Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2016

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

AXION POWER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		65-0774638
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

3601 Clover Lane
New Castle, Pennsylvania		16105
(Address of principal executive offices)		(Zip Code)

(724) 654-9300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company þ
(Do not check if a smaller reporting company)

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

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

Title of Each Class		Shares Outstanding at November 11, 2016
Common Stock, $0.005 par value		86,815,173

AXION POWER INTERNATIONAL, INC.

FORM 10-Q

Report Index

PART I - Financial Information		3

Item 1.	Financial Statements (unaudited)	3

	Consolidated Balance Sheets at September 30, 2016 and December 31, 2015	3

	Consolidated Statements of Operations and Comprehensive Loss for the Three Month and Nine Month Periods Ended September 30, 2016 and 2015	4

	Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2016 and 2015	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 4.	Controls and Procedures	25

PART II - Other Information		25

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 4.	Mine Safety Disclosures	26

Item 6.	Exhibits	27

Signatures		28

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

	September 30, 2016 (unaudited)			December 31, 2015
Assets

Cash and cash equivalents	$	301,005		$	1,006,743
Restricted cash		610,778			7,150,003
Accounts receivable, net		-			13,057
Other current assets		170,892			378,013
Inventories, net		267,467			279,835
Total current assets		1,350,142			8,827,651

Property and equipment, net		1,558,914			1,771,641

Total assets	$	2,909,056		$	10,599,292

Liabilities and stockholders’ (deficit)

Accounts payable	$	261,522		$	361,022
Other liabilities		553,275			790,000
Notes payable		31,526			371,263
Accrued interest convertible notes		130,814			93,755
Subordinated convertible notes		65,000			65,000
Derivative liability		1,572,899			-
Senior convertible notes, net of discount		2,458,047			7,085,818
Total current liabilities		5,073,083			8,766,858

Derivative liability		-			2,153,920
Total liabilities		5,073,083			10,920,778

Stockholders’ (Deficit)
Convertible preferred stock – 12,500,000 shares authorized
Series A preferred – 2,000,000 shares designated, $0.005 par value, 0 shares issued and outstanding		-			-
Common stock – 100,000,000 shares authorized $0.005 par value, 43,006,598 issued and outstanding (9,920 in 2015)		215,036			50
Additional paid-in capital		127,176,804			122,576,282
Retained earnings (deficit)		(129,304,254	)		(122,646,205	)
Cumulative foreign currency translation adjustment		(251,613	)		(251,613	)
Total stockholders’ (deficit)		(2,164,027	)		(321,486	)

Total liabilities & stockholders’ (deficit)	$	2,909,056		$	10,599,292

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

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015

Net sales	$	4,773		$	166,980		$	35,626		$	510,536

Cost of tangible goods sold		(4,069	)		233,405			186,401			639,142
Cost of goods sold - idle capacity		255,725			399,172			870,602			1,344,082
Gross loss		(246,883	)		(465,597	)		(1,021,377	)		(1,472,688	)

Research and development		130,865			218,948			474,487			719,119
Selling, general and administrative		625,777			609,463			2,135,970			2,362,520
Other expense, (income)		2,724			(4,591	)		(31,576	)		(4,599	)
Operating loss		(1,006,249	)		(1,289,417	)		(3,600,258	)		(4,549,728	)

Change in derivative value, (gain), loss		(592,081	)		(1,180,861	)		(1,357,948	)		639,989
Debt discount amortization expense		553,151			238,410			1,657,550			238,410
Interest expense, notes payable		1,425			26,245			11,563			34,891
Extinguishment loss on senior notes conversion		1,420,958			-			1,878,839			-
Premium expense on senior convertible notes		164,958			-			164,958			-
Placement agent warrants		-			-			-			23,826
Interest expense on convertible notes		161,331			1,455			702,828			4,232
Loss before income taxes		(2,715,991	)		(374,666	)		(6,658,048	)		(5,491,076	)
Income taxes		-			-			-			-
Net loss		(2,715,991	)		(374,666	)		(6,658,048	)		(5,491,076	)
Foreign translation adjustment		-			-			-			1
Comprehensive (loss)	$	(2,715,991	)	$	(374,666	)	$	(6,658,048	)	$	(5,491,077	)

Basic and diluted net loss per share	$	(0.24	)	$	(44.48	)	$	(1.72	)	$	(1,058.01	)

Basic and diluted weighted average common shares outstanding		11,383,205			8,424			3,859,865			5,190

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

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2016			2015
Operating Activities

Net loss	$	(6,658,048	)	$	(5,491,076	)

Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation expense		216,138			228,969
Change in derivative value (gain) loss		(1,357,948	)		639,989
Debt discount amortization expense		1,657,550			238,410
Extinguishment loss on senior note conversions		1,878,839			-
Placement agent warrants		-			23,826
Gain on forgiveness of stock compensation expense		(34,719	)		-
Stock-based compensation expense		35,955			244,271
Inventory valuation adjustment		168,265			111,500

Changes in operating assets & liabilities
Accounts receivable, net		13,057			(41,283	)
Other current assets		332,782			(19,660	)
Inventory		(155,897	)		181,033
Accounts payable		(99,500	)		153,863
Other current liabilities		(99,530	)		148,756
Accrued interest		481,109			28,133
Net cash (used in) operating activities		(3,621,947	)		(3,553,269	)

Financing Activities
Repayment of notes payable		(3,619,605	)		(75,902	)
Proceeds from convertible bridge notes		-			510,000
Change in restricted cash		6,539,225			-
Net cash provided by financing activities		2,919,620			434,098

Investing Activities
Capital expenditures		(3,411	)		-
Net cash (used in) investing activities		(3,411	)		-

Effect of exchange rate on cash		-			-
Net change in cash and cash equivalents		(705,738	)		(3,119,171	)
Foreign Translation adjustment		-			1
Cash and cash equivalents – beginning of period		1,006,743			3,436,198
Cash and cash equivalents – ending	$	301,005		$	317,028

Supplemental schedule of cash flow information:
Cash paid for interest	$	238,297		$	11,007
Cash paid for income taxes	$	-		$	-

Supplemental schedule of non-cash investing and financing activities:
Landlord lease deposit applied as payment against landlord note payable	$	19,297		$	-
Common stock issued for principal and interest payments on senior convertible notes	$	4,017,067		$	-
Common stock issued to settle liability	$	-		$	9,180
Common stock issued for warrants exercised	$	-		$	15,681
Reclassification of derivative liability for warrants exercised	$	-		$	3,500,126
Beneficial conversion feature related to convertible bridge notes	$	-		$	179,947
Debt discount and OID related to convertible bridge notes	$	-		$	243,169
Accounts payable converted to promissory note and prepaids	$	-		$	291,975
Round up shares	$	82		$	2,914
Insurance premium financed recorded as other asset and other liability	$	145,090		$	-
Debt Discount reduced due to cash payment on senior convertible notes	$	339,458		$	-
Other liabilities reduced for fees not owed due to return of cash to investors	$	247,437		$	-

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

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

1.	Basis of Presentation

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

In the opinion of management the accompanying unaudited consolidated financial statements contain all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, statements of income and comprehensive income and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). These consolidated financial statements should be read in conjunction with the audited financial statements and footnotes thereto in the Annual Report on Form 10-K for the year ended December 31, 2015. The results of income and comprehensive income for the three and nine month periods ended September 30, 2016 are not necessarily indicative of results of income and comprehensive income for the Company’s 2016 calendar year.

As approved by our board of directors and shareholders, we effected a 1-for-35 stock split of our common shares and Series A warrants on July 14, 2015. During 2015, there were 1,457 true-up rounding shares issued due to the above mentioned reverse stock split.

As approved by our board of directors and shareholders, we effected a 1-for-400 stock split of our common shares effective July 15, 2016. We did not effect a reverse split of any of our warrants and instead, each warrant is exercisable into 1/400th of a share of our common stock. All share related and per share information was adjusted to give effect to the reverse stock split from the beginning of the earliest period presented.

We have again sought approval from our shareholders to effect a reverse split of our common stock in a range of 1-for-100 to 1-for-400 as set forth in our Definitive Proxy Statement on Schedule 14A filed with the SEC on October 17, 2016. As stated in the 14A, we have asked our shareholders for their consent no later than November 14, 2016. This reverse split is to increase our stock price and to make shares available for conversion for satisfaction of our November 2015 notes.

The preparation of consolidated 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.

New Accounting Pronouncements

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230, Statement of Cash Flows, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. ASU 2016-15 will be effective for the reporting periods beginning after December 15, 2017, and early adoption is permitted. The Company is evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to employee share-based payment accounting, which includes provisions intended to simplify various aspects related to how share-based compensation payments are accounted for and presented in the financial statements. This amendment will be effective prospectively for reporting periods beginning on or after December 15, 2016, and early adoption is permitted. The Company is evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize the lease assets and lease liabilities classified as operating leases on the balance sheet. The amendment will be effective for reporting periods beginning on or after December 15, 2018, and early adoption is permitted. The Company is evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

On November 20, 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance does not change the existing requirement that only permits offsetting within a jurisdiction. The new guidance will be effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years (i.e., in the first quarter of 2017 for calendar year-end companies). Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact, if any, of the adoption of this newly issued guidance to its consolidated financial statements.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory , that simplifies the measurement of inventory for all entities. The amendment applies to all inventories that are measured using first-in, first-out or average cost. The guidance requires an entity to measure inventory at the lower of cost and net realizable value. The guidance must be applied prospectively and will be effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the expected impact, if any, of the adoption of the newly issued guidance to the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Topic 225-20): Simplifying the Presentation of Debt Issue Costs , that simplifies the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. This guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company elected early adoption of this newly issued guidance, and there was no impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidations (Topic 225-20): Amendments to the Consolidation Analysis , which affects current consolidation guidance. The guidance changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance must be applied using one of two retrospective application methods and is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company has adopted this new guidance, and there was no impact on the Company’s consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items , which changed the requirements for reporting extraordinary and unusual items in the income statement. The update eliminates the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. A reporting entity may apply the amendments prospectively or retrospectively to all periods presented in the financial statements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this newly issued guidance did not have an impact to the Company’s consolidated financial statements.

Inventories

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 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 September 30, 2016 and December 31, 2015 is as follows:

	September 30, 2016			December 31, 2015
Raw materials	$	151,707		$	363,559
Work in process		314,357			421,732
Finished goods		8,472			34,581
Inventory reserves		(207,069	)		(540,037	)
	$	267,467		$	279,835

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

Warrants

Warrants consist of the following:

	Shares			Weighted average exercise price		Weighted average remaining contract term (years)
Outstanding at January 1, 2016		12,582,352		$	1.85		1.97
Granted		-			-		-
Exercised		(10,000	)		-		-
Lapsed		(24,521	)		113.75		-
Outstanding at September 30, 2016		12,547,831		$	1.54		1.22

As of September 30, 2016, there were no Series B warrants classified as derivative liabilities. On April 27, 2016, 10,000 Series B warrants were exercised resulting in the issuance of 29 shares of the Company’s common stock. The remaining 24,521 Series B warrants expired on April 29, 2016. In addition, as of September 30, 2016, there were 11,967,716 warrants also classified as derivative liabilities relating to the November 2015 private placement of senior convertible notes and warrants. We effected a 1-for-400 reverse split of our common stock on July 15, 2016 (as contractually required as a result of needing shares for conversions of our November 2015 notes); however, the number of warrants was not split and instead each warrant is exercisable or convertible into 1/400th of a share of our common stock.

Equity Compensation

The Company adopted ASC 718 “ Compensation – Stock Compensation " whereby employee-compensation expense related to stock based payments is recorded over the requisite service period based on the grant date fair value of the awards. The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50 “ Equity-Based Payments to Non-Employees” . The measurement date for fair value of the equity instruments is determined by the earlier of (i) the date at which commitment for performance by the vendor or consultant is reached, or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

The stock based compensation expense for the nine months ended September 30, 2016 and 2015 was $35,955 and $244,771 of which $0 and $112,793 was for independent directors’ compensation in lieu of cash, respectively. In May 2016, the Board of Directors chose to forgive the previously reported $19,719 owed in Director’s fees for the fourth quarter of 2015, as well as forgive the $15,000 stock compensation for consulting services also reported for the fourth quarter of 2015.

Outstanding compensatory options consist of the following based on grant date:

				Weighted Average
	Number of Options			Exercise Price		Fair Value		Remaining Life (years)		Aggregate Intrinsic Value
Outstanding at January 1, 2016		38		$	104,600	$	34,832		4.9	$	-
Granted		-			-		-		-		-
Forfeited or lapsed		(2	)		977,012		359,868		-		-
Outstanding at September 30, 2016		36		$	90,454	$	26,936		4.2	$	-
Exercisable at September 30, 2016		30		$	112,317	$	31,925		3.8	$	-

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

Non-vested compensatory options consist of the following based on grant date:

	All Options
	Shares			Fair Value
Subject to future vesting at January 1, 2016		10		$	10,445
Granted		-			-
Forfeited or lapsed		-			-
Vested		(4	)		8,125
Subject to future vesting at September 30, 2016		6		$	8,869

As of September 30, 2016, there was $46,620 of unrecognized compensation related to non-vested options granted under the plans. The Company expects to recognize this expense over a weighted average period of 1.25 years. We have not granted any options in 2016.

Earnings (Loss) Per Share

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

If the Company had generated earnings during the nine months ended September 30, 2016 and 2015, the Company would have added 482,659,713 and 68 respectively, of common equivalent shares to the weighted average shares outstanding to compute the diluted weighted average shares outstanding. The Company had unexercised Series B warrants of 34,521 outstanding as of September 30, 2015. The remaining unexercised outstanding 34,521 Series B warrants would have added 98 common shares as permitted by the Amendment to the original warrant agreement.

Other Income

For the nine months ended September 30, 2016, the Company recognized $31,576 in other income. The Company sold various pieces of zero value equipment.

Notes with Landlords

At December 31, 2015, the Company had a balance of $237,600 in notes with its landlords for its two New Castle facilities, which was settled as of September 30, 2016. As per the note agreement the Company made payments of $25,000 per month to Becan Development and the final payment due in April was reduced by the original $19,297 lease deposit. In addition to the principal payments, Becan Development also received $2,300 in interest. As per the note agreement with S&S Partnership, the Company made monthly installment payments of $17,200 for a total of $137,600 in principal payments. The Company also paid $12,592 of accrued interest. As of April 1, 2016, the Company has moved from the Greenridge facility as planned and consolidated to the Clover Lane facility.

At September 30, 2016 there is no principal or remaining interest outstanding.

Subordinated Convertible Notes and Warrants

During 2013 , the Company sold $1,000,000 principal amount of its Subordinated Convertible Notes (the “Subordinated Notes”) to investors consisting of management and directors of the Company and one individual accredited investor. The sale of the Subordinated Notes did not carry any additional fees and expenses, so the Company received the entire $1 million in proceeds from the Subordinated Notes at closing. The Subordinated Notes are subordinated in right of repayment to the Company’s now expired 2013 Senior Notes and were to mature 91 days subsequent to the maturity date of the 2013 Senior Notes. The Subordinated Notes bear interest at the rate of 8% per year. The Subordinated Notes may be converted and/or prepaid in cash. The conversion price for the Subordinated Notes is $184,800 per share. The holders of the Subordinated Convertible Notes were issued five year warrants to purchase 1,097 shares of Company common stock (“Subordinated Warrants”). Each Subordinated Warrant has an exercise price of $528.50 and is convertible into 1/400 of a share.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

The fair value of the warrants, issued in connection with the Subordinated Notes is $304,000 in the aggregate and was calculated using the Black-Scholes-Merton option pricing model with the following assumptions: (i) expected life of 5 years, (ii) volatility of 80%, (iii) risk free interest rate of 0.75% and (iv) dividend yield of zero.

The outstanding principal balance at September 30, 2016 and December 31, 2015, related to the Subordinated Notes is $65,000. The subordinated notes remain outstanding as a result of a verbal agreement with the noteholders to continue to extend the maturity thereof.

10.

Public offering of common stock, Series A warrants and Series B warrants

Effective October 29, 2014, the Company consummated an underwritten public offering consisting of 53,572 shares of common stock ("Common Stock"), together with Series A warrants to purchase 53,572 shares of its Common Stock ("Series A Warrants") and Series B warrants to purchase 1,875,000 shares of its Common Stock (“Series B Warrants”) for gross proceeds to the Company of approximately $6.1 million and net proceeds of $5.5 million. The public offering price for each share of Common Stock, together with one Series A Warrant and one Series B Warrant, was $113.75. The Series A Warrants may be exercised for a period of five years and have an exercise price of $113.75 per share of Common Stock. The Series B Warrants were originally exercisable for a period of 15 months from the date of closing and expired on April 29, 2016 (due to an extension) and had an exercise price of $113.75 per share of Common Stock. In connection with the offering, the Company granted to the underwriter a 45-day option to acquire up to 8,036 additional shares of Common Stock and/or up to 8,036 additional Series A Warrants and/or up to 281,250 additional Series B Warrants. The Company has also closed on the underwriter’s exercise of the over-allotment option on the Series A Warrants and the Series B Warrants. The Company’s common stock and Series A Warrants are now listed on the OTCQB Capital Market under the symbols “AXPW” and “AXPWW”, respectively. On June 15, 2015, as the result of an agreement with the holders of our Series A warrants and Series B warrants, we adjusted the terms of our Series A warrants so that the exercise price was reduced to $.50, which number was changed to $17.50 as a result of our July 14, 2015 1-for -35 reverse stock split. The Series A warrants were not further reverse-split as a result of our July 2016 1:400 reverse split and instead each warrant is exercisable into 1/400 ^th of a share of our common stock. The Series B warrants were not subject to the 1-for-35 reverse split.

On April 26, 2016, 10,000 Series B warrants were exercised and 29 shares of the Company’s common stock were issued. As of September 30, 2016 there are no Series B warrants. The remaining 24,521 unexercised Series B warrants expired on April 29, 2016.

Accounting for the Series B warrants

Pursuant to ASC 815-40, due to the net settlement terms included in the Series B warrants, which requires an increased number of shares to be issued if the price of the Company’s common stock falls, the Company determined that the Series B warrants were not indexed to the Company’s own stock and must be recognized separately as a derivative liability in the consolidated balance sheet, measured at fair value and marked to market each reporting period.

As of September 30, 2016 and December 31, 2015, the fair value of the Series B warrants was estimated to be $0 and $35,764, respectively.

The change in the fair value of the Series B warrant liability for the nine months ended September 30, 2016 is as follows:

	Fair
	Value
Series B warrant liability, January 1, 2016	$	35,764
Revaluation of remaining Series B warrants		(35,159	)
Series B warrants exercised		(605	)
Series B warrant liability, September 30, 2016	$	-

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

The change in fair value of the Series B warrant liability for the nine months ended September 30, 2015 is a follows:

	Fair
	Value
Series B warrant liability, January 1, 2015	$	2,930,335
Series B warrants exercised		(3,500,126	)
Revaluation of remaining Series B warrants		639,989
Series B warrant liability, September 30, 2015	$	70,198

Fair Value Disclosure

The Company has two Level 3 financial instruments. Prior to the expiration of the Series B warrants on April 29, 2016 there were three Level 3 financial instruments.

11.

Description of the 2015 Private Placement

On November 4, 2015, we entered into a financing transaction for the sale of convertible notes and warrants issued by us with gross proceeds of $9,000,000 to us. Upon closing of the sale of the notes and warrants, which occurred on November 5, 2015, we received cash proceeds of $1.85 million and deposited an additional $7,150,000 into a series of control accounts in our name. Under the original terms of the notes, we are permitted to withdraw funds from our control accounts (i) in connection with certain conversions of the notes or (ii) otherwise, as follows: $1 million on each 30-day anniversary of the commencing on the 30 ^th day after the effective date of a registration statement being filed in connection with the transaction until there are no more funds in the control accounts, subject in each instance to equity conditions set forth in the convertible notes. As a result of the January 28, 2016 amendments to the notes, another $1.8 million was released on that date, and the balance of $5.35 million was to be released in 8 equal monthly installments commencing on May 2, 2016 (subsequently amended to be May 6, 2016), subject to terms and conditions set forth in the notes.

We received approximately $1,790,000 in net proceeds at closing, which occurred on November 5, 2015, after deducting our placement agent’s legal fee of $60,000. Offering expenses, including our placement agent’s fee, were approximately $183,750, which were paid out of operating cash at Closing. At each release of funds starting on May 6, 2016, we were to receive approximately $620,000 in net proceeds, after deducting our placement agent’s fee of $50,000, if equity conditions (certain stock price and volume and other conditions set forth in the loan documents from our November 5, 2015) were met. As a result of a further waiver and amendment entered into on May 1, 2016, the equity conditions were waived with respect to a release of $310,000 to us on May 6, 2016. Further, the waiver and amendment (i) waives equity conditions for our ability to make all installment and preinstallment payments in stock through May 6, 2017, and (ii) reduces the preinstallment and installment conversion prices to 75% of an average vwap price over the five trading days preceding the date of issuance. In June of 2016 an additional $355,000 was released.

In the third quarter of 2016 and subsequently, we received the following releases from the control accounts as follows: July $668,866, August $305,889, September $305,889 and October $288,889.

The initial conversion price of the notes was $492.00 per share (for optional conversions only and not Company amortization payments), and the initial exercise price of the 10,975,608 warrants was $1.29 per share (and post reverse split, each warrant is exercisable into 1/400th of a share of our common stock).

As a result of the “rollover” of $363,530 of principal amount and accrued and unpaid interest of our August 2015 Bridge Notes, on November 10, 2015, an additional note in the principal amount of $363,530 and an additional 443,328 warrants were issued to replace the rolled over Bridge Notes.

The outstanding principal bears interest at 9% per annum and shall be repaid or converted at monthly installment dates over a 14-month period. Additionally, the notes are convertible by the holder at any time after issuance. Pursuant to the optional conversion feature of these notes (as opposed to the monthly Company conversions which are at a discount formula as set forth below), the Company would deliver the number of shares of common stock equal to the outstanding principal amount, accrued interest amount, and a make whole amount equal to the interest that would be accrued on the conversion amount until maturity, divided by the fixed conversion price of $492.00. Additionally, a portion of the outstanding amount would have been exchanged for common shares at each Monthly Installment Date at a conversion price equal to the lower of the conversion price in effect and 85% of the fair value of the common shares the trading day prior to the installment date (now 75%). On the 23 ^rd date prior to any installment date, shares to be delivered based upon the conversion price formula for the installment amount, and then on the installment date in question, the amount of shares to be delivered is recalculated for the conversion price formula on that installment date, and if the conversion price is lower on the installment date than on the preinstallment date, a number of shares equal to the number to be delivered on the installment date less the number of shares delivered on the preinstallment date is delivered to the investor. The number of common shares deliverable under the contract is limited by a beneficial ownership cap of 4.99% for any single investor (except for one investor which has a cap of 9.99%), so shares may be deemed issued but held in abeyance by the transfer agent until the investor is able to accept further shares without exceeding the beneficial ownership cap.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

As the Company was required to separate the conversion option in the notes under ASC 815, Derivatives and Hedging, the Company recorded the bifurcated conversion option valued at $1.33 million as a derivative liability, which creates additional discount on the debt. The derivative liability is marked to market through the income statement each reporting period, while the discount created on the convertible notes is accreted as interest expense over the maturity period of the debt. Additionally, the convertible notes were issued to the investors in a basket transaction with warrants that are classified as derivative liabilities. These warrants, initially valued at $725,111 ($691,861 as discount on the debt and $33,250 as issuance costs for compensation to the underwriter), are also marked through the income statement each reporting period, while further discount is created on the convertible notes, and is accreted as interest expense using the effective interest method over the life of the debt.

At inception, the warrants were valued by calibrating the aggregate fair value of the notes and warrants to the transaction price, as required by ASC 820. Calibrating the valuation model to ensure that the model is consistent with the fair value at initial recognition provides a basis for estimating the inputs required in the analysis that are not directly observable. For each subsequent reporting date, the warrants are valued based on the payoff structure, considering the change in assumptions between the inception and the subsequent reporting date.

The conversion feature fair value is determined at inception and for each reporting date using a “with” and “without” analysis, based on the payoff structure of the notes. The same key assumptions utilized in the warrants valuation were considered in the conversion feature fair value,

Using the Calibration model, to calculate the mark to market value at September 30, 2016, the following key assumptions were utilized in both the valuations of the notes and warrants as follows: (i) risk free interest rate 0.29%, (ii) credit spread 125%, (iii) volatility 41.57%, and (iv) stock price $0.01.

Derivative liability relating to the 2015 Private Placement

The change in the fair value of the 2015 Private Placement derivative liability is as follows:

Private Placement derivative liability, January 1, 2016	$	2,118,156
Change in derivative value gain		(1,357,948)
Loss on forward shares		812,691
Private Placement derivative liability September 30, 2016	$	1,572,899

Securities Purchase Agreement

The notes and warrants were issued pursuant to the terms of a Securities Purchase Agreement among us and the investors named therein. The Purchase Agreement provided for the sale of the notes and warrants for gross proceeds of $9,000,000 to us.

Ranking

The notes are senior unsecured obligations of us.

Maturity Date

Unless earlier converted or redeemed, the notes mature 14 months from the Closing, subject to the right of the investors to extend the date (i) if an event of default under the notes has occurred and is continuing or any event shall have occurred and be continuing that with the passage of time and the failure to cure would result in an event of default under the Notes and (ii) for a period of 20 business days after the consummation of a fundamental transaction if certain events occur.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

Interest

The notes bear interest at the rate of 9% per annum and are compounded4 monthly, on the first calendar day of each calendar month. The interest rate will increase to 18% per annum upon the occurrence and continuance of an event of default (as described below). Interest on the notes is payable in arrears on each installment date (as defined below). If a holder elects to convert or redeem all or any portion of a note prior to the maturity date, all accrued and unpaid interest on the amount being converted or redeemed will also be payable. If we elect to redeem all or any portion of a note prior to the maturity date, all accrued and unpaid interest on the amount being redeemed will also be payable. The amount of interest due at any time is the amount of any interest that, but for any conversion, installment conversion, acceleration or redemption hereunder on such given date, would have accrued with respect to the conversion amount or installment amount being converted or redeemed under the note at the interest rate for the period from such given date through the maturity date of the note.

Optional Conversion

All amounts due under the notes are convertible at any time, in whole or in part, at the option of the holders into shares of our common stock at a fixed conversion price, which is subject to adjustment as described below. The notes are initially convertible into shares of our common stock at the initial price of $492.00 per share. This conversion price is subject to adjustment for stock splits, combinations or similar events and “full ratchet” antidilution provisions.

Payment of Principal and Interest

We have agreed to make amortization payments with respect to the principal amount of each note in shares of our common stock, subject to the satisfaction of certain equity conditions, or at our option, in cash on each of the following installment dates: the twenty-first trading day after the earlier of (x) the initial effective date of a registration statement filed in connection with this offering or (y) May 2, 2016; the first trading day of the calendar month immediately following the initial installment date (or if such date is less than twenty trading days after the initial installment date, the second calendar month immediately following the initial installment date to the extent); and then each month through and including the Maturity Date, each in an amount equal to 1/11 of the principal amount of each note. Payment in stock was originally at 85% of the market price based upon a variable weighted average price formula.

As a result of the amendment agreements entered into by us with each selling stockholder on January 28, 2016, an additional $1,800,000 was released from the controlled accounts on January 28, 2016, starting on May 2, 2016, and continuing for seven consecutive months thereafter on the 1 ^st business day of each such month $667,500 would have been released in total from the controlled accounts. As a result of a further waiver and amendment entered into on May 1, 2016, the equity conditions were waived with respect to a release of $310,000 to us on May 6, 2016. Further, the waiver and amendment (i) waives equity conditions for our ability to make all installment and preinstallment payments in stock through May 6, 2017, and (ii) reduces the preinstallment and installment conversion prices to 75% of an average vwap price over the five trading days preceding the date of issuance. An additional $355,000 was released in June 2016. In the third quarter of 2016 and subsequently, we received the following releases from the control accounts as follows: July $ 668,866, August $ 305,889, September $305,889 and October $288,889.

On August 10, 2016, $3,464,124 from the restricted cash accounts was released from the control accounts and returned to the investors on a pro rata basis based upon the original principal amount of the notes issued to each investor. Of the funds released, $3,299,166 was applied against the $9,363,530 notes and the additional $164,957 was applied as a 5% redemption premium to the investors. The placement agent fees have been reduced by an amount of $247,437 due to the cash repayment on the senior convertible notes. In addition, the debt discount recorded on the senior convertible notes was reduced by $339,458 as a result of the cash payment made.

Acceleration and Deferral of Amortization Amounts

During each period after an installment date and prior to the immediately subsequent installment date, a holder may elect to accelerate the amortization of the note at the applicable amortization conversion price for such prior installment date with respect to any given installment period, the holder may not elect to effect any acceleration during such installment period if either (x) in the aggregate, all the accelerations in such installment period exceeds the sum of two (2) other installment amounts, or (y) accelerations have been consummated in four (4) prior installment periods.

The holder of a note may, at the holder’s election by giving notice to us, defer the payment of the installment amount due on any installment dates, in whole or in part, to another installment date, in which case the amount deferred will become part of such subsequent installment date and will continue to accrue interest.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2016

(unaudited)

Events of Default

The notes contain standard and customary events of default including but not limited: (i) failure to register our common stock within certain time periods; (ii) failure to make payments when due under the Notes; and (iii) bankruptcy or insolvency of us.

If an event of default occurs, each holder may require us to redeem all or any portion of the notes (including all accrued and unpaid interest thereon), in cash, at a price equal to the greater of (i) up to 125% of the amount being redeemed, depending on the nature of the default, and (ii) the intrinsic value of the shares of common stock then issuable upon conversion of the note.

Fundamental Transactions

The notes prohibit us from entering into specified transactions involving a change of control, unless the successor entity assumes in writing all of our obligations under the notes under a written agreement.

In the event of transactions involving a change of control, the holder of a note will have the right to require us to redeem all or any portion of the Note it holds (including all accrued and unpaid interest thereon) at a price equal to the greater 125% of the amount of the Note being redeemed and the intrinsic value of the shares of common stock then issuable upon conversion of the note being redeemed.

Limitations on Conversion and Issuance

A note may not be converted and shares of common stock may not be issued under the notes if, after giving effect to the conversion or issuance, the holder together with its affiliates would beneficially own in excess of 4.99% of our outstanding shares of common stock. At each holder’s option, the note blocker may be raised or lowered to any other percentage not in excess of 9.99%.

As a result of the January 28, 2016 amendment agreements, there is no exchange cap in this transaction.

January 28, 2016 Amendment Agreements

On January 28, 2016, we entered into amendment agreements with each of the selling stockholders with respect to the November 5, 2015 private placement exempt from securities registration under Section 4(a)(2) of the Securities Act of 1933 and Rule 506(b) of Regulation D. On or about November 20, 2015, we filed a registration statement on Form S-1 to register the Registrable Securities, and as a result of comments received from the SEC, we withdrew this original S-1 on January 21, 2016. Subsequent to the withdrawal of the original S-1, we sought to make certain amendments to the terms of the securities purchase agreement and registration rights agreement, entered into in connection with the sale of the senior secured convertible notes, as well as to the notes. The amendments are embodied in the amendment agreements with each of the buyers.

Changes to the securities purchase agreement are as follows:

The term “principal market” was changed from the Nasdaq Capital Market to the OTCQB. This change was also made in the notes and accompanying warrants for conformity.

Section 4(d) was amended to add the following at the end of the Section. “Until the later of June 2, 2016 and the date on which the Buyers are eligible to resell all shares of Company Common Stock underlying the Notes and Warrants (assuming cashless exercise of the Warrants) without restriction under Rule 144 (assuming such Buyers are not then affiliates of we), we may not make any payments to Affiliates of we other than (i) up to $11,800 to repay, in full, that certain bridge note issued by we to Walker Wainwright; (ii) director and Board committee fees in the ordinary course of business, consistent with past practices, to its non-management directors accruing on or after January 1, 2016 in an amount not to exceed $25,000, in the aggregate, per calendar quarter, (iii) current compensation arrangements (but not accrued and unpaid obligations for compensation to current and former officers of we) to its executive officers upon terms and conditions publicly existing as of December 31, 2015 and/or disclosed on a Current Report on Form 8-K on January 27, 2016; (iv) stock options and/or restricted stock as per normal Board of Directors policy; and (v) customary, reasonable and usual travel and lodging expenses for Company business.”

We no longer have the obligation to obtain shareholder approval for the issuance of securities with respect to the private placement as we are moving our listing to the OTCQB which does not require shareholder approval for issuance of securities in this transaction. Accordingly, the “exchange cap” at 19.9% of issued and outstanding shares was also omitted.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2016

(unaudited)

Changes to the notes are as follows:

The definition of an event upon which funds can be released from any of the controlled accounts was amended to read as follows: “Controlled Account Release Event” means, as applicable, (i) with respect to any Restricted Principal designated to be converted in a Conversion Notice, our receipt of both (A) such Conversion Notice hereunder executed by the Holder in which all, or any part, of the Principal to be converted includes any Restricted Principal and (B) written confirmation by the Holder that the shares of Common Stock issued pursuant to such Conversion Notice have been properly delivered in accordance with Section 3(c) (in each case, as adjusted, if applicable, to reflect the withdrawal of any Conversion Notice, in whole or in part, by the Holder, whether pursuant to Section 3(c)(ii) or otherwise), (ii) our receipt of a notice by the Holder electing to effect a release of any Restricted Principal to we, (iii) on the date of execution of the certain Amendment Agreements, dated January 28, 2016, by and among we and certain holders of the Notes, which act as an amendment to the Notes, $1,800,000, and (iv) on May 2, 2016, and the first Trading Day of each of the subsequent seven calendar months thereafter, the lesser of (x) the amount of Restricted Principal then outstanding hereunder and (y) the Holder Pro Rata Amount of $668,750; provided, in the case of clause (iv) above, as of such date of determination, no Equity Conditions Failure then exists. The Buyer hereby waives all Equity Condition Failures existing on or before the date of this Agreement.”

Each existing note is being split into two notes, one of which is in the principal amount of the buyer’s pro rata portion of the initial $3,650,000 principal amount of funds released from the controlled accounts, and the second of which represents the remaining principal amount of the original note issued to that buyer.

Changes to the registration rights agreement are as follows:

The filing deadline for the initial registration statement (registering shares to be issued upon conversion of the $3,650,000 principal amount of the notes and interest thereon representing the total amount of funds released from the controlled accounts to date) was changed to January 29, 2016, and the effectiveness deadline for the initial registration statement was changed to February 16, 2016.

The number of registrable securities was reduced to 26,839 shares of our common stock which may be issued upon conversion of up to $3.65 million principal amount of the notes and 2,416 shares of our common stock which may be issued upon conversion of interest due and owing on the released $3.65 million principal amount.

The initial notice date for installment payments by us is now the earlier of the effectiveness date of the registration statement being filed on January 29, 2016, and May 2, 2016.

May 1, 2016 Waiver and Amendment

The Company has entered into a Waiver and Amendment (“Waiver”) with each of the buyers listed on the Schedule of Buyers attached to the securities purchase agreement. In each Waiver, the Company and the Buyer agreed as follows:

•

With respect to the Notes, the Buyer waives the Volume Failure (as defined in the securities purchase agreement) and the Price Failure (as defined in the securities purchase agreement) on any and all Installment Conversions (as defined in the securities purchase agreement) and delivery of shares for any Pre-Installment Conversion Shares (as defined in the securities purchase agreement) pursuant to an Installment Notice (as defined in the securities purchase agreement) until May 1, 2017.

•

Section 3(b)(2) of the Notes is amended by replacing the definition of Conversion Price, as defined in the Notes, with the following definition:

“as of any Conversion Date or other date of determination, a price per share equal to the lowest of (x) $492.00, subject to adjustment as provided in this Note (the price set forth in this clause (x), the "Fixed Conversion Price"), (y) 75% of the arithmetic average of the Weighted Average Prices of the Common Stock during the five (5) consecutive Trading Day period ending immediately preceding the time of delivery of the applicable Conversion Notice, and (z) 75% of the Weighted Average Price of the Common Stock on the Trading Day of the delivery of the applicable Conversion Notice. For the avoidance of doubt, all such foregoing determinations to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction during the applicable calculation period.”

•

All references in paragraphs 7, 8 and 11 of the Notes to “Conversion Price” are amended to state “Fixed Conversion Price.”

•

Paragraph 4 of the Amendment Agreement, dated January 28, 2016, among the Company and the Buyers, is amended by adding the following sentence at the end of the paragraph:

“Notwithstanding anything to the contrary in this paragraph 4, the Company and the Buyers hereby acknowledge that the Equity Conditions for the Controlled Account Release Event on May 6, 2016 are not, and are deemed not to be, satisfied, and the Buyers hereby waive the Equity Conditions for the Controlled Account Release Event on May 6, 2016, for an aggregate release of $310,000, to be released proportionately among the Buyers based upon the pro rata share as a result of the original principal amounts of the Notes.”

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2016

(unaudited)

August 8, 2016 Waiver and Amendment to the November 2015 Notes

The Company has entered into a Waiver and Amendment (“Waiver”) with each of the buyers (“Holders”) listed on the Schedule of Buyers attached to that certain Securities Purchase Agreement (“SPA”), dated November 5, 2015, among the Company and the Holders (each capitalized term used below is used as defined in the SPA and notes entered into in conjunction with the SPA, “Notes”). In each Waiver, the Company and the Holders agreed as follows:

Section 31(n) of the Notes is hereby amended to add the following:

“Notwithstanding anything to the contrary within, there shall be a Controlled Account Release Event on August 8, 2016 in an amount equal to the Holder’s Pro Rata Amount of $300,000. The Company has requested further Controlled Account Release Events on each of

September 1, 2016, October 1, 2016 and November 1, 2016 in an amount equal to the Holder’s Pro Rata Amount of $300,000, and if, as and when a future release or releases occur, the Holder shall have been automatically deemed to have waived any Equity Condition Failures with respect to such release.”

All Restricted Principal in the Controlled Account in excess of the Holder’s Pro Rata Amount of $1,200,000 shall be immediately returned to Holder, and the amount of the returned Restricted Principal shall be credited against the outstanding principal balance of the Note such that for every $1.05 of Restricted Principal returned, the principal amount of the Note shall be reduced by $1.00.

The Waivers became effective on August 8, 2016 upon entry into waivers by all of the Holders, individually, with the Company.

2015 Private Placement Debt Rollforward:

Balance- January 1, 2016	$	7,085,818
Conversion of senior convertible notes		(3,573,412	)
Cash repayment of senior convertible notes		(3,299,166	)
Amortization of senior convertible notes		2,244,807
Balance- September 30, 2016	$	2,458,047

During the nine months ended September 30, 2016, the Company has issued 37,509,851 shares of its common stock to convert $3,573,412 of principal. In addition on September 30, 2016, the Company issued 4,453,568 shares of common stock for $272,046 interest and 1,133,546 shares of common stock for $171,613 make whole interest. The Company will be required to issue additional true-up shares which cannot be calculated at this time. During the nine months ended September 30, 2016, the Company recognized an extinguishment loss of $2,043,797 on the conversions of the senior convertible notes. The loss is determined based on the difference between the conversion price as calculated on the installment date versus the previously calculated price on the notice date.

As of November 11, 2016 86,638,138 shares of our common stock have been issued as a result of the conversion of principal, interest, make-whole and true ups related to the November 2015 Senior Convertible Notes which shall be applied consistent with the conversion notices and for Pre-installment shares, calculation and application of the applicable Installment price and true-up arising therefrom. Until and unless we are able to make more shares available for conversion of the notes, we will be unable to meet our obligations to repay the notes, and we will likely be unable to obtain the remaining $321,889 in the control accounts.

12.

Related party transactions

During the first nine months of 2016, the Company engaged the services of a marketing firm to provide branding and web site development at a cost of $138,338. We engaged the firm to further provide sales and marketing services for the full year at an estimated cost of $115,000. The principal of this firm is our Chief Executive Officer’s brother in law; however, neither our Chief Executive Officer nor his immediate family has any direct or indirect interest in the marketing firm. At September 30, 2016, the balance owed to this firm was $13,750 which is included in the Company’s accounts payable balance.

At September 30, 2016, the Company’s accounts payable balance included $76,540 as a result of related party transactions. Of those transactions, $59,593 was for consulting fees associated with the previous CEO, $13,750 was for marketing services of which the principal of the firm is our Chief Executive Officer's' brother in law, however, neither our Chief Executive Officer nor his immediate family has any direct or indirect interest in the marketing firm, and $3,197 was for employee related travel expense reimbursement. At September 30, 2015, the Company’s accounts payable balance included $64,976 in related party transactions. Of those transactions $59,593, was for fees associated with the previous CEO, $623 was for director related meeting fees, and $4,760 was for employee related travel expense reimbursement.

At September 30, 2016, the subordinated notes, all held by related parties had a balance of $65,000. Accrued interest payable on the subordinated was approximately $18,000.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2016

(unaudited)

13.

Going concern

The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern. At September 30, 2016 the Company’s working capital was $(3,723) million. The financial resources of the Company will not provide sufficient funds for the Company’s operations beyond the fourth quarter of 2016, as those operations currently exist. Subsequent funding will be required to fund the Company’s ongoing operations, working capital, and capital expenditures beyond the fourth quarter of 2016. No assurances can be given that the Company will be successful in arranging the further funds needed to continue the execution of its business plan, which includes the development and commercialization of new products, or even if further funding is available, upon what terms. Failure to obtain such funds on terms acceptable to the Company’s management 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 unaudited consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might occur if the Company is unable to continue as a going concern.

14.

Subsequent events

Resignation of Auditor

On October 11, 2016, the Company was advised by its independent registered accounting firm, Mayer Hoffman McCann P.C. (“Mayer Hoffman”), of its intention to not seek re-appointment as the Company’s independent registered public accounting firm for the year ending December 31, 2016 and to cease serving as the Company’s independent registered public accounting firm upon completion of the review of the Company’s unaudited financial statements for the quarter ended September 30, 2016.

Mayer Hoffman’s reports on the financial statements of the Company for each of the past two fiscal years have neither contained an adverse opinion or a disclaimer of opinion, nor been qualified or modified as to uncertainty, audit scope or accounting principles, except that, the reports included an explanatory paragraph with respect to the uncertainty as to the Company’s ability to continue as a going concern. During the past two fiscal years and in the subsequent interim period through October 11, 2016, there were (i) no disagreements with Mayer Hoffman on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Mayer Hoffman, would have caused it to make reference to the subject matter of the disagreements in connection with its reports, and (ii) there were no reportable events (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).

Shareholder Approval Sought for Reverse Split

On October 17, 2016, we filed a Definitive Proxy Statement on Schedule 14A seeking approval from our shareholders for another reverse split of our common stock in a ratio of at least 1-for-100 but not to exceed 1-for-400 (with the final ratio to be determined by our Board). The deadline for shareholder approval of this reverse stock split was November 14, 2016; however, as of November 9, 2016, we had not received the requisite number of votes for a Quorum of shares under Delaware law to approve or not approve the reverse split proposal, so we, have extended the solicitation period until November 30, 2016, at 5:00 pm EST. If our shareholders do not approve the reverse split, we will be required to further seek approval consistent with our contractual obligations. Without this reverse split we are unable to provide additional shares of our common stock for issuance upon conversion notes issued in the November 2015 private placement.

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2016

(unaudited)

Execution of Non Binding Letter Of Intent

Effective on November 1, 2016, Axion Power International, Inc. entered into a non binding Tri-Party Letter of Intent with Fengfan Co. Ltd. of Baoding, China (SH. 600482) and LCB International Inc. of BVI, regarding the sale of Axion’s PbC technology in China, Taiwan, Hong Kong and Macau to Fengfan and LCB, along with non-exclusive licensing rights in North America. The IP package includes the sale of Axion’s five PbC patents in China; nonexclusive license to its 15 PbC patents in the United States; and will give Fengfan and LCB access to all of Axion’s intellectual property rights to PbC technology for use in a wide variety of applications, from automotive to energy storage.

The Letter of Intent, calls for a $5 million cash infusion into Axion over a 24-month period. As a result of the signing of this Letter of Intent, Fengfan will make an initial cash down payment of $250,000 to Axion by December 1, 2016 upon receiving regulatory approvals.

Concurrent with the signing of this Letter of Intent and the receipt of the $250,000, the three parties are targeting a definitive Tri-Party Agreement by the end of January 2017. Once finalized, quarterly payments to Axion are anticipated to begin in the first quarter of 2017. Then, starting one year following achievement of agreed-upon PbC volume production goals, or agreed-to PbC battery performance and cost objectives, Axion will receive a royalty of two percent of Fengfan’s net sales of PbC batteries in Greater China and North America, with a guaranteed annual minimum of $1 million.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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.

Business targets and objectives

During 2015, our business objectives were aimed at providing PbC batteries, electronics and systems to meet a variety of consumer and business needs. To achieve these objectives, the overall business strategy includes collaborative working relationships that could allow the following to occur:

	·	Manufacture of batteries using our proprietary electrodes thereby allowing us to solely focus on the electrode manufacture
	·	Distribution of PbC batteries and product systems by established commercial organizations to allow shorter time to market
	·	Licensing of PbC products to established companies for use in their systems design and sale to broaden the acceptance of the technology
	·	Territorial intellectual property and applications licensing to facilitate global expansion and development of PbC uses beyond the capabilities of limited Axion resources
	·	Direct marketing and sale of batteries and systems with a very focused effort by Axion on discrete applications and markets.

The nearer term market opportunities in 2015 were the non-vehicle targets and significant work is in process to:

	·	Provide target markets with custom engineered solutions
	·	Leverage and potentially profitably grow this custom-focused business model
	·	Build and explore synergistic relationships within the customer and supplier spheres
	·	Explore and commercialize both market-wide and custom solutions, including new applications for PbC technology
	·	Use market feedback to improve and enhance PbC technology performance.

Our plan to reach these objectives over 2016 is comprised of the following:

	·	Complete restructuring and completion of combination of the Greenridge and Clover Lane facilities
	·	Complete ongoing cost cutting and efficiency increase measures
	·	Continue to identify and work with strategic partners to reach business objective
	·	Commence initiative to obtain corporate and brand identity and increase market awareness of technology and products through effective public relations and marketing campaign
	·	Identify discrete products with broad market demand utilizing the PbC technology such as a new generation residential energy storage system and a remote, off-grid lighting system.

On February 2016, we initiated the following specific business strategies:

	·	Detailed and rigorous cost and expense management in order to maximize efficient use of our cash flow and create opportunities for business development
	·	Development of “value-added” strategic partnership plan with third parties, teaming agreements and joint ventures to derive business development and production opportunities with more established and better capitalized entities to develop business and production opportunities for our products
	·	Focused product applications development effort to better identify and capitalize upon application opportunities with a shorter “time to market” in order to identify near term commercial opportunities for marketing of our products

·	Near term specific commercial opportunities to achieve prompt market placement of our products
		o	Micro off-grid
		o	Residential/commercial energy storage
		o	Frequency regulation such as PJM Interconnection
		o	Battery distribution network development for “stand alone” applications such as our dual battery street lamp application
·	Development of new and comprehensive marketing plan with messaging, advertising and marketing communication of the “revised and revamped” Axion
·	Comprehensive realignment of our personnel and corporate operations to implement our “act fast and be decisive” corporate philosophy

We continue to develop third party PbC battery suppliers that could manufacture batteries using our PbC technology, and selling energy storage systems. We believe that this streamlined effort with regard to our carbon negative electrode manufacturing, as well as consolidation of our facilities and refocus of our business initiatives, will provide us with the best opportunity to commercialize our technology and thereby provide the potential to improve our financial condition, cash flow and market presence. It is our primary goal to become the leading supplier of carbon electrode assemblies for the global lead – acid battery industry.

Net sales are derived from the sale of lead - acid batteries for specialty collector and racing cars; sales of AGM batteries and flooded lead- acid batteries: sales of PbC batteries and PbC energy storage components and devices and from the sales of products related to advanced battery applications for our PbC technology.

Cost of tangible goods sold include raw materials, components, labor, and allocated manufacturing overhead to produce batteries and provide components for PbC energy storage devices and lead-acid batteries sold to customers. Cost of tangible goods sold represented in our current financial statements may not be indicative of the future costs to produce batteries and provide components for PbC energy storage devices. Also included in tangible cost of goods sold are provisions for inventory valuation and obsolescence reserves.

	·	Cost of goods sold – idle capacity includes direct production costs in excess of charges allocated to our finished goods in production. Operating costs include direct and indirect labor, production supplies, rent, insurance, property taxes, utilities and repairs and maintenance. Our charges for labor and overhead allocated to our finished goods are determined on a basis which is calculated presuming normal capacity utilization of two shifts a day, five days per week, which is lower than our actual production costs incurred. Operating costs in excess of production allocations are expensed in the period incurred rather than to the cost of finished goods produced.

	·	Research and development expenses include expenses to design, develop and test advanced batteries, carbon electrode assemblies and systems for our energy storage products with prospective customers based on our patented lead carbon technology. Also included are materials consumed in the production of pilot plant production and our engineering activities.

Selling, general and administrative expenses include business development, sales and marketing expenses; administrative expenses; and, expenses associated with being a public company.

Board of Directors

In January 2016, D. Walker Wainwright resigned as a Director. Effective February 1, 2016, our board appointed Robert A. Maruszewski as a Director to take the seat vacated by Mr. Wainwright. Mr. Maruszewski’s appointment will serve until the formal shareholder election for board members to be held at the Company’s 2018 Annual Meeting. Stanley A. Hirschman was appointed as a Director and Audit Committee Chairman also effective as of February 1, 2016.

Effective as of February 1, 2016, Donald Farley has resigned from responsibilities as interim CEO but shall remain as our Chairman and our Director. Also, effective as of February 1, 2016, Richard H. Bogan was appointed as our chief executive officer.

Effective April 21, 2016, Stanley Hirschman resigned as a director and chairman and member of the Audit Committee of Axion Power International, Inc. (the “Company”) due to his inability to devote the time and resources necessary to continue in his role as a director. On April 25, 2016, the Company’s Board of Directors appointed Richard Bogan, its Chief Executive Officer, as its Chairman in addition to being its CEO, and Donald Farley, as its Vice Chairman. The Board also appointed Michael Kishinevsky as the interim chairman of its Audit Committee.

Effective May 25, 2016, the Board of Directors of Axion Power International, Inc. appointed Michael J. Corcoran as a director to take the seat vacated by Stanley Hirschman. Mr. Corcoran’s appointment will serve until the next formal shareholder meeting. The Board also appointed Mr. Corcoran as the Chair of its Audit Committee.

Effective as of September 2, 2016, Axion Power International, Inc. (the “Company”) entered into an employment contract with Richard Bogan, its Chief Executive Officer pursuant to a written Executive Employment Agreement (the “Executive Employment Agreement”). The following summarizes the material terms of the Employment Agreement:

The term of the Employment Agreement begins effective as of September 1, 2016 and continues until August 31, 2019;

Mr. Bogan will receive an annual salary of $300,000 during the term of the Executive Employment Agreement;

If Mr. Bogan’s employment is terminated (i) other than for cause or for good reason , the Company shall pay him an aggregate severance amount equal to his base salary for the remainder of the term of this employment agreement or one year, whichever is shorter but in no event less than six (6) months plus any accrued and unused vacation for the current year and accrued but unpaid bonus if defined objectives have been achieved.

The agreement also states that the Company will immediately and automatically pay Mr. Bogan the sum of $600,000 upon a change in control, which is defined as (i) a transaction or series of related transactions resulting in a 40% or greater change in ownership of the Company’s equity on a fully diluted basis (other than as a result of conversion of the senior convertible notes issued by the Company in November 2015); or (ii) a sale or other disposition of all or substantially all of the assets of the Company (or consummation of a series of related transactions having the same effect).

Mr. Bogan will receive stock options as determined by the Board of Directors upon receipt of consent from the investors in the November 2015 financing as required by the agreements entered into in connection therewith; and

In connection with the Executive Employment Agreement, Mr. Bogan signed an agreement regarding confidential information and non-competition (the “Non-Competition Agreement”) whereby Mr. Bogan and the Company agree, for a period of two years after the termination of Mr. Bogan’s employment with the Company, that:

Mr. Bogan will not render services to Conflicting Organizations (as defined therein) or with respect to Conflicting Products (as defined therein) without written assurances to the Company that such services will not be rendered in connection with any Conflicting Product; If, within one month after the termination of Mr. Bogan’s employment with the Company, he is unable to find employment due solely to the Non-Competition Agreement, the provisions of the Non-Competition Agreement will continue in effect so long as the Company continues to pay Mr. Bogan an amount equal to his base pay at the time of his termination (the “Termination Payments”). The Termination Payments will continue for a period of 23 months or until the Company gives Mr. Bogan written permission to accept conflicting employment or a written waiver of the provisions of the Non-Competition Agreement; and

If, after the termination of Mr. Bogan’s employment with the Company, he accepts other employment but due solely to the Non-Competition Agreement his gross monthly income in such other employment is less than his base pay at termination, the Company will pay Mr. Bogan the difference between his base pay at termination and his gross monthly income in such other employment.

Key Performance Indicators, Material Trends and Uncertainties

We utilize appropriate non-financial measures to evaluate the performance of our research and development and engineering activities and projects with prospective customers. 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 three most significant financial metrics for our business are:

Revenue growth of our PbC technologies.

Extracting an acceptable and competitive level of operating profit from our revenue (as measured by EBITDA).

Ensuring we have sufficient capital to fund our short and long-term business requirements.

We will continue to characterize and perfect our PbC products through working with targeted prospective customers in a number of projects as we move into commercialization. While we are working toward successful commercialization of our PbC products, we cannot provide assurances that the PbC products will be successful in their present design or that further research and development will not be needed. The successful completion of present and future characterization and demonstration projects is critical to the development and acceptance of our PbC technology.

We must continue to improve methodologies for manufacturing 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 commercialize our PbC products in large quantities.

Results of Operations

Summarized selected financial data for the three months ended September 30, 2016 and 2015

	2016			2015			Change			% Change
Net sales	$	4,773		$	166,980		$	(162,207	)		97	%
Cost of tangible goods sold		(4,069	)		233,405			(237,474	)		102	%
Cost of goods sold – idle capacity		255,725			399,172			(143,447	)		36	%
Gross loss		(246,883	)		(465,597	)		218,714			47	%

Research and development expense		130,865			218,948			(88,083	)		40	%
Selling, general and administrative expense		625,777			609,463			16,314			3	%
Other (income)		2,724			(4,591	)		7,315			159	%
Operating loss		(1,006,249	)		(1,289,417	)		283,168			22	%

Change in derivative value		(592,081	)		(1,180,861	)		588,780			50	%
Debt discount amortization expense		553,151			238,410			314,741			132	%
Interest expense, note payable		1,425			26,245			(24,820	)		95	%
Extinguishment loss on senior notes conversion		1,420,958			-			1,420,958			100	%
Premium expense on senior convertible notes		164,958			-			164,958			100	%
Interest on convertible notes		161,331			1,455			159,876			10,988	%
Net loss before income taxes	$	(2,715,991	)	$	(374,666	)	$	(2,341,325	)		625	%

Reconciliation of net loss to adjusted EBITDA

	2016			2015			Change			% Change
GAAP net loss before income taxes	$	(2,715,991	)	$	(374,666	)	$	(2,341,325	)		625	%

Change in derivative value		(592,081	)		(1,180,861	)		588,780			50	%
Debt discount amortization expense		553,151			238,410			314,741			132	%
Interest expense, note payable		1,425			26,245			(24,820	)		95	%
Extinguishment loss on senior notes conversion		1,420,958			-			1,420,958			100	%
Premium expense on senior convertible notes		164,958			-			164,958			100	%
Interest on convertible notes		161,331			1,455			159,876			10,988	%
Depreciation expense		72,204			71,920			284			.4	%
Share based compensation expense		11,856			103,737			(91,881	)		89	%
Adjusted EBITDA (1)	$	(922,189	)	$	(1,113,760	)	$	191,571			17	%

Summarized selected financial data for the nine months ended September 30, 2016 and 2015

	2016			2015			Change			% Change
Net sales	$	35,626		$	510,536		$	(474,910	)		93	%
Cost of tangible goods sold		186,401			639,142			(452,741	)		71	%
Cost of goods sold – idle capacity		870,602			1,344,082			(473,480	)		35	%
Gross loss		(1,021,377	)		(1,472,688	)		451,311			31	%

Research and development expense		474,487			719,119			(244,632	)		34	%
Selling, general and administrative expense		2,135,970			2,362,520			(226,550	)		10	%
Other (income)		(31,576	)		(4,599	)		(26,977	)		587	%
Operating loss		(3,600,258	)		(4,549,728	)		949,470			21	%

Change in derivative value		(1,357,948	)		639,989			(1,997,937	)		312	%
Debt discount amortization expense		1,657,550			238,410			1,419,140			595	%
Interest expense, note payable		11,563			34,891			(23,328	)		67	%
Extinguishment loss on senior notes conversion		1,878,839			-			1,878,839			100	%
Premium expense on senior convertible notes		164,958			-			164,958			100	%
Placement agent fees		-			23,826			(23,826	)		100	%
Interest on convertible notes		702,828			4,232			698,596			16,507	%
Net loss before income taxes	$	(6,658,048	)	$	(5,491,076	)	$	(1,166,972	)		21	%

Reconciliation of net loss to adjusted EBITDA

	2016			2015			Change			% Change
GAAP net loss before income taxes	$	(6,658,048	)	$	(5,491,076	)	$	(1,166,972	)		21	%

Change in derivative value		(1,357,948	)		639,989			(1,997,937	)		312	%
Debt discount amortization expense		1,657,550			238,410			1,419,140			595	%
Interest expense, note payable		11,563			34,891			(23,328	)		67	%
Extinguishment loss on senior notes conversion		1,878,839			-			1,878,839			100	%
Premium expense on senior convertible notes		164,958			-			164,958			100	%
Placement agent fees		-			23,826			(23,826	)		100	%
Interest on convertible notes		702,828			4,232			698,596			16,507	%
Depreciation expense		216,138			228,969			(12,831	)		6	%
Share based compensation expense		35,955			244,271			(208,316	)		85	%
Adjusted EBITDA (1)	$	(3,348,165	)	$	(4,076,488	)	$	728,323			18	%

(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 Income for the three and nine months ended September 30, 2016 and September 30, 2015 (in thousands)

Net Sales

Net sales for the three months ended September 30, 2016 were $5 compared to $167 for the same period in 2015. Net sales for the nine months ended September 30, 2016 were $36 compared to $511 for the same period in 2015. We had one customer that accounted for approximately 87% of sales for the nine months ended September 30, 2016 as compared to three customers that accounted for approximately 68% of net sales for nine months ended September 30, 2015. Sales declined due the Company’s decision to discontinue the manufacturing and sales of lead-acid batteries and focus on the continued development of its PbC technology.

Cost of Tangible Goods Sold

The costs of tangible goods sold for the three months ended September 30, 2016 were $(4) compared to $233 for the same period in 2015. Cost of goods sold for the nine months ended September 30, 2016 were $186, which included and inventory revaluation of $168, compared to $639 for the nine months ended September 30, 2015 which included an inventory revaluation of $111,500. Cost of goods sold declined for the three and nine months ended September 30, 2016 due to a reduced sales as well as the write off of expired warranty costs.

Cost of Goods Sold –Idle Capacity

The costs of goods sold-idle capacity for the three months ended September 30, 2016 was $256 compared to $399 for the three months ended September 30, 2015. The cost of goods sold idle-capacity for the nine months ended September 30, 2016 was $871 and $1,344 for the nine months ended September 30, 2015. The decrease in cost of goods sold idle-capacity, resulted primarily from decreased headcount and fixed expenses as well as labor due to decreased manufacturing.

Gross Loss

Gross loss for the three months ended September 30, 2016 was $247 compared to $466 for the same period in 2015. Gross loss for the nine months ended September 30, 2016 was $1,021 compared to $1,473 for the same period in 2015. The variance in gross loss for both the three and nine months ended September 30, 2016 is due primarily to the headcount reductions mentioned above as well as decreased revenue, decreased cost of goods sold and decreased cost of idle capacity.

Research and Development Expenses

Research and development expense was $131 compared to $219 for the three months ended September 30, 2015. Research and development expenses for the nine months ended September 30, 2016 were $474 compared to $719 for the nine months ended September 30, 2015. The decrease in research and development expense was due to reduced headcount and reduced inventory use for testing.

General and Administrative Expenses

General and administrative expense for the three months ended September 30, 2016 was $626 compared to $609 for the three months ended September 30, 2015. General and administrative expense for the nine months ended September 30, 2016 was $2,136, which included one-time expense of $150 related to the consolidation of our facilities, and increase in expense of $130 for additional consulting service related to the derivative accounting associated with the November 2015 private placement of senior convertible notes, and $120 for related SEC filings. For the same period in 2015 the selling, general and administrative expense was $2,363

Other Income

The Company recorded other income of $31,576 in 2016 and $4,599 in 2015. The income was due to the sale of pieces of zero value equipment.

Non-Operating (Income) Expenses

Change in Derivative Valuation

For the three months ended September 30, 2016, the Company recorded gains of $592 and $1,181 for the same period in 2015. For the nine months ended September 30, 2016, the Company recorded a gain of $1,358 compared to a loss of $640 for the nine months ended September 30, 2015.

Debt Discount Amortization Expense

For the three months ended September 30, 2016, the Company recognized an expense of $553 of amortization expense related to the 2015 private placement. For the same period in 2015, amortization expense was $238. For the nine months ended September 30, 2016, the debt discount amortization expense was $1,658. For the same period in 2015 amortization expense was $238.

Extinguishment Loss on Senior Note Conversion

The Company recognized an extinguishment loss of $1,421 for the three months ended September 30, 2016. There was no extinguishment of debt for the same period in 2015. For the nine months ended September 30, 2016 the Company recorded an extinguishment loss of $1,879. For the same period in 2015 there was no extinguishment of debt.

Premium Expense on Senior Convertible Notes

The Company paid a premium in the amount of $165 related to the cash pay down on the senior convertible notes for both the three and nine months ended September 30, 2016. There was no premium paid for the same period in 2015.

Interest Expense on Convertible Notes

The Company recognized interest expense of $161 on the senior convertible notes during the three months ended September 30, 2016. During the three months ended September 30, 2015 there was $1 of interest expense. For the nine months ended September 30, 2016 there was $703 recognized for interest expense on the senior convertible notes. Of that, $229 was paid in cash while the $444 in was paid through stock conversions. For the same period in 2015, the Company recorded $4 in interest expense.

Liquidity and Capital Resources (In Thousands)

Our sources of liquidity have historically been cash generated from issuances of our equity and debt securities. From inception through September 30, 2016, we have generated revenue from operations that was not significant enough to produce an operating profit.

At September 30, 2016, the Company’s working capital was $ (3,723). The financial resources of the Company will not provide sufficient funds for the Company’s operations beyond the fourth quarter 2016, as those operations currently exist. Subsequent funding will be required to fund the Company’s ongoing operations, working capital, and capital expenditures beyond the fourth quarter 2016. No assurances can be given that the Company will be successful in arranging the further funds needed to continue the execution of its business plan, which includes the development and commercialization of new products, or even if further funding is available, upon what terms. Failure to obtain such funds on terms acceptable to the Company’s management 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 unaudited consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might occur if the Company is unable to continue as a going concern.

Working Capital

At September 30, 2016 working capital was $ (3,723) compared to $61 at December 31, 2015.

Cash Flows Used in Operating Activities

Net cash used in operations for the nine months ended September 30, 2016 was $3,622 consisting of net cash used by operations of $4,094 offset by $472 provided by changes in operating assets and liabilities. Net cash used by operations for the same period of 2015 was $3,553 of which $4,004 was used to fund the operation of the business offset by $451 which was provided by operating assets and liabilities.

Cash Flows Used in Financing Activities

Net provided by financing activities for the nine months ended September 30, was $2,919 compared to net cash provided of $434 for the same period in 2015. Cash provided in 2016 was from the release of restricted cash of $6,539 offset by repayment short term debt of $3,620. For 2015, net cash provided was $510 in proceeds from Convertible Bridge Notes with $76 being used to repay short term debt.

Cash Flows Used in Investing Activities

Cash used in investing activities for the nine months ended September 30, 2016 was $(3) compared to no cash used for the same period in 2015.

Critical Accounting Policies, Judgments and Estimates

Our significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies are described in “Critical Accounting Policies, Judgments and Estimates” and Note 2 (Accounting Policies) to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2015. During the first nine months ending September 30, 2016, there have been no modifications to our Accounting Policies as defined in Form 10-K for the year ended December 31, 2015.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial statements.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by our quarterly report, management performed, with the participation of our Principal Executive Officer and Principal Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Principal Executive Officer and our Principal Financial Officer, to allow timely decisions regarding required disclosures.

Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1.

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 1A.

RISK FACTORS

There is no change to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 except as set forth below:

As a result of our November 2015 financing, we have experienced and continue to experience significant dilution to our stock both in the number of shares being issued and continued decline in our stock price.

Reducing the number of outstanding shares of our common stock through the reverse stock split is intended, absent other factors, to increase the per share market price of our common stock. However, other factors, such as our financial results, general market conditions and the market perception of our company, may adversely affect the market price of our common stock. As a result, there can be no assurance that the reverse stock split, if completed, will result in the intended benefits described above, that the market price of our common stock will increase following the reverse stock split or that the market price of our common stock will not decrease in the future. Additionally, we cannot assure you that the market price per share of our common stock after a reverse stock split will increase in proportion to the reduction in the number of shares of our common stock outstanding before the reverse stock split. Accordingly, the total market capitalization of our common stock after the reverse stock split may be lower than the total market capitalization before the reverse stock split. Our third reverse stock split with a 1:400 ratio was effected on July 15, 2016, which was approved by the shareholders on June 27, 2016 as a result of the Definitive Proxy Statement on Schedule 14A filed by the Company on May 25, 2016. The Company listed as its primary goal raising the stock price to the $1 to $3 range and providing sufficient authorized and unissued shares to satisfy its obligations with respect to the November 2015 Notes. While it was temporarily successful, as a result of continued conversions of these Notes pursuant to the terms of these Notes (which calls for the conversion price to be set at 75% of the then current market price), the stock price quickly decreased and is now less than $0.02, thus necessitating the currently proposed reverse stock split. As of November 10, 2016 we did not have sufficient shares of stock voted in order to approve or not approve the reverse stock split, so we have extended the period of the solicitation until November 30, 2016. If the reverse split does not gain approval, we are contractually required to again seek approval, which we may not receive. While we will attempt to work out an alternative resolution with the investors, we cannot assure you if we will be able to do so or upon what terms. We cannot assure you that the currently proposed reverse stock split will not result in dilution of the magnitude experienced as a result of the July 2016 stock split.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 6.

EXHIBITS

10.78

Form of Amendment Agreement, dated January 28, 2016 (1)

10.79

Form of Waiver (2)

10.80

Waiver and Amendment, dated May 1, 2016 (3)

10.81

Waiver and Amendment dated August 8, 2016 (4)

10.82

Executive Employment Agreement for Richard Bogan, dated September 2, 2016 (5)

31.1

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

31.2

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

32.1

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

The following materials from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2016, 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

(1) Incorporated by reference from our current Report on Form 8-K, filed on January 28, 2016

(2) Incorporated by reference from our Amendment No. 1 to registration statement in Form S-1 filed on February 10, 2016

(3) Incorporated by reference from our Current Report on Form 8-K, filed on May 2, 2016

(4) Incorporated by reference from our Current Report on Form 8-K, filed on August 9, 2016

(5) Incorporated by reference from our Current Report on Form 8-K filed on September 9, 2016

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.

/s/ Richard Bogan

Richard Bogan
Principal Executive Officer and Director
Dated: November 14, 2016

/s/ Danielle Baker
Danielle Baker, Principal Financial Officer and Principal Accounting Officer
Dated: November 14, 2016