AXPWQ Axion Power International Inc (CE)

 

Prospectus Supplement No. 2 (To Post Effective Amendment No. 2. to Prospectus dated May 10, 2012)

Filed Pursuant to Rule 424(b)(3) Registration No.  333-164352

 

Axion Power International, Inc.

45,757,572 Shares of Common Stock

 

This prospectus supplement relates to the offer and sale from time to time of up to 45,757,572 shares of common stock of Axion Power International, Inc., a Delaware corporation, by the selling stockholders named in the post effective amendment no. 2 to prospectus dated May 10, 2012 (the “Prospectus”). The Prospectus relates to the offer and sale of up to 45,757,572 shares of common stock registered on Registration Statement No. 333-164352. You should read this prospectus supplement in conjunction with the Prospectus, and this prospectus supplement is qualified in its entirety by reference to the Prospectus, except to the extent that the information contained in this prospectus supplement supersedes or supplements the information contained in the Prospectus.

 

The information contained herein supplements the information in the Prospectus related to the Financial Statements and Supplementary Data by including our audited financial statements and related notes for the three months ended June 30, 2012. This prospectus supplement also contains certain other information included in our report on Form 10-Q for the quarter ended June 30, 2012.

 

Our report on Form 10-Q for the quarter ended June 30, 2012, reflects a total of 113,211,091 shares of our common stock issued and outstanding as of July 27, 2012.

 

Investing in our common stock is speculative and involves a high degree of risk. See “Risk Factors” beginning on page 2 of the Prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is October 10, 2012.

 

  

PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(A Development Stage Company)

 

		June 30, 2012				December 31, 2011
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	6,303,990			$	1,987,637
Accounts receivable			816,260				309,354
Other receivables			26,833				162,249
Prepaid expenses			254,107				145,442
Inventory, net			2,938,462				2,717,173
Total current assets			10,339,652				5,321,855
Property & equipment, net			8,181,817				8,417,163
Other receivables – long term			48,000				53,000
TOTAL ASSETS		$	18,569,469			$	13,792,018
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	832,734			$	520,358
Other current liabilities			495,442				429,432
Notes payable			104,777				104,777
Total current liabilities			1,432,953				1,054,567
Deferred revenue			1,432,263				1,573,962
Derivative liabilities			20,554				15,843
Notes payable			385,770				439,480
Total liabilities			3,271,540				3,083,852
Stockholders' Equity
Convertible preferred stock-12,500,000 shares authorized			-				-
Common stock-200,000,000 shares authorized $0.0001 par value 113,233,762 shares issued & outstanding (85,503,302 in 2011)			11,323				8,552
Additional paid in capital			95,783,142				86,953,180
Deficit accumulated during development stage			(80,244,861	)			(76,001,894	)
Cumulative foreign currency translation adjustment			(251,675	)			(251,672	)
Total stockholders' equity			15,297,929				10,708,166
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY		$	18,569,469			$	13,792,018

 

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

 

 

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(A Development Stage Company)

UNAUDITED

 

		Three Months Ended								Six Months Ended								Inception
		June 30,								June 30,								9/18/2003  to
		2012				2011				2012				2011				6/30/2012
Product		$	2,751,862			$	1,699,371			$	4,512,424			$	2,734,813			$	16,804,417
Service			-				387,645				-				411,645				1,279,726
Net sales			2,751,862				2,087,016				4,512,424				3,146,458				18,084,143
Costs and expenses
Product costs			2,433,582				1,557,435				4,000,152				2,360,969				14,597,111
Research & development			1,139,297				1,194,810				2,540,120				2,269,762				31,411,012
Selling, general & administrative			1,117,788				1,161,628				2,201,207				2,195,166				31,965,891
Interest expense			4,413				4,608				9,227				9,413				2,386,398
Impairment of assets			-				-				-				-				2,062,160
Derivative revaluations			(33,016	)			(499,648	)			4,711				9,021				(1,621,925	)
Mega C Trust share augmentation			-				-				-				-				400,000
Interest & other income			(24	)			(3,844	)			(26	)			(7,726	)			(569,312	)
Loss before income taxes			(1,910,178	)			(1,327,973	)			(4,242,967	)			(3,690,147	)			(62,547,192	)
Income taxes			-				-				-				-				4,300
Accumulated deficit			(1,910,178	)			(1,327,973	)			(4,242,967	)			(3,690,147	)			(62,551,492	)
Less preferred stock dividends and beneficial conversion feature			-				-				-				-				(17,693,369	)
Net loss applicable to common shareholders		$	(1,910,178	)		$	(1,327,973	)		$	(4,242,967	)		$	(3,690,147	)		$	(80,244,861	)
Foreign Currency Translation adjustment			(3	)			-				(34	)			-				(251,675	)
Comprehensive Income(Loss)			(1,910,181	)			(1,327,973	)			(4,243,001	)			(3,690,147	)			(80,496,536	)
Basic and diluted net loss per share		$	(0.02	)		$	(0.02	)		$	(0.04	)		$	(0.04	)		$	(2.11	)
Weighted average common shares outstanding			113,221,056				85,461,544				108,096,412				85,457,446				38,029,182

 

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

 

 

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(A Development Stage Company)

  UNAUDITED

 

		Six Months Ended								Inception
		June 30,								9/18/2003  to
		2012				2011				6/30/2012
Cash Flows from Operating Activities
Accumulated deficit		$	(4,242,967	)		$	(3,690,147	)		$	(62,551,492	)
Adjustments to reconcile deficit accumulated for noncash items
Depreciation			687,890				444,101				3,360,012
Interest expense			-				-				1,970,251
Impairment of assets			-				-				2,062,161
Derivative revaluations			4,711				9,021				(1,621,925	)
Mega C Trust share augmentation			-				-				400,000
Share based compensation expense			197,846				240,963				6,434,083
Changes in operating assets & liabilities
Accounts receivable			(506,906	)			(2,349,874	)			(823,129	)
Other receivables – long term			135,416				(146,892	)			(4,873	)
Prepaid expenses			(108,665	)			(121,479	)			(251,519	)
Inventory, net			(221,289	)			(1,611,603	)			(2,938,461	)
Accounts payable			312,376				2,632,215				2,487,378
Other current liabilities			66,010				124,723				516,574
Liability to issue equity instruments			-				-				178,419
Deferred revenue and other			(141,699	)			95,477				1,519,781
Net cash used by operating activities			(3,817,277	)			(4,373,495	)			(49,262,740	)
Cash Flows from Investing Activities
Other receivables			5,000				6,000				(1,265,016	)
Purchases of property & equipment			(452,544	)			(1,785,579	)			(12,209,214	)
Investment in intangible assets			-				-				(167,888	)
Net cash used by investing activities			(447,544	)			(1,779,579	)			(13,642,118	)
Cash Flows from Financing Activities
Net Proceeds from related party			-				-				5,445,458
Repayment of notes payable			(53,711	)			(52,126	)			490,547
Net proceeds from sale of common stock			8,634,888				-				53,806,253
Net proceeds from exercise of warrants			-				-				2,014,766
Net proceeds from sale of preferred stock			-				-				7,472,181
Net cash (used) provided by financing activities			8,581,177				(52,126	)			69,229,205
Net change in cash and cash equivalents			4,316,356				(6,205,200	)			6,324,347
Effect of exchange rate on cash			(3	)			(18	)			(20,357	)
Cash and cash equivalents - beginning			1,987,637				13,330,009				-
Cash and cash equivalents - ending		$	6,303,990			$	7,124,791			$	6,303,990

 

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

 

 

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(A Development Stage Company)

 

1.	Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

The consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain prior period amounts have been reclassified to conform to current period presentation.

 

2.	Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. At June 30, 2012 the Company’s working capital was $8.9 million. During the first six months of 2012, the Company had revenue of $4.5 million and a net loss of $4.2 million. The financial resources of the Company will not provide sufficient funds for the Company’s operations beyond March 31, 2013, as those operations currently exist. Subsequent sources of funding will be required to fund the Company’s ongoing operations, working capital, and capital expenditures beyond March 31, 2013. No assurances can be given that the Company will be successful in arranging the further financing needed to continue the execution of its business plan, which includes the development and commercialization of new products, or even if further financing is available, upon what terms. Failure to obtain such financings 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 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.

 

3.	Recent Accounting Pronouncements

 

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

  

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

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

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

 

4.

Inventory

 

Net inventories are stated at the lower of cost (computed in accordance with first in first out method) or market. Elements of costs include raw materials, components, labor, and overhead, and are as follows:

 

		June 30, 2012				December 31, 2011
Raw materials		$	1,181,203			$	1,534,957
Work in process			1,746,450				1,070,901
Finished goods			220,824				359,540
Inventory reserves			(210,015	)			(248,225	)
		$	2,938,462			$	2,717,173

 

Inventories are assessed based on the estimated net realizable value and carrying value reduced for components that are obsolete or in excess of our forecasted usage.  The Company estimates the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand, and market requirements.  The carrying value of inventory is also reviewed and compared to the estimated selling price less costs to sell and adjust accordingly. Reductions to the carrying value of inventories are recorded in product costs. If future demand for our products is less favorable than our forecasts, inventories may need to be reduced, which would result in additional expense.

  

5.

Warrants

 

The following table provides summary information on warrants outstanding as of June 30, 2012:

 

		Shares				Weighted average exercise price				Weighted average remaining contract term (years)
Warrants outstanding at December 31, 2011			11,896,070			$	0.85				1.3
Granted			-				-				-
Exercised			-				-				-
Forfeited or lapsed			-				-				-
Warrants outstanding at June 30, 2012			11,896,070			$	0.85				0.8

 

 As of June 30, 2012, 1,085,714 warrants were classified as derivative liabilities. Each reporting period, the warrants are revalued and adjusted through the caption “derivative revaluations” on the statements of operations.

 

6.	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.

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

  

The Company has adopted an outside directors’ stock option plan covering an aggregate of 1,000,000 shares of common stock which provides that each eligible director will automatically be granted an option to purchase shares having an aggregate fair market value on the date of grant of twenty thousand dollars ($20,000) for each year of his term in office. The board of directors also adopted an officers and employees non-qualified stock options plan that has not been approved by the shareholders, covering an aggregate of 2,000,000 shares of common stock.

 

During the six months ended June 30, 2012, the Company granted a total of 365,000 stock options:

 

On January 1, 2012, two employees were granted options to purchase a cumulative total of 90,000 shares of our common stock at an exercise price of $1.50 per share. 9,018 of these options vested in January 2012; 2,454 options will vest monthly through the remainder of the contract and are exercisable for a period of 5 years from the vesting date. These options were valued at $6,552, utilizing the Black-Scholes-Merton model with $1,638 of compensation expense in 2012.

 

On January 6, 2012, an employee was granted options to purchase 150,000 shares of our common stock at an exercise price of $1.50 per share. 15,020 of these options vested in January 2012; 3,970 options will vest monthly through the remainder of the contract and are exercisable for a period of 5 years from the vesting date. These options were valued at $ 21,384, using the Black-Scholes-Merton model with $5,346 of compensation expense in 2012.

 

On March 12, 2012, an employee was granted options to purchase 75,000 shares of our common stock at an exercise price of $1.50 per share. 7,515 of these options vested in March 2012; 2,045 options will vest monthly through the remainder of the contract and are exercisable for a period of 5 years from the vesting date. These options were valued at $8,856, using the Black-Scholes-Merton model with $2,214 of compensation expense in 2012.

 

On May 4, 2012, an employee was granted options to purchase 50,000 shares of our common stock at an exercise price of $1.50 per share. 5,021 of these options vested in May 2012; 1,363 will vest monthly through the remainder of the contract and are exercisable for a period of 5 years from the vesting date. These options were valued at $6,186, using the Black-Scholes-Merton model with $1,197 of compensation expense in 2012.

 

The Company uses the Black-Scholes-Merton Option Pricing Model to estimate the fair value of awards on the measurement date using the weighted average assumptions noted in the following table for the six months ended June 30, 2012:

  

Risk-free interest rate			1.02	%
Dividend yield		$	0.00
Expected volatility			59.31	%
Expected term (in years)			6.9

 

The compensation expense for options was $171,613 for the six months ended June 30, 2012 and had no impact on diluted loss per share.

 

A tax deduction is recognized for non-qualified stock options when the options are exercised. The amount of this deduction will be the excess of the fair value of the Company’s common stock over the exercise price on the date of exercise. Accordingly, there is a deferred tax asset recorded related to the tax effect of the financial statement expense recorded. The tax effect of the income tax deduction in excess of the financial statement expense will be recorded as an increase to additional paid-in capital. Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future to utilize the tax benefits of the options granted, the Company has recorded a valuation allowance to reduce gross deferred tax asset to zero. As a result for the six months ended June 30, 2012, there is no income tax expense impact from recording the fair value of options granted. There is no tax deduction allowed by the Company for incentive stock options held to term.

  

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

The following table provides summary information on all outstanding options based on grant date as of June 30, 2012:

 

						2012
						Weighted Average
All Plan & Non-Plan Compensatory Options		Number of Options				Exercise				Fair Value				Remaining Life (years)				Aggregate Intrinsic Value
Options outstanding at December 31, 2011			3,629,850			$	1.92			$	0.67				4.0			$	-
Granted			365,000			$	1.50			$	0.12
Exercised			-				-				-				-				-
Forfeited or lapsed			(250,268	)		$	3.24			$	1.85				-				-
Options outstanding at June 30, 2012			3,744,582			$	1.85			$	0.60				3.9			$	-
Options exercisable at June 30, 2012			2,823,229			$	1.97			$	0.68				3.2			$	-

 

The weighted-average grant date fair value of options granted during the six months ended June 30, 2012 was $0.12. There were no options exercised during the six months ended June 30, 2012.

 

The following table provides summary information on all non-vested stock options as of June 30, 2012:

 

		All Plan & Non-Plan Compensatory Options
		Shares				Weighted average grant date fair value
Options subject to future vesting at December 31, 2011			1,114,190			$	0.52
Options granted			365,000				0.12
Options forfeited or lapsed			(73,768	)			0.24
Options vested			(481,569	)			0.43
Options subject to future vesting at June 30, 2012			923,853			$	0.34

 

As of June 30, 2012, there was $247,938 of unrecognized compensation expense related to non-vested options granted under the plans. The Company expects to recognize the compensation expense over a weighted average period of years. The total fair value of options which vested during the six months ended June 30, 2012 and June 30, 2011 was $208,843 and $373,031, respectively. 

 

7.	Earnings/Loss Per Share

 

Basic earnings per share is computed by dividing income available to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. Diluted earnings per share are computed by assuming that any dilutive convertible securities outstanding were converted, with related preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options for which 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 six months ended June 30, 2012, the Company would have added 1,638,526 common equivalent shares to the weighted average shares outstanding to compute the diluted weighted average shares outstanding. If the Company had generated earnings during the six months ended June 30, 2011, the Company would have added 1,346,054 common equivalent shares to the weighted average shares outstanding to compute the diluted weighted average shares outstanding.

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

8.

Stockholder’s Equity

 

On February 3, 2012, the Company completed a registered direct common stock offering providing gross proceeds of approximately $9.4 million and net proceeds of approximately $8.6 million after the expenses of the offering and placement fees. This event is primarily responsible for the increase in par value and paid in capital reported in the financial statements

 

9.	Subsequent Events

 

In July 2012, we completed the Siltek project for the Washington Naval Yard. The unit has been fully commissioned and tested and is currently functioning on a daily basis. Solar panels charge our PbC batteries and the energy is stored for use by the Naval office building. We are monitoring the project each day and reporting results. The electronics and system are the basic components of our PowerCube technology that we are quoting to potential customers in various sizes ranging from 50kwh to 4MWH.

 

In August 2012, we executed a distribution agreement with Rosewater Energy, LLC (“Rosewater”) formalizing the residential energy “HUB” sales and marketing arrangement with them that became effective immediately. Rosewater will operate under an exclusive covenant as long as certain minimum sales are achieved. The agreement is three years in duration with provisions for extension. We will be providing Rosewater with a full standalone unit that will include batteries, battery management system, all electronics and NEMA3 housing for the unit. We will be jointly unveiling the unit at the CEDIA show in Indianapolis the first week of September 2012.

 

 

ITEM 2.

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

 

Overview

 

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

 

Since inception, we have received $69.2 million in cash generated from financing activities of which $62.9 million was used to fund research and development activities, capital expenditures, infrastructure and working capital.

 

Key Performance Indicators, Material Trends and Uncertainties

 

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

 

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

 

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

 

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

 

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

 

Financing Activities

 

On February 3, 2012, the Company completed a registered direct common stock offering providing gross proceeds of approximately $9.4 million and net proceeds of approximately $8.6 million after the expenses of the offering and placement fees.

 

Award Activities: Grants and Contracts :

 

In February of 2012, the final portion of the Commonwealth Financing Authority grant for $41,171 was billed and collected in May.

 

In May of 2012, we were awarded a $150,000 Phase I grant from the U.S. Department of Energy to fund a commercialization plan for the use of our PbC batteries in a “low-cost, high-efficiency” dual battery architecture for micro-hybrid vehicles. We have begun work on this nine month Phase I grant, the completion of which will enable us to apply for a Phase II grant. We were advised that approximately ten percent of the Phase I grant applicants were accepted and received awards. It has been confirmed to us that Phase II grants, of approximately $1,000,000 each, will be made to approximately fifty percent of the applying applicants. Phase II grants normally will not exceed 24 months and those successfully completing Phase II grants will be eligible to apply for Phase III grants which it is our understanding will have award sizes several times the size of the Phase II grants. As of June 30, 2012, no invoices have been issued seeking reimbursement against our Phase I grant.

 

 

Results of Operations

 

Our strategy for some time has been to utilize traditional production to train our work force, test our systems and incorporate quality improvements that we believe will ultimately benefit future PbC production. We have continued that strategy through the second quarter of 2012.

 

As previously stated, software improvements and mechanical tweaking continue to improve thru-put on our automated robotic electrode production line. This is an ongoing process and we will utilize what we have learned in future electrode production lines. The line currently runs end to end and provides us more than enough capacity for our short term needs.

 

On April 26 ^th , Norfolk Southern (“NS”) issued us an order for the first $400,000 of a $475,000 total purchase order order for PbC batteries for use in their initial all electric, battery powered locomotive. It is anticipated that the first “yard” locomotive will be commissioned in the next few months. On a parallel path, development of an “over the road” hybrid locomotive continues. As part of our agreement with NS, Penn State University is performing duplicate string testing on our PbC batteries that so far have confirmed our claims of string “self equalization”. Simply stated, this means that one of the unique characteristics of our PbC batteries is its inherent ability to equalize battery (even cell) voltage during charging at any rate. This is particularly important when the PbC is used in large string configurations (such as the locomotive, or the PowerCube) where the string is only as strong as its weakest (lowest voltage) battery (i.e. the string output is reduced by the lowest performing battery). The success of this testing will continue to allow us to expand the locomotive application to include other locomotive end users and locomotive integrators.

 

Work continues with the hybrid vehicle manufacturers we have been working with for the last couple of years. Third party testing continues under protocol developed with our longest standing OEM partner. We have also been in discussions with a new top 5 vehicle manufacturer regarding partnering with them on advanced stage testing of a two battery system. As we have previously reported, the interest of several OEM’s has been fueled by our White Paper that highlights the importance of “charge acceptance” in battery products designed for the micro hybrid and stop start markets.

 

Our onsite PowerCube™ (“Cube”) project continues to respond to signals from the grid in conjunction with our partnership arrangement with Viridity and PJM. There is a high interest level in our Cube technology for several applications. In addition to dispatchable power, we will be proving out the Cube’s ability to provide power quality, back- up power, power smoothing, and load leveling. Our .5MW Cube is a building block size unit that can easily be scaled up or down.

 

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

 

Other highlights of the first half of 2012 include:

 

·

In January, we were awarded a purchase order from Siltek, Inc. confirming their participation in a Zero Energy Building in the Washington D.C. Naval Yard. We have shipped and installed batteries and are coordinating our electronics into the system. Axion will be providing an array of its PbC batteries, system electronics and a battery management system that together will serve as an example of Axion’s “mini-cube” and, together with our onsite PowerCube, it has brought us numerous new requests for proposals encompassing cube sizes from 50 kwh up to 4MWH.

  

·

In March 2011, we announced that we had received a series of orders for the production and immediate delivery of flooded lead-acid batteries. The batteries will be branded by the purchaser, and will not carry an Axion Power identification label. Orders through the second quarter of 2012 have been 100% on time. We have been advised by the purchaser that their purchase of these products is expected to continue into at least the first quarter of 2013.

 

·

In May, we were awarded a $150,000 Phase I grant from the U.S. Department of Energy to fund a commercialization plan for the use of its PbC batteries in a “low-cost, high-efficiency” dual battery architecture for micro-hybrid vehicles. We have begun work on this nine month Phase I grant, the completion of which will enable us to apply for a Phase II grant. We were advised that approximately ten percent of Phase I grant applicants were accepted and received awards. It has been confirmed to us that Phase II grants, of approximately $1,000,000 each, will be made to approximately fifty percent of the applying applicants who must first successfully complete their Phase I grant. Phase II grants will not exceed 24 months and those successfully completing Phase II grants will be eligible to apply for Phase III grants, which it is our understanding will have award sizes several times the size of the Phase II grants. As of June 30, 2012 no invoices have been issued seeking reimbursement against our Phase I grant.

 

 

·

At our annual meeting in June, we announced that we had engaged with a marketing strategic partner, Rosewater Energy, LLC, to bring our residential energy “HUB” to market. We feel, once again, that the unique characteristics of our PbC battery (charge acceptance, fast recharge and battery string equalization) make our product ideally suited for this market. We plan to introduce the energy “HUB” to the market at the CEDIA Show in Indianapolis the first week in September 2012.

 

Overview

 

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

 

·

Our primary activity in our current development stage consists of R&D efforts for advanced battery applications, initial development, sales and marketing efforts to commercialize our advanced battery applications and the manufacture of PbC carbon electrode devices for testing, pilot demonstrations and potential customer applications.

·

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

·

Product costs include raw materials, components, labor, and allocated manufacturing overhead to produce batteries sold to customers. Due to the development stage of our business, current product costs represented in our current financial statements may not be indicative of the future costs to produce batteries. Product costs also include provisions for inventory valuation and obsolescence reserves.

·

Research & development includes expenses to design, develop, and test advanced batteries and carbon electrode assemblies for our energy storage products based on our patented lead carbon technology. Also included in R&D are the materials consumed in production of pilot products, manufacturing costs not assigned to product sales and costs attributable to service sales.

·

Selling, general and administrative expenses include employee compensation, selling and marketing expense, legal, auditing and other expenses associated with being a public company.

 

Selected Financial Data

 

The following represents summarized selected financial data for the six months ended June 30, 2012 and 2011:

 

		2012				2011				Change
Product  sales		$	4,512,424			$	2,734,813			$	1,777,611
Service  sales			-				411,645				(411,645	)
Total sales			4,512,424				3,146,458				1,365,966
Product costs			4,000,152				2,360,969				1,639,183
Research & development expenses			2,540,120				2,269,762				270,358
Selling, general & administrative  expenses			2,201,207				2,195,166				6,041
Derivative revaluations			4,711				9,021				(4,310	)
Loss before income taxes			(4,242,967	)			(3,690,147	)			(552,820	)

 

Reconciliation of net loss to EBITDA

 

		2012				2011				Change
GAAP loss before income taxes		$	(4,242,967	)		$	(3,690,147	)		$	(552,820	)
Plus: Interest expense			9,227				9,413				(186	)
Depreciation			687,890				444,101				243,789
Share based compensation			197,846				240,963				(43,117	)
Derivative revaluations			4,711				9,021				(4,310	)
EBITDA (1)		$	(3,343,293	)		$	(2,986,649	)		$	(356,644	)

 

 

(1)

EBITDA, a non-GAAP financial measure, is defined as earnings before interest expense and interest income, 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 Results for the three months and six months ended June 30, 2012 compared with June 30, 2011

 

Product Sales

 

Product sales for the three months ended June 30, 2012 were $2.8 million compared to $1.7 million for the same period in 2011. Net product sales for the six months ended June 30, 2012 were $4.5 million compared to $2.7 million for the same period in 2011. We had one customer that accounted for 76% and 86% of product sales for the three and six month periods ended June 30, 2012, respectively, and 78% and 75% of product sales for the three and six month periods ended June 30, 2011, respectively. The increase in net product sales in 2012 compared to 2011 is due to a series of orders for the production and immediate delivery of specialty flooded lead acid batteries with the purchaser carrying the cost of inventory and providing the raw materials required for production.

 

Service Sales

 

There were no service sales for the three and six months ended June 30, 2012 compared to less than $0.4 million for the same period in 2011.

 

Product Costs

 

Product costs for the three months ended June 30, 2012 were $2.4 million compared to $1.6 million for the same period in 2011. Product costs for the six months ended June 30, 2012 were $4.0 million compared to $2.4 million for the same period in 2011. The increase in product costs resulted primarily from increases in net product sales.

 

Research & Development Expenses

 

Research and development expenses for the three months ended June 30, 2012 were $1.1 million compared to $1.2 million for the same period in 2011. Research and development expenses for the six months ended June 30, 2012 were $2.5 million compared to $2.3 million for the same period in 2011.

 

Selling, General & Administrative Expenses

 

Selling, general & administrative expenses for the three months ended June 30, 2012 were $1.1 million compared to $1.2 million for the same period in 2011. Selling, general & administrative expenses were $2.2 million for the six month periods ended June 30, 2012 and 2011.

 

Derivative Revaluation

 

Gains from derivative revaluation for the three months ended June 30, 2012 were $0.03 million compared to $0.5 million for the same period in 2011. Losses from derivative revaluation for the six month periods ended June 30, 2012 and June 30, 2011 were less than $0.01 million. A loss from derivative revaluation results from an increase in the fair value of derivative liabilities. Derivative revaluations are recognized whenever the Company incurs a liability associated with the issuance of an equity-based instrument. The instrument is revalued for each reporting period until the liability is settled. These derivative losses or gains are non-cash items on our Statement of Operations.

 

 

Liquidity and Capital Resources

 

Our primary source of liquidity has historically been cash generated from issuances of our equity or debt securities. From inception through June 30, 2012, we have generated insignificant revenue from operations.

 

We believe that the currently available funds at June 30, 2012, which includes the net proceeds of $8.6 million from our February 2012 registered direct common stock offering and internally generated funds from products sales will provide sufficient financial resources for the current development stage operations, working capital and capital expenditures through the first quarter of 2013.

 

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

 

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

 

Management, with the advice and consent our Board of Directors, is taking actions to attempt to raise additional funds in order to continue operations beyond March 31, 2013 from sources that are in alignment with our business objectives and strategies.

 

Cash, Cash Equivalents and Working Capital

 

Cash and cash equivalents at June 30, 2012 totaled $6.3 million compared to $2.0 million at December 31, 2011. Cash equivalents consist of short-term liquid investments with original maturities of no more than six months that are readily convertible into cash.

 

At June 30, 2012 working capital was $8.9 million compared to working capital of $4.3 million at December 31, 2011. One customer accounted for $1.0 million or 12% of working capital at June 30, 2012.

 

Cash Flows from Operating Activities

 

Net cash used in operations for the six months ended June 30, 2012 was $3.8 million compared to $4.4 million for the same period in 2011. Our negative cash flow is consistent with the development stage of our business.

 

  Cash Flows from Investing Activities

 

Net cash used by investing activities for the six months ended June 30, 2012 was $0.4 million compared to net cash used by investing activities of $1.8 million for the same period in 2011. Investing activities primarily relate to the purchase of property and equipment.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities for the six months ended June 30, 2012 was $8.6 million compared to net cash used by financing activities of less than $0.1 million for the six months ended June 30, 2011.

 

Financing Activities

 

On February 10, 2012, the Company completed a registered direct common stock offering providing gross proceeds of approximately $9.4 million. The shares sold, par value $0.0001 were priced at $0.35, which was the volume - weighted average price of the shares over a 40-day trading period prior to the commencement of the offering. The shares were sold pursuant to a shelf registration statement declared effective July 14, 2011. Net proceeds were approximately $8.6 million after the expenses of the offering and placement fees. These proceeds are being used for working capital, capital expenditures and general corporate purposes.

 

 

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, 2011. During 2012, there were no modifications to our critical accounting policies as defined on Form 10-K for the year ended December 31, 2011.

 

Off Balance Sheet Arr angements

 

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

 

 

ITEM 4.

CONT ROLS 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 Chief Executive Officer and Chief 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 Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

Based upon that evaluation, our Chief Executive Officer and Chief 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 an additional risk factor to the risk factors disclosed in the Company’s Annual Report Form 10-K for the year ended December 31, 2011 as follows:

 

Our business may not be able to continue as a going concern and we will need to raise additional capital to continue operations beyond March 31. 2013.

 

We believe that our current financial resources will support ongoing operations, working capital, and capital expenditures through the first quarter of 2013. However, we will not be able to continue operations beyond March 31, 2013 without raising additional funding. We do not believe that we will be able to sufficiently increase our revenues to cover our costs of operations, working capital, and capital expenditures without raising additional funds.  We cannot assure you that any additional funds will be available to us on favorable terms, or at all. If we are unable to obtain additional funds when needed, our research, development and testing, and other pre-commercialization activities will be materially and adversely affected, and we may be unable to take advantage of future opportunities or respond to competitive pressures or to continue our operations at all beyond March 31, 2013. The inability to raise additional funds in sufficient amounts and on acceptable terms would have a material adverse effect on our ability to continue operations and could result in our inability to continue as a going concern which would mean that we would need to wind down our business.