AXPWQ Axion Power International Inc (CE)

Note 4 - Public offering of common stock, Series A warrants and Series B warrants

Effective October 29, 2014, the Company consummated an underwritten public offering consisting of 133.93 shares of common stock (“Common Stock”), together with Series A warrants to purchase 133.93 shares of its Common Stock (“Series A Warrants”) and Series B warrants to purchase 4,687.5 shares of its Common Stock (“Series B Warrants”) for gross proceeds to the Company of approximately $6.1 million and net proceeds of $5.5 million. The public offering price for each share of Common Stock, together with one Series A Warrant and one Series B Warrant, was $45,500. The Series A warrants may be exercised for a period of five years and the Series B warrants may be exercised for a period of 15 months. In connection with the offering, the Company granted to the underwriter a 45-day option to acquire up to 20 additional shares of Common Stock and/or up to 8,036 additional Series A Warrants and/or up to 281,250 additional Series B Warrants. As a result of the July 14, 2015 1-for-35 reverse split, the exercise price of the Series A warrants is $113.75 per share. The Series A Warrants were not subject to the July 15, 2016 1-for-400 reverse split and The Series B warrants were not subject to the 1 for 35 or the 1 for 400 reverse stock splits. The Company also closed on the underwriter’s exercise of the over-allotment option on the Series A Warrants and the Series B Warrants. The Company’s Common Stock and Series A Warrants were listed on the Nasdaq Capital Market under the symbols “AXPW” and “AXPWW”, respectively, until February 2016, when both issues were removed to the OTCQB under the same trading symbols. On June 15, 2015, as the result of an agreement with the holders of the Company’s Series A warrants and Series B warrants, the Company adjusted the terms of the Series A warrants so that the exercise price was reduced to $.50, which number was changed to $17.50 as a result of the Company’s July 14, 2015 1-for -35 reverse stock split.

Accounting for the Series B Warrants

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

On April 26, 2016, 10,000 Series B warrants were exercised and 29 shares of the Company’s common stock were issued. The remaining 24,521 unexercised Series B warrants expired on April 29, 2016. As of December 31, 2016, all Series B warrants had either been exercised or expired. At December 31, 2015, the fair value of the Series B Warrant was estimated to be $35,764. Using the Monte Carlo simulation model to calculate the mark to market valuation at December 31, 2015, the following key assumptions were used in determining the fair value: (i) expected life 1 month, (ii) volatility of 50.0%, (iii) risk free interest rate of 0.14%, (iv) dividend rate of zero, (v) stock price of $0.93, and (vi) exercise price of $1.0463.

The following table rolls forward the fair value of the Company’s warrant liability, which is determined by level 3 inputs for the year ended December 31, 2016

The change in the fair value of the Series B warrant liability is as follows:

Bridge Notes

On August 7, 2015, the Company entered into a securities purchase agreement (“Bridge Agreement”) with several accredited investors, including one director of the Company (each, a “Bridge Investor”) pursuant to which it sold $600,000 principal amount of Senior Convertible Notes (“Bridge Notes”) to the Bridge Investors. The transaction was approved by the Company’s Board of Directors on August 5, 2015. The Bridge Notes carried an original issue discount of 15% so that the gross amount of proceeds to the Company (before expenses) was $510,000. The Bridge Notes bore interest at the rate of 12% per annum, and the interest was payable in cash upon repayment of the Bridge Notes or in shares of the Company’s common stock upon conversion of the Bridge Notes. The Bridge Notes had a term of 90 days from the date of issuance. The holders of the Notes were issued one five-year warrant (“Bridge Warrants”) for each $1.00 of principal amount of the Bridge Note invested (510,000 warrants in total). Each Bridge Warrant has an exercise price of $1.75 per share. The Bridge Agreement, Bridge Notes and Bridge Warrants contain other terms and provisions which are customary for a transaction of this nature, including standard representations and warranties and events of default. The transaction was exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D, as promulgated thereunder.

The fair value of the warrants issued in conjunction with the Bridge Notes is $257,550 in the aggregate and was calculated using the binomial option model with the following assumptions: (i) expected life of 5 years, (ii) volatility of 100%, (iii) risk free interest rate of 1.59% and (iv) dividend yield of zero.

The conversion feature of the Bridge Notes and the related warrants were determined not to be derivative instruments, in accordance with the guidance in ASC Topic 470-20 Debt with conversion and Other Options (“ASC 470”). The Company first calculated the fair value of the warrants issued and then calculated the relative value of the Bridge Note and determined that there was a beneficial conversion feature in the amount of $179,947.

On November 5, 2015, $363,530 of principal and accrued and unpaid interest of the Company’s Bridge Notes was exchanged for an additional note in the principal amount of $363,530 with the same terms as the convertible notes issued in its November 5, 2015 private placement of notes and warrants, and an additional 443,328 warrants were issued with the same terms as the warrants issued in the November 5, 2015 private placement.

On November 10, 2015, the Company paid $235,294 in principal and $7,074 in interest to settle a portion of the Bridge Notes.

The remaining balance at December 31, 2016 and 2015 related to the Bridge Notes was $0.00 and $11,765, respectively. The final $11,765 in principal and $588 in interest with respect to the August 2015 Bridge Notes was paid on January 7, 2016.

The fair value of the warrants and the beneficial conversion feature were recorded as a debt discount and were amortized over the life of the Bridge Notes. As of December 31, 2016, the debt discount and beneficial conversion feature have been fully amortized.

Certain of the Company’s machinery and equipment are secured by the Pennsylvania Department of Community and Economic Development in relation to the Machinery and Equipment Loan Fund financing. The loan proceeds of $776,244 were received by us on September 14, 2009. The balance owed on the loan at December 31, 2016 and 2015 is $31,526 and $123,663, respectively, which bears interest at a rate of 5.25% and matured on October 1, 2016. The final payment to Pennsylvania Department of Community and Economic Development in the amount of $29,574 was made by the Company on January 9, 2018.

Notes with Landlords

The Company’s two landlords agreed to extend the payment date of an aggregate $291,975 due in lease payments until December 31, 2015.

At December 31, 2015, the Company renegotiated the repayment of the Notes with the landlords. At that time the Company made payment of $67,000 to Becan Development, the landlord for its Greenridge facility, which included $54,375 of principal and $12,625 of accrued interest. The remainder of the note was extended into four monthly installments of $25,000 plus accrued interest, commencing on January 1, 2016 and concluding on April 1, 2016. The negotiation with S&S Partnership, the landlord for the Clover Lane facility, resulted in an agreement to pay back the note in eight equal installments commencing January 1, 2016 and concluding on August 1, 2016. The monthly payments of $18,125, consisting of $17,200 of principal and $925 of accrued interest. During the year ended December 31, 2016, the balance of these notes was settled.

As of April 1, 2016, the Company has moved from the Greenridge facility as planned and consolidated to the Clover Lane facility.

As of December 31, 2016, and 2015, the balance of these notes amounted to $0.00 and $237,600, respectively.

Description of the 2015 Private Placement

On November 4, 2015, the Company entered into a financing transaction for the sale of convertible notes and warrants for gross proceeds of $9,000,000. Upon closing, which occurred on November 5, 2015, the Company received cash proceeds of $1,850,000 and deposit of an additional $7,150,000 into a series of control accounts in the Company’s name. Under the original terms of the notes, the Company is permitted to withdraw funds from its control accounts (i) in connection with certain conversions of the notes or (ii) otherwise, as follows: $1,000,000 on each 30-day anniversary of the commencing on the 30 ^th day after the effective date of a registration statement being filed in connection with the transaction until there are no more funds in the control accounts, subject in each instance to equity conditions set forth in the convertible notes. As a result of the January 28, 2016 amendments to the notes, another $1,800,000 was released on that date, and the balance of $5,350,000 was released in 8 equal monthly installments commencing on May 2, 2016 (subsequently amended to be May 6, 2016) subject to terms and conditions set forth in the notes.

The Company received approximately $1.7 million in net proceeds at closing, which occurred on November 5, 2015, after deducting placement agent’s fee of $138,750. Offering expenses, other than the placement agent’s fee, were approximately $100,000, which were paid out of proceeds at closing. At each release of funds starting on May 6, 2016, the Company was to receive approximately $925,000 in net proceeds, after deducting placement agent’s fee of $75,000, if equity conditions (certain stock price and volume and other conditions set forth in the loan documents from November 5, 2015) were met. As a result of a further waiver and amendment entered into on May 1, 2016, the equity conditions were waived with respect to a release of $310,000 to the Company on May 6, 2016. Further, the waiver and amendment (i) waives equity conditions for the Company’s ability to make all installment and pre-installment payments in stock through May 6, 2017, and (ii) reduces the pre-installment and installment conversion prices to 75% of an average vwap price over the five trading days preceding the date of issuance. In June of 2016 an additional $355,000 was released.

In the third quarter of 2016 and subsequently, the Company received the following releases from the control accounts as follows: August $305,389, September $305,389 and October $288,889.

The initial conversion price of the notes was $492.00 per share (for optional conversions only and not Company amortization payments), and the initial exercise price of the 10,975,608 warrants was $1.29 per share.

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

The $9,363,530 of total outstanding principal on November 10, 2015 bears interest at 9% per annum and shall be repaid or converted at monthly installment dates over a 14-month period. Additionally, the notes are convertible by the holder at any time after issuance. Pursuant to the optional conversion feature of these notes (as opposed to the monthly Company conversions which are at a discount formula as set forth below), the Company would deliver the number of shares of common stock equal to the outstanding principal amount, accrued interest amount, and a make whole amount equal to the interest that would be accrued on the conversion amount until maturity, divided by the fixed conversion price of $492. Additionally, a portion of the outstanding amount is exchanged for common shares at each Monthly Installment Date at a conversion price equal to the lower of the conversion price in effect and 85% of the fair value of the common shares the trading day prior to the installment date. Subsequent to May 1, 2016, the rate is 75% of the fair value. On the 23rd date prior to any installment date, shares to be delivered based upon the conversion price formula for the installment amount, and then on the installment date in question, the amount of shares to be delivered is recalculated for the conversion price formula on that installment date, and if the conversion price is lower on the installment date than on the pre-installment date, a number of shares equal to the number to be delivered on the installment date less the number of shares delivered on the pre-installment date is delivered to the investor. The number of common shares deliverable under the contract is limited by a beneficial ownership cap of 4.99% for any single investor (except for one investor which has a cap of 9.99%), so shares may be deemed issued but held in abeyance by the transfer agent until the investor is able to accept further shares without exceeding the beneficial ownership cap.

As the Company was required to separate the conversion option in the notes under ASC 815, Derivatives and Hedging, the Company recorded the bifurcated conversion option valued at $1.33 million as a derivative liability at December 31, 2015, which creates additional discount on the debt. The derivative liability is marked to market through the income statement each reporting period, while the discount created on the convertible notes is accreted as interest expense over the maturity period of the debt. Additionally, the convertible notes were issued to the investors in a basket transaction with warrants that are classified as derivative liabilities. These warrants, initially valued at $725,111 ($691,861 as discount on the debt and $33,250 as issuance costs for compensation to the underwriter), are also marked through the income statement each reporting period, while further discount is created on the convertible notes, and is accreted as interest expense using the effective interest method over the life of the debt.

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

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

Using the Calibration model, to calculate the mark to market value at December 31, 2015, the following key assumptions were utilized in both the valuations of the notes and warrants as follows: (i) risk free interest rate 0.66%, (ii) credit spread break point $0.72 (iii) credit spread 90%, (iv) volatility 53%, (v) stock price $168, (vi) negotiation discount 90.7%.

Using the Binomial Tree model, to calculate the mark to market value at December 31, 2016, the following key assumptions were utilized in both the valuations of the notes and warrants as follows: (i) spot price $0.0139, (ii) maturity date: December 31, 2018, (iii) maximum exercise price $492, (iv) exercise period starting from valuation dates, (v) volatility of 300%, (vi) coupon interest of 18% per year, (vii) dividend yield $0.00.

Derivative liability relating to the 2015 Private Placement

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

Securities Purchase Agreement

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

Notes

Ranking

The notes are senior unsecured obligations of the Company.

Maturity Date

Unless earlier converted or redeemed, the notes mature 14 months from the Closing, subject to the right of the investors to extend the date (i) if an event of default under the notes has occurred and is continuing or any event shall have occurred and be continuing that with the passage of time and the failure to cure would result in an event of default under the Notes and (ii) for a period of 20 business days after the consummation of a fundamental transaction if certain events occur. The notes mature on the fourteen-month anniversary of the issuance date (January 5, 2017) and are therefore already in their default state.

Interest

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

Optional Conversion

All amounts due under the notes are convertible at any time, in whole or in part, at the option of the holders into shares of the Company’s common stock at a fixed conversion price, which is subject to adjustment as described below. The notes are initially convertible into shares of the Company’s common stock at the initial price of $492 per share. This conversion price is subject to adjustment for stock splits, combinations or similar events and “full ratchet” antidilution provisions.

Payment of Principal and Interest

The Company has agreed to make amortization payments with respect to the principal amount of each note in shares of the Company’s common stock, subject to the satisfaction of certain equity conditions, or at the Company’s option, in cash on each of the following installment dates:

The twenty-first trading day after the earlier of (x) the initial effective date of a registration statement filed in connection with this offering or (y) May 2, 2016; the first trading day of the calendar month immediately following the initial installment date (or if such date is less than twenty trading days after the initial installment date, the second calendar month immediately following the initial installment date to the extent); and then each month through and including the Maturity Date, each in an amount equal to 1/11 of the principal amount of each note. Payment in stock is at 85% of the market price based upon a variable weighted average price formula.

As a result of the amendment agreements entered into by the Company with each selling stockholder on January 28, 2016, an additional $1.8 million was released from the controlled accounts on January 28, 2016, starting on May 2, 2016, and continuing for seven consecutive months thereafter on the 1 ^st business day of each such month $667,500 released in total from the controlled accounts.

Acceleration and Deferral of Amortization Amounts

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

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

Events of Default

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

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

Fundamental Transactions

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

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

Limitations on Conversion and Issuance

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

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

January 28, 2016 Amendment Agreements

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

Changes to the securities purchase agreement are as follows:

Changes to the notes are as follows:

Changes to the registration rights agreement are as follows:

May 1, 2016 Waiver and Amendment

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

“as of any Conversion Date or other date of determination, a price per share equal to the lowest of (x) $492, subject to adjustment as provided in this Note (the price set forth in this clause (x), the “Fixed Conversion Price”), (y) 75% of the arithmetic average of the Weighted Average Prices of the Common Stock during the five (5) consecutive Trading Day period ending immediately preceding the time of delivery of the applicable Conversion Notice, and (z) 75% of the Weighted Average Price of the Common Stock on the Trading Day of the delivery of the applicable Conversion Notice. For the avoidance of doubt, all such foregoing determinations to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction during the applicable calculation period.”

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

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

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

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

Warrants

The warrants entitle the holders of the warrants to purchase, in aggregate, 28,547 (27,439 shares from the November 5, 2015 closing and 1,108 shares from the “rollover” of Bridge Notes described at the beginning of this section) shares of the Company’s common stock. The warrants will expire November 5, 2017. The Warrants are initially exercisable at an exercise price equal to the lower of $516 and 85% of the market price at the time of exercise, subject to certain adjustments. The warrants may be exercised for cash, provided that, if there is no effective registration statement available registering the exercise of the warrants, the warrants may be exercised on a cashless basis.

The exercise price of the warrants is subject to adjustment for stock splits, combinations or similar events, and, in this event, the number of shares issuable upon the exercise of the warrant will also be adjusted so that the aggregate exercise price shall be the same immediately before and immediately after the adjustment. In addition, the exercise price is also subject to a “full ratchet” anti-dilution adjustment if the Company issue or is deemed to have issued securities at a price lower than the then applicable exercise price.

Limitations on Exercise

The warrants may not be exercised if, after giving effect to the exercise, the holder of the warrant together with its affiliates would beneficially own in excess of 4.99% of the Company’s outstanding shares of common stock. At each holder’s option, the warrant blocker applicable to the exercise of the warrants may be raised or lowered to any other percentage not in excess of 9.99%.

Fundamental Transactions

The warrants prohibit the Company from entering into specified transactions involving a change of control, unless the successor entity assumes all of the Company’s obligations under the Warrants under a written agreement before the transaction is completed.

Registration Rights Agreement

The Company entered into a Registration Rights Agreement with the Holders as of the date of Closing. Under this Agreement, the Company has agreed to register 200% of the shares issuable under the notes and 125% of the shares issuable under the warrants, with filing to occur no later than 15 days of the Closing and with effectiveness to occur no later than 75 days of the Closing. If the Company is unable to meet either of these deadlines, it may be required to pay certain cash damages under the registration rights agreement or, with the passage of additional time, an event of default under the notes may occur.

As a result of the January 28, 2016 amendment, the Company is only required to register shares of stock upon conversion of $3.65 million principal amount of the notes, and interest thereon with a 200% reserve for registration.

During the year ended December 31, 2016, the Company has issued: 84,301,569 shares of its common stock to convert $2,804,557 of principal; 9,808,381 shares of its common stock to convert $329,316 of interest; and 1,834,649 shares of its common stock for $134,555 in make whole interest. The Company will be required to issue additional true-up shares which cannot be calculated at this time.

Note 5 – Other Income

For the year ended December 31, 2015, the Company recognized $401,737 in other income. The Company also sold various zero value equipment, as well as use of the “Turbo Start” trademark for $420,000. For this transaction, the Company received $255,000 and a note receivable of $165,000. Net gain on this sale which included $32,000 in inventory and related commissions was $367,687. The Company then sold additional zero value equipment with a gain of $34,050.

This note receivable is being paid to the Company over an eight-month period commencing January 15, 2016 and for seven subsequent months thereafter at the rate of $15,000 per month.

In addition, the Company recognized a gain on deposit for the nonrefundable $250,000 earnest money deposit made by LCB International, Inc. to the Company as a result of the June 15, 2015 letter of intent between the parties.

For the year ended December 31, 2016, the Company recognized $29,651 as other income related to the gain on sale of disposition of assets.

Note 6 – Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. At December 31, 2016 the Company’s working capital was negative $7.9 million. The financial resources of the Company will not provide sufficient funds for the Company’s operations beyond the second quarter of 2018, as those operations currently exist. Subsequent funding will be required to fund the Company’s ongoing operations, working capital, and capital expenditures beyond the second quarter of 2018. 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. Furthermore, the Company has no current customers for its products, and if it does not meet conditions to pay back principal and interest due on its 2015 Senior Notes in stock, it would be obligated to make repayment in cash, and it does not have the ability to do so. 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.

Note 7 – Stockholders’ deficiency

Authorized Capitalization: The Company’s authorized capitalization includes 100 million shares of common stock and 12.5 million shares of preferred stock.

Common Stock: At December 31, 2016 and 2015, 95,954,549 and 9,920 shares of common stock were issued and outstanding, respectively. 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 12.5 million 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, 2016 and 2015, 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, 2016 and 2015, 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. Shares and amounts in the follow table represent the common stock equivalent:

As of December 31, 2016, and 2015, there are 0 and 34,521 warrants classified as derivative liabilities relating to the public offering of common stock that occurred on October 29, 2014. Each reporting period the warrants are re-valued and adjusted through the captions “change in value of Series B warrants, loss “and” senior warrants loss (gain)” on the consolidated statements of operations and comprehensive loss. In addition, as of December 31, 2016 and 2015, there were 11,967,716 warrants (of which 548,780 were issued to the placement agent) classified as derivative liabilities relating to the warrants issued in conjunction with the $9,000,000 principal amount of 2015 senior convertible notes. There were no cash proceeds from exercise of the Series B warrants as these were exercised using a cashless exercise provision contained therein.

Note 8 – Stock Based Equity compensation

Incentive Stock Plan Approved by Stockholders: There are no incentive stock options outstanding at December 31, 2016 or 2015.

Independent 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 50 shares of common stock at December 31, 2013. On March 18, 2014 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 50 shares to 150 shares. As of December 31, 2016, the plan remains at 150 shares of common stock available.

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.

The following tables provide consolidated summary information on the Company’s non-qualified stock option activity for the years ended December 31, 2016 and 2015.

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

On January 1, 2015 the Company issued 13 options to two directors upon being elected to the Board. These options will vest equally over a three-year period. The options were valued using the Black-Scholes method of valuation using: (i) risk free interest rate of 1.1%, (ii) volatility of 63%, (iii) dividend rate of zero, (iv) exercise price of $14,000 and (v) expected 5-year life. The value of these options was $111,888 and will be expensed over their three-year term.

On January 20, 2015, the Company granted a total of 19 options to six key employees. The options were valued using the Black-Scholes method of valuation using: (i) risk free interest rate of 0.85%, (ii) volatility of 67.1%, (iii) dividend yield of zero, (iv) exercise price of $14,000 and (v) expected 5-year life. These options vested at the date of grant. The Company recognized expense of $79,537 during 2015 related to these options.

As of December 31, 2016, there was $37,296 of unrecognized compensation related to non-vested options compared to $95,657 at December 31, 2015. The Company expects to recognize the cost during the year ended December 31, 2017.

The Company has recognized $45,279 and $258,009 in non-cash compensation expense for the years ended December 31, 2016 and 2015, respectively.

Note 9 – 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.

If the Company had generated earnings during the year ended December 31, 2016, the Company would have added 432,886,278 of 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 year ended December 31, 2015, the Company would have added 65,040 of common equivalent shares to the weighted average shares outstanding to compute the diluted weighted average shares outstanding, excluding unexercised Series B warrants. The Company had unexercised Series B warrants of 34,521 outstanding at December 31, 2015. The remaining unexercised outstanding 34,521 Series B warrants would have added 97.09 common shares as permitted by the amendment to the original warrant agreement.

The following table sets forth the computation of basic and diluted loss per share on a GAAP basis:

For periods in which there is income, certain securities would be antidilutive to the diluted earnings per share calculation. The following table summarizes antidilutive securities that would be excluded from the computation of dilutive loss per share:

The Company has net operating loss carry forwards of $77,000,000 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 2035. The Canadian loss carry forwards expire at various dates between 2016 and 2033. 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 2027. 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, due to equity transactions that have occurred, 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 years ended December 31, 2016 and 2015 is as follows:

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, 2016, the Company has no unrecognized tax benefits. By statute, tax years ending December 31, 2011 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject.

Note 11 – Related Party Transactions

During the year ended December 31, 2016, the Company engaged the services of a marketing firm to provide branding and web site development at a cost of $153,483. The principal of this firm is the Company’s Chief Executive Officer’s brother in law; however, neither the Chief Executive Officer nor his immediate family has any direct or indirect interest in the marketing firm. At December 31, 2016, there is no balance due to this firm in the Company’s accounts payable balance.

At December 31, 2016, the Company’s accounts payables balance included $59,593 of related party transactions which were for consulting fees associated with the previous CEO.

At December 31, 2015, the Company’s accounts payable balance included $118,126 of related party transactions. Of those transactions, $91,224 was for consulting fees associated with the previous CEO and the interim CEO, $17,290 for director related meeting fees, $7,500 in commission on the sale of equipment and $2,112 in employee related travel expense reimbursement.

Note 12 – Commitments and Contingencies, Concentrations and Significant Contracts

On March 28, 2010, the Company renewed its commercial lease for existing space at its manufacturing plant, located at 3601 Clover Lane, in New Castle, Pennsylvania. The Clover Lane facility lease was terminated February 16, 2018 six weeks prior to the scheduled termination date per the lease agreement of March 31, 2018.

On December 28, 2015, we entered into a lease agreement for four months beginning January 1, 2016. The rental amount of this agreement is $15,000 per month. Following the four-month period, the Company moved its offices to the Clover Lane facility, but continued to rent warehouse space from May through October 2016 at a cost of $820.21 monthly.

Rent expense for both facilities was $290,721 and $437,964 for the years ended December 31, 2016 and 2015, respectively.

The Company entered into a twelve month agreement with an individual commencing April 19, 2014 and ending April 18, 2015. The agreement was then extended through September 2, 2015. The individual was paid a minimum of $8,000 per month for a total of $90,600 in 2015.

On January 28, 2015 the Company announced a strategic marketing, sales and reselling agreement with privately owned Portland OR-based Pacific Energy Ventures LLC, a technology and project development firm specializing in the renewable energy and energy storage sectors, which was terminated in March 2016 and effective 120 days thereafter. A total of $60,000 was paid to Pacific Energy Ventures during the term of the agreement. with all payments being made in 2015, which will be credited against any 10% commissions due and payable under the agreement. Any fees due on any contracts which are brought forward as of this date are payable as set forth in the agreement.

On October 6, 2015, the Company entered into an agreement with Phoenix Capital Resources to provide services in identifying opportunities to partner with or to obtain investors to assist in the development of renewable energy or energy storage projects. The fees for the services were a $30,000 non-refundable fee followed by an additional $30,000 made in a series of installments. At the time of consummation of any such transaction, the Company was obligated to pay Phoenix a fee equal to the greater of a) $200,000 (“Minimum Fee”), or b) four percent (4.0%) of a Transaction Value up to $5,000,000, plus; five percent (5.0%) of a Transaction Value between $5,000,000 and $7,500,000, plus six percent (6%) of a Transaction Value between $7,500,000 and $10,000,000, plus seven percent (7.0%) of a Transaction Value between $10,000,000 and $12,500,000, plus eight percent (8%) of a Transaction Value between $12,500,000 and $15,000,000, plus (9) percent of a Transaction Value between $15,000,000 and $17,500,000, plus ten percent (10.0%) of a Transaction Value greater than $17,500,001 (the “Transaction Fee”). There have been no transaction fees earned as of the date of this filing. As of March 31, 2016, the Company terminated its agreement with Phoenix except with respect to the consummation of a contract with the U.S. Navy, for which it would get paid fees as described should a transaction be consummated. As of December 31, 2015, no further fees were owed.

On October 15, 2015, the Company filed an Interconnection Application with PJM Interconnection and submitted a fee of $15,000. Upon notification of acceptance, a feasibility study was submitted on February 28, 2016 and a payment in the amount of $10,000 was made on March 18, 2016. The Company terminated this project on December 1, 2016.

Concentration of Business Transacted with One Customer : The Company had one customer that accounted for 72% of sales in 2016 and three customers that accounted for 66% of sales in 2015.

Executive Employment Agreements:

Effective as of April 1, 2013, the Company entered into an Executive Employment Agreement (“Agreement “) with Philip S. Baker as its Chief Operating Officer. Under the terms of the Agreement, which has a term of three years, Mr. Baker receives an annual salary of $199,800, which is subject to review annually, an annual stipend of $19,980, an annual bonus as determined by the Compensation Committee of the Board of Directors, and an annual car allowance of $6,000. On April 1, 2013, Mr. Baker was granted a five-year option to purchase 12 shares of our common stock with an exercise price of $30,000 per share, 1 option vested on April 1, 2010, and, beginning in June, 2010, 1 option vested ratably through the remaining 34 months of his contract.

Effective as of November 1, 2014, the Company entered into an Executive Employment Agreement (“Agreement “) with Charles R. Trego as its Chief Financial Officer. Under the terms of the Agreement, which has a term of two years, Mr. Trego received an annual salary of $225,000, an annual stipend of $22,500 on the first and second anniversaries of the date of the Executive Employment Agreement, respectively, if he is still employed by the Company in such capacity on the first anniversary date, and on the second anniversary date, if he has an agreement to continue as the Chief Financial Officer of the Company for at least six months subsequent to the second anniversary date, an annual car allowance of $7,500. Mr. Trego resigned as CFO on October 1, 2015, and thus his contract was terminated as of that date. The stipend was due on October 31, 2015 in the amount of $22,500, but was paid early as recognition for his years of service to the Company.

On March 31, 2015, Axion Power International, Inc. accepted the resignation of Vani Dantam, Vice President of Sales and Marketing.

In May 2015, $32,250 of the December 2014 deferred salaries was paid to the Estate of Mr. DiGiancinto (Axion’s Former CEO who died in January 2015). The remainder of the deferred amount has not been paid due to a covenant with the Company’s existing November 2015 investors to not repay such amounts until June 2016. At December 31, 2016 and 2015, the total amount of the deferrals was $159,297 and $104,992, respectively.

The Company has no retirement plans or other similar arrangements for any directors, officers or employees, other than a non-contributory 401(k) plan.