Attached files
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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.
16
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.
17
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
|
18
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
|
19