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EXCEL - IDEA: XBRL DOCUMENT - Axion Power International, Inc.Financial_Report.xls

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

 

 x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

 

 ¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___ until ___

Commission File Number 000-22573

AXION POWER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware   65-0774638
(State or other jurisdiction of   (I.R.S. Employer
incorporation organization)   Identification No.)
     
3601 Clover Lane    
New Castle, Pennsylvania   16105
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (724) 654-9300

 

Securities Registered under Section 12(b) of the Act

None

Securities Registered under Section 12(g) of the Act

Common Stock, par value $.0001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.       Yes ¨   No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨   No x

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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    X¨    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x

 

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

 

The aggregate market value of the 43,395,134 shares of voting stock held by non-affiliates of the registrant based on the closing price on the Over the Counter Bulletin Board on June 30, 2011 was $27,772,886

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

  Shares Outstanding
Title of Class March 1, 2012
Common Stock 113,211,091

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement for the 2012 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

 

 
 

 

TABLE OF CONTENTS

 

PART I      
       
Item 1. Business.   3
       
Item 1A. Risk Factors.   12
       
Item 2. Properties.   16
       
Item 3. Legal Proceedings.   16
       
Item 4. Mine Safety Disclosures   16
       
PART II      
       
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Equity of Securities.   17
       
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   18
       
Item 8. Financial Statements and Supplementary Data.   25
       
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.   50
       
Item 9A Controls and Procedures.   50
       
PART III      
       
Item 10. Directors, Executive Officers and Corporate Governance.   51
       
Item 11. Executive Compensation.   51
       
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.   51
       
Item 13. Certain Relationships and Related Transactions, and Director Independence.   51
       
Item 14. Principal Accountant Fees and Services.   51
       
PART IV      
       
Item 15. Exhibits.   52

 

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Cautionary Note Regarding Forward-Looking Information

 

This Annual Report on Form 10-K, in particular the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the energy storage device industry, all of which are subject to various risks and uncertainties.

 

When used in this Annual Report on Form 10-K as well as in reports, statements, and information we have filed with the Securities and Exchange Commission (the “Commission” or “SEC”), in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this periodic report that are not statements of historical fact may be deemed to be forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors.

 

PART I

 

Item 1   Description of Business

 

Axion Power International, Inc. (the “Company”, Axion, “we”, “our”, or “us”) is a development stage company whose primary mission is to engage in the development and production of new battery technologies. These are known as lead carbon PbC® batteries and components. In addition we manufacture standard and specialty lead-acid batteries. Our new technologies, primarily consisting of the use of activated carbon as an alternative to lead in the battery’s negative electrode, have application in the production of batteries for virtually all energy system storage functions. It is the Company’s long term goal to become a primary supply source of PbC negative electrodes to established battery manufacturers.  

 

The Battery Industry

 

There are two principal types of lead-acid batteries: flooded batteries and valve regulated lead-acid. The choice of battery depends mainly on the specific application that the battery serves. Typical standby or stationary applications use valve regulated lead-acid batteries due to their inherent advantages, including spill proof design, low maintenance, and compact form, low self-discharge and high performance. On the other hand, applications like industrial equipment are better served by the flooded lead-acid battery types due to their superior performance in continuous deep discharge applications and at high operating temperatures, among other features. Technology within the lead-acid battery industry has remained relatively stable for the last 30 years, and an industry-wide lack of innovation has generally restrained growth into new applications and emerging markets.

 

Alternative energy applications like wind and solar power require an energy storage solution that combines low cost and long deep discharge cycle life. Lead-acid batteries are currently one of the gold standards in large-scale power storage applications, but the low charge acceptance and short cycle-life of lead-acid chemistry at deep discharge levels is a primary inhibitor to growth. Due primarily to these limitations, a number of battery manufacturers are experimenting with alternative battery technologies that are far more expensive to implement, but offer substantial cycle-life advantages.

 

 The North American lead-acid battery industry is mature with a few leading vendors that have a global presence and a larger number of smaller regional and local vendors that cater to the needs of the North American market. The first tier companies that have a global presence include EnerSys, Exide Technologies and Johnson Controls.  The second tier companies that cater mainly to the North American Markets include, among others, East Penn Manufacturing, GS Batteries, and Trojan Battery. The user segments that rely on lead-acid batteries include internal combustion engine automotive applications, standby applications ranging from uninterruptible power supplies to telecommunication applications, limited power storage for wind and solar systems and motive power for heavy-duty equipment and railroad applications.

 

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Our Corporate History

 

Axion Power Corporation, our wholly owned subsidiary, was formed in September of 2003 to acquire and develop certain innovative battery technology. Since inception Axion Power Corporation has been engaged in research and development (“R&D”) of new technology for the production of our PbC batteries. On December 31, 2003, Axion Power Corporation engaged in a reverse acquisition with Tamboril Cigar Company (“Tamboril”), a public shell company whereby Axion Power Corporation became a wholly owned subsidiary of Tamboril. Tamboril was originally incorporated in Delaware in January 1997 and operated a wholesale cigar business until December 1998, after which date it was an inactive public shell until the reverse acquisition and subsequent name change to Axion Power International, Inc.

 

In February 2006, we acquired use of our Clover Lane facility. We have utilized this space to manufacture our specialty lead-acid battery products and to produce and test prototypes which incorporate our new technology. Our Clover Lane plant provides us the opportunity to manufacture batteries for sale under the Axion brand name; to manufacture for third parties under a specific contract arrangement; or to manufacture prototypes for our own use and testing, or for testing by our customers. Our facility has been fully tested and was found to be in compliance with emission standards established by new federal guidelines in accordance with the Clean Air Act–Title III.

 

Since inception, our operations have been financed through the sale of equity and debt instruments to investors, as well as loans and proceeds from government grants, and with minimal revenue generated from our operations. We believe that a successful transition from R&D to PbC manufacturing will improve our financial condition, cash flow and market profile.

 

Developments Since 2008

 

Since 2008, we have devoted a significant portion of our time and financial resources to upgrading, and where necessary, replacing existing battery manufacturing equipment as part of our long range business plan. Our business plan anticipated utilizing upgraded equipment to manufacture our proprietary PbC lead carbon products. During 2009, we continued to make improvements to our production processes through capital acquisitions and the early stage of quality control systems. We also installed and continued to engineer our first prototype automated PbC negative electrode manufacturing line.

 

On December 22, 2009, we sold 45,757,572 shares of our common stock at a price of $0.57 per share for total gross proceeds of $26,081,816 and net cash proceeds of $24,928,323 after “breakup” fees and cash offering costs.

 

During 2010, we continued to improve and utilize the new prototype line which, together with certain manual processes, allowed us to manufacture our PbC negative electrodes for sale and for use in ongoing prototype testing. We then incorporated our knowledge and experience into the design of a second generation automated robotic line. There were two main challenges we needed to address in order to be able to ready our product for commercial production quantities – (i) implementation of improved quality control; and (ii) increase in target quantity production levels. We began discussions with a major “design and equipment manufacture” firm early in 2010 which, in the summer of 2010, led to a design and build contract for a robotic carbon electrode manufacturing line. The complete new line was delivered to us in 2011 and was put in place at our Green Ridge Road facility in New Castle, PA. We anticipate that the carbon electrode component of our PbC batteries for our various planned PowerCubeTM projects, for our hybrid locomotive Norfolk Southern project, for our automotive strategic partners and for testing on various other customer oriented projects will all be manufactured with robotic precision on this second generation line. We also continue to identify further improvements to the new line which will be incorporated into the next generation.

 

Our upgrade and replacement of battery manufacturing equipment, begun in 2010, was completed in 2011 and included the installation of a new automatic paste mixer and a fixed orifice pasting line that will improve the quality and dimensional tolerances of battery plates. In addition, the assembly operation added an automatic stacker that will provide the precise wrap and alignment of absorbed glass matt separator that is needed for the production of our premium PbC products. 2011 also saw us complete the modernization of our second lead-acid production line; the rebuild of five casting machines; the addition of new welding equipment; and a 35% expansion of our formation area.

 

As a result of our having invested in the reconfiguration of our manufacturing space and in the training of our workforce, we have been able to seize an evolving opportunity to increase revenue and cash flow generated from specialty lead-acid batteries. On March 8, 2011, we announced that we had received a series of purchase orders for the production and immediate delivery of specialty flooded lead-acid batteries. The batteries will be branded by the purchaser. We anticipated, and saw, weekly shipments of these batteries and these shipments generated $6.4 million in 2011 product sales. The flooded lead-acid batteries were built by us, with the purchaser carrying the cost of inventory and providing the raw materials required. The battery order was well-suited to production on our newly renovated, and under-utilized, manufacturing facilities at Clover Lane. This initiative, which will continue in 2012, is not a deviation from our long-term strategy which is focused on PbC battery and component production. Rather, it provided us with an opportunity to enhance that strategy by further training our factory personnel, while at the same time allowing us to make production and quality improvements. A further benefit was the generation of cash flow to reduce our cash burn rate as we move forward toward the commercialization of our PbC products.

 

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The Company was recommended by a Quality System Registrar (SRI) for certification under ISO 9001:2008 – ANSI/ISO/ASQ Q9001-2008 for its Quality Management System. The scope of the ISO 9001:2008 registration is the “Design, manufacture, and distribution of advanced lead-acid batteries and battery components”. Training, visual shop floor controls, and a strong commitment to quality resulted in us receiving ISO certification in February, 2011.

 

In 2011, our automotive work incorporated new OEM partners to the ongoing mix. As more and more empirical evidence is presented with respect to the lack of merit, and/or practicality, of existing stop-start battery solutions, the potential of our PbC product gains more and more traction. The clock is running for the US and European automotive manufacturers as they seek to comply with upcoming governmental regulations and consumer expectations for increased miles per gallon. European OEM’s in particular have made commitments to fleet wide adoption of hybridization for their future manufactured vehicles. This commitment was strongly influenced by European Union (EU) legislation that requires reductions in CO2 emissions for all new passenger vehicle production in Europe beginning in 2012. In the first year of the phased in requirement, 65% of the fleet (average) is required to reduce CO2 emissions to 130 grams per kilometer. The percentage ratchets up to 75% in 2013, 80% in 2014 and a full 100% (average) in 2015. Beginning in 2012, failure to comply with the regulation will result in a fine based on the number of grams of CO2 that were emitted above the 130 gram limit. The assessment begins with 5 euros for the first gram; 15 euros for the second; 25 euros for the third; 95 euros for the fourth; and 95 euros for every subsequent gram of CO2 over the 130 gram limit. This fine will be assessed against the entire new manufactured fleet of an OEM. In real terms it means that if an OEM manufactured one million vehicles (and there are several that do) in 2015, and that manufacturer was 5 grams of CO2 over the limit (at the 135 grams of CO2 per kilometer level), then that manufacturer would be fined 235 million euros for the year 2015, and for every subsequent year of non-compliance (European Parliament regulation EC443/2009).

 

We and others believe that the fastest, and least expensive, method of reducing CO2 emissions from an internal combustion engine vehicle is to equip the vehicle with stop-start technology. Simply put, in stop-start, every time the vehicle comes to rest the engine shuts off. When the operator takes their foot off the brake and re-engages, the engine comes back on. CO2 emission reductions, and the “hand in hand” fuel savings, are directly proportional to the time the engine is at rest. But, while the engine is off, there is still an ancillary load in the car that must be powered (headlights, heater/air conditioning, radio, power brakes, windshield wipers, door locks, dash board lights, power windows, etc.). The car battery will have to power this load, and it will have to do so without charge from the alternator, or integrated starter generator, because the engine is at rest. Several battery technologies can be utilized - expensive lithium ion, nickel metal hydride, supercapacitors in various forms and combinations, but these solutions all add 4 figures + to the cost when the necessary ancillary equipment, required by these chemistries, is included in the equation. Prospective solutions in the form of conventional lead-acid batteries would cost a few hundred dollars but lead-acid batteries, in flooded, VRLA or AGM constructs, do not allow the vehicle to fully function as required. This is true because the lead-acid battery develops poor charge acceptance early in its life cycle resulting in extended charge time requirements between stop-start events. The result is a charging event that takes minutes during which time the vehicle engine cannot shut off and therefore does not reduce CO2 emissions, and increase mpg, in conformance with government regulations. The solution offered by our PbC technology combines low cost, with a fast rate of charge acceptance and achieves the specified stop-start performance that is needed to comply with CO2 emissions regulations, while improving miles per gallon. We feel we have the best potential product for the emerging micro-hybrid (stop-start) market and therefore we have devoted considerable time and money in working with our strategic partners and prospective customers in this area.

 

A major focus in 2011 was our continued effort in the hybrid locomotive application. Similar to the hybrid vehicle market, battery charge acceptance and ability to take advantage of opportunity charging are key elements in providing a product for the hybrid locomotive market. If you add to the equation the hybrid locomotive’s need for a product that also has a “high cycle life” component, you can easily see why we feel our PbC battery, with high charge acceptance, fast re-charge ability and high cycle life, has a significant advantage in this market. Most of our work over the last two years has been with Norfolk Southern, with whom we forged a partnership after the early battery technologies they chose to work with proved to be inadequate for the unique needs of that hybrid technology. After initial testing confirmed that our PbC product demonstrated great potential for the hybrid locomotive market, we entered into a 12 month service and supply agreement with Norfolk Southern, under which we initially provided engineering expertise and small quantities of batteries for their in house testing. This arrangement evolved into the sale of much greater quantities of batteries for their use in large string testing. That string testing (as well as electronic compatibility testing) continues and is being mimicked by us and by Penn State University. We have also begun promising work with other manufacturers in the hybrid locomotive field.

 

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With the financial assistance provided by the Pennsylvania Energy Development Authority and Commonwealth Financing Authority grants we were awarded, we commissioned our first PowerCube™ product onsite at our Clover Lane facility. The PowerCube was fully integrated by us and, in addition to the batteries, contains a racking system, electronics and power equipment, battery management system, climate control and fire suppression systems. As part of this undertaking, we entered into a partnership with Viridity Energy and PJM (the largest Regional Transmission Organization in the US). Basically through this arrangement, the PowerCube is network connected to the PJM system and allows us to respond through Viridity to curtailment and demand response signals from PJM. Our strategic partnerships with Viridity and PJM were formed partially in response to anticipated new rulings from the Federal Energy Regulatory Commission (FERC). The new rulings took place in October of 2011 and basically allowed power sources, of 500kW down to 100kW, to be connected to the grid. They also ruled that “pay for performance” provisions would be phased in during calendar year 2012. “Pay for performance” translates into the faster you respond the higher rate the utility will pay on a per kilowatt basis. Our PowerCube is rated at 500kW and we initially began to respond to PJM’s curtailment signals at a 100kW level, which will be ramped up as we go forward. Since our PowerCube can respond to curtailment signals in 50 milliseconds, we are looking forward to the implementation of “pay for performance” rates in 2012.

 

Since the PowerCube can be scaled, we began a parallel path development of smaller PowerCube units (mini-cubes) in 2011. These mini-cube applications include residential storage (at levels down to 10kW) and small commercial storage. The units can be connected to wind and solar in addition to filtering power directly from the grid. The end product will provide backup power, power quality, power smoothing, and potential peak shaving. We have entered into a memorandum of understanding with a group that will take this product to market.

 

We completed our initial work on a $1.0 million grant from the Office of Naval Research (ONR) in 2011. This project was aimed at developing a product for the Navy and Marine Corps silent watch program and their assault vehicle program. This program provided us with valuable information that we can utilize across the spectrum of our products. We have billed $1.0 million and collected all monies less a 1% service fee as of December 31, 2011 and expect to collect the balance in the first half of 2012.   

 

Work begun with Norfolk Southern (“NS”) in 2010 continued to progress in 2011. In the third quarter of 2011, NS accepted delivery of large strings of PbC batteries from Axion to further their platform testing. These batteries were installed in the NS platform facility and are under test. We are performing duplicate testing in New Castle, as well as comparison testing with other battery technology. As part of our agreement with NS, Penn State University is also performing string testing on our PbC batteries. To date the data from all battery system testing confirms PbC batteries are performing as anticipated. The success of this testing is allowing us to expand the locomotive application to include other locomotive end users and locomotive integrators.

 

Our public filings in 2011, as well as some of our public statements, made clear our need for outside funding resources in order to continue our business growth. We spoke with several investment banks and institutions throughout the second half of 2011. The financial markets were difficult and at times somewhat unstable. Nonetheless, in an event subsequent to 2011, (February 7, 2012), we completed a registered direct common stock offering at a per share price of $0.35 per share. This straight equity transaction, at a 10% discount to market based on trailing average, provided total gross proceeds of $9.4 million and net cash proceeds of $8.6 million to us after allowing for placement fees and expenses of the offering.

 

Our Business and Products

 

We are a development stage company. Since inception we have been engaged in research and development of new technology to manufacture carbon electrode assemblies for our lead-acid-carbon energy storage devices that we refer to as our PbC devices. Our PbC energy storage device is a hybrid battery supercapacitor that combines the simplicity of lead-acid batteries with the faster recharge rate, longer cycle life and greater charge acceptance of supercapacitors. The result is a relatively low cost device that has versatility of design that will allow differing iterations to deliver maximum power; maximum energy; or a range of balances between the two. 

 

Our PbC technology is protected by ten issued U.S. patents and other proprietary features and structures and we typically have a number of additional patent applications in process at any point in time. The resulting devices are technically sophisticated and yet simple in design. The carbon negative electrode assemblies are fabricated from readily available raw materials using, for the most part, standard industrial processes and techniques. The PbC negative electrodes that are then assembled into PbC batteries can employ the same cases, covers, positive electrodes, separators and electrolyte that are used in conventional lead-acid batteries. Our PbC batteries can be assembled with the same equipment and methodology used throughout the world for manufacturing conventional lead-acid batteries. PbC batteries use significantly less lead than standard lead-acid batteries with a comparable footprint, and the lead, plastics and acid employed, just like lead-acid batteries, can be routinely and profitably recycled at existing recycling facilities around the world. As is the case with the lead-acid battery, we expect that in the United States our PbC battery will be fully recycled 99.1% of the time (United States Environmental Protection Agency, Solid Waste and Energy Response [5306P]).

  

We believe our advanced battery technologies are uniquely situated to answer the current challenges facing the conventional lead-acid battery and the lead acid battery industry as a whole. While we explore the various potential applications for our PbC technology, two facilities in New Castle, Pennsylvania provide us with both an excellent R&D facility and a pilot production plant in which to produce our advanced energy storage devices. In manufacturing our PbC battery using conventional lead-acid battery production methods, we provide proof to our future PbC negative electrode customers that our product is suitable to immediate use in their factories.

 

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The PbC battery production is limited at this time by our inability to make the carbon electrodes in large numbers and with full automated quality control. As part of our plan to transition from pilot production of PbC negative electrodes to commercial manufacturing, in 2010 we entered into a long term lease for an additional New Castle, Pennsylvania facility that we had been subleasing since 2008 (our Green Ridge Road facility). This 45,000 square foot facility currently houses our prototype automated PbC negative electrode production line. In addition, this transition will require that we:

 

·continue to refine our fabrication methods for carbon sheeting, packet assembly and other key components of our carbon electrode assemblies;

 

·demonstrate the feasibility of manufacturing our PbC device and our other technologies, using standard techniques and equipment;

 

·demonstrate that the proper quality control can be achieved on our robotic PbC negative electrode manufacturing line;

 

·demonstrate and document the performance of our products in key applications; and

 

·respond appropriately to anticipated and unanticipated technical and manufacturing challenges.

 

Our Clover Lane facility has a permitted manufacturing capacity of 3,000 batteries per day, so we currently have excess battery manufacturing capacity. This allows us to dedicate a portion of this production capacity to direct sale high margin specialty batteries that are required in relatively small numbers, as well as have the flexibility to respond to industry requests to provide contract manufacturing. We are also able to respond quickly as other opportunities to manufacture traditional products present themselves.

 

Meanwhile, we plan to develop our lead carbon technology for use in a variety of applications including:

 

·motive power applications;

 

·stationary power applications;

 

·hybrid electric vehicle applications;

 

·hybrid locomotive applications; and

 

·military applications. 

 

We believe demand for cost-effective energy storage systems produced using our PbC technology will grow rapidly. We also believe that our technologies can be among the leaders in the high performance battery market, and that our competitive advantages will include:

 

·cost effectiveness: Due to an extended cycle life and relatively low production costs;

 

·superior properties of our product: The PbC battery has a much greater charge acceptance and has must faster recharge capabilities when compared to other standard and advanced lead-acid batteries;

 

·ease of manufacturing integration: Our planned carbon electrode assemblies will be designed to replace the standard lead negative electrodes in conventional lead-acid batteries. In some applications that require fixed voltage operations, voltage conversion may be needed;

 

·superior flexibility: By changing the number, geometry and arrangement of the PbC negative electrode assemblies, we expect to be able to configure our devices to favor either maximum energy storage or maximum power delivery; and

 

·reduced lead content: Depending on the energy, power and cycling requirements of a particular application, our fully recyclable device will use substantially less lead than conventional lead-acid batteries in some applications.

 

 

We anticipate our ability to establish and maintain a competitive position will be dependent on several factors, including:

 

·the availability of raw materials and key components;

 

·our ability to design and manufacture commercial carbon electrode assemblies;

 

·our ability to establish and operate facilities that can fabricate PbC negative electrode assemblies and commercially manufacture our PbC device with consistent quality at a predictable cost;

 

·our ability to establish and expand a customer base;

 

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·our ability to execute and perform on any future strategic distribution agreements with tier one and/or tier two battery manufacturers;

 

·our ability to compete against established, emerging, and other storage technologies;

 

·the market for batteries in general; and

 

·our ability to retain key personnel.

 

Our objective is to become an industry leader in the development and production of components for low cost, high performance energy storage systems. We plan to achieve this objective by pursuing the following core strategies:

 

·Platform technology business model. We plan to implement a platform technology business model that will focus on developing and manufacturing carbon electrode assemblies that we can offer for sale to established battery manufacturers who want to use our PbC carbon electrode products in their batteries.

 

·Leverage relationships with thought leaders. We are engaged in discussions with industry consortia, research institutions, automotive OEM’s, rail transportation providers and other thought leaders in the fields of utility applications and hybrid electric vehicle technology. As we develop our relationships in the field of energy research, we believe the opportunities for government funding and consortia participation will expand and improve our access to potential suppliers and customers.

 

·Leverage relationships with battery manufacturers. Our business model is based on the premise that, as we continue forward, we can most effectively address the needs of the market by selling PbC negative electrode assemblies to established lead-acid battery manufacturers who want to add advanced battery technology to their existing product lines. This business model should allow us to leverage the business abilities, manufacturing facilities and distribution networks of established manufacturers in order to reduce our time to market and increase our potential market penetration.

 

·Build a recognized brand. We believe strong brand name recognition is important in order to increase product awareness and to effectively penetrate the mass market. We intend to differentiate our brand by emphasizing our combination of high performance and low total cost of ownership per storage cycle.

 

·Focus on specific markets. Markets for hybrid electric vehicles, hybrid locomotives and conventional utility applications are becoming increasingly attractive. We are actively pursuing the use of our lead carbon technology products in these emerging markets.

 

·Maintain our technical advantage and reduce manufacturing costs. We intend to maintain our technical advantage by continuing to invest in R&D in order to improve the performance of our PbC devices and other technologies and to continue to lower our manufacturing costs.

 

 The battery industry is mature, capital intensive, heavily regulated, highly competitive and averse to product performance risks associated with radical departures from established technology. We do not believe we will be able to make a credible entry into the battery market until we have proven the advantages of our PbC device technology in demonstration projects with end users. Therefore, our business plan contemplates two discrete phases: the development phase (including prototype and demonstration) and the commercialization phase. 

 

Development Phase. We are currently in the final stages of the development phase of our business plan. We are focusing on producing quantities of commercial prototypes in our own manufacturing facilities. These commercial prototypes will serve as the foundation for a series of paid demonstration projects with established end users. If these projects are successful and end user testing validates the advantages of our PbC device technology under real-world operating conditions, we may be able to proceed more easily to the full commercialization phase. In general, our development path in each identified target market will include the following:

 

·Prototype manufacturing. We are finalizing architecture and manufacturing methods for our commercial prototype PbC carbon electrodes. These PbC negative electrode assemblies will be the key component in the onsite manufacturing of our PbC batteries. We are also working in house, and with third parties, to develop methods of properly integrating electronics unique to various applications. We have integrated these electronics, for example, into our onsite PowerCube. Our proprietary battery management system plays a key role in this development since it allows us to remotely monitor, and in some cases manage the condition, of both individual batteries and battery strings.

 

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·Demonstration projects. When we have developed and bench tested our commercial prototype PbC devices for a particular target market, we will negotiate additional demonstration projects for each of the intended applications. In some of the larger projects we may partner with a larger battery manufacturer in order to provide the required quantity of PbC devices. Our goal is to document and validate the superior performance of our products in real-world applications.

 

·Commercial production. When we have developed sufficient data to support a decision to commence full scale production of a product or product line, we intend to use our Clover Lane facility until we reach our maximum capacity, after which we plan to pursue strategic relationships with other battery manufacturers that are willing to manufacture co-branded commercial PbC products. Those products will contain our proprietary PbC negative electrode assembly, which we will continue to manufacture at our Green Ridge Road facility and build our brand recognition.

  

Our planned demonstration projects are not expected to generate sufficient revenue and gross profit to offset our expected operating costs. Accordingly, we do not expect to attain profitability during the development phase. If we enter into a commercialization relationship for a specific product or product line, we believe our margins may improve based on efficiencies of scale. However, there is no assurance that the commercialization of products for one or more market segments will generate sufficient revenue and gross profit to offset our anticipated R&D and other operating expenses and yield a profit.

 

Commercialization Phase. During the commercialization phase, we intend to implement a platform technology business model where we will develop and manufacture the PbC carbon electrode assemblies that are unique to our PbC batteries. In addition to using these assemblies in our batteries, we eventually intend to sell our proprietary assemblies to other established battery manufacturers who are seeking to market more advanced batteries. We believe a platform technology business model will reduce our time to market, allow us to rely on the established business abilities of existing manufacturers and forge a strong brand identity for our PbC products, while, at the same time, allowing us to focus on a narrow band of value-added activities that should minimize our investment and maximize our profitability.

 

Until we complete our planned demonstration projects, our negotiation position with respect to developing customer relationships with established battery manufacturers may be impaired. Even if our planned demonstration projects are successful, we may be unable to negotiate manufacturing relationships on terms acceptable to us.

 

We plan to initially focus on high-value market segments where the total cost of ownership is the primary determining factor in product selection. We believe our commercial PbC device will be most appealing where longer life, high performance, and low maintenance are fully valued.

 

Our Patents and Intellectual Property

 

We own ten issued U.S. patents at the date of this report covering various aspects of our PbC technologies, and we typically have a number of patent applications in process at any point in time. There is no assurance that any of the pending patent applications will ultimately be granted. Our issued patents are:

 

·U.S. Patent No. 6,466,429 (expires May 2021) - Electric double layer capacitor;
·U.S. Patent No. 6,628,504 (expires May 2021) - Electric double layer capacitor;
·U.S. Patent No. 6,706,079 (expires May 2022) - Method of formation and charge of the negative polarizable carbon electrode in an electric double layer capacitor;
·U.S. Patent No. 7,006,346 (expires April 2024) - Positive Electrode of an electric double layer capacitor;
·U.S. Patent No. 7,110,242 (expires February 2021) - Electrode for electric double layer capacitor and method of fabrication thereof;
·U.S. Patent No. 7,119,047 (expires February 2021) - Modified activated carbon for carbon for capacitor electrodes and method of fabrication thereof;
·U.S. Patent No. 7,569,514 (expires May 22, 2021) - Modified activated carbon for carbon for capacitor electrodes and method of fabrication thereof; and
·U.S. Patent No. 7,881,041(expires March 2027) – Activated Carbon Electrode with PTFE B
·U.S. Patent No. 8,023,251(expires November 2028) – Hybrid Energy Storage Device and Method of Making Same
·U.S. Patent No. 7,998,616(expires February 2028) – Negative Electrode for a Hybrid Energy Storage Device

 

Presently, we have no duty to pay any royalties or license fees with respect to the commercialization of our PbC device technology, and we are not subject to any field of use restrictions. We believe our patents and patent applications, along with our trade secrets, know-how and other intellectual property, will be critical to our success.

 

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Our ability to compete effectively with other companies will depend on our ability to maintain and protect the PbC device intellectual property and technology. We plan to file additional patent applications in the future. However, the degree of protection offered by our existing patents or the likelihood that our future applications will be granted, or the degree of protection afforded by future patents, if granted, is uncertain. Competitors in both the United States and foreign countries, many of which have substantially greater resources and have made substantial investment in competing technologies, may have, or may apply for and obtain patents that will prevent, limit or interfere with our ability to make and sell products based on our PbC device technology. Competitors may also intentionally infringe on our patents. The prosecution and defense of patent litigation is both costly and time-consuming, even if the outcome is favorable to us. An adverse outcome in the defense of a patent infringement suit could subject us to significant liabilities to third parties and prevent us from using all or any portion of the technology covered by such a patent. Although third parties have not asserted any infringement claims against us, there is no assurance that third parties will not assert such claims in the future.

 

We also rely on trade secrets and know-how, and there is no assurance that others will not independently develop the same or similar technology or obtain unauthorized access to our trade secrets, know-how and other unpatented technology. To protect our rights in these areas, we require all employees, consultants, advisors and collaborators to enter into strict confidentiality agreements. These agreements may not provide meaningful protection for our unpatented technology in the event of an unauthorized use, misappropriation or disclosure. While we have attempted to protect the unpatented proprietary technology that we develop or acquire, and will continue to attempt to protect future proprietary technology through patents, copyrights and trade secrets, we believe that our success will depend, to a large extent, upon continued innovation and technological expertise.

 

Our proposed products are still in the development stage, and we may need to license additional technologies to optimize the performance of our products. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies can be identified, licensed and integrated.

 

In general, the level of protection afforded by a patent is directly proportional to the ability of the patent owner to protect and enforce those rights through legal action. Since our financial resources are limited, and patent litigation can be both expensive and time consuming, there can be no assurance that we will be able to successfully prosecute an infringement claim in the event that a competitor develops a technology or introduces a product that infringes on one or more of our patents or patent applications. There can be no assurance that our competitors will not independently develop other technologies that render our proposed products obsolete. In general, we believe the best protection of our proprietary technology will come from market position, technical innovation, speed-to-market, and product performance. There is no assurance that we will realize any benefit from our intellectual property rights.

 

Our Competition

 

Our PbC technology is potentially competitive with technologies being developed by a number of new and established companies engaged in the manufacture of storage devices or components for storage devices. In addition, many universities, research institutions and other companies are developing advanced energy storage technologies including:

 

·symmetric supercapacitors;
·asymmetric supercapacitors with organic electrolytes;
·nickel metal hydride batteries;
·lithium-ion batteries;
·other advanced lead-acid devices; and
·flow batteries.

  

Other business entities are developing advanced energy production technologies like fuel cells, solar cells and windmills which may use our products, or, in some cases, compete with our products. Since some of our competitors are developing technologies that may ultimately have costs similar to, or lower than, our projected costs, there can be no assurance we will be able to compete effectively.

  

Our competitors with more diversified product offerings may be better positioned to withstand changing market conditions. Some of our competitors own, partner with, have longer term or stronger relationships with suppliers of raw materials and components, which could result in them being able to obtain raw materials on a more favorable basis than us. It is possible that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share, which would harm our business.

 

The development of technology, equipment and manufacturing techniques and the operation of a facility for the automated production of rechargeable batteries require large capital expenditures. In order to minimize our capital investment in manufacturing facilities and establish strong brand name recognition for our products, our overall strategy is to negotiate strategic alliances and other production agreements with established battery manufacturers that want to add high-performance co-branded products to their existing product lines. There can be no assurance, however, that our PbC platform technology business model will succeed in the battery industry.

 

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Raw Materials

 

During the research stage, we used readily available raw materials, off-the-shelf components manufactured by others and hand-made components fabricated by our staff. When we begin manufacturing our PbC products in commercial quantities, we will need to establish reliable supply channels for commercial quantities of raw materials and components. We believe established suppliers of raw materials and components will be able to satisfy our requirements on a timely basis. However, we do not have any long-term supply contracts and the unavailability of necessary raw materials or components could delay the production of our products and adversely impact our results of operations.

 

Lead is the primary raw material in lead-acid batteries and currently accounts for 80% of our raw material and component costs in the specialty conventional lead-acid batteries we now manufacture. Lead prices have fluctuated dramatically over the last three years, similar to other industrial grade commodity metals. Although our PbC battery does not require as much lead as a conventional lead-acid battery, lead is still a major raw material component.

 

Environmental Protection

 

Lead is a toxic material that is a primary raw material in our PbC batteries. We also use, generate and discharge other toxic, volatile and hazardous chemicals and wastes in our research, development and manufacturing activities. We comply with federal, state and local laws and regulations regarding pollution control and environmental protection. Under some statutes and regulations, a government agency, or other parties, may seek to recover response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for such release or otherwise at fault. In addition, more stringent laws and regulations may be adopted in the future, and the costs of complying with those laws and regulations could be substantial. If we fail to control the use of, or to adequately restrict the discharge of, hazardous substances, we could be subject to significant monetary damages and fines, or forced to suspend certain operations. Our facility was previously tested and found to be in compliance with emission standards as established by new federal guidelines in accordance with the Clean Air Act – Title III.

 

Our Research and Development

 

We engage in extensive R&D activities for the purpose of improving our PbC technology and our proposed products. Our goal is to increase efficiency and reduce costs in order to maximize our competitive advantage. Our R&D organization works closely with our engineering and business development teams, our suppliers and potential customers to improve our product design and lower manufacturing costs. During 2011 and 2010, we spent $5.1 million and $5.4 million, respectively, on R&D, and $28.9 million since inception, net of grant reimbursements. While our limited financial resources and brief operating history makes it difficult for us to estimate our future expenditures, we expect to incur R&D expenditures of consistent magnitude for the foreseeable future.

 

Our Employees

 

As of December 31, 2011 we employed a staff of 90, including a 16 member scientific and engineering team, and 51 people who are involved principally in manufacturing. We are not subject to any collective bargaining agreements, and we believe we have a good relationship with our employees.

 

Description of Properties

 

On March 28, 2010, we renewed our lease for existing space at our manufacturing plant located at 3601 Clover Lane in New Castle, Pennsylvania. The salient terms of the renewal lease are as follows:

 

·The term commenced on April 3, 2010 with an initial term of three years.
·The renewal lease may be extended for two successive five-year renewal options with future rent to be negotiated at a commercially reasonable rate.  
·The battery manufacturing facility includes 70,438 square feet of floor space, including 7,859 square feet of office, locker, lab and lunch area, 46,931 square feet of manufacturing space, 1,488 square feet of dedicated lab space, 9,200 square feet of storage buildings and 5,000 square feet of basement area.
·The rental amount for the initial term is $16,700 per month, which is fixed through 2013. In addition to the monthly rental, we are obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance, and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises.
·On May 26, 2011 we executed an addendum to the existing lease agreement which resulted in the lease of an additional 2,160 square feet of additional space for $500.00 per month. There were no other changes to the existing lease.
·With the execution of the addendum we now lease 72,598 square feet for a monthly rent of $17,200.

 

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On November 4, 2010, the Company entered into a Commercial Lease (“Lease”) with Becan Development, LLC (“Lessor”) to lease a 45,000 square foot building, located at 209 Green Ridge Road in New Castle PA, (the “Property”), which the Company currently occupies to house various offices and manufacturing facilities. The salient terms of the Lease are as follows:

 

·The Lease term commenced on January 1, 2011 and the term expires on December 31, 2015.
·The Lease may be extended for two 5-year terms, by giving notice not less than 30 nor more than 120 days before the expiration of the initial term or first renewal term (as applicable). The renewal leases shall be on terms substantially similar to the terms of the initial Lease except for any adjustment to rent, if warranted, as mutually agreed upon by Lessor and the Company.

 

·The rental amount for the initial term is $19,297 per month and is on a “triple net” basis.
·If the Company is able to obtain sufficient funding from either the federal or state government or agencies, and it enters into a binding agreement to purchase the Property, the Lease shall be immediately terminated and Lessor shall credit the most recent 6 months of actual rental payments made to Lessor against the purchase price of the Property

 

·The Company also has a right of first refusal to purchase the property within 30 days of receipt of notice of a third party offer from Lessor upon substantially the same terms as those offered by the third party

 

·The Lease contains market terms on standard provisions such as defaults and maintenance

 

Item 1A Risk Factors

 

Investing in our common stock is very speculative and involves a high degree of risk. You should carefully consider all of the information in this report before making an investment decision. The following are among the risks we face related to our business, assets and operations. They are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also arise. Any of these risks could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of our common stock. You should not purchase our shares unless you can afford to lose your entire investment.

 

We are a development stage company, and our business and prospects are extremely difficult to evaluate.

 

Since our inception in September 2003, the majority of our resources have been dedicated to our R&D efforts, and we have only recently begun to transition into the very early stages of commercial PbC prototype production. We do not have a stable operating history that you can rely on in connection with your evaluation of our current business and our future business prospects. Our business and prospects must be carefully considered in light of the limited history of PbC technology and the many business risks, uncertainties and difficulties that are typically encountered by development stage companies that have minimal revenues and are committed to focusing on research, development and product testing for an indeterminate period of time. Some of the principal risks and difficulties we have encountered and expect to continue to encounter include, but are not limited to, our ability to:

 

·Maintain effective control over the cost of our research, pace of progress, development and product testing activities;
·Develop cost effective manufacturing methods for essential components of our proposed products;
·Improve the performance of our commercial prototype batteries;
·Successfully transition from our laboratory research and pilot production efforts to commercial manufacturing and sales of our prototype PbC battery technologies;
·Adapt and successfully execute our vision and business plan;
·Implement and improve operational, information technology, financial and management control systems and processes;
·License complementary technologies if necessary and successfully defend our intellectual property rights against potential claims;
·Respond effectively to competitive developments and changing market conditions;
·Continue to attract, retain and motivate qualified personnel; and
·Manage each of the other risks set forth below.

 

Because of our limited operating history and our relatively recent transition into the production of prototype PbC devices that we are relying on to become our core revenue generating products, we have limited insight into trends and conditions that may exist or might emerge and affect our business. There is no assurance that our business strategy will be successful or that we will successfully address the risks identified in this report.

 

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We have incurred net losses from inception and do not expect to introduce our first commercial PbC products in quantity until 2012.

 

From our inception we have incurred net losses and expect to incur substantial and possibly increasing losses for the foreseeable future as we increase our spending to fund the development of production methods for our PbC devices and to build an infrastructure to support this business. Our operating losses have had, and will continue to have, an adverse impact on our working capital, total assets and stockholders’ equity. For 2011, we had a net loss applicable to common shareholders of $8.3million.  In addition, we had cumulative losses from inception (September 18, 2003) to December 31, 2011 of $76.0 million. We have not yet reached a point where we can manufacture our proprietary PbC batteries and our proprietary activated carbon electrodes in commercial volumes and we will not be in a position to commercialize such products until we complete the design development, manufacturing process development and pre-market testing activities. There can be no assurance that our development and testing activities will be successful or that our proposed products will achieve market acceptance or be sold in sufficient quantities and at prices necessary to make them commercially viable.

 

We are subject to stringent environmental regulation.

 

We use or generate certain hazardous substances in our research and manufacturing facilities. We do not carry environmental impairment insurance. We believe that all permits and licenses required for our current business activities are in place. Although we do not know of any material environmental, safety or health problems in our property or processes, there can be no assurance that problems will not develop in the future which could have a material adverse effect on our business, results of operation, or financial condition. 

 

Our products contain hazardous materials including lead.

 

Lead is a toxic material that is a primary raw material in our batteries. We also use, generate and discharge other toxic, volatile and hazardous chemicals and wastes in our research, development and manufacturing activities. We are required to comply with federal, state and local laws and regulations regarding pollution control and environmental protection. Under some statutes and regulations, a government agency, or other parties, may seek to recover response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for such release or otherwise at fault. In addition, more stringent laws and regulations may be adopted in the future, and the costs of complying with those laws and regulations could be substantial. If we fail to control the use of, or inadequately restrict the discharge of, hazardous substances, we could be subject to significant monetary damages and fines, or be forced to suspend certain operations.

 

As we sell our products, we may become the subject of product liability claims.

 

Due to the hazardous nature of many of the key materials used in the manufacturing of our batteries, the producers of such products may be exposed to a greater number of product liability claims, including possible environmental claims. We currently have product liability insurance up to $1,000,000 per occurrence and $5,000,000 in the aggregate to protect us against the risk that in the future a product liability claim or product recall could materially and adversely affect our business operations. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our product. We cannot assure you that as we continue distribution of our products that we will be able to obtain or maintain adequate coverage on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. Even if we maintain adequate insurance, any successful claim could materially and adversely affect our reputation and prospects, and divert management’s time and attention. If we are sued for any injury allegedly caused by our future products our liability could exceed our total assets and our ability to pay such liability.

 

We depend on key personnel, and our business may be severely disrupted if we lose the services of our key executives, employees, and consultants.

 

Our business is dependent upon the knowledge and experience of our key scientists, engineers, manufacturing staff and executive officers. Given the competitive nature of our industry, there is the risk that one or more of our key scientists or engineers will resign their positions, which could have a disruptive impact on our operations. If any of our key scientists, engineers or executive officers do not continue in their present positions, we may not be able to easily replace them and our business may be severely disrupted. If any of these individuals joins a competitor or forms a competing company, we could lose important know-how and experience and incur substantial expense to recruit and train suitable replacements. Currently, all of our key employees have employment contracts that include non-compete provisions.

 

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We will not begin automated production of our PbC technology until 2012.

 

We will not be able to begin full commercial production of our PbC energy storage devices until we complete our current testing operations, our planned application evaluation, planned product development and until our second generation robotic PbC negative electrode production line is fully commissioned. We believe our path to full automated production will, at a minimum, take us into the first half of 2012. Even if our prototype development operations are successful, there can be no assurance that we will be able to establish and maintain our facilities and relationships for the manufacturing, distribution and sale of our PbC batteries and other technologies or that any future products will achieve market acceptance and be sold in sufficient quantities and at prices necessary to make them commercially successful. Even if our proposed products are commercially successful, there can be no assurance that we will realize enough revenue and gross margin from the sale of products to achieve profitability.

  

We have limited manufacturing experience with respect to our PbC technology, which may translate into substantial cost overruns in manufacturing and marketing our products.

 

We do not have extensive manufacturing experience with respect to production of our commercial PbC negative electrode prototypes in quantities required to achieve our operational goals, and there is no assurance that we will be able to retain a qualified manufacturing staff or effectively manage the manufacturing of our proposed products when we are ready to do so.

 

As we transition into the commercial production of our prototype devices, we may experience substantial cost overruns in manufacturing and marketing our PbC technologies, and we may not have sufficient capital in the future to successfully complete such tasks. In addition, we may not be able to manufacture or market our products because of industry conditions, general economic conditions, and/or competition from potential manufacturers and distributors. Either of these inabilities could cause us to abandon our current business plan and may cause our operations to eventually fail.

 

Risks related to our PbC Technology

 

We need to improve the performance of our commercial prototypes before we commit to achieve large scale production.

 

Our commercial prototypes do not satisfy all of our performance expectations, and we need to continue to improve various aspects of our PbC technology as we move forward with larger scale production of our commercial prototypes. There is no assurance that we will be able to resolve the known technical issues. Future testing of our prototypes may reveal additional technical issues that are not currently recognized as obstacles. If we cannot improve the performance of our prototypes in a timely manner, we may be forced to redesign or delay the large scale production of commercial prototypes or possibly cause us to abandon our product development efforts altogether.

 

 We do not have any long-term vendor contracts.

 

We currently purchase the raw materials for our carbon electrodes and a variety of other components from third parties. We then fabricate our carbon electrodes and build our prototypes in-house. We do not have any long-term contracts with suppliers of raw materials and components, and our current suppliers may be unable to satisfy our future requirements on a timely basis. Moreover, the price of purchased raw materials and components could fluctuate significantly due to circumstances beyond our control. If our current suppliers are unable to satisfy our long-term requirements on a timely basis, we may be required to seek alternative sources for necessary materials and components or redesign our proposed products to accommodate available substitutes.

 

We will be a small player in an intensely competitive market and may be unable to compete.

 

The lead-acid battery industry is large, intensely competitive and resistant to technological change. Even if our product development efforts are successful, we will have to compete or enter into further strategic relationships with well-established companies that are much larger and have greater financial capital and other resources than we do. We may be unable to convince end users that products based on our PbC technology are superior to available alternatives. Moreover, if competitors introduce similar products, they may have a greater ability to withstand price competition and finance their marketing programs. There is no assurance that we will be able to compete effectively.

 

To the extent we enter into strategic relationships, we will be dependent upon our partners.

 

Some of our products are not intended for direct sale to end users and our business strategy is likely to require us to enter into strategic relationships with manufacturers of other power industry equipment that use batteries and other energy storage devices as important components of their finished products. The agreements governing any future strategic relationships may not provide us with control over the activities of any strategic relationship we negotiate and our future partners, if any, could retain the right to terminate the strategic relationship at their option. Our future partners will have significant discretion in determining the efforts and level of resources that they dedicate to our products and may be unwilling or unable to fulfill their obligations to us. In addition, our future partners may develop and commercialize, either alone or with others, products that are similar to or competitive with the products that we intend to produce.

 

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Risks relating to our intellectual property

 

We may rely on licenses for our PbC technology, which may affect our continued operations with respect thereto.

 

As we develop our PbC technology, we may need to license additional technologies to optimize the performance of our products. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies can be identified, licensed and integrated. The inability to obtain any necessary third-party licenses could cause us to abandon a particular development path, which could seriously harm our business, financial position and results of our operations.

 

New technology may lead to our competitors developing superior products which would reduce demand for our products.

 

Research into the electrochemical applications for carbon nanotechnology and other storage technologies is proceeding at a rapid pace, and many private and public companies and research institutions are actively engaged in the development of new battery technologies based on carbon nanotubes, nanostructured carbon materials and other non-carbon materials. These new technologies may, if successfully developed, offer significant performance or price advantages when compared with our technologies. There is no assurance that our existing patents or our pending and proposed patent applications will offer meaningful protection if a competitor develops a novel product based on a new technology.

 

If we are unable to protect our proprietary technology and preserve our trade secrets, we will increase our vulnerability to competitors which could materially adversely impact our ability to remain in business.

 

Our ability to successfully commercialize our products will depend, in large measure, on our ability to protect those products and our technology with domestic and foreign patents. We will also need to continue to preserve our trade secrets. The issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. The patent positions of technology companies, including us, are uncertain and involve complex legal and factual issues.

 

We cannot assure you that our patents will prevent other companies from developing similar products or products which produce benefits substantially the same as our products, or that other companies will not be issued patents that may prevent the sale of our products or require us to pay significant licensing fees in order to market our products. Accordingly, if our patent applications are not approved or, even if approved, if such patents are circumvented or not upheld in a court of law, our ability to competitively exploit our patented products and technologies may be significantly reduced. Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued.

 

From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties in order to develop, manufacture and market our products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may be inhibited or prevented. Additionally, we cannot assure investors that any of our products or technology will be patentable or that any future patents we obtain will give us an exclusive position in the subject matter claimed by those patents. Furthermore, we cannot assure investors that our pending patent applications will result in issued patents, that patent protection will be secured for any particular technology, or that our issued patents will be valid or enforceable or provide us with meaningful protection.

 

If we are required to engage in expensive and lengthy litigation to enforce our intellectual property rights, the costs of such litigation could be material to our results of operations, financial condition and liquidity and, if we are unsuccessful, the results of such litigation could materially adversely impact our entire business.

 

We may find it necessary to initiate litigation to enforce our patent rights, to protect our trade secrets or know-how or to determine the scope and validity of the proprietary rights of others. We plan to aggressively defend our proprietary technology and any issued patents if funding is available to do so. Litigation concerning patents, trademarks, copyrights and proprietary technologies can often be time-consuming and expensive and, as with litigation generally, the outcome is inherently uncertain.

 

Although we have entered into invention assignment agreements with our employees and with certain advisors, if those employees or advisors develop inventions or processes independently which may relate to products or technology under development by us, disputes may also arise about the ownership of those inventions or processes. Time-consuming and costly litigation could be necessary to enforce and determine the scope of our rights under these agreements.

 

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We also rely on confidentiality agreements with our strategic partners, customers, suppliers, employees and consultants to protect our trade secrets and proprietary know-how. We may be required to commence litigation to enforce such agreements, and it is certainly possible that we will not have adequate remedies for breaches of our confidentiality agreements.

 

Other companies may claim that our technology infringes on their intellectual property or proprietary rights and commence legal proceedings against us which could be time-consuming and expensive and could result in our being prohibited from developing, marketing, selling or distributing our products.

 

Because of the complex and difficult legal and factual questions that relate to patent positions in our industry, we cannot assure you that our products or technology will not be found to infringe upon the intellectual property or proprietary rights of others. Third parties may claim that our products or technology infringe on their patents, copyrights, trademarks or other proprietary rights and demand that we cease development or marketing of those products or technology or pay license fees. We may not be able to avoid costly patent infringement litigation, which will divert the attention of management away from the development of new products and the operation of our business. We cannot assure investors that we would prevail in any such litigation. If we are found to have infringed on a third party’s intellectual property rights, we may be liable for money damages, encounter significant delays in bringing products to market or be precluded from manufacturing particular products or using particular technology.

 

Other parties may challenge certain of our foreign patent applications. If such parties are successful in opposing our foreign patent applications, we may not gain the protection afforded by those patent applications in particular jurisdictions and may face additional proceedings with respect to similar patents in other jurisdictions, as well as related patents. The loss of patent protection in one jurisdiction may influence our ability to maintain patent protection for the same technology in other jurisdictions.

 

Risks relating to our common stock

 

We have issued a large number of warrants and options, which if exercised would substantially increase the number of common shares outstanding.

 

On March 1, 2012, we had 113,211,091 shares of common stock outstanding, and (a) we have warrants outstanding that, if fully exercised, would generate proceeds of $10,152,447 and cause us to issue up to an additional 11,896,070 of common stock, with 1,085,714 of these warrants classified as derivative liabilities, and (b) we have options outstanding to purchase common stock that, if fully exercised, would generate proceeds of $6,960,718 and result in the issuance of an additional 3,629,850 shares of common stock.

 

As a key component of our growth strategy we have provided and intend to continue offering compensation packages to our management and employees that emphasize equity-based compensation and would thus cause further dilution.

 

Our stock price may not stabilize at current levels.

 

Our common stock is quoted on the Over the Counter Bulletin Board. Since trading in our common stock began in January 2004, trading has been sporadic, trading volumes have been low and the market price has been volatile. The closing price reported as of March 1, 2012, the latest practicable date, was $0.40 per share. Current quotations are not necessarily a reliable indicator of value and there is no assurance that the market price of our stock will stabilize at or near current levels.

 

Item 2 Properties

 

The terms of the Leases are set forth above in Item 1. Business (Description of Properties).

 

Item 3 Legal Proceedings

 

From time to time, we are involved in lawsuits, claims, investigations and proceedings, including pending opposition proceedings involving patents that arise in the ordinary course of business. There are no matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.

 

Item 4 Mine Safety Disclosures

 

Not Applicable

 

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PART II

 

Item 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market information

 

Our common stock trades on the Over the Counter Bulletin Board under the symbol “AXPW”.  Trading in our common stock has historically been sporadic, trading volumes have been low, and the market price has been volatile.

 

The following table shows the range of high and low bid prices for our common stock as reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.

 

Period  High   Low 
First Quarter 2010  $1.60   $1.12 
Second Quarter 2010  $1.20   $0.66 
Third Quarter 2010  $0.72   $0.46 
Fourth Quarter 2010  $0.80   $0.51 
First Quarter 2011  $1.27   $0.55 
Second Quarter 2011  $1.20   $0.60 
Third Quarter 2011  $0.73   $0.42 
Fourth Quarter 2011  $0.55   $0.25 

 

On March 1, 2012, the sale price for our common stock as reported on the Over the Counter Bulletin Board was $0.40 per share.

 

Securities outstanding and holders of record

 

On December 31, 2011 there were 423 holders of record for our common stock and 85,531,114 shares of our common stock outstanding.

 

Dividends

 

We have never paid dividends.

 

Information respecting equity compensation plans

 

Summary Equity Compensation Plan Information: The following table provides summary information on our equity compensation plans as of December 31, 2011:

Equity Compensation Plan category:  Number of  shares
Issuable on exercise of
Outstanding options
   Weighted  average
exercise price of
outstanding options
   Number of shares
available for future
issuance under equity
compensation  plans
 
Compensation plans approved by stockholders               
2004 Incentive Stock Plan   0   $0    2,000,000 
2004 Directors’ Option Plan   438,972   $1.57    561,028 
                
Compensation not approved by stockholders               
Options held by officers, employees, and consultants   1,570,500   $2.45      
2010 Employees and Officers Stock Option Plan   1,620,378    1.50    379,622 
Total equity awards   3,629,850   $1.92      

 

 The Company has two stockholder approved equity compensation plans, and on September 28, 2010, the board of directors amended the 2004 Director’s Option Plan without stockholder approval. For certain positions, the Company enters into employment and other contracts that provide for equity compensation arrangements other than those contemplated by the stockholder approved plans.

 

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Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the consolidated financial statements and the related notes that are set forth in our financial statements elsewhere in this annual report.

 

Overview

 

We are a development stage company that was formed in September 2003 to acquire and develop certain innovative battery technology. Since inception we have been engaged in research and development of new technology to manufacture carbon electrode assemblies for our energy storage devices that we refer to as our PbC devices.

 

Since inception, we have received $60.6 million in cash generated from financing activities of which $58.7million was used to fund research and development activities, capital expenditures, infrastructure, operations and working capital.

 

Key Performance Indicators, Material Trends and Uncertainties

 

Because we are a development stage company, typical investor financial measures are not particularly relevant or helpful in the assessment of company operations.

 

We utilize appropriate non-financial measures to evaluate the performance of our R&D activities and demonstration projects. Our demonstration projects entail extended periods of time to assess our energy devices over multiple charge and discharge cycles. Further, the results of our demonstration projects do not lend themselves to simple measurement and presentation.

  

The single most significant financial metric for us is the adequacy of working capital. Working capital is necessary to fund our capital expenditures, infrastructure and processes required to progress from demonstration projects to commercial deployment of our proprietary carbon electrode assemblies for our PbC devices.

 

We believe we need to continue to characterize and perfect our products in house and through a limited number of demonstration projects before moving into full commercial production. While the results of this work are moving toward that goal, we cannot provide assurances that the products will be successful in their present design or that further R&D will not be needed. The successful completion of present and future characterization and demonstration projects is critical to the development and acceptance of our technology.

 

We must devise methodologies to manufacture carbon electrode assemblies for our energy storage devices in commercial quantities. While we have assembled an engineering team that we believe can accomplish this goal, and are adding to it as we go forward, there is no assurance that we will be able to successfully commercially produce our product.

 

Financing Activities

 

There were no financing activities during 2011. On February 3, 2012, the Company completed a registered direct common stock offering providing gross proceeds of approximately $9.4 million and net proceeds were approximately $8.6 million after the expenses of the offering and placement fees. (See Note 11 Subsequent Events in Item 8 Financial Statements and Supplementary Data)

 

Award Activities: Grants and Contracts

 

On February 5, 2009, we received two grants from the Advanced Lead-Acid Battery Consortium (the “ALABC”), the leading industry association made up in part by the largest companies supplying the world’s battery market. The two grants total $388,000 and provided support research into two key areas. The first grant sought to identify the mechanism by which the optimum specification of carbon, when included in the negative active material of a valve-regulated lead-acid battery, provides protection against accumulation of lead sulfate during high-rate partial-state-of-charge operation. The second grant sought to characterize our proprietary PbC battery in hybrid electric vehicle (HEV) type duty-cycle testing. The grants were administered through the Durham, NC-based International Lead Zinc Research Organization acting on behalf of the ALABC. The research work was completed during the first quarter of 2010.

 

On February 9, 2009, we received notice that we were the recipient a grant from the Pennsylvania Alternative Fuels Incentive Grant program. The $800,000 initial grant was part of Pennsylvania’s overall effort to invest in businesses that are creating important and innovative clean energy and bio-fuels technologies. The award proceeds were used to demonstrate the advantages our proprietary PbC battery technologies provide in a variety of electric vehicle types including: HEVs, such as the popular Toyota Prius;  “plug-ins” (PHEVs)  used in commuter, delivery and other vehicles; and in electric vehicles (EVs) and converted (from combustion engine operation) EVs. The grant was initially billed against in the fourth quarter of 2009 and completed in July 2010.

 

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On December 22, 2009, we were awarded a $248,650 grant from the Pennsylvania Energy Development Authority, to assist in the development and deployment of an Axion PowerCube™ battery energy storage system using the our PbC battery technology. The .5 MW PowerCube will be built and installed at our New Castle facility and will be designed to enhance a Smart Grid electrical distribution system, that will potentially include  a future solar-powered electric vehicle charging station and a potential wind-powered energy system.  

 

On May 11, 2010, we were awarded a federal contract number N00014-10-C-0094 for the development of new lightweight, high-powered batteries for use in vehicles operated by the U.S. Marine Corps. This final contract provides $1,004,747 to us for this project.  Under the contract, we worked with the U.S. Navy and Marine Corps to study the feasibility of utilizing one of our PbC ® products in their assault and silent watch vehicles.

 

On June 16, 2010, Axion Power Battery Manufacturing, Inc. received a $298,605 solar energy program grant from the Pennsylvania Department of Community and Economic Development. This grant, along with proceeds from the December 22, 2009 Pennsylvania Energy Development Authority provided funding for our development program with a total project cost of $1.0 million.

 

A summary of award activities is listed as follows:

 

   Total Award
Amount
   Unbilled
AmountAward
Balance at
December 31,
2010
   Unbilled
Award Balance
at December 31,
2011
 
DOD Office of Naval Research Contract  $1,004,747   $389,090   $- 
ALABC   388,000         - 
PA Alternative Fuels Incentive Grant Program   763,404         - 
Pennsylvania Energy Development Authority   248,650    140,389      
Pennsylvania Department of Community and Economic Development   298,605    298,605    41,171 
   $2,703,406   $828,084   $41,171 

 

Results of Operations

 

Product manufacturing in the third quarter of 2011 ramped up with production of PbC® prototype batteries, as well as meeting increased requirements to fill existing purchase orders for traditional lead-acid batteries.

 

Our strategy for some time has been to utilize traditional production to train our work force, test our systems and incorporate quality improvements that we believe will ultimately benefit future PbC production. To this end, we have completed several capital projects in 2011: including the modernization of our second lead-acid production line; the rebuild of five casting machines; addition of new welding equipment; and a 35% expansion of our formation area.

 

Software improvements and mechanical tweaking continue to improve thru-put on our automated robotic electrode production line. All stations currently participate in the fabrication process as the line runs end to end. We are comfortable with the design modifications and will incorporate them into our next planned electrode production line.

 

Norfolk Southern (“NS”) has accepted delivery of large strings of PbC batteries to further their platform testing. These batteries are now installed in the NS platform facility and undergoing testing. We are performing duplicate testing in New Castle, as well as comparison testing with other battery technology. As part of our agreement with NS, Penn State University is also performing string testing on our PbC batteries. To date the data from all battery system testing confirms PbC batteries are performing as anticipated. The success of this testing is allowing us to expand the locomotive application to include other locomotive end users and locomotive integrators.

 

Expanding potential customer base also applies to the emerging hybrid vehicle market. We have met with new OEM’s that are, or soon will be, producing vehicles incorporating stop-start technology. The OEM’s interest has been fueled by our recent White Paper that highlights the importance of “charge acceptance” in battery products designed for these markets. It also provides empirical evidence on the deficiencies of existing products currently used in these markets. Our long-standing collaboration with both European and US manufacturers continues as we share information and results from both bench and vehicle testing.

 

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Our onsite PowerCube™ (“Cube”) is in the final stage of testing as we move toward tying into the grid. We are qualifying for dispatchable power applications and will be proving out the Cube’s ability to provide power quality, back- up power, power smoothing, and load leveling. This .5MW Cube can easily be scaled up or down from this building block size.

 

We continue to evaluate the market for smaller Cubes for residential and community storage and larger Cubes for utilities, oil rigs and other larger applications such as solar and wind. We anticipate establishing additional formal marketing agreements for some of these applications in 2012.

 

Overview

 

The following Management’s Discussion and Analysis (“MD&A”) is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements, the accompanying financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2011.

 

·Net sales are derived primarily from the sale of lead acid batteries for specialty collector and racing cars, AGM batteries, and flooded batteries. Net sales also include sales of product and services related to advanced battery applications for our PbC® technology.

 

·Product costs include raw materials, components, labor, and allocated manufacturing overhead required expenses to produce batteries sold to customers. Manufacturing overhead expenses not assigned to product sales are included in research & development expenses. Product costs also include provisions for inventory valuation and obsolescence reserves. Due to the development stage of our business, current product costs may not be indicative of the future costs to produce batteries.

 

·Research & development expenses (“R&D”) includes activities to design, develop, and test advanced batteries and carbon electrode assemblies for our energy storage products based on our patented lead carbon technology. Also included in R&D are the materials consumed in production of pilot products, manufacturing costs not assigned to product sales and the reimbursement of R&D related to government grants.

 

·Selling, general and administrative expenses (“SG&A”) include employee compensation, selling and marketing expenses, legal, auditing and other costs associated with being a public company.

 

Summarized selected Statement of Operations data for the years ended December 31, 2011 and 2010.

 

   2011   2010 
Product  sales  $7,631,529   $1,328,025 
Service  sales   459,645    820,081 
Total sales   8,091,174    2,148,106 
Product costs   6,799,302    893,681 
Research & development expenses   5,060,036    5,432,230 
Selling, general & administrative  expenses   4,463,269    3,448,508 
Impairment of assets   308,882    361,793 
Derivative revaluations (income)   (238,618)   (1,165,751)
Loss before income tax   (8,311,890)   (6,830,854)

 

Reconciliation of net loss to EBITDA

 

   2011   2010 
GAAP loss before income taxes  $(8,311,890)  $(6,830,854)
Plus: Interest net   10,193    8,499 
Depreciation   1,014,661    673,170 
Share based compensation   453,770    444,986 
Derivative revaluations (income)   (238,618)   (1,165,751)
Impairment of assets   308,882    361,793 
EBITDA (1)  $(6,763,002)  $(6,508,157)

 

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(1) EBITDA, a non-GAAP financial measure, is defined as earnings before interest expense and interest income, taxes, depreciation, amortization, share based compensation, derivative revaluations, and impairment of assets.  EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business.

 

Summary of Consolidated Operating Results for the Year Ended December 31, 2011 compared with the Year Ended December 31, 2010

 

Product Sales

 

Product sales for the year ended December 31, 2011 were $7.6 million compared to $1.3 million for the same period in 2010. We have one customer that accounted for 84% of product sales in 2011 and two customers that accounted for 43% and 17% of product sales in 2010. The increase in net product sales in 2011 compared to 2010 is due to a series of orders for the production and immediate delivery of specialty flooded lead acid batteries with the purchaser financing the cost of inventory and providing the raw materials required for production.

 

Service Sales

 

Service sales for the year ended December 31, 2011 were $0.5 million compared to $0.8 million for the same period in 2010. We have two customers that accounted for all of the service sales during 2011 and three customers that accounted for the service sales during 2010.

 

Total Sales

 

Total sales for the year ended December 31, 2011 were $8.1 million compared to $2.1 million for the same period in 2010.

 

Product Cost

 

Product costs for the year ended December 31, 2011 were $6.8 million compared to $0.9 million for the same period in 2010. The increase in product costs resulted primarily from an increase in product sales.

 

Research & Development Expenses

 

Research and development expenses for the year ended December 31, 2011 were $5.1 million compared to $5.4 million for the same period in 2010. R&D expenses decreased by $0.3 million or 5% during 2011.

 

Selling, General & Administrative Expenses

 

Selling, general & administrative expenses for the year ended December 31, 2011 were $4.5 million compared to $3.4 million for the same period in 2010. SG&A for 2010 included a reduction of legal expenses of $0.8 million resulting from the settlement of the Mercatus matter as disclosed in the Company’s Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2010. Excluding this charge, SG&A increased $0.3 million or 7%.

 

Derivative Revaluation

 

Income from derivative revaluation for the year ended December 31, 2011 was $0.2 compared to an income of $1.2 million for the same period in 2010. Income from derivative revaluation results from a decrease in the fair value of derivative liabilities. Derivative revaluations are recognized whenever the Company incurs a liability associated with the issuance of an equity-based instrument. The instrument is revalued for each reporting period until the liability is settled.

 

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Liquidity and Capital Resources

 

Historically, our primary source of liquidity has been cash generated from issuances of our equity or debt securities. From inception through September 30, 2011, we have generated insignificant revenue from operations. The receipt of $24.9 million in proceeds from our December 2009 equity private placement and internally generated funds from product sales and grants provided the financial resources to fund our operations, working capital, and capital expenditures in 2010 and 2011.

 

On February 3, 2012 we completed a registered direct common stock offering which provided net proceeds of $8.6 million which will be used for working capital, capital expenditures and general corporate purposes. See Note 11 – Subsequent Events included in Item 8 Financial Statements and Supplementary Data.

 

We believe that the currently available funds at December 31, 2011, along with the receipt of $8.6 million in proceeds from our February 2012 registered direct common stock offering and internally generated funds from product sales, will provide sufficient financial resources for current development stage operations, working capital, and capital expenditures through the first quarter of 2013.

 

Subsequent financings will be required to fund the Company’s ongoing operations, working capital, and capital expenditures beyond March 31, 2013. No assurances can be given that the Company will be successful in arranging the further financing needed to continue the execution of its business plan, which includes the development and commercialization of new products. Failure to obtain such financings will require management to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company.

 

The need to secure additional capital to fund continued operations past the first quarter of 2013 is the result of various factors. In addition, although we have made very significant progress with our PbC® technology, the adoption process, and the general path to commercial viability, has been longer than we originally anticipated. In addition, we will need working capital to fund our anticipated continued growth of sales in traditional batteries and PbC products. 

 

Cash, Cash Equivalents, and Working Capital

 

At December 31, 2011, we had $2.0 million of cash and cash equivalents compared to $13.3 million at December 31, 2010.  At December 31, 2011 working capital was $4.3 million compared to a working capital of $14.0 million at December 31, 2010. One customer accounted for $1.3 million or 30% of working capital at December 31, 2011. Cash equivalents consist of short-term liquid investments with original maturities of no more than six months and are readily convertible into cash.

 

Cash Flows from Operating Activities

 

Net cash used by operating activities was $8.2 million for the year ended December 31, 2011 and $6.7 million for the same period in 2010. Our negative cash flow is consistent with the development stage of our business.

 

Cash Flows from Investing Activities

 

 Net cash used by investing activities for year ended December 31, 2011 was $3.0 million compared to net cash used by investing activities of $3.6 million for the same period in 2010. Investing activities in 2011 and 2010 were due primarily to purchases of property and equipment.

 

Cash Flows from Financing Activities

 

Net cash used by financing activities for the year ended December 31, 2011 was $0.1 million compared to net cash provided by financing activities of $0.3 million for the same period in 2010. In 2010 proceeds from the exercise of warrants were the primary source of financing activities.

 

Significant Financing Arrangements

 

On February 9, 2010, April 19, 2010, July 12, 2010, and October 1, 2010 a total of 400,000 warrants (100,000 warrants from each transaction) were exercised for a total of $228,000. In settlement of the Mercatus matter, during August 2010, 301,700 warrants issued were exercised for $131,266 and in December 2010, 198,300 shares of our common stock were issued at for a total of $113,031.

 

22
 

 

The “Management’s Discussion and Analysis of Financial Condition or Plan of Operation” section of this Annual Report discusses our financial statements, which have been prepared in accordance with GAAP. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. On an ongoing basis, management evaluates its estimates and judgment, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation. Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

 

Critical Accounting Policies, Judgments and Estimates

 

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

 

Principles of Consolidation: The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, Axion Power Battery Manufacturing, Inc., APC and C&T. All significant inter-company balances and transactions have been eliminated in consolidation.

 

Derivative Financial Instruments:  The Company’s objective in using derivative financial instruments is to obtain the lowest cash cost-source of funds. Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC topic 815-40 " Derivatives and Hedging – Contracts in Entity’s own Equity ". The estimated fair value of derivative liabilities is calculated using the Black-Scholes-Merton method where applicable and such estimates are revalued at each balance sheet date, with changes in value recorded as income or expense in the consolidated statement of operations.

 

Inventory: Inventory is recorded at the lower of cost or market value, and adjusted as appropriate for changes in valuation and obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected sales activity, inventory costs and composition to determine appropriate reserve levels.

 

Revenue Recognition: The Company recognizes revenue when there is persuasive evidence of an agreement, delivery has occurred or services have been rendered, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. Evidence of an agreement and fixed or determinable sales price is predominantly based on a customer purchase order or other form of written sales order or written agreement. Sales on account are approved only for credit-worthy customers; otherwise payment is generally received prior to shipment. Shipping terms are generally FOB shipping point and revenue is recognized when product is shipped to the customer. In limited cases, if terms are FOB destination or contingent upon collection by a prime contractor, then in these cases, revenue is recognized when the product is delivered to the customer’s delivery site or the conditions for collection have been fulfilled. The Company records sales net of discounts and estimated customer allowances and returns. We offer a 90 day free replacement warranty on some specialty collector car and motorsports products. Collector car products also carry a four year prorated warranty that begins at the end of the 90 days. To date, our warranty exposure on these products has been minimal. Flooded battery sales do not have standard warranty provisions and instead are sold at a discount in lieu of warranty. There are no other post shipment obligations that may impact the timing of revenue recognition for the year ending December 31, 2011.

 

Grants: We recognize government grants when there is a reasonable assurance that we will comply with the conditions attached to the grant arrangement and the grant will be received. For reimbursements of expenses, the government grants are recognized as reduction of the related expense. For reimbursements of capital expenditures, the grants are recognized as a reduction of the basis of the asset. The grant is recognized in profit or loss over the life of a depreciable asset as reduced depreciation expense.

 

 Stock-Based Compensation: Prior to January 1, 2006, we accounted for stock option awards in accordance with the recognition and measurement provisions of former authoritative literature APB 25 and related interpretations, as permitted by former authoritative literature Statement of Financial Accounting Standard No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”. Under APB 25, compensation cost for stock options issued to employees was measured as the excess, if any, of the fair value of our stock at the date of grant over the exercise price of the option granted. Compensation cost was recognized for stock options, if any, ratably over the vesting period. As permitted by SFAS 123, we reported pro-forma disclosures presenting results and earnings as if we had used the fair value recognition provisions of SFAS 123 in the Notes to the Consolidated Financial Statements.

 

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Effective January 1, 2006, we adopted the provisions of FASB ASC topic 718 using the modified prospective transition method. Stock-based compensation related to employee and non-employees is recognized as compensation expense in the accompanying consolidated statements of operations and is based on the fair value of the services received or the fair value of the equity instruments issued, whichever is more readily determinable. Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC 505-50 “Equity-Based Payments to Non-Employees” (formerly EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments granted to Other Than Employees.”) The measurement date for the fair value of the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

 

Research and Development: R&D costs are recorded in accordance with FASB ASC topic 730, “Accounting for Research and Development Costs,” which requires that costs incurred in R&D activities covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses be expensed as incurred. The policy of expensing the costs of R&D activities relate to (1) in-house work conducted by us, (2) costs incurred in connection with contracts that outsource R&D to third party developers and (3) costs incurred in connection with the acquisition of intellectual property that is properly classified as in-process R&D. R&D includes the conceptual formulation, design and testing of product alternatives, construction of prototypes, and operation of pilot plants.

 

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements. 

 

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Item 8 Financial Statements and Supplementary Data

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Axion Power International, Inc.

 

We have audited the accompanying consolidated balance sheets of Axion Power International, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 2011 and for the period since inception (September 18, 2003) through December 31, 2011. Axion Power International, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Axion Power International, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011 and for the period since inception (September 18, 2003) through December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ EFP Rotenberg, LLP

 

EFP Rotenberg, LLP

Rochester, New York

March 30, 2012

 

25
 

 

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(A Development Stage Company)

 

   December 31, 2011   December 31, 2010 
         
ASSETS          
Current Assets          
Cash and cash equivalents  $1,987,637   $13,330,009 
Accounts receivable   309,354    221,922 
Other receivables   162,249    144,973 
Prepaid expenses   145,442    82,060 
Inventory, net   2,717,173    1,428,560 
Total current assets   5,321,855    15,207,524 
           
Property & equipment, net   8,417,163    6,738,575 
Other receivables   53,000    65,000 
TOTAL ASSETS  $13,792,018   $22,011,099 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities          
Accounts payable  $520,358   $930,021 
Other liabilities   429,432    225,804 
Notes payable   104,777    101,684 
Total current liabilities   1,054,567    1,257,509 
           
Deferred revenue   1,573,962    1,385,185 
Derivative liabilities   15,843    254,461 
Notes payable   439,480    547,612 
Total liabilities   3,083,852    3,444,767 
           
Stockholders' Equity          
Convertible preferred stock-12,500,000 shares authorized . Series-A preferred – 2,000,000 shares designated 0 shares issued and outstanding   -    - 
Common stock – 200,000,000 shares authorized $0.0001 
par value 85,531,114 issued & outstanding (85,453,302 in 2010)
   8,552    8,545 
Additional paid in capital   86,953,180    86,499,416 
Deficit accumulated during development stage   (76,001,894)   (67,690,004)
Cumulative foreign currency translation adjustment   (251,672)   (251,625)
Total stockholders' equity   10,708,166    18,566, 332 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $13,792,018   $22,011,099 

 

The accompanying notes are an integral part of these consolidated financial statements

 

26
 

 

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(A Development Stage Company)

 

   Years Ended   Inception 
   December 31   9/18/2003 to 
   2011   2010   12/31/2011 
Product  $7,631,529   $1,328,025   $12,291,993 
Service   459,645    820,081    1,279,726 
Net sales   8,091,174    2,148,106    13,571,719 
                
Costs and expenses               
Product costs   6,799,302    893,681    10,596,959 
Research & development   5,060,036    5,432,230    28,870,892 
Selling, general & administrative   4,463,269    3,448,508    29,764,684 
Interest expense   18,042    21,143    2,377,171 
Impairment of assets   308,882    361,793    2,062,160 
Derivative revaluations (income)   (238,618)   (1,165,751)   (1,626,636)
Mega C Trust share augmentation   -    -    400,000 
Interest & other income   (7,849)   (12,644)   (569,286)
Loss before income taxes   (8,311,890)   (6,830,854)   (58,305,225)
                
Income taxes   -    -    4,300 
Accumulated deficit   (8,311,890)   (6,830,854)   (58,308,525)
                
Less preferred stock dividends and beneficial conversion feature   -    -    (17,693,369)
Net loss applicable to common shareholders  $(8,311,890)  $(6,830,854)  $(76,001,894)
                
Basic and diluted net loss per share  $(0.10)  $(0.08)  $(2.25)
                
Weighted average common shares outstanding   85,488,150    83,711,708    33,812,173 

 

The accompanying notes are an integral part of these consolidated financial statements

 

27
 

 

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(A Development Stage Company)

 

   Years Ended   Inception 
   December 31   9/18/2003 to 
   2011   2010   12/31/2011 
Cash Flows from Operating Activities               
Accumulated deficit  $(8,311,890)  $(6,830,854)  $(58,308,525)
                
Adjustments to reconcile deficit accumulated for noncash items               
Depreciation   1,014,661    673,170    2,672,122 
Interest expense   -    -    1,970,251 
Impairment of assets   308,882    361,793    2,062,161 
Derivative revaluations (income)   (238,618)   (1,165,751)   (1,626,636)
Mega C Trust share augmentation   -    -    400,000 
Share based compensation expense   453,770    444,986    6,236,237 
                
Changes in operating assets & liabilities               
Accounts receivable   (87,432)   (27,607)   (316,223)
Other receivables   (17,276)   63,206    (140,289)
Prepaid expenses   (63,382)   (2,073)   (142,854)
Inventory, net   (1,288,613)   (420,468)   (2,717,172)
Accounts payable   (409,663)   (445,271)   2,175,002 
Other liabilities   203,628    143,478    450,564 
Liability to issue equity instruments   -    -    178,419 
Deferred revenue and other   188,777    528,977    1,661,480 
                
Net cash used by operating activities   (8,247,156)   (6,676,414)   (45,445,463)
                
Cash Flows from Investing Activities               
Other receivables   12,000    (30,399)   (1,270,016)
Purchases of property & equipment   (3,002,130)   (3,557,458)   (11,756,670)
Investment in intangible assets   -    -    (167,888)
Net cash used by investing activities   (2,990,130)   (3,587,857)   (13,194,574)
                
Cash Flows from Financing Activities               
Net proceeds from related party debt   -    -    5,445,458 
Repayment of notes payable   (105,039)   (101,937)   544,258 
Net proceeds from sale of common stock   -    57,137    45,171,365 
                
Net proceeds from exercise of warrants   -    359,266    2,014,766 
Net proceeds from sale of preferred stock   -    -    7,472,181 
Net cash (used) provided by financing activities   (105,039)   314,466    60,648,028 
                
Net change in cash and cash equivalents   (11,342,325)   (9,949,805)   2,007,991 
Effect of exchange rate on cash   (47)   348    (20,354)
Cash and cash equivalents - beginning   13,330,009    23,279,466    - 
Cash and cash equivalents - ending  $1,987,637   $13,330,009   $1,987,637 

 

The accompanying notes are an integral part of these consolidated financial statements

 

28
 

 

Axion Power International, Inc.

Consolidated Statement of Stockholders' Equity (Deficit)

For Periods Ended December 31, 2003 through 2011

(A Development Stage Company)

  

   Preferred   Common   Deficit
Accumulated
During
   Other
Comprehensive
Income
Cumulative
   Total
Stockholders'
 
   Shares   Senior
Preferred
   Series-A
Preferred
   Shares   Common
Stock Amount
   Additional Paid-
In Capital
   Subscriptions
Receivable
   Development
Stage
   Translation
Adjustments
   Equity
(Deficit)
 
Inception September 18, 2003   0   $0   $0    0   $0   $0   $0   $0   $0   $0 
Shares to founders upon formulation of APC                  1,360,000    137    (137)                    
Stock based compensation                  170,000    17    48,936                   48,953 
Conversion of debt to equity                  1,108,335    111    1,449,889    (350,000)             1,100,001 
Debt discount from convertible debt                            86,402                   86,402 
Unamortized discount on convertible debt                            (77,188)                  (77,188)
Fair value of options issued as loan inducements                            15,574                   15,574 
Recapitalization:                                                  
- shares issued to Mega-C trust                  6,147,483    615    (615)                    
- Equity acquired in recapitalization                  1,875,000    188    (188)                    
Net Loss                                      (3,097,030)        (3,097,030)
Other comprehensive income (loss):                                                  
Foreign currency translation adjustment                                           (56,547)   (56,547)
Comprehensive loss                                                (3,153,577)
Balance at December 31, 2003   0   $0   $0    10,660,818   $1,067   $1,522,674   $(350,000)  $(3,097,030)  $(56,547)  $(1,979,836)
Shares issued to founders                  445,000    45    (45)                    
Augmentation shares issued to Mega-C trust                  180,000    18    (18)                    
Conversion of debt                  283,333    28    451,813    350,000              801,841 
Warrants in consideration for technology purchased                            563,872                   563,872 
Common stock offering proceeds                  823,800    81    1,607,053                   1,607,134 
Proceeds from exercise of warrants                  475,200    48    867,972                   868,020 
Liability converted as partial prepayment on options                            306,000                   306,000 
Stock based compensation                  45,000    5    191,738                   191,742 
Fraction Shares Issued Upon Reverse Spilt                  48,782    5    (5)                    
Net Loss                                      (3,653,637)        (3,653,637)
Other comprehensive income (loss):                                                  
Foreign currency translation adjustment                                           (74,245)   (74,245)
Comprehensive loss                                                (3,727,882)
Balance at December 31, 2004   0   $0   $0    12,961,933   $1,296   $5,511,054   $0   $(6,750,667)  $(130,792)  $(1,369,109)

 

29
 

  

Axion Power International, Inc.

Consolidated Statement of Stockholders' Equity (Deficit)

For Periods Ended December 31, 2003 through 2011

(A Development Stage Company)

Continued

 

   Preferred   Common   Deficit
Accumulated
During
   Other
Comprehensive
Income
Cumulative
   Total
Stockholders'
 
   Shares   Senior
Preferred
   Series-A
Preferred
   Shares   Common
Stock Amount
   Additional Paid-
In Capital
   Subscriptions
Receivable
   Development
Stage
   Translation
Adjustments
   Equity
(Deficit)
 
Balance at December 31, 2004   0   $0   $0    12,961,933   $1,296   $5,511,054   $0   $(6,750,667)  $(130,792)  $(1,369,109)
                                                   
Proceeds from exercise of warrants & options                  853,665    85    1,283,395    (496,000)             787,480 
Common stock offering proceeds                  600,000    60    1,171,310    (200,000)             971,370 
Preferred stock offering proceeds   385,000    3,754,110                        (25,000)             3,729,110 
Conversion of preferred to common   (245,000)   (2,475,407)        1,470,000    147    2,475,260                     
Stock issued for services                  500,000    50    1,524,950                   1,525,000 
Fair value of options for non-employee services                            237,568                   237,568 
Employee incentive share grants                  219,000    22    647,480                   647,502 
Impact of beneficial conversion feature                            3,099,156         (3,099,156)          
Preferred stock dividends        176,194                             (176,194)          
Net Loss                                      (6,325,113)        (6,325,113)
                                                   
Other Comprehensive income (loss):                                                  
Foreign currency translation adjustment                                           (24,780)   (24,780)
Comprehensive loss                                                (6,349,893)
Balance at December 31, 2005   140,000   $1,454,897   $0    16,604,598   $1,661   $15,950,173   $(721,000)  $(16,351,130)  $(155,572)  $179,028 
                                                   
Preferred series-A proceeds   782,997         7,571,768                                  7,571,768 
Preferred - dividends        119,092    103,101                        (222,193)          
Senior preferred Cancellation   (2,500)   (25,000)                       25,000                
Common stock offering proceeds                  80,000    8    199,992    696,000              896,000 
Proceeds from exercise of warrants                  56,700    6    113,394                   113,400 
Employee incentive share grants                  6,000    1    23,999                   24,000 
Augmentation shares issued to Mega-C trust                  (500,000)   (50)   (1,124,950)                  (1,125,000)
Stock based compensation                            1,241,231                   1,241,231 
Fair value of warrants with related party debt                            885,126                   885,126 
Modification of preexisting warrants                            392,811                   392,811 
Fair value warrants issued for services                            86,848                   86,848 
Beneficial conversion feature on related party debt                            95,752                   95,752 
Beneficial conversion feature on preferred stock             (6,096,634)             6,709,970         (613,336)          
Net Loss                                      (7,027,963)        (7,027,963)
Other comprehensive income (loss):                                                  
Foreign currency translation adjustment                                           (95,387)   (95,387)
Comprehensive loss                                                (7,123,350)
                                                   
Balance at December 31, 2006   920,497   $1,548,989   $1,578,235    16,247,298   $1,625   $24,574,346   $0   $(24,214,622)  $(250,959)  $3,237,614 

 

30
 

 

Axion Power International, Inc.

Consolidated Statement of Stockholders' Equity (Deficit)

For Periods Ended December 31, 2003 through 2011

(A Development Stage Company)

Continued

 

   Preferred   Common   Deficit
Accumulated
During
   Other
Comprehensive
Income Cumulative
   Total
Stockholders'
 
   Shares   Senior
Preferred
   Series-A
Preferred
   Shares   Common
Stock Amount
   Additional Paid-
In Capital
   Subscriptions
Receivable
   Development
Stage
   Translation
Adjustments
   Equity
(Deficit)
 
Balance at December 31, 2006   920,497   $1,548,989   $1,578,235    16,247,298   $1,625   $24,574,346   $-   $(24,214,622)  $(250,959)  $3,237,614 
Preferred series-A proceeds   40,000         337,270                                  337,270 
Preferred stock dividends        130,566    1,790,755                        (1,921,321)          
Employee incentive share grants                  1,000    0    315,950                   315,950 
Stock based compensation                            215,393                   215,393 
Fair value of warrants with related party debt                            98,463                   98,463 
Modification of preexisting warrants        (164,179)                  164,179                     
Beneficial conversion feature on preferred stock             6,096,634              400,000         (6,496,634)          
Net Loss                                      (5,866,127)        (5,866,127)
Other Comprehensive income (loss):                                                  
Foreign currency translation adjustment                                           21,136    21,136 
Comprehensive loss                                                (5,844,991)
                                                   
Balance at December 31, 2007   960,497   $1,515,376   $9,802,894    16,248,298   $1,625   $25,768,331   $0   $(38,498,704)  $(229,823)  $(1,640,301)
                                                   
Preferred  stock dividends        141,359    976,340                        (1,117,699)          
Preferred converted into common stock   (104,000)        (1,338,875)   1,071,099    107    1,338,768                     
Bridge loans converted into common stock                  514,611    51    1,080,633                   1,080,684 
Proceeds from Quercus Trust-net of costs                  8,571,429    857    15,273,908                   15,274,765 
Employee incentive share grants                  12,000    1    435,725                   435,726 
Stock based compensation                            425,979                   425,979 
Fair value of warrants with related party debt                            667,208                   667,208 
Fair value warrants issued for services                            1,193,735                   1,193,735 
Net Loss                                      (9,494,659)        (9,494,659)
Other comprehensive income (loss):                                                  
Foreign currency translation adjustment                                           (19,446)   (19,446)
Comprehensive loss                                                (9,514,105)
                                                   
Balance at December 31, 2008   856,497   $1,656,735   $9,440,359    26,417,437   $2,641   $46,184,287   $0   $(49,111,062)  $(249,269)  $7,923,691 

 

31
 

 

Axion Power International, Inc.

Consolidated Statement of Stockholders' Equity (Deficit)

For Periods Ended December 31, 2003 through 2011

(A Development Stage Company)

Continued

 

   Preferred   Common   Deficit
Accumulated
During
   Other
Comprehensive
Income
Cumulative
   Total
Stockholders'
 
   Shares   Senior
Preferred
   Series-A
Preferred
   Shares   Common
Stock Amount
   Additional Paid-
In Capital
   Subscriptions
Receivable
   Development
Stage
   Translation
Adjustments
   Equity
(Deficit)
 
Balance at December 31, 2008   856,497   $1,656,735   $9,440,359    26,417,437   $2,641   $46,184,287   $0   $(49,111,062)  $(249,269)  $7,923,691 
                                                   
Preferred stock dividends        126,497    909,819                        (1,036,316)          
Preferred converted into common stock   (88,100)        (1,280,308)   1,149,201    114    1,280,194                     
Senior Preferred Converted into common   (137,500)   (1,982,315)   0    1,390,944    139    1,982,176                     
Reclassify warrants to APIC upon conversion of senior preferred        164,179                   (164,179)                    
Reclassify offering costs to APIC upon preferred conversion into common        34,904                   (34,904)                    
Bridge loans converted to common stock                  651,520    65    371,301                   371,366 
Proceeds from common stock offering-net of costs                  45,825,716    4,583    24,923,740                   24,928,323 
Employee incentive share grants                  333,000    33    500,451                   500,484 
Stock based compensation                            441,120                   441,120 
Fair value of warrants with related party debt                            34,002                   34,002 
Fair value warrants issued in lieu of liquidated damages                            45,380                   45,380 
Cumulative adjustments from adoption of ASC 815 as of Jan 1, 2009                            (6,877,176)        6,877,176           
Reclassification of warrants to derivative liabilities                            (2,450,542)                  (2,450,542)
Extinguishment of derivative liabilities                            7,126,155                   7,126,155 
Beneficial conversion feature  on preferred stock                            3,010,517         (3,010,517)          
Net Loss                                      (14,578,427)        (14,578,427)
Other comprehensive income (loss):                                                  
Foreign currency translation adjustment                                           (2,704)   (2,704)
Comprehensive loss                                                (14,581,131)
Balance at December 31, 2009   630,897   $(0)  $9,069,871    75,767,818   $7,576   $76,372,520   $0   $(60,859,150)  $(251,973)  $24,338,844 
Stock issuance costs                            (55,894)                  (55,894)
Preferred converted into common stock   (630,897)   -    (9,390,803)   8,785,484    879    9,389,924                     
Reclassify offering costs to APIC on  series-A conversion             320,932              (320,932)                    
Warrants exercised                  400,000    40    227,960                   228,000 
Mercatus settlement in shares                  198,300    20    113,011                   113,031 
Mercatus warrant exercise                  301,700    30    131,266                   131,296 
Incentive shares forfeited                            (46,993)                  (46,993)
Stock based comp.                            491,978                   491,978 
Extinguishment of derivative liabilities                            196,576                   196,576 
Net Loss                                      (6,830,854)        (6,830,854)
Other comprehensive income (loss):                                                  
Foreign currency translation adjustment                                           348    348 
Comprehensive loss                                                (6,830,506)
Balance at December 31, 2010   0   $0   $0    85,453,302   $8,545   $86,499,416   $0   $(67,690,004)  $(251,625)  $18,566,332 
Balance at December 31, 2010   0   $0   $0    85,453,302   $8,545   $86,499,416   $0   $(67,690,004)  $(251,625)  $18,566,332 
Incentive shares granted                  50,000    5    14,129                   14,134 
Stock based comp.                  27,812    2    439.635                   439,637 
Net loss                                      (8,311,890)        (8,311,890)
Other comprehensive income (loss):                                                  
Foreign currency translation adjustment                                           (47)   (47)
Comprehensive loss                                                (8,311,890)
Balance at December 31, 2011   0   $0   $0    85,531,114   $8,552   $86,953,180   $0   $(75,693,012)  $(251,672)  $10,708,166 

  

The Accompanying Notes are an Integral Part of the Financial Statements

 

32
 

  

AXION POWER INTERNATIONAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(A DEVELOPMENT STAGE COMPANY)

 

Note 1 — Organization and Operations  

 

These consolidated financial statements of Axion Power International, Inc., a Delaware corporation (API), include the operations of its wholly owned subsidiaries; Axion Power Battery Manufacturing, Inc. (APB), Axion Power Corporation, a Canadian Federal corporation (“APC”), and C & T Co. Inc., an Ontario corporation (“C&T”) (collectively, the “Company”).

 

We are a development stage company that was formed in September 2003 to acquire and develop certain innovative battery technology. Since inception we have been engaged in research and development of new technology to manufacture carbon electrode assemblies for our energy storage devices that we refer to as our PbC devices

 

Note 2 — Accounting Policies

 

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

 

Principles of Consolidation:   The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, Axion Power Battery Manufacturing, Inc., APC and C&T. All significant inter-company balances and transactions have been eliminated in consolidation.

 

Basis of Presentation: The financial statements have been presented in a “development stage” format in accordance with the provisions of Statement of Financial Accounting Standards (FASB) ASC 915, “Development Stage Entities”. Since inception, the Company’s primary activities have been raising capital to invest in the development and testing of Axion’s propriety energy storage technology.

 

Segment Reporting: Management has determined that the Company is organized, managed and internally reported as one business segment.

 

Foreign Currency Translation:   The accounts of APC and C&T are measured using the Canadian dollar as the functional currency for all the periods presented in the financial statements. The translation from Canadian dollars to U.S. dollars is performed for the balance sheet accounts using current exchange rates in effect at each of the balance sheet dates, and for the revenue and expense accounts using the average rate in effect during the periods. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Gains or losses resulting from transactions denominated in currencies other than the functional currency are included in the results of operations as incurred. The gains or losses arising from the inter-company loan denominated in U.S. dollars are directly reflected in other comprehensive income, as the amounts are not expected to be repaid in the foreseeable future.

 

Comprehensive Income: The Company follows FASB ASC 220, “Comprehensive Income.” Comprehensive income is the change in equity of a business enterprise during a reporting period from transactions and other events and circumstances from non-owner sources. In addition to the Company’s net loss, the change in equity components under comprehensive income include the foreign currency translation adjustment.

 

Fair Value of Financial Instruments:   FASB ASC 825, “Financial Instruments ," requires disclosure of fair value information about certain financial instruments, including, but not limited to, cash and cash equivalents, accounts receivable, refundable tax credits, prepaid expenses, accounts payable, accrued expenses, notes payable to related parties and convertible debt-related securities. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2011 and 2010. The carrying value of the balance sheet financial instruments included in the Company’s consolidated financial statements approximated their fair values.

 

Cash and Cash Equivalents:   For financial statement presentation purposes, the Company considers those short-term, highly liquid investments to be cash or cash equivalents. Our investment policy is that we only invest cash in U.S. Government Treasuries with original maturities of six months or less. As of December 31, 2011, the company did not have any short-term investments.

 

33
 

  

Accounts Receivable and Concentration of Credit Risk: The Company records its accounts receivable net of an allowance for doubtful accounts. The Company manages its credit risk exposure and establishes an allowance for doubtful accounts for accounts that are deemed at risk for collection. When management determines that an account is uncollectible, it is written off against the related allowance.

 

Inventory: Inventory is recorded at the lower of cost or market value, and adjusted as appropriate for decreases in valuation and obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, historical and current sales activity, inventory costs and inventory composition to determine appropriate reserve levels. Cost is determined using the first-in first-out (FIFO) method. Many components and raw materials we purchase have minimum order quantities. 

 

A summary of inventory at December 31, 2011 and 2010 is as follows: 

 

   2011   2010 
Raw materials  $1,534,957   $1,053,825 
Work in process   1,070,901    470,219 
Finished goods   359,540    123,516 
Inventory reserves   (248,225)   (219,000)
   $2,717,173   $1,428,560 

 

Property and Equipment:   Property and equipment are recorded at cost. Depreciation is computed using the straight line method over the estimated useful lives of the assets, ranging from 3 to 22 years. Expenditures for renewals and betterments are capitalized. Expenditures for minor items are charged to repairs and maintenance expense. Gain or loss upon sale or retirement is reflected in operating results in the period the event takes place.

 

A summary of property and equipment at December 31, 2011 and 2010 is as follows:

 

  Estimated useful life   2011   2010 
Construction in progress      $1,651,204   $2,361,391 
Leasehold improvements   Lesser of lease term or 10 years    371,948    154,650 
Machinery & equipment   3-22 years    9,156,153    5,970,015 
Less accumulated depreciation       (2,762,142)   (1,747,481)
Net      $8,417,163   $6,738,575 

 

Depreciation expense was $1,014,661 and $673,170 for the years ended December 31, 2011 and December 31, 2010 respectively.

 

Certain of our machinery and equipment amounting to $1,582,111 are secured by the Pennsylvania Department of Community and Economic Development in relation to the Machinery and Equipment Loan Fund financing. The initial loan proceeds in the amount of $776,244 were received by us on September 14, 2009. The proceeds of the loan were used to defray part of the cost of equipment purchased for use at our Green Ridge Road facility. The loan bears interest at the rate of 3% interest per annum and is payable in equal monthly installments of principal and interest over a period of seven years, maturing on October 1, 2016.  

 

Impairment or Disposal of Long-Lived Assets: The Company adopted the provisions of FASB ASC 360-10-15-3, “Impairment or Disposal of Long-lived Assets.” This standard requires, among other things, that long-lived assets be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these expected cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The primary measure of fair value is based on discounted cash flows. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations. The Company recorded an impairment loss of $308,882 in 2011compared to an impairment loss of $361,793 in 2010.

 

Derivative Financial Instruments:  The Company’s objectives in using derivative financial instruments are to obtain the lowest cash cost-source of funds. Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC topic 815-40 " Derivatives and Hedging – Contracts in Entity’s own Equity ". The estimated fair value of the derivative liabilities is calculated using the Black-Scholes-Merton method where applicable and such estimates are revalued at each balance sheet date, with changes in value recorded as other income or expense in the consolidated statement of operations. As a result of the Company’s adoption of ASC topic 815-40, effective January 1, 2009 some of the Company’s warrants are now accounted for as derivatives. 

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On January 1, 2009, the Company adopted ASC topic 815-40, and as a result the 10,000,000 outstanding warrants issued to the Quercus Trust and another 1,485,714 warrants issued as payment of services related to this offering, both containing exercise price down round reset provisions that were previously classified in equity, were reclassified to derivative liabilities. As of January 1, 2009, these warrants were no longer deemed to be indexed to the Company’s own stock. The fair value of these derivative liabilities as of January 1, 2009 was $2,450,542 and was reclassified from additional paid-in capital. The significant assumptions used in the January 1, 2009 valuation were: the exercise price of $2.60; the market value of the Company’s common stock on January 1, 2009, $1.15; expected volatility of 49.44%; risk free interest rate of 1.28%; and a remaining contract term of 4.27 years.

 

On September 22, 2009, the exercise price for 10,000,000 warrants issued to The Quercus Trust was reset from $2.60 to $0.75.  On December 15, 2009 the 1,485,714 warrants issued in payment of services related to Quercus offering, were reset from $2.60 to $0.57.

 

On December 22, 2009 the derivative liability relating to the 10,000,000 Quercus Trust warrants was extinguished, and the liability valued on that date of $7,126,155 was reclassified back into equity.  The significant assumptions used in the December 22, 2009 valuation were: exercise price of $0.75; market value of the Company’s common stock of $1.30 on December 22, 2009, volatility of 61.5%; risk free interest rate of 1.22%; and a remaining contract term of 2.5 years.

 

On February 9, 2010, 100,000 warrants valued at $78,213 were exercised at $0.57 per share. On April 19, 2010, 100,000 warrants valued at $66,053 were exercised at $0.57 per share. On July 12, 2010, 100,000 warrants valued at $26,379 were exercised at $0.57 per share. On October 1, 2010, 100,000 warrants valued at $25,931 were exercised at $0.57 per share. The reduction in the fair value of the Company’s remaining 1,085,714 derivative liabilities were primarily driven by the decrease in stock price from $1.56 per share on December 31, 2009 to $0.57 per share on December 31, 2010, yielding a gain of $1,165,751 for the year ended December 31, 2010.

 

There were no warrants exercised during year ended December, 31, 2011.

 

A summary of the assumptions used for the derivative revaluations at December 31, 2011 and 2010 were as follows:

 

    2011     2010  
Exercise price   $0.57     $0.57  
Risk-free interest rate   0.25%     0.61%  
Dividend yield   $-.     $-  
Expected volatility   56.78%     71.14%  
Expected term (in years)   1.27     2.27  

  

Revenue Recognition:   The Company recognizes revenue when there is persuasive evidence of an agreement, delivery has occurred or services have been rendered, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. Evidence of an agreement and fixed or determinable sales price is predominantly based on a customer purchase order or other form of written sales order or written agreement. Sales on account are approved only for credit-worthy customers; otherwise payment in full is received prior to shipment. Shipping terms are generally FOB shipping point and revenue is recognized when product is shipped to the customer. In limited cases, if terms are FOB destination or contingent upon collection by a prime contractor, then in these cases, revenue is recognized when the product is delivered to the customer’s delivery site or the conditions for collection have been fulfilled. The Company records sales net of discounts and estimated customer allowances and returns. We offer a 90 day free replacement warranty on some specialty collector car and motorsports products. Collector car products also carry a four year prorated warranty that begins at the end of the 90 days.  To date, our warranty exposure on these products has been minimal. Flooded battery sales do not have standard warranty provisions and instead are sold at a discount in lieu of warranty.  There were no other post shipment obligations that may impact the timing of revenue recognition for the year ending December 31, 2011.

 

Grants: The Company recognizes government grants when there is reasonable assurance that the Company will comply with the conditions attached to the grant arrangement and the grant will be received. Government grants are recognized in the consolidated statements of operations on a systematic basis over the periods in which the Company recognizes the related costs for which the government grant is intended to compensate. Specifically, when government grants are related to reimbursements for cost of revenues or operating expenses, the government grants are recognized as a reduction of the related expense in the consolidated statements of operations. For government grants related to reimbursements of capital expenditures, the government grants are recognized as a reduction of the basis of the asset and recognized in the consolidated statements of operations over the estimated useful life of the depreciable asset as a reduced depreciation expense. The Company records government grants receivable in the consolidated balance sheets in other receivables.   

 

35
 

  

Stock-Based Compensation: Prior to January 1, 2006, we accounted for stock option awards in accordance with the recognition and measurement provisions of former authoritative literature APB 25 and related interpretations, as permitted by former authoritative literature Statement of Financial Accounting Standard No. 123, (“SFAS 123”) “Accounting for Stock-Based Compensation” . Under APB 25, compensation cost for stock options issued to employees was measured as the excess, if any, of the fair value of our stock at the date of grant over the exercise price of the option granted. Compensation cost was recognized for stock options, if any, ratably over the vesting period. As permitted by SFAS 123, we reported pro-forma disclosures presenting results and earnings as if we had used the fair value recognition provisions of SFAS 123 in the Notes to the Consolidated Financial Statements. 

 

Effective January 1, 2006, we adopted the provisions of ASC topic 718 using the modified prospective transition method. Stock-based compensation related to employees and non-employees is recognized as compensation expense in the accompanying consolidated statements of operations and is based on the fair value of the services received or the fair value of the equity instruments issued, whichever is more readily determinable. Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50 “Equity-Based Payments to Non-Employees” (formerly EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments granted to Other Than Employees”). The measurement date for the fair value of the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

  

Research and Development: R&D costs are recorded in accordance with FASB ASC topic 730, “Accounting for Research and Development Costs,” which requires that costs incurred in R&D activities covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses be expensed as incurred. R&D includes the conceptual formulation, design and testing of product alternatives, construction of prototypes, and operation of pilot plants.

 

 Income Taxes: Deferred income taxes are recorded in accordance with FASB ASC 740, “Income Taxes”, and deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. FASB ASC 740 provides for the recognition of deferred tax assets if realization of such assets is more likely than not to occur. Realization of net deferred tax assets is dependent upon generating sufficient taxable income in future years in appropriate tax jurisdictions to realize benefit from the reversal of temporary differences and from net operating loss, or NOL, carry forwards. The Company has determined it is more likely than not that the deferred tax asset resulting from these timing differences will not materialize and have provided a valuation allowance against the entire net deferred tax asset. Management will continue to evaluate the realizability of the deferred tax asset and its related valuation allowance. If the assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which the determination is made. The tax rate may also vary based on actual results and the mix of income or loss in domestic and foreign tax jurisdictions in which operations take place. The provision for taxes represents corporate-level franchise taxes which may be based on assets, equity, capital stock or a variation thereof.

 

Recently Issued Accounting Pronouncements:    

 

In May 2011, the FASB issued Update No. 2011-04 related to fair value measurements and disclosures in the financial statements, which updates ASC Topic 820 “Fair Value Measurement”.  This guidance conforms the wording to describe many of the requirements in U.S. GAAP to International Financial Reporting Standards to ensure the related standards are consistently applied.  The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is effective during interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. The adoption of this standard will not materially expand the Company’s consolidated financial statement footnote disclosures.

 

In June 2011, the FASB issued Update No. 2011-05 related to the presentation of comprehensive income in the financial statements, which updates ASC Topic 220 “Comprehensive Income”.  The Update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity.  Under the new guidance, the Company has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this standard will not have an impact on the Company’s consolidated financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.

 

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In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05, which defers the effective date pertaining to reclassification adjustments out of other accumulated comprehensive income in ASU 2011-05, until the FASB is able to reconsider those requirements. All other requirements of ASU 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011, which coincide with the effective dates of the requirements in ASU 2011-05 amended by this Update. The Company has evaluated the impact of this Update on its financial statements and determined that there will be no change.

 

Note 3 — Grant Income Pertaining to Equipment

 

Grants from Commonwealth of Pennsylvania:    The Company records state grants received for equipment as deferred revenue based on qualifying equipment purchases that are billed to the Commonwealth for reimbursement. Deferred revenue is amortized into income over the estimated useful life of the related equipment. As of December 31, 2011, the liability for deferred revenue was $1,573,962 and other receivables included $140,389 for equipment grants invoiced in 2011. During the year 2011, $238,918 of income was recorded for the amortization of deferred revenue. As of December 31, 2010, the liability for deferred revenue from state equipment grants was $1,385,185, other receivables relating to equipment grants included $108,261 for equipment grants invoiced in 2010, and $187,900 of income was recorded for the amortization of deferred revenue. 

 

Note 4 — Stockholders' Equity

 

Authorized Capitalization: The Company’s authorized capitalization includes 200,000,000 shares of common stock and 12,500,000 shares of preferred stock. The number of authorized common shares was increased by 75,000,000 pursuant to the Shareholder meeting vote on July 20, 2011.

 

Common Stock:   At December 31, 2011, 85,531,114 shares of common stock were issued and outstanding. The holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Holders of common stock are entitled to receive dividends when and if declared by the board out of funds legally available. In the event of liquidation, dissolution or winding up, the common stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock. The common stockholders have no conversion, preemptive or other subscription rights and there are no redemption provisions applicable to the common stock. All of the outstanding shares of common stock are fully paid and non-assessable.

 

Preferred Stock:  The Company’s certificate of incorporation authorizes the issuance of 12,500,000 shares of blank check preferred stock. The Company’s board of directors has the power to establish the designation, rights and preferences of any preferred stock. Accordingly, the board of directors has the power, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock.

At December 31, 2011 and 2010, no shares of Series-A Convertible Preferred stock were issued and outstanding.

 

Equity Transactions –Year ended December 31, 2010 and 2011

 

Series-A Preferred: On January 26, 2010, a shareholder converted 100,000 shares of Series-A Convertible Preferred stock along with accrued dividends of $525,277 into 1,426,960 shares of the Company’s common stock, and the remaining 530,897 shares of Series-A Convertible Preferred stock were converted into 7,358,524 shares of common stock pursuant to an amendment to the Series-A Certificate of Designation filed with the Delaware Secretary of State on February 24, 2010.

 

There were no preferred stock transactions in 2011.

 

Warrants: On February 9, 2010, April 19, 2010, July 12, 2010, and October 1, 2010 a total of 400,000 warrants (100,000 warrants from each transaction) were exercised for a total of $228,000. During August 2010, 301,700 warrants issued were exercised for $131,266, in partial settlement of the Mercatus matter.

  

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Common Stock Issuances: The following table represents per share issuances of common stock from inception through December 31, 2011, pursuant to FASB ASC 915, “Development Stage Enterprises”:

  

2003                
Description:  Date   Shares   Per share
valuation
   Business reason: 
Shares issued to founders   9/18/2003    1,360,000   $0.00   Original capitalization-no contributed capital 
                    
APC Founder   9/18/2003    170,000   $0.29   Services rendered with respect to formation 
                    
Seed debt financing   12/31/2003    500,000   $1.00   Conversion of debt plus interest to common stock 
                    
Series I convertible debt   12/31/2003    533,334   $1.50   Conversion of debt plus interest to common stock 
                    
Series II convertible debt   12/31/2003    75,000   $2.00   Conversion of debt plus interest to common stock 
                    
Mega-C Trust   12/31/2003    6,147,484   $0.00   In lieu of shares issuable to founders 
                    
Tamboril shareholders   12/31/2003    1,875,000   $0.00   Recapitalization at fair market value of Tamboril assets 
                    
2003 Totals        10,660,818   $0.14     
                    
2004                   
Description:   Date    Shares    Per share valuation   Business reason: 
Shares issued to founders   1/9/2004    445,000   $0.00   In lieu of shares issuable to founders 
                    
Mega-C Trust   1/9/2004    180,000   $0.00   Adjustment is shares issuable to founders 
                    
Officer   1/9/2004    45,000   $1.60   Services rendered by former officer 
                    
Series I convertible debt-Igor Filipenko   1/9/2004    50,000   $1.00   Conversion of debt plus interest to common stock 
                    
Series II convertible debt-Turitella   1/9/2004    133,333   $1.50   Conversion of debt plus interest to common stock 
                    
Series III convertible debt-Turitella   1/9/2004    100,000   $2.00   Conversion of debt plus interest to common stock 
                    
Series II common stock offering   2/1/2004    175,000   $2.00   Common stock & warrants issued for cash 
                    
Series III common stock offering   3/31/2004    288,100   $3.00   Common stock & warrants issued for cash 
                    
Exercise of Series I warrants   Various    316,700   $1.50   Warrants exercised pursuant to original terms 
                    
Exercise of Series II warrants   Various    125,000   $2.28   Warrants exercised pursuant to original terms 
                    
Exercise of Series II warrants   Various    33,500   $3.23   Warrants exercised pursuant to original terms 
                    
November emergency funding   11/1/2004    314,000   $1.50   Common stock & warrants issued for cash 
                    
December emergency funding   12/1/2004    46,700   $1.50   Common stock & warrants issued for cash 
                    
Fractional shareholders   12/31/2004    48,782   $0.00   Shares issued due to reverse split rounding formula 
                    
2004 Totals        2,301,115   $1.37     

 

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2005                
Description:  Date   Shares   Per share
valuation
   Business reason: 
Mega-C Trust   2/28/2005    500,000   $3.05   Trust augmentation 
                    
Banca di Unionale   3/18/2005    30,000   $2.00   Conversion of Preferred and accrued dividends 
                    
Banca di Unionale   4/20/2005    20,000   $2.00   Conversion of Preferred and accrued dividends 
                    
C&T employees   4/1/2005    219,000   $2.50   Employee incentive share grants 
                    
7 individuals   6/10/2005    29,565   $3.57   Exercise of Director options 
                    
3 individuals   7/11/2005    190,000   $1.58   Conversion of Preferred and accrued dividends 
                    
Banca di Unionale   7/11/2005    10,000   $1.60   Exercise of preferred warrants 
                    
3 individuals   8/28/2005    150,000   $1.67   Conversion of Preferred and accrued dividends 
                    
James Smith   9/7/2005    30,000   $1.67   Conversion of Preferred and accrued dividends 
                    
2 individuals   9/28/2005    1,050,000   $1.69   Conversion of Preferred and accrued dividends 
                    
2 individuals   Various    226,900   $1.79   Exercise of Series I warrants 
                    
3 individuals   Various    91,200   $2.40   Exercise of Series III warrants 
                    
2 individuals   Various    25,000   $1.60   Exercise of Preferred warrants 
                    
Officer   10/20/2005    446,000   $1.00   Exercise of warrants and options 
                    
Officer   10/20/2005    25,000   $2.00   Exercise of warrants 
                    
6 individuals   12/1/2005    600,000   $2.00   Common stock and warrants 
                    
2005 Totals        3,642,665   $1.94     
                    
2006                   
Description:   Date    Shares    Per share valuation   Business reason: 
2 individuals   4/21/2006    80,000   $2.50   Common stock and warrants issued for cash 
                    
Officer   4/21/2006    56,700   $2.00   Exercise of non-plan incentive option by CEO 
                    
Officer   4/21/2006    6,000   $4.00   Unrestricted share grant to CTO 
                    
Mega-C Trust   11/28/2006    (500,000)  $2.25   Return of shares per settlement agreement 
                    
2006 Totals        (357,300)  $2.20     
                    
2007                   
Description:   Date    Shares    Per share valuation   Business reason: 
Officer   12/1/2007    1,000   $2.30   Unrestricted share grant to VP Mfg Eng. 
                    
2007 Totals        1,000   $2.30     

  

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 2008                 
Description:  Date   Shares   Per share
valuation
   Business reason: 
The Quercus Trust   1/14/2008    1,904,762   $2.10   Securities purchase agreement 
                    
1 individual   3/31/2008    106,659   $2.10   2007 Bridge Loan Conversion 
                    
The Quercus Trust   4/8/2008    1,904,762   $2.10   Securities purchase agreement 
                    
1 individuals   4/21/2008    25,000   $2.10   2007 Bridge Loan Conversion 
                    
Lichtensteiniche Landsbank   5/6/2008    508,512   $1.25   Series-A Preferred Conversions 
                    
Director   5/29/2008    2,000   $2.10   2007 Bridge Loan Conversion 
                    
The Quercus Trust   6/30/2008    4,761,905   $2.10   Securities purchase agreement 
                    
Director   6/30/2008    380,952   $2.10   2007 Bridge Loan Conversion 
                    
1 individual   8/20/2008    520,787   $1.25   Series-A Preferred Conversion 
                    
1 individual   9/11/2008    41,800   $1.25   Series-A Preferred Conversion 
                    
V.P. Mfg Engineering   01/01/2008-12/01/2008    12,000   $1.85   Unrestricted share Grant 
                    
2008 Totals      10,169,139   $2.01      

 

2009                 
Description:  Date   Shares   Per share
valuation
   Business reason: 
V.P. Mfg Engineering   01/01/2009-12/01/2009    23,000   $1.55   Unrestricted share Grant 
                    
CFO   6/16/2009    30,000   $1.41   Unrestricted share Grant 
                    
New Energy Fund   7/21/2009    286,735   $1.25   Series-A Preferred Conversions 
                    
Fursa Global Event Driven Fund LP   11/4/2009    862,466   $1.07   Series-A Preferred Conversions 
                    
Director   12/23/2009    252,912   $1.43   Senior Preferred Conversion 
                    
Director   12/23/2009    431,297   $1.43   Senior Preferred Conversion 
                    
8 individuals   12/23/2009    706,735   $1.43   Senior Preferred Conversion 
                    
11 individuals   12/23/2009    719,664   $0.57   Common stock placement fees 
                    
48 investors   12/22/2009    45,106,052   $0.57   Securities purchase agreement, net of 2009 Bridge Loan conversion 
                    
Director   12/22/2009    300,620   $0.57   2009 Bridge Loan conversion 
                    
1 individual   12/22/2009    350,900   $0.57   2009 Bridge Loan conversion 
                    
 CTO   12/29/2009    280,000   $1.50   Unrestricted share Grant 
                    
2009 Totals      49,350,381   $0.61       

 

40
 

 

2010                 
Description:  Date   Shares   Per share
valuation
   Business reason: 
1 individual   1/26/2010    1,426,960   $1.07   Series-A conversion 
                    
1 individual   2/9/2010    100,000   $0.57   Warrant Exercise 
                    
18 individuals   2/24/2010    3,453,899   $1.07   Series-A conversion 
                    
Director   2/24/2010    1,692,160   $1.07   Series-A conversion 
                    
Officer   2/24/2010    275,296   $1.07   Series-A conversion 
                    
Director   2/24/2010    1,937,169   $1.07   Series-A conversion
                    
1 individual   4/19/2010    100,000   $0.57   Warrant Exercise 
                    
1 individual   7/12/2010    100,000   $0.57   Warrant Exercise 
                    
1 individual   7/28/2010    301,700   $0.44   Mercatus Warrants 
                    
1 individual   10/1/2010    100,000   $0.57   Warrant Exercise 
                    
2 individuals   12/15/2010    198,300   $0.57   Settlement of accrued liabilities to selling shareholders in the Mercatus settlement 
                    
2010 Totals      9,685,484   $1.02      

 

2011                  
Description:  Date   Shares   Per share
valuation
   Business reason: 
1 individual   6/15/2011    50,000   $0.66   Employee exercised incentive options 
                    
Director non-cash compensation   8/4/2011    12,837   $0.65   Stock compensation in lieu of cash 
                    
Director non-cash compensation   10/26/2011    14,975   $0.60   Stock compensation in lieu of cash 
                     
         77,812    0.65      

  

Warrants:   The following table provides summary information on warrants outstanding as of December 31, 2011 and 2010, with summary information on the various warrants issued by the Company in private placement transactions, warrants exercised to date, warrants that are presently exercisable and the current exercise prices of such warrants.

  

       2011       2010 
   Shares   Weighted Average
Exercise price
   Shares   Weighted Average
Exercise price
 
                 
Warrants outstanding January 1   12,973,820   $1.18    13,965,433   $1.36 
                     
Granted during year   -    -           
                     
Exercised             (701,700)   .51 
                     
Lapsed   (1,077,750)   4.74    (289,913)   6.00 
                     
Outstanding at December 31   11,896,070   $0.85    12,973,820   $1.18 
                     
Weighted average years remaining   1.3         2.2      

  

41
 

  

On September 22, 2009, we entered into an Amendment to Warrants and Securities Purchase Agreement with Quercus Trust, amending the January 14, 2008 Warrant and Securities Purchase Agreement. The Amendment resets the exercise price for warrants previously issued to Quercus from $2.60 per share to $0.75 per share, and is reflected in this table by reducing the weighted average exercise price of warrants outstanding as of January 1, 2009 from $2.94 to $1.44 per share.  In Amendment No. 2 to the Securities Purchase Agreement dated December 15, 2009, The Quercus Trust agreed to waive further anti-dilution rights on its warrants to purchase our common stock below an exercise price of $0.75 per share. On December 22, 2009 the 1,485,714 warrants issued in payment of services related to Quercus offering, were reset from $2.60 to $0.57 per share. The reset in the exercise price of the Quercus related warrants decreased the weighted average exercise price for warrants outstanding at December 31, 2009 from $2.90 to $1.36 per share

 

As of December 31, 2011 and 2010, 1,085,714 warrants were classified as derivative liabilities. Each reporting period the warrants are re-valued and adjusted through the caption “derivative revaluation” on the consolidated statements of operations.

 

Note 5 – Equity Compensation

   

On August 4, 2011, Axion issued 12,837 shares of stock in lieu of cash compensation to members of the Board of Directors.

Non- cash compensation expense recognized was $8,370.

 

On October 26, 2011, Axion issued 14,975 shares of common stock in lieu of cash compensation to members of the Board of Directors. Non-cash compensation expense recognized was $8,910.

 

On January 30, 2012, subsequent to year end, Axion issued 27,844 shares of common stock in lieu of cash compensation to members of the Board of Directors. Non-cash compensation expense recognized was $8,910.

 

The compensation expense that has been recognized for options granted was $413,447 and $491,979 for the years ended December 31, 2011 and 2010 respectively. There was no dilutive impact per share during 2011 compared to $0.01 for 2010. For stock options issued as non-qualified stock options, a tax deduction is not allowed until the options are exercised. The amount of this deduction will be the difference between the fair value of the Company’s common stock and the exercise price at the date of exercise. Accordingly, there is a deferred tax asset recorded for the tax effect of the financial statement expense recorded. The tax effect of the income tax deduction in excess of the financial statement expense will be recorded as an increase to additional paid-in capital. Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future to utilize the tax benefits of the options granted, the Company has recorded a valuation allowance to reduce gross deferred tax assets to zero. As a result, for the year ended December 31, 2011, there is no income tax expense impact from recording the fair value of options granted. There is no tax deduction allowed by the Company for incentive stock options.

 

The Company has two stockholder approved equity compensation plans. The following sections summarize the Company’s equity compensation arrangements.

 

Incentive Stock Plan Approved by Stockholders: The Company’s stockholders have adopted an incentive stock plan for the benefit of its employees, consultants and advisors. Under the terms of the original plan, the Company was authorized to grant incentive awards for up to 1,000,000 shares of common stock. At the Company’s 2005 annual meeting, its shareholders increased the authorization under the incentive stock plan to 2,000,000 shares.

 

The incentive stock plan authorizes a variety of awards including incentive stock options, non-qualified stock options, shares of restricted stock, and shares of phantom stock and stock bonuses. In addition, the plan authorizes the payment of cash bonuses when a participant is required to recognize income for federal income tax purposes because of the vesting of shares of restricted stock or the grant of a stock bonus.

 

The plan authorizes the grant of incentive awards to full-time employees of the Company who are not eligible to receive awards under the terms of an employment contract or another specialty plan. The plan also authorizes the grant of incentive awards to directors who are not eligible to participate in the Company’s outside directors’ stock option plan, independent agents, consultants and advisors who have contributed to the Company’s success.

 

The Compensation Committee administers the plan. The Committee has absolute discretion to decide which employees, consultants and advisors will receive incentive awards, the type of award to be granted and the number of shares covered by the award. The committee also determines the exercise prices, expiration dates and other features of awards.

 

The exercise price of incentive stock options must be equal to the fair market value of such shares on the date of the grant or, in the case of incentive stock options granted to the holder of more than 10% of the Company’s common stock, at least 110% of the fair market value of such shares on the date of the grant. The maximum exercise period for incentive stock options is ten years from the date of grant, or five years in the case of an individual who owns more than 10% of the Company’s common stock. The aggregate fair market value determined at the date of the option grant, of shares with respect to which incentive stock options are exercisable for the first time by the holder of the option during any calendar year, shall not exceed $100,000.

 

42
 

 

There are no incentive stock options outstanding at December 31, 2011.

  

Outside Directors' Stock Option Plan Approved by Stockholders: The Company’s stockholders have adopted an outside directors' stock option plan for the benefit of its non-employee directors in order to encourage their continued service as directors. Under the terms of the original plan, the Company was authorized to grant incentive awards for up to 125,000 shares of common stock. At the 2005 annual meeting, the Company’s shareholders increased the authorization under the incentive stock plan to 500,000 shares.

 

Each eligible director who is, on or after the effective date, appointed to fill a vacancy on the Board or elected to serve as a member of the Board may participate in the plan. Each eligible director shall automatically be granted an option to purchase the maximum number of shares having an aggregate fair market value on the date of grant of twenty thousand dollars ($20,000). The option price of the stock subject to each option is required to be the fair market value of the stock on its date of grant. Options generally expire on the fifth anniversary of the date of grant. Any option granted under the plan shall become exercisable in full on the first anniversary of the date of grant, provided that the eligible director has not voluntarily resigned or been removed "for cause" as a member of the Board of Directors on or prior to the first anniversary of the date of grant (qualified option). Any qualified option shall remain exercisable after its first anniversary regardless of whether the optionee continues to serve as a member of the Board.

 

During 2010, the Company issued 77,922 five year options to one of its directors, vesting one third per year over the next three years. These options are exercisable at a price of $0.77 per share, expiring five years from vest date and are valued at $34,860 utilizing the Black-Scholes-Merton option pricing model, with $12,152 recorded as compensation in 2010, and the Company issued 8,000 four year options to one of its directors, vesting immediately. These options are exercisable at a price of $3.60 per share, expiring June 25, 2014 and are valued at $14,882 utilizing the Black-Scholes-Merton option pricing model, with $14,882 recorded as compensation expense in 2010.

 

There were no issuances in 2011.

 

Stock Options Held by Officers, Employees, and Consultants Not Approved by Stockholders:

 

The Company uses the Black-Scholes-Merton Option Pricing Model to estimate the fair value of awards on the measurement date using the weighted average assumptions noted in the following table:  

 

Year  Interest Rate %   Dividend Yield %   Expected Volatility %   Expected Life 
2004   3.8    0.0    59.1    60 months 
2005   4.0    0.0    52.0    100 months 
2006   4.7    0.0    53.6    45 months 
2007   3.9    0.0    54.4    62 months 
2008   2.8    0.0    51.4    58 months 
2009   2.0    0.0    53.0    80 months 
2010   2.3    0.0    58.0    69 months 
2011   1.4    0.0    59.4    76 months 

 

Expected volatilities are calculated based on the historical volatility of the Company’s stock since its listing on the public markets. Management has determined that it cannot reasonably estimate a forfeiture rate given the insufficient amount of time and activity of share option exercise and employee termination patterns. The expected life of options, representing the period of time that options granted are expected to be outstanding, was determined using the contractual term. The risk-free interest rate for periods within the expected life of the option is based on the interest rate for a similar time period of a U.S. Treasury note in effort on the date of the grant.

 

43
 

 

The following table provides consolidated summary information on the Company’s stock option activity for the years ended December 31, 2004 through 2011.

 

       2004     
       Weighted Average     
All Plan & Non-
Plan Compensatory Options
  Number of
Options
   Exercise   Fair Value   Remaining
Life (years)
   Aggregate
Intrinsic
Value
 
Options outstanding at December  31, 2003   -   $0.00   $0.00           
Granted   736,350    3.53    2.87          
Exercised   -    0.00    0.00          
Forfeited or lapsed   -    0.00    0.00              
Options outstanding at December 31, 2004     736,350   $3.53   $2.87      6.34       

   

       2005     
       Weighted Average     
All Plan & Non-
Plan  Compensatory Options
  Number of
Options
   Exercise   Fair Value   Remaining
Life (years)
   Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2004   736,350   $3.53   $2.87           
Granted   1,254,500    2.48    1.34          
Exercised   (358,865)   1.65    2.32          
Forfeited or lapsed      (182,100)   3.04    1.44               
Options outstanding at December 31, 2005      1,449,885   $3.12   $1.86      7.73        

 

       2006 
       Weighted Average 
All Plan & Non-
Plan Compensatory Options
  Number of Options   Exercise   Fair Value   Remaining
Life (years)
   Aggregate Intrinsic Value 
Options outstanding at December 31, 2005   1,449,885   $3.12   $1.86           
Granted   1,191,000    5.42    0.82           
Exercised   -    0.00    0.00           
Forfeited or lapsed      (894,000)   3.24    1.94           
Options outstanding at December 31, 2006      1,746,885   $4.65   $1.035    3.70   $634,903 
Options exercisable at December 31, 2006      1,192,385   $5.11   $0.97    2.90   $254,903 

 

       2007     
       Weighted Average     
All Plan & Non-Plan Compensatory
Options
  Number of
Options
   Exercise   Fair Value   Remaining
Life
(years)
   Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2006   1,746,885   $4.65   $1.03           
Granted   228,000    4.82    0.87           
Exercised   -    0.00    0.00           
Forfeited or lapsed     (124,000)   2.50    1.14             
Options outstanding at December 31, 2007     1,850,885   $4.81   $1.00    1.5   $18,000 
Options exercisable at December 31, 2007     1,442,385   $4.88   $0.93    2.0   $6,000 

 

44
 

 

       2008     
       Weighted Average     
All Plan & Non-Plan Compensatory
Options
  Number of
Options
   Exercise   Fair Value   Remaining
Life
(years)
   Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2007   1,850,885   $4.81   $1.00           
Granted   969,055    2.38    0.73           
Exercised   -    0.00    0.00           
Forfeited or lapsed    -    0.00    0.00             
Options outstanding at December 31, 2008     2,819,940   $3.98   $0.91      3.1   $0 
Options exercisable at December 31, 2008    1,831,690   $4.75   $0.90      1.4   $0 

 

       2009     
       Weighted Average     
All Plan & Non-Plan Compensatory
Options
  Number of
Options
   Exercise   Fair Value   Remaining
Life
(years)
   Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2008   2,819,940   $3.98   $0.91           
Granted   164,565    1.64    0.70           
Exercised   -    -    -           
Forfeited or lapsed   (1,101,035)   5.71    0.68             
Options outstanding at December 31, 2009     1,883,470   $2.77   $1.02    4.1   $51,890 
Options exercisable at December 31, 2009    1,077,155   $3.16   $1.14     2.9   $10,440 

 

       2010     
       Weighted Average     
All Plan & Non-Plan Compensatory
Options
  Number of
Options
   Exercise   Fair Value   Remaining
Life
(years)
   Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2009   1,883,470   $2.77   $1.02           
Granted   2,074,970    1.47    0.49           
Exercised   -    -    -           
Forfeited or lapsed     (379,920)   3.17    1.11             
Options outstanding at December 31, 2010    3,578,520   $1.97   $0.70      4.7   $- 
Options exercisable at December 31, 2010     1,660,910   $2.42   $0.91      3.4   $- 

 

       2011     
       Weighted Average     
All Plan & Non-Plan Compensatory
Options
  Number of
Options
   Exercise   Fair Value   Remaining
Life
(years)
   Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2010   3,578,520   $1.97   $0.70           
Granted   300,104    1.50    0.30           
Exercised   -    -    -           
Forfeited or lapsed     (248,774)   2.17    0.68             
Options outstanding at December 31, 2011     3,629,850   $1.92   $0.67      4.0   $  - 
Options exercisable at December 31, 2011     2,515,660   $2.12   $0.77      3.2   $  - 

 

The following table summarizes the status of the Company’s non-vested options:

 

All non-vested stock options as of December 31, 2011  Shares   Fair Value 
Options subject to future vesting at December 31, 2010   1,917,610   $0.52 
Options granted   300,104    0.30 
Options forfeited or lapsed   (127,774)   0.21 
Options vested     (975,750)   0.56 
Options subject to future vesting at December 31, 2011     1,114,190   $0.45 

 

45
 

 

As of December 31, 2011, there was $474,872 of unrecognized compensation related to non-vested options compared to $825,726 at December 31, 2010. The Company expects to recognize the cost over a weighted average period of 0.9 years. The total fair value of options vested was $888,318 and $1,515,274 for 2011 and 2010, respectively.

 

Note 6 — Earnings/Loss Per Share  

 

Basic earnings per share is computed by dividing income available to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. Diluted earnings per share are computed by assuming that any dilutive convertible securities outstanding were converted, with related preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options for which market price exceeds the exercise price, less shares which could have been purchased by us with the related proceeds. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.

 

Had the Company recorded income applicable to common shareholders for the periods ended December 31, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, and 2011 weighted-average number of common shares outstanding would have increased by 785,897, 1,386,612, 2,970,730, 2,135,938, 8,975,643, 9,566,738, 15,825,589, 1,519,892, and 161,219 respectively, for the fiscal years, reflecting no change to dilutive securities in the calculation of diluted earnings per share. The increase in weighted average common shares for the cumulative period since inception (September 18, 2003) to December 31, 2011 is 8,128,594 shares. 

 

Note 7 — Income Taxes Expense (Benefit)

 

A summary of the components giving rise to the income tax expense (benefit) for the periods ended December 31, 2011 and 2010 is as follows:

 

   2011   2010 
Current income tax expense:          
Federal  $-   $- 
State   -    - 
Foreign   -    - 
   $-   $- 
           
Deferred income tax provision (benefit):          
Federal  $(2,857,000)  $(2,711,000)
State   (555,000)   (584,000)
Foreign   48,000    (441,000)
Total deferred tax   (3,364,000)   (3,736,000)
Less increase in allowance   3,364,000    3,736,000 
Net deferred tax  $                     .   $- 
           
Total income tax expense (recovery)  $-   $- 

 

Individual components giving rise to the deferred tax asset are as follows:   2011    2010 
           
Future tax benefit arising from net operating loss carry forwards   17,748,000   $14,584,000 
Future tax benefit arising from available tax credits   1,373,000    1,373,000 
           
Future tax benefit arising from options/warrants issued for Services   1,029,000    845,000 
Other   225,000    209,000 
Total future tax benefit   20,375,000    17,011,000 
Less valuation allowance   (20,375,000)   (17,011,000)
Net deferred tax  $-   $- 
           

 

The components of pretax net loss are as follows:   2011    2010 
United States  $(8,309,197)  $(6,838,031)
Foreign   (2,693)   7,177 
   $(8,311,890)  $(6,830,854)

  

46
 

 

The Company has net operating loss carry forwards of $39,900,000 and $2,800,000 available to reduce future income taxes in United States and Canada, respectively. The United States carry forwards expire at various dates between 2024 and 2030. The Canadian carry forwards expire at various dates between 2012 and 2030. The Company also has generated Canadian tax credits related to research and development activities.  The credit, amounting to $734,000 U.S. Dollars, is available to offset future taxable income in Canada and expires at various dates between 2024 and 2026. The Company has adopted FASB ASC 740, which provides for the recognition of a deferred tax asset based upon the value certain items will have on future income taxes and management's estimate of the probability of the realization of these tax benefits. The Company has determined it more likely than not that these timing differences will not materialize and have provided a valuation allowance against the entire net deferred tax asset. The utilization of NOL and tax credit carry forwards from Tamboril prior to the reorganization may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. Accordingly, these amounts have not been included in the gross deferred tax asset number above. In addition, due to equity transactions that have occurred subsequent to the reorganization with Tamboril, the utilization of NOL carry forwards may be subject to further change in control limitations that generally restricts the utilization of the NOL per year.

  

The reconciliation of the United States statutory federal income rate and the effective income tax rate in the accompanying Consolidated Statements of Operations for the periods ended December 31, 2011 and 2010 is as follows:

 

   2011   2010 
Statutory U.S. federal income tax rate   (34.0)%   (34.0)%
Prior period adjustments   0.00%   (1.9)%
State taxes, net   (6.7)%   (8.5)%
Foreign currency fluctuation   0.6%   (2.3)%
U.S. tax credits   0.0%   (2.2)%
Revaluation of Derivatives   (0.5)%   (5.8)%
Other   0.1%   0.2%
Change in valuation allowance   40.5%   54.7%
Effective income tax rate   0.0%   0.0%

 

The Company adopted the provisions of FASB ASC 740-10 “Income Taxes” on January 1, 2008.  As the result of the assessment, the Company recognized no material adjustments to unrecognized tax benefits. At the adoption date of January 1, 2008 and as of December 31, 2011, the Company has no unrecognized tax benefits.  By statute, tax years ending December 31, 2008 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is subject.

 

Note 8 — Related Party Transactions

 

Trust for the Benefit of the Shareholders of Mega-C Power Corp: The Trustee for The Trust for the Benefit of the Shareholders of Mega-C Power Corp. served as an officer of one of our consolidated companies in 2004. Effective December 22, 2009 with the private placement, the percentage beneficial ownership held by the Mega-C Trust fell below 5% and is no longer a Related Party.

 

Transactions with C&T: A former board member of the Company, Dr. Igor Filipenko, was the former majority shareholder of C&T prior to the acquisition by the Company. The Board of Directors on August 21, 2009 approved the issuance of warrants to purchase not more than 1,600,000 shares of common stock at an exercise price of $2.00 per share and a term of two years to the C&T Group. On January 11, 2010, Dr. Igor Filipenko gave notice of his resignation as a director of the Company, effective immediately. On December 31, 2011 these warrants have not yet been issued pending "mutual understanding" between the parties.  

 

Related party notes payable: During the year ending December 31, 2009, the Company borrowed certain amounts from related parties; certain of these borrowings were extinguished through the issuance of the Company’s common stock during the fourth quarter of 2009. Refer to Note 5 “Related Party Debt”.

 

Senior Preferred conversions:  On December 23, 2009, based on agreements received to convert shares using an October 30, 2009 conversion amount, two directors and the wife of a director, converted 67,633 shares of their 8% Cumulative Convertible Senior Preferred stock into 684,209 common shares.

 

47
 

 

Warrants: On September 22, 2009, we entered into an Amendment to Warrants and Securities Purchase Agreement with The Quercus Trust, amending the January 14, 2008 Warrant and Securities Purchase Agreement. The Amendment resets the exercise price for warrants previously issued to Quercus from $2.60 per share to $0.75 per share. On December 15, 2009, in Amendment No. 2 to the Securities Purchase Agreement, The Quercus Trust agreed to waive further anti-dilution rights on its warrants to purchase our common stock below an exercise price of $0.75 per share subject to the close of the Private Placement which occurred on December 22, 2009

 

Note 9 — Supplemental Cash Flow Information

 

 Cash payments for interest during the years ended December 31, 2011 and December 31, 2010 were $18,042 and $21,143 respectively. There were no payments of income taxes during the years ended December 31, 2011 and 2010.

 

Note 10 — Commitments and Contingencies and Significant Contracts

 

Facilities: On March 28, 2010, we renewed our lease for existing space at our manufacturing plant, located at 3601 Clover Lane, in New Castle, Pennsylvania. The salient terms of the Lease are as follows:

 

·The term commenced on April 3, 2010 with an initial term of three years.
   
·The renewal lease may be extended for two successive five-year renewal options with future rent to be negotiated at a commercially reasonable rate.  
   
·The battery manufacturing facility includes 70,438 square feet of floor space, including 7,859 square feet of office, locker, lab and lunch area, 46,931 square feet of manufacturing space, 1,488 square feet of dedicated lab space, 9,200 square feet of storage buildings and 5,000 square feet of basement area.
   
·The rental amount for the initial term is $17,200 per month, which is fixed through 2013. In addition to the monthly rental, we are obligated to pay all required maintenance costs, taxes and special assessments, maintain public liability insurance, and maintain fire and casualty insurance for an amount equal to 100% of the replacement value of the leased premises.
   
·On May 26, 2011 we executed an addendum to the existing lease agreement which resulted in the lease of an additional 2,160 square feet of additional space for $500.00 per month. There were no other changes to the existing lease.
   
·With the execution of the addendum we now lease 72,598 square feet for a monthly rent of $17,200.

 

On November 4, 2010, the Company entered into a Commercial Lease (“Lease”) with Becan Development, LLC (“Lessor”) to lease a 45,000 square foot building, located at 209 Green Ridge Road in New Castle PA, (the “Property”). The salient terms of the Lease are as follows:

 

·The Lease term commenced on January 1, 2011 and the term expires on December 31, 2015.
   
·The Lease may be extended for two 5-year terms, by giving notice not less than 30 nor more than 120 days before the expiration of the initial term or first renewal term (as applicable). The renewal leases shall be on terms substantially similar to the terms of the initial Lease except for any adjustment to rent, if warranted, as mutually agreed upon by Lessor and the Company.
   
·The rental amount for the initial term is $19,297 per month and is on a “triple net” basis.
   
·If the Company is able to obtain sufficient funding from either the federal or state government or agencies, and it enters into a binding agreement to purchase the Property, the Lease shall be immediately terminated and Lessor shall credit the most recent 6 months of actual rental payments made to Lessor against the purchase price of the Property
   
·The Company also has a right of first refusal to purchase the property within 30 days of receipt of notice of a third party offer from Lessor upon substantially the same terms as those offered by the third party.
   
·The Lease contains market terms on standard provisions such as defaults and maintenance.

 

48
 

 

Employment Agreements:    The Company has entered into executive employment agreements with Thomas Granville, Charles R. Trego, and Phillip S. Baker. These agreements generally require each executive to devote substantially all of his business time to the Company’s affairs, establish standards of conduct, prohibit competition with our company during their term, affirm our rights respecting the ownership and disclosure of patents, trade secrets and other confidential information, provide for the acts and events that would give rise to termination of such agreements and provide express remedies for a breach of the agreement. Each of the executives is allowed to participate in our standard employee benefit programs, including medical/hospitalization insurance and group life insurance, as in effect from time to time. Each of the covered executives will generally receive an automobile allowance, reimbursement for all reasonable business expenses incurred by him on behalf of the Company in the performance of his duties, and a severance package that guarantees continued remuneration equal to the executives base salary for a total of 23 months so long as the Company elects to enforce the provisions of the Non-Competition Agreement, should the executive be unable to find employment or accepts employment at a reduced rate of pay due solely to the Non-Competition Agreement. The provisions of the individual agreements are set forth in the following table:

 

Name  Position      Date      Term   Salary   Options   Price    Vesting   Stock 
Thomas Granville (1)   CEO    6/29/10    3-year   $380,000    360,000   $1.50    Monthly    0 
Charles R. Trego   (2)   CFO    4/01/10    3-year   $225,000    265,000   $1.50    Monthly    0 
Philip S. Baker      (3)   COO    4/01/10    3-year   $199,800    230,000   $1.50    Monthly    0 

  

1.

Thomas Granville. On June 29, 2010, the Company entered into an Executive Employment Agreement with Thomas Granville as Chief Executive Officer. Pursuant to this agreement, Mr. Granville receives an annual salary of $380,000, and an annual car allowance of $9,000 for the period commencing June 29, 2010, and terminating June 30, 2013. Mr. Granville’s base salary is subject to annual review, and such salary is subject to renegotiation on the basis of Mr. Granville’s and the Company’s performance. In addition, Mr. Granville received a signing bonus of $270,000 and was paid on July 9, 2010. The Company also granted Mr. Granville an option to purchase 360,000 shares of our common stock at a price of $1.50 per share at a vesting rate of 10,000 shares per month through the term of the agreement. Mr. Granville is eligible to participate in any executive compensation plans adopted by the shareholders of the Company and the Company's standard employee benefit programs.

 

2. Charles R. Trego. On April 1, 2010, the Company entered into an Executive Employment Agreement with Charles R. Trego as Chief Financial Officer. Under the terms of his employment agreement, which has a term of three years, Mr. Trego receives an annual salary of $225,000, which is subject to review after the initial six month term of the agreement and annually thereafter, an annual car allowance of $9,000, bonuses as determined by the compensation committee, and a 5-year option to purchase 265,000 shares of our common stock at a price of $1.50 per share. 27,000 options shall vest upon execution of this contract and, beginning in June 2010, 7,000 options will vest monthly through the remaining 34 months of this contract.

 

3.

Philip S. Baker. On April 1, 2010, the Company entered into an Executive Employment Agreement with Philip S. Baker as Chief Operating Officer. Under the terms of his employment agreement, which has a term of three years, Mr. Baker receives an annual salary of $199,800, which is subject to review after the initial six month term of the agreement and annually thereafter, an annual car allowance of $6,000, and a 5-year option to purchase 230,000 shares of our common stock at a price of $1.50 per share. 26,000 options shall vest upon execution of this contract and, beginning in June, 2010, 6,000 options will vest monthly through the remaining 34 months of this contract.

 

We have no retirement plans or other similar arrangements for any directors, executive officers or employees, other than a noncontributory 401(k) plan.

 

Purchase Orders

 

On May 11, 2010, the Company was awarded federal contract number N00014-10-C-0094. Under the terms of the agreement, Axion shall furnish personnel and facilities to conduct the research effort for the development of new lightweight, high-powered batteries for use in vehicles operated by the U.S. Marine Corps. This cost-plus-fixed-fee completion contract requires scientific or technical reports to be delivered, inspected and accepted prior to reimbursement. Costs incurred during the performance period, will be reimbursed quarterly. The final report was delivered in July, 2011. The contract, provided $1,004,747 to us in funding for this project, and is subject to a financial audit upon contract completion which we anticipate will occur in 2012.

 

Selling price was determined by periodic spending using the hourly labor, overhead, and G&A rates submitted with the proposal. The rates are subject to adjustment at the end of contract, and secured by the unpaid fixed fee. Revenue based on the proportionate performance of the work performed was recognized from inception to completion when collection of the reimbursement was reasonably assured. Recognition of the fixed fee was postponed to contract completion. Fixed fee billings were recorded under deferred revenue. The contract contributed $387,645 to service revenue during 2011 and $535,105 in 2010.

 

Amendment No. 3 to Securities Purchase Agreement, dated as of September 30, 2010

 

On September 28, 2010, both Stanley A. Hirschman and Joseph Bartlett gave notice of their resignations as directors of the Company, effective immediately.  In connection with Mr. Bartlett’s resignation, Quercus has executed Amendment No. 3 to Securities Purchase Agreement, dated as of September 30, 2010, pursuant to which it has waived its right to have three directors appointed to the Company’s Board and instead will reserve the right to have one director appointed.  These actions are consistent with the Company’s overall goal of reducing the size of its Board.

 

49
 

 

Note 11 — Subsequent Events

 

On January 23, 2012, the Company announced that Vani Kumar Dantam joined Axion Power International, Inc in the newly appointed position of Senior Vice President-Business Development, Sales and Marketing.  From 2010 to 2011, Mr. Dantam served as the Vice President – Business Development & Sales for Ener 1, a manufacturer of EV and HEV batteries. During his tenure with Ener 1, Dantam developed over 35 comprehensive proposals for new global customers, building a pipeline of over $500 million in EV and HEV battery business. From 1994 to 2010, Dantam was employed with Remy International, as Director – Sales & Marketing, Global Director – Heavy Duty Sales & Marketing (2004-2009) and Global Director – Hybrid & Traction Motor Sales & Business Development (2009 – 2010). Mr. Dantam holds an MBA ( Finance and International Business ) from Indiana University, an MS, Mechanical Engineering from Vanderbilt University and a BE, Metallurgical Engineering from Banaras Hindu University- in India. Under the terms of his employment agreement effective January 1, 2012, which has a term of three years, Mr. Dantam receives an annual salary of $225,000, which is subject to review on an annual basis, a $20,000 sign on bonus, bonuses as determined by the compensation committee, and a 5-year option to purchase 150,000 shares of our common stock at a price of $1.50 per share, 15,020 options shall vest upon execution of this contract and, beginning in March 2012, 3,970 options will vest monthly through the remaining 34 months of this contract.

 

On February 3, 2012 the Company completed a registered direct common stock offering providing gross proceeds of approximately $9.4 million.  The shares sold, par value $0.0001 were priced at $0.35, which was the volume-weighted average price of the shares over a 40-day trading period prior to the commencement of the offering.  The shares were sold pursuant to a shelf registration statement declared effective July 14, 2011.  Net proceeds were approximately $8.6 million after the expenses of the offering and placement fees, will be used for working capital, capital expenditures and general corporate purposes.

 

Item 9  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A         Controls and Procedures

 

Disclosure Controls and Procedures

 

As of December 31, 2011 (“Evaluation Date”), the end of the period covered by this Annual Report on Form 10-K, management performed, with the participation of our Principal Executive Officer and Principal Accounting Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Principal Executive Officer and our Principal Accounting Officer, to allow timely decisions regarding required disclosures. Based upon the evaluation, our Principal Executive Officer and our Principal Accounting Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

 

Management's Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management has conducted, with the participation of our Principal Executive Officer and our Principal Accounting Officer, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of Evaluation Date. Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission. 

 

50
 

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with our management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we have not identified any material weaknesses in our internal control over financial reporting as of Evaluation Date.  We have thus concluded that our internal control over financial reporting was effective as of the Evaluation Date.

         

During the three months ended December 31, 2011, there were no significant changes in our internal control over financial reporting.

 

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Commission that permit the Company to provide only management's report in this annual report.

 

PART III

 

Item 10 Directors, Executive Officers and Corporate Governance

 

Information with respect to our executive officers and directors and disclosure of delinquent Form 3, 4 or 5 filers required by this item will be contained in the Definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders; said information is incorporated herein by reference.

 

Code of business conduct and ethics

 

Our Board of Directors has adopted a Code of Business Conduct and Ethics, which has been distributed to all directors, officers, and employees and is given to new employees at the time of hire. The Code of Business Conduct and Ethics contains a number of provisions that apply principally to our President, Chief Financial Officer and other key accounting and financial personnel. A copy of our Code of Business Conduct and Ethics can be found under the “Investor Information” section of our website at www.axionpower.com. We intend to disclose any amendments or waivers of our Code of Business Conduct and Ethics on our website.

 

Item 11 Executive Compensation

 

A description of the compensation of our executive officers will be contained in the Definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders; said information is incorporated herein by reference.

 

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

A description of the security ownership of certain beneficial owners and management will be contained in the Definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders; said information is incorporated herein by reference.  

 

Item 13 Certain Relationships and Related Transactions, and Director Independence

 

A description of certain relationships and related transactions with management will be contained in the Definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders; said information is incorporated herein by reference.

 

Item 14 Principal Accounting Fees and Services

 

A description of principal accounting fees and services will be contained in the Definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders; said information is incorporated herein by reference.

 

51
 

 

PART IV

 

Item 15 Exhibits

 

2.1 Reorganization Agreement (without exhibits) between Tamboril Cigar Company, Axion Power Corporation and certain stockholders of Axion Power Corporation dated December 31, 2003. (1)
2.2 First Addendum to the Reorganization Agreement between Tamboril Cigar Company, Axion Power Corporation and certain stockholders of Axion Power Corporation dated January 9, 2004. (1)
3.1 Amended and Restated Certificate of Incorporation of Tamboril Cigar Company dated February 13, 2001.  (2)
3.3 Amendment to the Certificate of Incorporation of Tamboril Cigar Company dated June 4, 2004. (3)
3.4 Amendment to the Certificate of Incorporation of Axion Power International, Inc. dated June 4, 2004. (3)
3.5 Amended By-laws of Axion Power International, Inc. dated June 4, 2004.   (3)  
3.6 Certificate of Amendment to the Certificate of Incorporation of Axion Power International, Inc., dated June 14, 2010. (25)

3.7

4.1

Certificate of Amendment to the Certificate of Incorporation of Axion Power International, Inc., dated July 22, 2011.

Specimen Certificate for shares of Company’s $0.00001 par value common stock.

 

(9)

4.2 Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation dated December 31, 2003. (1)
4.3 Succession Agreement Pursuant to the Provisions of the Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation dated March 25, 2004. (4)
4.4 Form of Warrant Agreement for 1,796,300 capital warrants. (9)
4.5 Form of Warrant Agreement for 667,000 Series I investor warrants. (9)
4.6 Form of Warrant Agreement for 350,000 Series II investor warrants. (9)
4.7 Form of Warrant Agreement for 313,100 Series III investor warrants. (9)
4.8 Form of 8% Cumulative Convertible Senior Preferred Stock Certificate (D)
4.9 First Amended and Restated Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation dated February 28, 2005. (11)
4.10 Second Amendment and Restated Trust Agreement for the Benefit of the Shareholders of Mega-C Power Corporation dated November 21, 2006. (19)
4.11 Certificate of Powers, Designations, Preferences and Rights of the 8% Convertible Senior Preferred Stock of Axion Power International, Inc. dated March 17, 2005. (12)
4.12 Certificate of Powers, Designations, Preferences and Rights of the Series-A Convertible Preferred Stock, Par Value $0.0001 Per Share, of Axion Power International, Inc. dated October 23, 2006. (13)
4.13 Amended Certificate of Powers, Designations, Preferences and Rights of the Series-A Convertible Preferred Stock, Par Value $0.0001 Per Share, of Axion Power International, Inc. dated October 26, 2006. (13)
4.14 Certificate of Amendment to the Certificate of Powers, Designations, Preferences and Rights of the Series-A Convertible Preferred Stock, Par Value $.0001 Per Share, of Axion Power International, Inc. dated February 24, 2010.  
9.1 Agreement respecting the voting of certain shares beneficially owned by the Trust for the Benefit of the Shareholders of Mega-C Power Corporation. Included in Exhibit 4.2
     
10.1 Development and License Agreement between Axion Power Corporation and C and T Co. Incorporated dated November 15, 2003. (1)
10.2 Letter Amendment to Development and License Agreement between Axion Power Corporation and C and T Co. Incorporated dated November 17, 2003. (1)
10.3 Tamboril Cigar Co. Incentive Stock Plan dated January 8, 2004. (A)
10.4 Tamboril Cigar co. Outside Directors Stock Option Plan dated February 2, 2004. (A)
10.5 Stock Purchase & Investment Representation Letter among John L. Petersen, Sally A. Fonner and C and T Co. Incorporated dated January 9, 2004. (1)
10.6 Letter Amendment to Development and License Agreement between Axion Power Corporation and C and T Co. Incorporated dated January 9, 2004. (1)
10.7 First Amendment to Development and License Agreement between Axion Power Corporation and C and T Co. Incorporated dated as of January 9, 2004. (5)
10.8 Definitive Incentive Stock Plan of Axion Power International, Inc. dated June 4, 2004. (3)

  

52
 

 

10.9 Definitive Outside Directors’ Stock Option Plan of Axion Power International, Inc. dated June 4, 2004. (3)
10.10 Executive Employment Agreement of Charles Mazzacato. (9)
10.11 Executive Employment Agreement of Peter Roston. (9)
10.12 Amended Retainer Agreement between the law firm of Fefer, Petersen & Cie dated March 31, 2005. (C)
10.13 Retainer Agreement between the law firm of Fefer, Petersen & Cie and Tamboril Cigar Company dated January 2, 2004. (10)
10.14 Bankruptcy Settlement Agreement Between Axion Power International, Inc. and Mega-C Power Corporation dated December, 2005. (E)
10.15 Second Amendment to Development and License Agreement between Axion Power International, Inc. and C and T Co. Incorporated dated as of March 18, 2005. (12)
10.16 Executive Employment Agreement of Thomas Granville dated June 23, 2008. (20)

  

10.17 Loan agreement between Axion Battery Products, Inc. as borrower, Axion Power International, Inc. as accommodation party and Robert Averill as lender respecting a $1,000,000 purchase money and working capital loan dated January 31, 2006. (14)
10.18 Security agreement between Axion Battery Products, Inc. as debtor and Robert Averill as secured party dated January 31, 2006. (14)
10.19 Security agreement between Axion Power International, Inc. as debtor and Robert Averill as secured party dated January 31, 2006. (14)
10.20 Promissory Note between Axion Battery Products, Inc. as maker and Robert Averill as payee dated February 14, 2006. (14)
10.21 Form of Warrant Agreement between Axion Power International, Inc. and Robert Averill. (14)
10.22 Commercial Lease Agreement between Axion Battery Products, Inc. as lessee and Steven F. Hoye and Steven C. Warner as lessors dated February 14, 2006. (14)
10.23 Asset Purchase Agreement dated between Axion Battery Products, Inc. as buyer and National City Bank of Pennsylvania as seller February 10, 2006. (14)
10.24 Escrow Agreement between Axion Battery Products, Inc. and National City Bank of Pennsylvania as parties in interest and William E. Kelleher, Jr. and James D. Newell as escrow agents dated February 14, 2006.  (14)
10.25 Executive Employment Agreement of Edward Buiel dated June 23, 2008. (21)
10.26 Consulting Agreement, by and between Axion Power International, Inc. and Andrew Carr Conway, Jr. dated as of September 27, 2007. (16)
10.27 Amendment No. 1 to Consulting Agreement by and between Axion Power International, Inc. and Andrew Carr Conway, Jr. dated as of October 31, 2007. (16)
10.28 Securities Purchase Agreement by and between Axion Power International, Inc. and Quercus Trust dated as of January 14, 2008. (17)
10.29 Common Stock Purchase Warrant executed by Axion Power International, Inc. dated January 14, 2008.  (17)
10.30 Executive Employment Agreement of Donald T. Hillier dated June 18, 2008. (19)
10.31 Amendment to Warrants and Securities Purchase Agreement by and between Axion Power International, Inc. and Quercus Trust dated as of September 22, 2009. (22)
10.32 Securities Purchase Agreement by and between Axion Power International, Inc. and the Investors named therein dated as of December 18, 2009. (23)
10.33 Registration Rights Agreement, executed by Axion Power International Inc. and the Investors named therein. (23)
10.34 Amendment No. 2 to Securities Purchase by and between Axion Power International, Inc. and Quercus Trust Agreement dated as of January 14, 2008. (23)
10.35 Lock-Up Agreement executed by Quercus Trust and David Gelbaum and Monica Chavez Gelbaum. (23)
10.36 Lease Agreement by and between Steven F. Hoye and Steven C. Warner, Lessor, and Axion Power Battery Manufacturing, Inc., Lessee dated March 28, 2010. (6) 
     
10.37 Executive Employment Agreement of Charles R. Trego dated April 1, 2010. (24)
10.38 Executive Employment Agreement of Phillip S. Baker dated April 1, 2010. (24)
     
10.39 Executive Employment Agreement of Thomas Granville dated June 29, 2010. (26)
10.40 Amendment No. 3 to Securities Purchase Agreement by and between Axion Power International, Inc. and the Quercus Trust dated September 30, 2010.  (27)

10.41

10.42

10.43

10.44

Commercial Lease with Becan Development, LLC dated November 4, 2010.

Form of Subscription Agreement

Placement Agency Agreement, dated January 31, 2012

Employment Agreement with Vani Kumar Dantam, dated January 2012

 (28)

(30)

(30)

 

53
 

 

31.1

32.2

32.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)

Statement of Principal Executive Officer Pursuant to Section   1350 of Title 18 of the United States Code.

 
     
32.2 Statement of Principal Financial Officer Pursuant to Section   1350 of Title 18 of the United States Code.  

  

(1) Incorporated by reference from our Current Report on Form 8-K dated January 15, 2004.
(2) Incorporated by reference from our Current Report on Form 8-K dated February 5, 2003.
(3) Incorporated by reference from our Current Report on Form 8-K dated June 7, 2004.
(4) Incorporated by reference from our Current Report on Form 8-K dated April 13, 2004.
(5) Incorporated by reference from our Form S-3 registration statement dated May 20, 2004.
(6) Incorporated by reference from our Annual Report on Form 10-KSB dated March 30, 2004.
(7) Incorporated by reference from our Current Report on Form 8-K dated April 13, 2003.
(8) Incorporated by reference from our Current Report on Form 8-K dated February 16, 2004.
(9) Incorporated by reference from our Form S-1 registration statement dated September 2, 2004.
(10) Incorporated by reference from our Form S-1 registration statement dated December 17, 2004.
(11) Incorporated by reference from our Current Report on Form 8-K dated February 28, 2005.
(12) Incorporated by reference from our Current Report on Form 8-K dated March 21, 2005.
(13) Incorporated by reference from our Current Report on Form 8-K dated November 8, 2006.
(14) Incorporated by reference from our Current Report on Form 8-K dated February 16, 2006.
(15) Incorporated by reference from our Current Report on Form 8-K dated January 3, 2007.
(16) Incorporated by reference from our Current Report on Form 8-K dated November 6, 2007.
(17) Incorporated by reference from our Current Report on Form 8-K dated January 17, 2008.
(18) Incorporated by reference from our Current Report on Form 8-K dated January 31, 2008.
(19) Incorporated by reference from our Registration Statement on Form S-1 dated July 3, 2008.
(20) Incorporated by reference from our Current Report on Form 8-K dated June 27, 2008.
(21) Incorporated by reference from our Current Report on Form 8-K dated July 2, 2008.
(22) Incorporated by reference from our Current Report on Form 8-K dated September 22, 2009.
(23) Incorporated by reference from our Current Report on Form 8-K dated December 18, 2009.
(24) Incorporated by reference from our Current Report on Form 8-K dated April 6, 2010.
(25) Incorporated by reference from our Current Report on Form 8-K dated June 15, 2010.
(26) Incorporated by reference from our Current Report on Form 8-K dated July 6, 2010.
(27) Incorporated by reference from our Current Report on Form 8-K dated October 4, 2010.

(28)

(29)

(30)

Incorporated by reference from our Current Report on Form 8-K dated November 10, 2010.

Incorporated by reference from our Current Report on Form 8-K dated July 22, 2011.

Incorporated by reference from our Current Report on Form 8-K dated January 31, 2012.

 

(A) Incorporated by reference from our Current Report on Form 8-K/A dated February 2, 2004.
(B) Incorporated by reference from our Current Report on Form 8-K dated April 4, 2005.
(C) Incorporated by reference from our Registration Statement on Form SB-2 dated April 26, 2005.
(D) Incorporated by reference from our Current Report on Form 8-K dated December 13, 2005.

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2011, formatted in eXtensible Business Reporting Language: (i) the Condensed Balance Sheets, (ii) the  Consolidated Statements of Operations, (iii)  the Consolidated Statements of Cash Flows and (v) the Notes to Condensed Financial Statements, as follows:

 

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema

101.CAL XBRL Taxonomy Extension Calculation Linkbase

101.DEF XBRL Taxonomy Extension Definition Linkbase

101.LAB XBRL Taxonomy Extension Label Linkbase

101.PRE XBRL Extension Presentation Linkbase

Financial Statements

 

Consolidated Financial Statements for Axion Power International, Inc. for the fiscal years ended December 31, 2011 and 2010, respectively as set forth in Item 8 of this Annual Report on Form 10-K.

  

54
 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  AXION POWER INTERNATIONAL, INC.
     
  By: /s/ Thomas Granville
    Thomas Granville, Principal Executive Officer and Director
     
  Dated: March 30, 2012

 

  AXION POWER INTERNATIONAL, INC.
     
  By: /s/ Charles R. Trego
    Charles R. Trego, Principal Financial Officer
     
  Dated: March 30, 2012

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Robert G. Averill        
Robert G. Averill   Director   March 30, 2012
         
/s/ Glenn Patterson        
Glenn Patterson   Director   March 30, 2012
         
/s/ Michael Kishinevsky        
Michael Kishinevsky   Director   March 30, 2012
         
/s/ D. Walker Wainwright        
D. Walker Wainwright   Director   March 30, 2012

 

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