NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Basis of Presentation
Axion Power International, Inc. (the “Company”, Axion, “we”, “our”,
or “us”) is a company whose primary purpose is to develop, design, manufacture and sell advanced energy storage devices
and components that are based on our patented PbC Technology. In addition we manufacture standard and specialty lead-acid batteries.
Our new PbC® batteries and components, which are manufactured primarily through the use of activated carbon as an alternative
to lead in the battery’s negative electrode, have application to virtually all energy system storage functions. It is the
Company’s long term goal to become a primary supply source of PbC negative electrodes to established battery manufacturers.
Note 2 — Accounting Policies
Use of Estimates
:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates, assumptions and judgments that affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from the estimates.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, Axion
Power Battery Manufacturing, Inc., APC and C&T. All significant inter-company balances and transactions have been eliminated
in consolidation.
Segment Reporting:
Management
has determined that the Company is organized, managed and internally reported as one business segment.
Foreign Currency Translation:
The accounts of APC and C&T are measured using the Canadian dollar as the functional currency for all the periods presented
in the financial statements. The translation from Canadian dollars to U.S. dollars is performed for the balance sheet accounts
using current exchange rates in effect at each of the balance sheet dates, and for the revenue and expense accounts using the
average rate in effect during the periods. The resulting translation adjustments are recorded as a component of accumulated other
comprehensive income (loss) within stockholders’ equity. Gains or losses resulting from transactions denominated in currencies
other than the functional currency are included in the results of operations as incurred. Any gains or losses arising from the
inter-company loan denominated in U.S. dollars are directly reflected in other comprehensive income, as the amounts are not expected
to be repaid in the foreseeable future.
Comprehensive Income:
The
Company follows FASB ASC 220, “
Comprehensive Income
.” Comprehensive income is the change in equity of a business
enterprise during a reporting period from transactions and other events and circumstances from non-owner sources. In addition
to the Company’s net loss, the change in equity components under comprehensive income include any foreign currency translation
adjustment.
Fair Value of Financial Instruments
:
FASB ASC 825, “Financial
Instruments
," requires disclosure of fair value information about certain financial
instruments, including, but not limited to, cash and cash equivalents, accounts receivable, refundable tax credits, prepaid expenses,
accounts payable, accrued expenses, notes payable to related parties and convertible debt-related securities. Fair value estimates
discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31,
2012 and 2011. The carrying value of the balance sheet financial instruments included in the Company’s consolidated financial
statements approximated their fair values.
Cash and Cash Equivalents:
For financial statement presentation purposes, the Company considers those short-term, highly liquid investments
to be cash or cash equivalents. Our investment policy is that we only invest cash in U.S. Government Treasuries with original
maturities of six months or less. As of December 31, 2012, the Company had a thirty day Certificate of Deposit valued at $1.0
million.
Accounts Receivable and Concentration
of Credit Risk:
The Company records its accounts receivable net of any allowance for doubtful accounts. The Company manages
its credit risk exposure and establishes an allowance for doubtful accounts for accounts that are deemed at risk for collection.
When management determines that an account is uncollectible, it is written off against the related allowance. No allowance was
considered necessary as of December 31, 2012 and 2011.
Inventory:
Inventory is
recorded at the lower of cost or market value, and adjusted as appropriate for decreases in valuation and obsolescence. Adjustments
to the valuation and obsolescence reserves are made after analyzing market conditions, historical 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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of inventory at December 31,
2012 and 2011 is as follows:
|
|
2012
|
|
|
2011
|
|
Raw materials
|
|
$
|
945,763
|
|
|
$
|
1,534,957
|
|
Work in process
|
|
|
471,935
|
|
|
|
1,070,901
|
|
Finished goods
|
|
|
1,677,605
|
|
|
|
359,540
|
|
Inventory reserves
|
|
|
(256,512
|
)
|
|
|
(248,225
|
)
|
|
|
$
|
2,838,791
|
|
|
$
|
2,717,173
|
|
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is computed using the straight line method over the estimated
useful lives of the assets, ranging from 3 to 22 years. Expenditures for renewals and betterments are capitalized. Expenditures
for minor items are charged to repairs and maintenance expense. Gain or loss upon sale or retirement is reflected in operating
results in the period the event takes place.
A summary of property and equipment at
December 31, 2012 and 2011 is as follows:
|
|
Estimated useful life
|
|
2012
|
|
|
2011
|
|
Construction in progress
|
|
|
|
$
|
476,257
|
|
|
$
|
1,651,204
|
|
Leasehold improvements
|
|
Lesser of lease term
or 10 years
|
|
|
382,680
|
|
|
|
371,948
|
|
Machinery & equipment
|
|
3-22 years
|
|
|
11,186,840
|
|
|
|
9,156,153
|
|
Less accumulated depreciation
|
|
|
|
|
(4,082,736
|
)
|
|
|
(2,762,142
|
)
|
Net
|
|
|
|
$
|
7,963,041
|
|
|
$
|
8,417,163
|
|
Depreciation expense was $1,320,594 and $1,014,661 for the
years ended December 31, 2012 and December 31, 2011 respectively.
Certain of our machinery and equipment
amounting to $1,582,111 are secured by the Pennsylvania Department of Community and Economic Development in relation to the Machinery
and Equipment Loan Fund financing. The initial loan proceeds in the amount of $776,244 were received by us on September 14, 2009. The
proceeds of the loan were used to defray part of the cost of equipment purchased for use at our Green Ridge Road and Clover Lane
facilities. The loan bears interest at the rate of 3% interest per annum and is payable in equal monthly installments of principal
and interest over a period of seven years, maturing on October 1, 2016.
Impairment or Disposal of Long-Lived
Assets:
The Company adopted the provisions of FASB ASC 360-10-15-3, “
Impairment or Disposal of Long-lived Assets
.”
This standard requires, among other things, that long-lived assets be reviewed for potential impairment whenever events or circumstances
indicate that the carrying amounts may not be recoverable. The assessment of possible impairment is based on the ability to recover
the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the
related operations. If these expected cash flows are less than the carrying value of such asset, an impairment loss is recognized
for the difference between estimated fair value and carrying value. The primary measure of fair value is based on undiscounted
future cash flows. The measurement of impairment requires management to make estimates of these cash flows related to long-lived
assets, as well as other fair value determinations. There was no impairment loss recorded for year ended December 31, 2012 as
compared to an impairment loss of $308,882 in 2011.
Derivative Financial Instruments
:
The Company’s objectives in using derivative financial instruments are to obtain the lowest cash cost-source of funds. Derivative
liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC topic
815-40 "
Derivatives and Hedging – Contracts in Entity’s own Equity
". The estimated fair value of
the derivative liabilities is calculated using the Black-Scholes-Merton method where applicable and such estimates are revalued
at each balance sheet date, with changes in value recorded as other income or expense in the consolidated statement of operations.
As a result of the Company’s adoption of ASC topic 815-40, effective January 1, 2009 some of the Company’s warrants
are now accounted for as derivatives.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
A summary of the assumptions used for the
derivative revaluations at December 31, 2012 and 2011 were as follows:
|
|
2012
|
|
|
2011
|
|
Exercise price
|
|
$
|
0.57
|
|
|
$
|
0.57
|
|
Risk-free interest rate
|
|
|
0.33
|
%
|
|
|
0.25
|
%
|
Dividend yield
|
|
$
|
-
|
|
|
$
|
-
|
|
Expected volatility
|
|
|
59.31
|
%
|
|
|
56.78
|
%
|
Expected term (in years)
|
|
|
0.27
|
|
|
|
1.27
|
|
Revenue Recognition
:
The Company recognizes revenue when there is persuasive evidence of an agreement, delivery has occurred or services have been rendered,
the sales price to the buyer is fixed or determinable and collectability is reasonably assured. Evidence of an agreement and fixed
or determinable sales price is predominantly based on a customer purchase order or other form of written sales order or written
agreement. Sales on account are approved only for credit-worthy customers; otherwise partial or full payment.is received prior
to shipment. Shipping terms are generally FOB shipping point and revenue is recognized when product is shipped to the customer.
In limited cases, if terms are FOB destination or contingent upon collection by a prime contractor, then in these cases, revenue
is recognized when the product is delivered to the customer’s designated delivery site or the conditions for collection have
been fulfilled. The Company records sales net of discounts and estimated customer allowances and returns. We offer a 90 day free
replacement warranty on some specialty collector car and motorsports products. Collector car products also carry a four year prorated
warranty that begins at the end of the 90 days. To date, our warranty exposure on these battery products has been minimal. Flooded
battery sales do not have standard warranty provisions and instead are sold at a discount in lieu of warranty. There
were no other post shipment obligations that may impact the timing of revenue recognition for the year ending December 31, 2012.
Grants:
The Company recognizes government grants when there is reasonable assurance that the Company will comply with the conditions
attached to the grant arrangement and the grant will be received. Government grants are recognized in the consolidated statements
of operations on a systematic basis over the periods in which the Company recognizes the related costs for which the government
grant is intended to compensate. Specifically, when government grants are related to reimbursements for cost of revenues or operating
expenses, the government grants are recognized as a reduction of the related expense in the consolidated statements of operations.
For government grants related to reimbursements of capital expenditures, the government grants are recognized as a reduction of
the basis of the asset and recognized in the consolidated statements of operations over the estimated useful life of the depreciable
asset as a reduced depreciation expense. The Company records government grants receivable in the consolidated balance sheets in
other receivables.
Deferred revenue is amortized into income over the estimated useful life of the related equipment. As
of December 31, 2012, the liability for deferred revenue was $1,262,295 and there are no grant receivables at December 31, 2012
compared to $140,389 at December 31, 2011. During the year 2012, $338,562 of income was recorded for the amortization of deferred
revenue compared to $238,918 during 2011.
Stock based Compensation:
Stock-based compensation related to employees and non-employees is recognized as compensation expense in the accompanying consolidated
statements of operations and is based on the fair value of the services received or the fair value of the equity instruments issued,
whichever is more readily determinable. Our accounting policy for equity instruments issued to consultants and vendors in exchange
for goods and services follows the provisions of ASC 505-50 “
Equity-Based Payments to Non-Employees”.
The measurement
date for the fair value of the equity instruments issued is determined at the earlier of (1) the date at which a commitment for
performance by the consultant or vendor is reached or (2) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of
the consulting agreement.
Research and Development:
R&D
costs are recorded in accordance with FASB ASC topic 730,
“Accounting for Research and Development Costs,”
which
requires that costs incurred in R&D activities covering basic scientific research and the application of scientific advances
to the development of new and improved products and their uses be expensed as incurred. R&D includes the conceptual formulation,
design and testing of product alternatives, construction of prototypes, and operation of pilot plants.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Income Taxes:
Deferred income
taxes are recorded in accordance with FASB ASC 740, “
Income Taxes
”, and deferred tax assets and liabilities
are determined based on the differences between financial reporting and the tax basis of assets and liabilities using the tax rates
and laws in effect when the differences are expected to reverse. FASB ASC 740 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not to occur. Realization of net deferred tax assets is dependent upon generating
sufficient taxable income in future years in appropriate tax jurisdictions to realize benefit from the reversal of temporary differences
and from net operating loss, or NOL, carry forwards. The Company has determined it is more likely than not that the deferred tax
asset resulting from these timing differences will not materialize and have provided a valuation allowance against the entire net
deferred tax asset. Management will continue to evaluate the realizability of the deferred tax asset and its related valuation
allowance. If the assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would
record the related adjustment to income during the period in which the determination is made. The tax rate may also vary based
on actual results and the mix of income or loss in domestic and foreign tax jurisdictions in which operations take place. The provision
for taxes represents corporate-level franchise taxes which may be based on assets, equity, capital stock or a variation thereof.
Recently Issued Accounting Pronouncements:
In May 2011, the FASB
issued Update No. 2011-04 related to fair value measurements and disclosures in the financial statements, which update 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 in the financial statements, which updates ASC
Topic 220 “Comprehensive Income”. The Update eliminates the option to present the components of other comprehensive
income as part of the statement of shareholders’ equity. Under the new guidance, the Company has the option to
present the total of comprehensive income, the components of net income, and the components of other comprehensive income either
in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance
will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption
of this standard 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.
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.
Note 3 - Going Concern
The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. At December 31, 2012 the Company’s
working capital was $4.8 million. The financial resources of the Company will not provide sufficient funds for the Company’s
operations beyond April 30, 2013, as those operations currently exist. Subsequent funding will be required to fund the Company’s
ongoing operations, working capital, and capital expenditures beyond April 30, 2013. 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 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.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 4 — Stockholders' Equity
Authorized Capitalization:
The Company’s authorized capitalization includes 200,000,000 shares of common stock and 12,500,000 shares of preferred stock.
The number of authorized common shares was increased by 75,000,000 pursuant to the Shareholder meeting vote on July 20, 2011.
Common Stock:
At December
31, 2012, 113,260,006 shares of common stock were issued and outstanding. The holders of common stock are entitled to one vote
for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the
election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. Holders of common stock are entitled to receive dividends when and if declared by the board out of
funds legally available. In the event of liquidation, dissolution or winding up, the common stockholders are entitled to share
ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made
for each class of stock, if any, having preference over the common stock. The common stockholders have no conversion, preemptive
or other subscription rights and there are no redemption provisions applicable to the common stock. All of the outstanding shares
of common stock are fully paid and non-assessable.
Preferred Stock:
The
Company’s certificate of incorporation authorizes the issuance of 12,500,000 shares of blank check preferred stock. The Company’s
board of directors has the power to establish the designation, rights and preferences of any preferred stock. Accordingly, the
board of directors has the power, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. At December
31, 2012 and 2011, no shares of Series-A Convertible Preferred stock were issued and outstanding.
Warrants:
The following table provides
summary information on warrants outstanding as of December 31, 2012 and 2011, with summary information on the various warrants
issued by the Company in private placement transactions, warrants exercised to date, warrants that are presently exercisable and
the current exercise prices of such warrants.
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
Shares
|
|
|
Weighted Average
Exercise price
|
|
|
Shares
|
|
|
Weighted Average
Exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding January 1
|
|
|
11,896,070
|
|
|
$
|
0.83
|
|
|
|
12,973,820
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted during year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lapsed
|
|
|
(173,755
|
)
|
|
|
2.35
|
|
|
|
(1,077,750
|
)
|
|
|
4.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
11,712,315
|
|
|
$
|
0.83
|
|
|
|
11,896,070
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average years remaining
|
|
|
.3
|
|
|
|
|
|
|
|
1.3
|
|
|
|
|
|
As of December 31, 2012 and 2011, 1,085,714
warrants were classified as derivative liabilities. Each reporting period the warrants are re-valued and adjusted through the caption
“derivative revaluations” on the Consolidated Statements of Operations and Comprehensive Loss.
Note 5 – Equity Compensation
Incentive Stock Plan Approved by
Stockholders:
The Company’s stockholders have adopted an incentive stock plan for the benefit of its employees, consultants
and advisors. Under the terms of the original plan, the Company was authorized to grant incentive awards for up to 1,000,000 shares
of common stock. At the Company’s 2005 annual meeting, its shareholders increased the authorization under the incentive stock
plan to 2,000,000 shares.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The incentive stock plan authorizes a variety
of awards including incentive stock options, non-qualified stock options, shares of restricted stock, and shares of phantom stock
and stock bonuses. In addition, the plan authorizes the payment of cash bonuses when a participant is required to recognize income
for federal income tax purposes because of the vesting of shares of restricted stock or the grant of a stock bonus.
The plan authorizes the grant of incentive
awards to full-time employees of the Company who are not eligible to receive awards under the terms of an employment contract or
another specialty plan. The plan also authorizes the grant of incentive awards to directors who are not eligible to participate
in the Company’s outside directors’ stock option plan, independent agents, consultants and advisors who have contributed
to the Company’s success.
The Compensation Committee
administers the plan. The Committee has absolute discretion to decide which employees, consultants and advisors will receive incentive
awards, the type of award to be granted and the number of shares covered by the award. The committee also determines the exercise
prices, expiration dates and other features of awards.
The exercise price of incentive
stock options must be equal to the fair market value of such shares on the date of the grant or, in the case of incentive
stock options granted to the holder of more than 10% of the Company’s common stock, at least 110% of the fair market
value of such shares on the date of the grant. The maximum exercise period for incentive stock options is ten years from the
date of grant, or five years in the case of an individual who owns more than 10% of the Company’s common stock. The
aggregate fair market value determined at the date of the option grant, of shares with respect to which incentive stock
options are exercisable for the first time by the holder of the option during any calendar year, shall not exceed
$100,000.
There are no incentive stock options outstanding
at December 31, 2012.
Outside Directors' Stock Option Plan
Approved by Stockholders:
The Company’s stockholders have adopted an outside directors' stock option plan for the
benefit of its non-employee directors in order to encourage their continued service as directors. Under the terms of the original
plan, the Company was authorized to grant incentive awards for up to 125,000 shares of common stock. At the 2005 annual meeting,
the Company’s shareholders increased the authorization under the incentive stock plan to 500,000 shares.
On October 17, 2012, the Board of Directors amended the Axion
Power International, Inc. independent director’s stock option plan to increase the number of shares of common stock available
thereunder from 500,000 shares to 1,000,000 shares.
Each eligible director who is, on or after
the effective date, appointed to fill a vacancy on the Board or elected to serve as a member of the Board may participate in the
plan. Each eligible director shall automatically be granted an option to purchase the maximum number of shares having an aggregate
fair market value on the date of grant of twenty thousand dollars ($20,000). The option price of the stock subject to each option
is required to be the fair market value of the stock on its date of grant. Options generally expire on the fifth anniversary of
the date of grant. Any option granted under the plan shall become exercisable in full on the first anniversary of the date of grant,
provided that the eligible director has not voluntarily resigned or been removed "for cause" as a member of the Board
of Directors on or prior to the first anniversary of the date of grant (qualified option). Any qualified option shall remain exercisable
after its first anniversary regardless of whether the optionee continues to serve as a member of the Board.
During 2012, the Company issued 171,429
five year options to one of its directors, vesting one third per year over the next three years. These options are exercisable
at a price of $0.35 per share, expiring five years from vest date and are valued at $35,136 utilizing the Black-Scholes-Merton
option pricing model, with $6,832 recorded as compensation in 2012. There were no issuances in 2011.
Stock Options Held by Officers, Employees,
and Consultants Not Approved by Stockholders:
The Company uses the Black-Scholes-Merton
Option Pricing Model to estimate the fair value of awards on the measurement date using the weighted average assumptions noted
in the following table:
Year
|
|
Interest rate %
|
|
|
Dividend Yield %
|
|
|
Expected Volatility %
|
|
|
Expected Life
|
2012
|
|
|
0.42
|
|
|
|
0.0
|
|
|
|
61.12
|
|
|
96 months
|
2011
|
|
|
1.40
|
|
|
|
0.0
|
|
|
|
59.4
|
|
|
76 months
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
Expected volatilities are calculated based
on the historical volatility of the Company’s stock since its listing on the public markets. Management has determined that
it cannot reasonably estimate a forfeiture rate given the insufficient amount of time and activity of share option exercise and
employee termination patterns. The expected life of options, representing the period of time that options granted are expected
to be outstanding, was determined using the contractual term. The risk-free interest rate for periods within the expected life
of the option is based on the interest rate for a similar time period of a U.S. Treasury note in effort on the date of the grant.
The following table provides consolidated
summary information on the Company’s stock option activity for the years ended
December 31, 2012 and 2011.
|
|
|
|
|
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
|
|
|
3,909,300
|
|
|
$
|
1.85
|
|
|
$
|
0.64
|
|
|
|
4.2
|
|
|
|
|
|
Granted
|
|
|
536,429
|
|
|
|
1.13
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or lapsed
|
|
|
(369,584
|
)
|
|
|
2.45
|
|
|
|
0.82
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2012
|
|
|
4,076,145
|
|
|
$
|
1.70
|
|
|
$
|
0.56
|
|
|
|
3.8
|
|
|
$
|
-
|
|
Options exercisable at December 31, 2012
|
|
|
2,965,998
|
|
|
$
|
1.90
|
|
|
$
|
0.65
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
All Plan & Non-Plan Compensatory
Options
|
|
Number of
Options
|
|
|
Exercise
|
|
|
Fair Value
|
|
|
Remaining
Life
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding at December 31, 2010
|
|
|
3,578,520
|
|
|
$
|
1.97
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
579,552
|
|
|
|
1.22
|
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or lapsed
|
|
|
(248,772
|
)
|
|
|
2.17
|
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2011
|
|
|
3,909,300
|
|
|
$
|
1.85
|
|
|
$
|
0.65
|
|
|
|
4.2
|
|
|
$
|
-
|
|
Options exercisable at December 31, 2011
|
|
|
2,515,660
|
|
|
$
|
2.12
|
|
|
$
|
0.77
|
|
|
|
3.2
|
|
|
$
|
-
|
|
The following table summarizes the status of the Company’s
non-vested options:
All non-vested stock options as of December 31, 2012
|
|
Shares
|
|
|
Fair Value
|
|
Options subject to future vesting at December 31, 2011
|
|
|
1,393,638
|
|
|
$
|
0.43
|
|
Options granted
|
|
|
536,429
|
|
|
|
0.15
|
|
Options forfeited or lapsed
|
|
|
(101,582
|
)
|
|
|
0.25
|
|
Options vested
|
|
|
(718,338
|
)
|
|
|
0.42
|
|
Options subject to future vesting at December 31, 2012
|
|
|
1,110,147
|
|
|
$
|
0.40
|
|
As of December 31, 2012, there was $544,847
of unrecognized compensation related to non-vested options compared to $474,872 at December 31, 2011. The Company expects to recognize
the cost over a weighted average period of 1.4 years. The total fair value of options vested was $1,945,085 and $888,318 for 2012
and 2011, respectively.
The compensation expense that has been
recognized for options granted was $410,326 and $427,040 for the years ended December 31, 2012 and 2011 respectively. In addition
the Company recognized non-cash compensation expense of $35,640 in 2012 and $26,730 in 2011 for stock granted to directors in lieu
of cash. There was no dilutive impact per share during 2012 or 2011. For stock options issued as non-qualified stock options, a
tax deduction is not allowed until the options are exercised. The amount of this deduction will be the difference between the fair
value of the Company’s common stock and the exercise price at the date of exercise. Accordingly, there is a deferred tax
asset recorded for the tax effect of the financial statement expense recorded. The tax effect of the income tax deduction in excess
of the financial statement expense will be recorded as an increase to additional paid-in capital. Due to the uncertainty of the
Company’s ability to generate sufficient taxable income in the future to utilize the tax benefits of the options granted,
the Company has recorded a valuation allowance to reduce gross deferred tax assets to zero. As a result, for the year ended December
31, 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.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The Company has two stockholder approved
equity compensation plans. The following sections summarize the Company’s equity compensation arrangements.
Note 6 Earnings/Loss Per Share
Basic earnings per share is computed by
dividing income available to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the
denominator) for the period. Diluted earnings per share are computed by assuming that any dilutive convertible securities outstanding
were converted, with related preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also
assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options for which market
price exceeds the exercise price, less shares which could have been purchased by us with the related proceeds. In periods of losses,
diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding
would be anti-dilutive.
Had the Company recorded income applicable
to common shareholders for the periods ended December 31, 2012 and 2011 weighted-average number of common shares outstanding would
have increased by 161,219, and 1,519,892 respectively, for the fiscal years, reflecting no change to dilutive securities in the
calculation of diluted earnings per share.
Note 7 — Income Taxes Expense (Benefit)
A summary of the components giving rise to the income tax expense (benefit) for the periods ended December 31, 2012 and 2011 is as follows:
|
|
2012
|
|
|
2011
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,905,000
|
)
|
|
$
|
(2,857,000
|
)
|
State
|
|
|
(564,000
|
)
|
|
|
(555,000
|
)
|
Foreign
|
|
|
(51,000
|
)
|
|
|
48,000
|
|
Total deferred tax
|
|
|
(3,520,000
|
)
|
|
|
(3,364,000
|
)
|
Less increase in allowance
|
|
|
3,520,000
|
|
|
|
3,364,000
|
|
Net deferred tax
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (recovery)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Individual components giving rise to the deferred tax asset are as follows:
|
|
2012
|
|
|
2011
|
|
Future tax benefit arising from net operating loss carry forwards
|
|
|
21,100,000
|
|
|
$
|
17,748,000
|
|
Future tax benefit arising from available tax credits
|
|
|
1,373,000
|
|
|
|
1,373,000
|
|
Future tax benefit arising from options/warrants issued for Services
|
|
|
1,210,000
|
|
|
|
1,029,000
|
|
Other
|
|
|
222,000
|
|
|
|
225,000
|
|
Total future tax benefit
|
|
|
23,905,000
|
|
|
|
20,375,000
|
|
Less valuation allowance
|
|
|
(23,905,000
|
)
|
|
|
(20,375,000
|
)
|
Net deferred tax
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
The components of pretax net loss are as follows:
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
(8,553,281
|
)
|
|
$
|
(8,309,197
|
)
|
Foreign
|
|
|
-
|
|
|
|
(2,693
|
)
|
|
|
$
|
(8,553,281
|
)
|
|
$
|
(8,311,890
|
)
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The Company has net operating loss
carry forwards of $48,100,000 and $2,800,000 available to reduce future income taxes in United States and Canada,
respectively. The United States carry forwards expire at various dates between 2024 and 2032.0. The Canadian loss carry
forwards expire at various dates between 2012 and 2030. The Company also has generated Canadian tax credits related to
research and development activities. The credit, amounting to $734,000 U.S. Dollars, is available to offset future
taxable income in Canada and expires at various dates between 2024 and 2026. The Company has adopted FASB ASC 740, which
provides for the recognition of a deferred tax asset based upon the value certain items will have on future income taxes and
management's estimate of the probability of the realization of these tax benefits. The Company has determined it more likely
than not that these timing differences will not materialize and have provided a valuation allowance against the entire net
deferred tax asset. The utilization of NOL and tax credit carry forwards from Tamboril prior to the reorganization may be
subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of
1986, as amended and similar state provisions. Accordingly, these amounts have not been included in the gross deferred tax
asset number above. In addition, due to equity transactions that have occurred subsequent to the reorganization with
Tamboril, the utilization of NOL carry forwards may be subject to further change in control limitations that generally
restricts the utilization of the NOL per year.
The reconciliation of the United States
statutory federal income rate and the effective income tax rate in the accompanying Consolidated Statements of Operations for the
periods ended December 31, 2012 and 2011 is as follows:
|
|
2012
|
|
|
2011
|
|
Statutory U.S. federal income tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Prior period adjustments
|
|
|
0.0
|
%
|
|
|
0.00
|
%
|
State taxes, net
|
|
|
(6.6
|
)%
|
|
|
(6.7
|
)%
|
Foreign currency fluctuation
|
|
|
(0.6
|
)%
|
|
|
0.6
|
%
|
U.S. tax credits
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Revaluation of Derivatives
|
|
|
(0.1
|
)%
|
|
|
(0.5
|
)%
|
(Other
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Change in valuation allowance
|
|
|
41.1
|
%
|
|
|
40.5
|
%
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The Company adopted the provisions of FASB
ASC 740-10 “Income Taxes” on January 1, 2008. As the result of the assessment, the Company recognized no
material adjustments to unrecognized tax benefits. At the adoption date of January 1, 2008 and as of December 31, 2012, the Company
has no unrecognized tax benefits. By statute, tax years ending December 31, 2008 through 2012 remain open to examination
by the major taxing jurisdictions to which the Company is subject.
Note 8 — Related Party Transactions
Transactions with C&T:
A former board member of the Company, Dr. Igor Filipenko, was the former majority shareholder of C&T prior to the acquisition
by the Company. The Board of Directors on August 21, 2009 approved the issuance of warrants to purchase not more than 1,600,000
shares of common stock at an exercise price of $2.00 per share and a term of two years to the C&T Group. On January 11, 2010,
Dr. Igor Filipenko gave notice of his resignation as a director of the Company, effective immediately. On December 31, 2012 these
warrants have not yet been issued pending "mutual understanding" between the parties.
Note 9 — Supplemental Cash Flow Information
Cash payments for interest during
the years ended December 31, 2012 and December 31, 2011 were $17,595 and $18,042, respectively. There were no payments of income
taxes during the years ended December 31, 2012 and 2011
Note 10 — Commitments and Contingencies and Significant
Contracts
Facilities:
On March 28,
2010, we renewed our lease for existing space at our manufacturing plant, located at 3601 Clover Lane, in New Castle, Pennsylvania.
The salient terms of the Lease are as follows:
|
·
|
The term commenced on April 3, 2010 with an initial term of three
years.
|
|
·
|
The renewal lease may be extended for two successive five-year renewal
options with future rent to be negotiated at a commercially reasonable rate.
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – CONTINUED
|
·
|
The battery manufacturing facility includes 70,438 square feet of
floor space, including 7,859 square feet of office, locker, lab and lunch area, 46,931 square feet of manufacturing space, 1,488
square feet of dedicated lab space, 9,200 square feet of storage buildings and 5,000 square feet of basement area.
|
|
·
|
The rental amount for the initial term is $17,200 per month, which
is fixed through 2013. In addition to the monthly rental, we are obligated to pay all required maintenance costs, taxes and special
assessments, maintain public liability insurance and maintain fire and casualty insurance for an amount equal to 100% of the replacement
value of the leased premises.
|
|
·
|
On May 26, 2011 we executed an addendum to the existing lease agreement which resulted in the lease
of an additional 2,160 square feet of additional space for $500.00 per month. There were no other changes to the existing lease.
|
|
·
|
With the execution of the addendum we now lease 72,598 square feet for a monthly rent of $17,200.
|
On November 4, 2010, the Company entered
into a Commercial Lease (“Lease”) with Becan Development, LLC (“Lessor”) to lease a 45,000 square foot
building, located at 209 Green Ridge Road in New Castle PA, (the “Property”). The salient terms of the Lease are as
follows:
|
·
|
The Lease term commenced on January 1,
2011 and the term expires on December 31, 2015.
|
|
·
|
The Lease may be extended for two 5-year
terms, by giving notice not less than 30 nor more than 120 days before the expiration of the initial term or first renewal term
(as applicable). The renewal leases shall be on terms substantially similar to the terms of the initial Lease except for any adjustment
to rent, if warranted, as mutually agreed upon by Lessor and the Company.
|
|
·
|
The rental amount for the initial term
is $19,297 per month and is on a “triple net” basis.
|
|
·
|
If the Company is able to obtain sufficient
funding from either the federal or state government or agencies, and it enters into a binding agreement to purchase the Property,
the Lease shall be immediately terminated and Lessor shall credit the most recent 6 months of actual rental payments made to Lessor
against the purchase price of the Property
|
|
·
|
The Company also has a right of first
refusal to purchase the property within 30 days of receipt of notice of a third party offer from Lessor upon substantially the
same terms as those offered by the third party.
|
|
·
|
The Lease contains market terms on standard
provisions such as defaults and maintenance.
|
Employment Agreements:
The Company has entered into executive employment agreements with Thomas Granville, Charles R. Trego, Phillip S. Baker, and Vani
K. Dantam. These agreements generally require each executive to devote substantially all of his business time to the Company’s
affairs, establish standards of conduct, prohibit competition with our company during their term, affirm our rights respecting
the ownership and disclosure of patents, trade secrets and other confidential information, provide for the acts and events that
would give rise to termination of such agreements and provide express remedies for a breach of the agreement. Each of the executives
is allowed to participate in our standard employee benefit programs, including medical/hospitalization insurance and group life
insurance, as in effect from time to time. Each of the covered executives will generally receive an automobile allowance, reimbursement
for all reasonable business expenses incurred by him on behalf of the Company in the performance of his duties, and a severance
package that guarantees continued remuneration equal to the executives base salary for a total of 23 months so long as the Company
elects to enforce the provisions of the Non-Competition Agreement, should the executive be unable to find employment or accepts
employment at a reduced rate of pay due solely to the Non-Competition Agreement. The provisions of the individual agreements are
set forth in the following table:
Name
|
|
Position
|
|
Date
|
|
Term
|
|
|
Salary
|
|
|
|
Options
|
|
|
|
Price
|
|
|
Vesting
|
|
|
Stock
|
|
Thomas Granville
|
|
(1)
|
|
CEO
|
|
6/29/10
|
|
3-year
|
|
$
|
380,000
|
|
|
|
360,000
|
|
|
$
|
1.50
|
|
|
Monthly
|
|
|
0
|
|
Charles R. Trego
|
|
(2)
|
|
CFO
|
|
4/01/10
|
|
3-year
|
|
$
|
225,000
|
|
|
|
265,000
|
|
|
$
|
1.50
|
|
|
Monthly
|
|
|
0
|
|
Philip S. Baker
|
|
(3)
|
|
COO
|
|
4/01/10
|
|
3-year
|
|
$
|
199,800
|
|
|
|
230,000
|
|
|
$
|
1.50
|
|
|
Monthly
|
|
|
0
|
|
Vani K. Dantam
|
|
(4)
|
|
Sr. VP
|
|
1/23/12
|
|
3-year
|
|
$
|
225,000
|
|
|
|
150,000
|
|
|
$
|
1.50
|
|
|
Monthly
|
|
|
0
|
|
1.
|
Thomas Granville
. On June 29, 2010, the Company entered into an Executive Employment Agreement with Thomas Granville as Chief Executive Officer. Pursuant to this agreement, Mr. Granville receives an annual salary of $380,000, and an annual car allowance of $9,000 for the period commencing June 29, 2010, and terminating June 30, 2013. Mr. Granville’s base salary is subject to annual review, and such salary is subject to renegotiation on the basis of Mr. Granville’s and the Company’s performance. In addition, Mr. Granville received a signing bonus of $270,000 and was paid on July 9, 2010. The Company also granted Mr. Granville an option to purchase 360,000 shares of our common stock at a price of $1.50 per share at a vesting rate Of 10,000 shares per month through the term of the agreement. Mr. Granville is eligible to participate in any executive compensation plans adopted by the shareholders of the Company and the Company's standard employee benefit programs.
|
|
|
2.
|
Charles R. Trego.
On April 1, 2010, the Company entered into an Executive Employment Agreement with
Charles R. Trego
as Chief Financial Officer
.
Under the terms of his employment agreement, which has a term of three years, Mr. Trego receives an annual salary of $225,000, which is subject to review after the initial six month term of the agreement and annually thereafter, an annual car allowance of $9,000, bonuses as determined by the compensation committee, and a 5-year option to purchase 265,000 shares of our common stock at a price of $1.50 per share. 27,000 options shall vest upon execution of this contract and, beginning in June 2010, 7,000 options will vest monthly through the remaining 34 months of this contract.
|
3.
|
Philip S. Baker.
On April 1, 2010, the Company entered into an Executive Employment Agreement with Philip S. Baker as Chief Operating Officer. Under the terms of his employment agreement, which has a term of three years, Mr. Baker receives an annual salary of $199,800, which is subject to review after the initial six month term of the agreement and annually thereafter, an annual car allowance of $6,000, and a 5-year option to purchase 230,000 shares of our common stock at a price of $1.50 per share. 26,000 options shall vest upon execution of this contract and, beginning in June, 2010, 6,000 options will vest monthly through the remaining 34 months of this contract.
|
|
|
|
4.
Vani K. Dantam.
On January 1, 2012, The Company entered into an Executive Employment Agreement with Vani Dantam as Senior Vice President Business Development, Sales & Marketing. Pursuant to this agreement which has a term of three years, Mr. Dantam receives an annual salary of $225,000, which is subject to review on an annual basis, a $20,000 sign-on bonus which was paid in January 2102, bonuses as determined by the compensation committee, and a 5- year option to purchase 150,000 shares of our common stock at a price of $1.50 per share, 15,020 options vest upon execution of this contract and, beginning March 2012, 3,970 options will vest monthly.
|
We have no retirement plans or other similar
arrangements for any directors, executive officers or employees, other than a noncontributory 401(k) plan.
Purchase Orders
On May 11, 2010, the Company was awarded
federal contract number N00014-10-C-0094. Under the terms of the agreement, Axion shall furnish personnel and facilities to conduct
the research effort for the development of new lightweight, high-powered batteries for use in vehicles operated by the U.S. Marine
Corps. This cost-plus-fixed-fee completion contract requires scientific or technical reports to be delivered, inspected and accepted
prior to reimbursement. Costs incurred during the performance period, will be reimbursed quarterly. The final report was delivered
in July, 2011. The contract, provided $1,004,747 to us in funding for this project, and is subject to a financial audit upon contract
completion which we anticipate will occur in 2013.
Selling price was determined by periodic
spending using the hourly labor, overhead, and G&A rates submitted with the proposal. The rates are subject to adjustment at
the end of contract, and secured by the unpaid fixed fee. Revenue based on the proportionate performance of the work performed
was recognized from inception to completion when collection of the reimbursement was reasonably assured. Recognition of the fixed
fee was postponed to contract completion. Fixed fee billings were recorded under deferred revenue. The contract contributed no
service revenue in 2012 as compared to $387,645 in service revenue during 2011.
Note 11 – Subsequent events
On March 10, 2013, we renewed our lease
for our manufacturing plant at 3601 Clover Lane in New Castle, Pennsylvania. The lease which commences on April 3, 2013 is for
a term of five years with one five year renewal option. All other terms and conditions of the lease are the same as the existing
lease agreement.