis of expected realization within or beyond one year.

 (3) Merger

On March 20, 2008, we consummated a merger pursuant to an Agreement and Plan of Merger, among Axion, Holdings, and the Merger Sub.  The Merger Sub was merged into Axion, with Axion continuing as the surviving corporation and a wholly-owned subsidiary of Holdings.   Each issued and outstanding share of Axion became 47,630 shares of Common Stock of Holdings, or 9,190,630 shares in the aggregate constituting approximately 90.7% of the issued and outstanding capital stock of Holdings as of the effective date of the merger.  For accounting purposes, these actions resulted in a reverse merger, and Axion is the accounting survivor and surviving business entity; however, Holdings is the surviving legal entity.

We assumed liabilities in excess of the fair value of the assets we acquired.  We reduced paid in capital as follows:

Fair value of net assets acquired:
 
$
600,612
 
Consideration given:
       
Fair value of liabilities assumed
   
1,120,746
 
Net liabilities acquired over fair value of assets, recorded as a reduction to paid in capital
 
$
520,134
 

(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.  We plan to use such these revolutionary patented technologies in the production of structural plastic products such as railroad crossties, bridge infrastructure, utility poles, marine pilings, and bulk heading.

We paid approximately $32,000 and issued 714,447 shares of our Common Stock as consideration to Rutgers.  We have estimated the fair market value of the consideration received in exchange for the shares totaled approximately $20,000.  We recorded these amounts, as well as legal expenses we incurred to acquire the license, as an intangible asset.  The license has an indefinite life and will be tested for impairment on an annual basis

We are obligated to pay royalties on various product sales to Rutgers, and to reimburse Rutgers for certain patent defense costs.  We accrued royalty expense of $13,762 during the three month period ending June 30, 2009. For the three month period ending June 30, 2009, we did not incur any expense in connection with patent defense cost. We also pay annual membership dues to AIMPP, a department of Rutgers, as well as consulting fees for research and development processes.

(5)       Debt

The components of debt are summarized as follows.

Long-Term Debt
 
June 30, 2009
 
Senior  convertible debentures
  $ 664,199  
Discount for beneficial conversion feature
    (85,931 )
      578,268  
Less current portion
     
    $ 578,268  

Pursuant to the Merger, we assumed three 13% Senior Secured Convertible Debentures (the “Debentures”) totaling $1,643,050.  Simultaneous with the Merger, the maturity date of the debentures were extended and the principal increased $6,950 to account for previously issued warrants.

 
6

 

In April 2008, holders of the Debentures elected to convert $100,000 principal into 250,000 shares of Common Stock, and we repaid $200,000 of the outstanding principal. In May 2008, we issued a Series B Debenture (the “Series B Debenture”) in the principal amount of $200,000 to ADH Ventures, LLC (“ADH”), one of the holders of the Debentures and which beneficially owns more than 5% of our outstanding Common Stock, with substantially the same terms as the existing Debentures.

In August 2008, one of the holders of the Debentures elected to convert $282,564 of principal into 706,410 shares of Common Stock.

In September 2008, the Debenture holders converted an additional $714,200 into 2,109,834 shares of Common Stock.  They also agreed to amend and restructure the Debentures and the Series B Debentures to (i) lower the interest rate from 13% to 9%, (ii) extend the maturity date to September 30, 2010 and (iii) eliminate such holders’ security interest in the assets of the Company and its subsidiaries.  In addition, the Debentures and the Series B Debenture in the aggregate principal amount of $667,436 held by ADH were amended to reduce the conversion price from $.40 to $.30. A loss on debt extinguishment of $931,327 was recognized as debt conversion expense.  The amount of the loss represents the excess of the fair value of shares of common stock and new convertible debentures issued, amounting to $1,336,253 and $989,480, respectively, over the value of the beneficial conversion options present in the extinguished notes at the extinguishment date, $1,051,212, plus the carrying value of the extinguished notes, $342,808.
 
In September 2008, we restructured $325,000 of outstanding 13% convertible debentures, under which such debentures were converted at a conversion price of $0.40 per share into 812,500 shares of common stock and a new 9% Convertible Debenture due September 30, 2010 (the “New Debenture) in the principal amount of $172,500 to Divash Capital Partners LLC.  The New Debenture was issued without any further cash consideration and is convertible at a conversion price of $1.50 per share.  We treated the transaction as an induced conversion and recorded debt conversion expense of $173,547, representing the fair value of the consideration issued.
 
In June 2009, one of the holders of the Debentures converted $61,537 of principal plus accrued interest into 153,842 shares of Common Stock, and thereafter in July 2009, converted an additional $34,616 of principal plus accrued interest into 88,834 shares of Common Stock.

At the time of the merger we evaluated the application of EITF 98-05, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments” and concluded that the conversion option of the Debentures was a beneficial conversion feature with intrinsic value.  We recorded the fair value of the beneficial conversion feature of the Debentures, which we estimate to be $825,000, as a discount to par value which was being amortized over the term of the Debentures. As the Debentures have been converted and restructured the intrinsic value as been adjusted and will continue to be amortized over the remaining term.

The following table summarizes the issuances, repayments, and conversion of the Debentures, the Series B Debenture, and New Debentures from inception to June 30, 2009:

Acquired in Merger
  $ 1,643,050  
Repayments
    (200,000 )
Issuances
    379,450  
Conversion
    (1,158,301 )
Balance, June 30, 2009
  $ 664,199  

Required principal payments on long-term debt at June 30, 2009 totaled $0 and $664,199 for fiscal 2010.

(6)       Stockholder’s Equity

We are authorized to issue 100,000,000 shares of Common Stock, no par value, and 2,500,000 shares of Preferred Stock, no par value. There were 16,285,448 shares of Common Stock and no shares of Preferred Stock outstanding on June 30, 2009.

We may issue up to 2,500,000 shares of Preferred Stock, no par value, with dividend requirements, voting rights, redemption prices, liquidation preferences and premiums, conversion rights and other terms without a vote of the shareholders.  We also may issue up to 2,117,970 shares pursuant to our three nonqualified stock option plans and 1,350,614 shares pursuant to stock options that were granted outside the parameters of such plans.

The following table sets forth the number of shares of Common Stock that were issuable upon conversion of outstanding warrants and convertible debt as of June 30, 2009.

 
7

 

         
Conversion/
Exercise Price
   
Common Shares
Issuable
 
Class A Warrants
    95,473     $ 5.36       95,473  
Class B Warrants
    95,473       5.96       95,473  
Class E Warrants
    188,018       4.74       188,018  
Note Warrants issued to advisors in November 2006
    47,482       2.36       47,482  
Debentures
    78,236       0.30       260,787  
Debentures
    213,463       0.40       533,658  
Series B Debentures
    200,000       0.30       666,667  
New Debentures
    172,500       1.50       115,000  
Other Warrants
    871,000       0.88       871,000  
Total shares issuable and weighted average prices
            1.22       2,873,558  

(7)       Stock–based compensation

We recorded stock based compensation totaling $82,675 in connection with the issuance of 480,000 options to selected member of the management team and Board of Directors in the three months period ending June 30, 2009.

As of June 30, 2009 outstanding options to acquire shares of Common Stock are as follows:

   
Number
of
Options
   
Exercise
Price
 
Expiration
Date
 
Weighted
Average
Exercise Price
   
Weighted
Average
Contract
Life (Years)
 
                           
Employees
    55,000     $ 1.15  
5/31/2013
  $ 1.15       3  
Directors
    425,000     $ 1.13  
5/31/2013
  $ 1.13       3  
Total Outstanding
    480,000                            
Total Exercisable
    180,000                            
 
Pursuant to employment agreements dated January 1, 2008, our Chief Executive Officer will have the right to purchase up to 762,076 post-merger and post-split shares of Common Stock at an exercise price of $.0002 per share, and our President has the right to purchase up to 381,038 shares of Common Stock at an exercise price of $.0002 per share, under the terms of certain performance-based stock options.  The options have a five year term and will vest upon the achievement of annual revenue targets as follows.

Number of shares
(post merger and post
split)
   
Vests upon
achievement of annual
revenue totaling
 
Exercise Price
   
Intrinsic
value on date
of grant
 
                   
190,519
 
10 million
  $ .00002     $ 104,600  
285,779
 
15 million
  $ .00002     $ 156,900  
285,779
 
25 million
  $ .00002     $ 156,900  
381,038
 
25 million
  $ .00002     $ 209,200  

The intrinsic value of the options, based on the fair market value of shares sold in a private placement in December 2007, totaled $627,600. Stock-based compensation expense will be recognized in future periods in accordance with the performance-based terms of the options.

 
8

 

(8)  Leases

We lease approximately 1,000 square feet of space in Basking Ridge, New Jersey pursuant to an oral month-to-month lease at a monthly rent of $4,000. These premises serve as the corporate headquarters.  Facility rent expense totaled $40,880 the nine month period ending June 30, 2009. The company also has a leased facility of approximately 2,500 square feet in San Antonio, Texas which is currently being subleased.

(9)  Litigation and Other Contingencies

In November 2005 and November 2007, Holdings was named as party to suits filed in the State of Indiana by the Sycamore Springs Homeowners Association, as well as certain homeowners in the Sycamore Springs neighborhood of Indianapolis, Indiana, and by the developers of the Sycamore Springs neighborhood.  The claimants alleged that various Mid-States Engineering entities that are alleged to be subsidiaries of MSE Corporation, which Holdings acquired in 1997, adversely affected the drainage system of the Sycamore Springs neighborhood, and sought damages from flooding that occurred on September 1, 2003.  Mediation efforts held in November 2007 and April 2008 have been successful, and each of the suits has been settled. The agreement is a compromise of disputed claims asserted or which may be asserted by the claimants against the settling defendants for any past, present and future losses, damages, and claims they may have against the settling defendants.  The claims from the all three lawsuits arise from a single occurrence with one deductible applying to the matter, and defense of the actions were provided by Holdings’ insurance carrier.  We assumed a $100,000 obligation payable to our insurer, which represents the deductible pursuant to the terms of Holdings’ insurance coverage.

In April 2006, Holdings commenced an action against Tonga Partners, L.P. (“Tonga”), Cannell Capital, L.L.C. and J. Carlo Cannell in the United States District Court of New York, for disgorgement of short-swing profits pursuant to Section 16 of the Securities Exchange Act of 1934, as amended.  On November 10, 2004, Tonga converted a convertible promissory note into 1,701,341 shares of Common Stock, and thereafter, between November 10 and November 15, 2004, sold such shares for short-swing profits.  In September 2008, the District Court granted Holdings summary judgment against Tonga for disgorgement of short-swing profits in the amount of $4,965,898.  The defendants are appealing from the order granting Holdings summary judgment.

We are also subject to various other routine litigation incidental to our business. Management does not believe that any of these routine legal proceedings would have a material adverse effect on our financial condition or results of operations.

(10)  Subsequent Events

In July 2009, we issued a 10% promissory note of $100,000 which maturity date of October 21, 2009 or the date on which the company consummates an equity financing transaction in excess of $400,000.
 
(11)  Restatements
 
In connection with the preparation of its Annual Report on Form 10-K for the year ended September 30, 2009, the Company determined that certain transactions were not accurately presented in the financial statements included in the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2008 and the Company’s Quarterly Reports on Form 10-Q for the three months ended December 31, 2008, March 31, 2009 and June 30, 2009.  These include the following:

 
a)
The recognition and accounting for shares of common stock, options and warrants issued to service-providers
 
b)
The recognition and accounting for discounts on notes payable and convertible notes payable resulting from the concurrent issuance of warrants and from beneficial conversion features
 
c)
The treatment of debt modifications

The Company and the Company's audit committee discussed the above errors and adjustments with the Company's independent registered public accounting firm and determined that a restatement is necessary. The Annual Report on Form 10-K for the fiscal year ended September 30, 2009 reflects the changes for the annual results for the year ended September 30, 2008.

As a result of the correction of the errors described above, the Company restated its financial statements for the three months ended June 30, 2009 included in this Quarterly Report on Form 10-Q as follows:
 
9

 
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
 
   
Unaudited
         
Unaudited
 
   
June 30, 2009
         
June 30, 2009
 
   
as previously reported
   
Adjustments
   
as restated
 
Assets
                 
Current assets:
                 
     Cash and cash equivalents
  $ 211,504           $ 211,504  
     Accounts Receivable
    172,623             172,623  
     Inventories
    264,288             264,288  
     Prepaid expenses
    6,258             6,258  
          Total current assets
    654,673             654,673  
                       
Property, equipment, and leasehold improvements, at cost:
                     
     Equipment
    9,838             9,838  
     Machinery and equipment
    398,214             398,214  
     Purchased software
    56,404             56,404  
     Furniture and fixtures
    9,322             9,322  
     Leasehold improvements
    29,300             29,300  
      503,078             503,078  
     Less accumulated depreciation
    (142,164 )           (142,164 )
          Net property and leasehold improvements
    360,914             360,914  
                       
Long-term and intangible assets
                     
         License, at acquisition cost,
    68,284             68,284  
         Deposits
    4,000             4,000  
      72,284             72,284  
                       
          Total assets
  $ 1,087,871           $ 1,087,871  
                       
Liabilities and Stockholders' Deficit
                     
Current liabilities
                     
     Accounts payable
  $ 506,010     $ -     $ 506,010  
     Notes payable, net of discount
    454,000       (213,084 )  (b), (c)   240,916  
     Accrued liabilities
    346,174       (42,058 )  (e)   304,116  
     Interest payable
    80,154               80,154  
     Accrued payroll
    50,667               50,667  
          Total current liabilities
    1,437,005       (255,142 )     1,181,863  
                         
     Senior secured convertible debenture, net of discount
    349,677       228,591    (c), (e)   578,268  
                         
Total liabilities
    1,786,682       (26,551 )     1,760,131  
                         
Commitments and contingencies
                       
                         
Stockholders' deficit:
                       
     Common stock, no par value; authorized, 100,000,000 shares;
                       
        15,449,501 shares issued and outstanding
    3,804,586       2,393,755    (a), (b), (d), (e)   6,198,341  
      Deficit accumulated during development stage
    (4,503,397 )     (2,367,204 )  (a), (c), (d), (e)   (6,870,601 )
                         
          Total stockholders' deficit
    (698,811 )     26,551       (672,260 )
                         
          Total liabilities and stockholders' deficit
  $ 1,087,871             $ 1,087,871  
 
10

 
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
 
   
Unaudited
         
Unaudited
 
   
Three Months Ending
         
Three Months Ending
 
   
June 30, 2009
         
June 30, 2009
 
   
as previously reported
   
Adjustments
   
restated
 
                   
Revenue
  $ 566,849           $ 566,849  
                       
Cost of goods sold
    256,102  
$
76,500  
(f)
  332,602  
                       
Gross margin
    310,747    
(76,500
    234,247  
                       
     Research and development costs
    19,057             19,057  
     Marketing and sales
    149,109             149,109  
     General and administrative expenses
    619,727       363,659    (a), (f)   983,386  
     Depreciation and amortization
    54,703               54,703  
                         
        Total operating costs and expenses
    842,596       (363,659     1,206,255  
                         
          Loss from operations
    (531,849 )     (440,159 )     (972,008 )
                         
Other expense (income), net
                       
     Other income
    -               -  
     Interest expense, net
    98,482       10,958    (c)   109,440  
     Debt conversion expense
            46,153    (d)   46,153  
                         
        Total other expense, net
    98,482       57,111       155,593  
                         
          Loss before income taxes
    (630,331 )     (497,270 )     (1,127,601 )
                         
Provision for income taxes
    -               -  
                         
Net loss
  $ (630,331 ) $   (497,270 )   $ (1,127,601 )
                         
   Weighted average common shares - basic and diluted
    15,035,526               15,035,526  
                         
   Basic and diluted net loss per share
  $ (0.04 )           $ (0.07 )

11

 
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS

   
Unaudited
         
Unaudited
 
   
Nine Months Ending
         
Nine Months Ending
 
   
June 30, 2009
         
June 30, 2009
 
   
as previously reported
   
Adjustments
   
restated
 
                   
Revenue
  $ 1,004,411           $ 1,004,411  
                       
Cost of goods sold
    590,439  
225,500  
(f)
  815,839  
                       
Gross margin
    413,972   $
(225,500
    188,472  
                       
     Research and development costs
    180,819             180,819  
     Marketing and sales
    306,420             306,420  
     General and administrative expenses
    1,839,861       750,877    (a), (f)   2,590,738  
     Depreciation and amortization
    116,555               116,555  
                         
        Total operating costs and expenses
    2,443,655       750,877       3,194,532  
                         
          Loss from operations
    (2,029,683 )     (976,377 )     (3,006,060 )
                         
Other expense (income), net
                       
     Other income
    -               -  
     Interest expense, net
    202,469       71,834    (c)   274,303  
     Debt conversion expense
    -       46,153    (d)   46,153  
                         
        Total other expense, net
    202,469       117,987       320,456  
                         
          Loss before income taxes
    (2,232,152 )     (1,094,364 )     (3,326,516 )
                         
Provision for income taxes
    -               -  
                         
Net loss
  $ (2,232,152 ) $   (1,094,364 )   $ (3,326,516 )
                         
   Weighted average common shares - basic and diluted
    14,753,006               14,753,006  
                         
   Basic and diluted net loss per share
  $ (0.15 )           $ (0.23 )
 
(a) Stock option expense of $440,159 and $976,368 in the three- and nine-month periods ended June 30, 2009, respectively, was recognized for grants of stock and options to consultants by increases to general and administrative expenses and common stock.
(b) Discounts on notes payable of $325,749 were recorded in connection with the concurrent issuance of warrants, with a correponding increase to common stock.
(c) The amortization of discounts on notes payable and convertible debentures was increased by a $10,958 and $71,834 in the three- and nine-month periods ended June 30, 2009, which increased interest expense.
(d) Debt conversion expense of $46,153 was recorded for the value of consideration given in an induced conversion.
(e) Opening balance sheet adjustments were recorded for the restatements described in note 2 to the Company's financial statements included in its annual report on Form 10-K for the year ended September 30, 2009 as follows:

Accrued liabilities
  $ (42,058 )
Convertible debentures, net of discount
    269,423  
Common stock
    1,045,476  
Retained earnings
    (1,272,841 )
 
(f) Expenses of $76,500 and $225,500 in the three- and nine-month periods ended June 30, 2009, respectively, were reclassified to cost of goods sold.
 
12

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion of our financial condition and results of operations set forth below should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements that involve risk and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q, or in the documents incorporated by reference into this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “intend”, “expect”, “may”, “will” and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, without limitation, statements relating to competition, management of growth, our strategy, future sales, future expenses and future liquidity and capital resources. All forward-looking statements in this Form 10-Q are based upon information available to us on the date of this Form 10-Q, and we assume no obligation to update any such forward-looking statements. Our actual results, performance and achievements could differ materially from those discussed in this Form 10-Q. Factors that could cause or contribute to such differences (“Cautionary Statements”) include, but are not limited to, those discussed in Item !. Business – “Risk Factors” and elsewhere in Holdings’s Annual Report on Form 10-KSB, which are incorporated by reference herein.  All subsequent written and oral forward-looking statements attributable to Holdings or the Company, or persons acting on their behalf, are expressly qualified in their entirety by the Cautionary Statements.

Basis of Presentation

The financial information presents in this form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position results of operations or cash flows. Our fiscal year-end is September 30, and our fiscal quarters end on December 31, March 31, and June 30, unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

 
13

 

Overview

Axion International Holdings, Inc. (“Holdings”) was formed in 1981 to provide data conversion and digital mapping services to users of customized geographic information systems.  On March 20, 2008, Holdings consummated an Agreement and Plan of Merger (the “Merger”), among Holdings, Axion Acquisition Corp., a Delaware corporation and direct wholly-owned subsidiary of the Holdings (the “Merger Sub”), and Axion International, Inc., a Delaware corporation which incorporated on August 6, 2006 with operations commencing in November 2007, (“Axion”).  Pursuant to the Merger, the Merger Sub was merged into Axion, with Axion continuing as the surviving corporation and a wholly-owned subsidiary of Holdings.  Each issued and outstanding share of Axion became 47,630 shares of Holdings common stock (“Common Stock”), or 9,190,630 shares in the aggregate constituting approximately 90.7% of Holdings issued and outstanding Common Stock as of the effective date of the Merger.  The Merger resulted in a change of control, and as such, Axion (“we”, “our” or the “Company”) is the surviving entity.

Axion is the exclusive licensee of revolutionary patented technologies developed for the production of structural plastic products such as railroad crossties, bridge infrastructure, marine pilings and bulk heading.  We believe these technologies, which were developed by scientists at Rutgers University (“Rutgers”), can transform recycled consumer and industrial plastics into structural products which are more durable and have a substantially greater useful life than traditional products made from wood, steel and concrete.  In addition, we believe our recycled composite products will result in substantial reduction in greenhouse gases and also offer flexible design features not available in standard wood, steel or concrete products.

The Merger has been accounted for as a reverse merger in the form of a recapitalization with Axion as the successor.  The recapitalization has been given retroactive effect in the accompanying financial statements.  The accompanying consolidated financial statements represent those of Axion for all periods prior to the consummation of the Merger and the discussion below relates to Axion.

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.

Cash and Cash Equivalents.  We consider all highly liquid investments with maturities of three months or less to be cash equivalents.  Our investments are subject to potential credit risk. Our cash management and investment policies restrict investments to low-risk, highly liquid securities.

Income Taxes.  Income taxes are reflected under the liability method, which establishes deferred tax assets and liabilities to be recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

U.S. generally accepted accounting principles require that we record a valuation allowance against deferred tax assets if it is “more likely than not” that we will not be able to utilize it to offset future taxes.  Because we have no history of profitable operations, we have not recognized any of this net deferred tax asset.  We currently provide for income taxes only to the extent that we expect to pay cash taxes (primarily state taxes and the federal alternative minimum tax) on current taxable income.

Use of Estimates.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date the financial statements and the reported amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Inventories.  Inventories are priced at the lower of cost (first–in, first–out) or market and consist primarily of raw materials.  As of June 30, 2009 we had inventory of $264,288

 
14

 

Fair Value of Financial Instruments.  SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, requires that we disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

Goodwill and Intangible Assets:  We have adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS No. 142”). As a result, we do not amortize goodwill, and instead annually evaluates the carrying value of goodwill for impairment, in accordance with the provisions of SFAS No. 142. Goodwill represents the excess of the cost of investments in subsidiaries over the fair value of the net identifiable assets acquired.  We hold licenses and expect both licenses and the cash flow generated by the use of the licenses to continue indefinitely due to the likelihood of continued renewal at little or no cost.

Reverse Merger Purchase Accounting.  In connection with our Merger, we have made estimates regarding the fair value of the assets acquired and the liabilities assumed. Adjustments to these estimates are made during the acquisition allocation period, which is generally up to twelve months from the acquisition date.  Subsequent to the allocation period, costs incurred in excess of the recorded acquisition accruals are generally expensed as incurred and if accruals are not utilized for the intended purpose, the excess will be recorded as an adjustment to the cost of the acquired entity, which was charged to paid in capital.

Litigation.  We are subject to various claims, lawsuits and administrative proceedings that arise from the ordinary course of business.  Liabilities and costs associated with these matters require estimates and judgment based on professional knowledge and experience of management and our legal counsel.  When estimates of our exposure for claims or pending or threatened litigation matters meet the criteria of SFAS No. 5 “Accounting for Contingencies”, amounts are recorded as charges to operations.  The ultimate resolution of any exposure may change as further facts and circumstances become known.  See Note 9 – “Litigation and Other Contingencies”.

Results of Operations

Three Month and Nine Month Periods Ended June 30, 2009 Compared to Comparable Periods in 2008

Revenue. Revenues in the three and nine month periods ended June 30, 2009 were $566,849 and $1,004,411, respectively, primarily as the results of the sale of two thermoplastic composite bridges to the US Army and 2,100 composite railroad crossties to a major railroad carrier. Due to the start-up nature of the business there were no revenues generated in the comparable periods in 2008

Cost of Goods Sold.  Cost of Goods Sold for the three months ended and nine months ended June 30, 2009 totaled $332,602, and $815,839, respectively. These expenses are principally related to direct and indirect labor, quality control, and raw material cost associated with the production of our products. The increase in expense over the comparable periods ended June 30, 2008 directly relates to the production and installation of the composite bridges and railroad crossties.

Research and Development Costs.  Research and Development costs for the three months ended June 30, 2009 totaled $19,057 and totaled $180,819 for the nine month period ended June 30, 2009, as compared to $30,726 for the three month period ended June 30, 2008 and $92,831 for the nine month period ended June 30, 2008.  These expenses are principally related to the development of our molds, products, and quality control processes. This also includes expenses related to professional consulting fees, membership dues paid to technology-related organizations that are directly related research and development in polymer plastics. We continue to work with our scientific team at Rutgers University to enhance our product formulations, develop new innovative products, and expand the reach of our existing products. The increase in expense over the comparable periods ended June 30, 2008 directly relates to the expansion of our research and development activities to expand our product portfolio.

Marketing and Sales Expenses.  Marketing and selling expenses for the three months ended June 30, 2009 totaled $149,109 and total $306,420 for the nine month period ended June 30, 2009, as compared to $23,410 for the three month period and $45,377 for the nine month period ended June 30, 2008. These expenses are related to the expansion of our marketing and sales activity. During the nine month period ending June 30, 2009 we added additional personnel to improve our technical sales support and expanded our marketing staff to pursue opportunities in our target markets. Our initial target markets are the domestic and international railroad industry, the U.S. military, vehicular and pedestrian bridges, marine rehabilitation, golf architecture, and industrial engineering firms.

General and Administrative.  General and administrative costs for the three months ended June 30, 2009 totaled $983,386 and $2,590,738 for the nine month period ended June 30, 2009, as compared to $455,934 for three month period ended June 30, 2008 and $847,478 for the nine month period ended June 30, 2008.  These expenses are primarily related to wages and salaries of the executive management team, consulting fees related to market opportunities and financing, travel, supplies, insurance, professional fees and patent defense costs. The increase in expense over the comparable periods is a result of our increased stock-based compensation, outsourced manufacturing expense, professional consulting, and business growth related activities.

 
15

 

Depreciation and Amortization.  Depreciation and amortization for the three months ended June 30, 2009 totaled $54,703 and the nine month period ended June 30, 2009 totaled $116,555, as compared to $6,597 for the three months and $11,707 the nine months ended June 30, 2008. This is the results of the purchase of additional mold and manifolds to support the manufacturing of our expanding product offerings.

Interest Expense, Net. Commencing on September 29, 2008, our Debentures, Series B Debentures and New Debentures earned interest at the rate of 9% per annum and mature on September 30, 2010. Thereafter in March 2009, the New Debentures were amended to reduce the interest rate to 8.75% per annum and to extend the maturity date to December 31, 2010. Accordingly, we recorded coupon interest expense totaling approximately $64,838 for the three months ended June 30, 2009 and $98,497 for the nine month period. Additionally, we amortize the discount that represents the fair value of beneficial conversion feature of the Debentures, Series B Debentures and New Debentures as interest expense. We recorded approximately $44,603 in non-cash interest expense in the three month period ended June 30, 2009 and $175,804 for the nine month period ended June 30, 2009, as we amortized the debenture discounts. Interest expense for the comparable periods was $241,632 and $284,858 respectively, which principally represented the non-cash interest expense associated with the amortization of the debenture discount.

Net Loss. We recorded a net loss of approximately $1,127,601 in the three months ended June 30, 2009 or $0.07 per share as compared to a net loss of $758,299 or $0.07 per share for the comparable period ended June 30, 2008. For the nine month period ended June 30, 2009 we recorded a loss of approximately $3,326,516 or $0.23 per share compared to a loss of $1,282,251 or $0.15 per share for the comparable nine month period in 2008. We anticipate that we will continue to incur losses during the early stages of our business development and growth.

Liquidity and Capital Resources: Plan of Operation

As of June 30, 2009, we had $211,504 in cash and cash equivalents.  Our long-term debentures bear interest rates of 9% and 8.75% per annum and are due and payable on September 30, 2010 and December 30, 2010 if not converted into Common Stock.  As of June 30, 2009, the aggregate outstanding principal amount of the debentures was $664,199. The Debentures and the Series B Debentures are convertible at the option of the holders into Common Stock at a rate of $0.40 or $0.30 per share, and accordingly, we may issue up to 1,576,110 shares of Common Stock if the remaining principal balance is converted in its entirety.  The New Debentures are convertible at the option of the holders into Common Stock at a rate of $1.50 per share, and accordingly, we may issue up to 115,000 shares of Common Stock if the remaining principal balance is converted in its entirety.  We may also elect to pay interest in the form of Common Stock at the applicable conversion rate of each debenture. We recorded the debentures at a discount after giving effect to the $825,000 intrinsic value of the beneficial conversion feature and recorded the discount as equity.  We are amortizing the discount as interest expense over the life of the debentures as the carrying value of the debentures accretes to the respective face value.  The carrying value of the debentures at June 30, 2009 was $578,268.

Financing activities, in the three month period ended June 30, 2009 consisting principally of issuance of short term 0% promissory notes that generated net proceeds of $370,000 which mature upon the achievement of receiving certain accounts payables, consummation of an equity transaction, or a series of related transactions that yield net proceeds of not less than $250,000.   In addition we completed at private placement of 247,175 shares of common stock at $.88 for a net proceeds of $215,000.

We have used $1,834,459 in our operating activities for the nine month period primarily as a result of our activities devoted to expanding our operating capability and commercializing our business.   Financing activities, consisting principally of the sale of securities that generated net cash proceeds totaling approximately $1,590,000 during the period and this issuance of short term notes that generated gross proceeds of $1,004,000 of which $550,000 was repaid during the nine month period ended June 30, 2009.  We used $1,400,880 to expand and commercialize the business, including $492,000 for production materials, raw materials of $382,150, molds and manifolds of $136,863, and outsourced manufacturing capacity of $389,867. We believe we will need to raise additional capital through additional equity or debt financing in order to fund our operations and repay our debt obligations. Our current operating plans for the next fiscal year are to meet our existing customer commitments, enhance our research and development capabilities, expand our marketing and sales and engineering staffs, and continue to develop innovative solutions.  We may receive a substantial amount of cash pursuant to the judgment rendered against Tonga, but the outcome and the timing of the decision regarding the appeal filed by Tonga is uncertain.  Our ability to pay principal and interest on our outstanding long term debentures, which are due in September and December 2010, as well as to meet our other debt obligations and requirements to fund our planned capital expenditures, depends on our future operating performance and ability to raise capital. We anticipate that we will have to raise additional funds through the issuance of debt and/or equity during the next twelve months.  There can be no assurance that financing will be available, or if available, that such financing will be upon terms acceptable to us. These conditions raise doubt about our ability to continue as a going concern.

Disclosure About Off-Balance Sheet Arrangements

We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

 
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Item 3.  Quantitative and Qualitative Disclosures About Market Risks.

Not applicable.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on our evaluation, our Chief Executive Officer and our current Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective due to the following material weaknesses:
 
 
·
Insufficient personnel or expertise in the accounting function to provide for adequate segregation of duties surrounding the approval, processing and recording of transactions, the proper recording of complex transactions, independent review of journal entries and account analyses, an adequate monitoring program and a robust risk assessment function.
 
·
Missing or nonoperating controls over the recording of stock-based compensation transactions, allocation of production costs, and the preparation of account analyses.
 
·
Insufficient formal documentation of accounting policies and procedures to ensure continued operating effectiveness.
 
As a result of these weaknesses, certain errors in accounting for debt modifications, debt discounts and share-based transactions in the year ended September 30, 2008 and the nine months ended June 30, 2009 were not prevented or detected.
 
Management intends to focus its remediation efforts in the near term on developing additional formal policies and procedures surrounding transaction processing, particularly with respect to debt and share-based transactions, and period-end account analyses and providing for additional review and monitoring procedures and periodically assess the need for additional accounting resources as the business develops.  Management will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal control over financial reporting on an ongoing basis and are committed to taking further action and implementing enhancements or improvements, as necessary.
 
(b) Changes in internal control over financial reporting.

There has been no changes in our internal control over financial reporting (as defined in Rules 13a-13(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
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Part II
Other Information

Item 1. Legal Proceedings.

Please see Note 9  “Litigation and Other Contingencies” in the notes to the unaudited Consolidated Financial Statements in Part I above.

Item 1A. Risk Factors.

Not applicable.

Item 2. Unregistered Sales of Securities and Use of Proceeds.

In April 2009, we completed a private placement of 56,818 shares of Common Stock at $0.88 per share and issued 12,007 common shares in lieu of cash interest expense to our debenture holders.  We also issued 153,000 shares of Common Stock upon conversion of $61,537 principal amount plus accrued interest of outstanding Debentures. In June 2009, we completed a private placement of 170,454 shares of Common Stock at $0.88 per share and issued 76,923 of Common Stock in lieu of cash interest expense to a short term note holder. All of the foregoing transactions were conducted pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933
 
Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibits:

31.1
 
Section 302 Certification of Chief Executive Officer
     
31.2
 
Section 302 Certification of Principal Financial Officer
     
32.1
 
Section 906 Certification of Principal Executive Officer
     
32.2
 
Section 906 Certification of Principal Financial Officer
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Axion International Holdings, Inc.
   
Date:  February 22, 2010
/s/ James Kerstein
 
James Kerstein
 
Chief Executive Officer
   
Date:  February 22, 2010
/s/ Gary Anthony
 
Gary Anthony
 
Chief Financial Officer
 
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