UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

  (Mark One)

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

 

For the Quarterly Period Ended September 30, 2012

 

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

 

AXION POWER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   65-0774638
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
3601 Clover Lane    
New Castle, Pennsylvania   16105
(Address of principal executive offices)   (Zip Code) 
 

 (724) 654-9300

(Registrant’s telephone number, including area
code)

 

 

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

 

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

 

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

 

Large accelerated filer o Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company þ

 

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

 

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

 

Title of Each Class Outstanding Shares at November 9, 2012
Common Stock, $0.0001 par value 113,260,006

 

 
 

 

Cautionary Note Regarding Forward-Looking Information

 

This Report on Form 10-Q, in particular Part I Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the energy l storage device industry, all of which are subject to various risks and uncertainties.

 

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

 

2
 

 

  TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION 4
     
    ITEM 1. FINANCIAL STATEMENTS 4
    ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
    ITEM 4. CONTROLS AND PROCEDURES 17
     
PART II - OTHER INFORMATION 17
     
   ITEM 1. LEGAL PROCEEDINGS 17
   ITEM 1A. RISK FACTORS 17
   ITEM 4. MINE SAFETY DISCLOSURES 17
   ITEM 6. EXHIBITS 18

 

3
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(A Development Stage Company)

 

    September 30, 2012     December 31, 2011  
    (Unaudited)        
ASSETS                
Current Assets                
Cash and cash equivalents   $ 4,172,818     $ 1,987,637  
Accounts receivable     306,185       309,354  
Other receivables     21,860       162,249  
Prepaid expenses     231,017       145,442  
Inventory, net     3,229,175       2,717,173  
Total current assets     7,961,055       5,321,855  
                 
Property & equipment, net     8,124,661       8,417,163  
Other receivables- long-term     48,000       53,000  
TOTAL ASSETS   $ 16,133,716     $ 13,792,018  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current Liabilities                
Accounts payable   $ 739,917     $ 520,358  
Other current liabilities     312,943       429,432  
Notes payable     104,777       104,777  
Total current liabilities     1,157,637       1,054,567  
                 
Deferred grant  revenue     1,347,280       1,573,962  
Derivative liabilities     3,378       15,843  
Notes payable     358,610       439,480  
Total liabilities     2,866,905       3,083,852  
                 
Stockholders' Equity                
                 
Convertible preferred stock-12,500,000 shares authorized     -       -  
                 
Common stock- 200,000,000 shares authorized $0.0001 par value 113,260,006 shares
issued & outstanding (85,516,139 in 2011)
    11,326       8,552  
Additional paid in capital     95,888,022       86,953,180  
Deficit accumulated during development stage     (82,380,861 )     (76,001,894 )
Cumulative foreign currency translation adjustment     (251,676 )     (251,672 )
Total stockholders' equity     13,266,811       10,708,166  
                 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY   $ 16,133,716     $ 13,792,018  

 

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

 

4
 

 

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(A Development Stage Company)

UNAUDITED

 

    Three Months Ended     Nine Months Ended     Inception  
    September 30,     September 30,     9/18/2003  to  
    2012     2011     2012     2011     9/30/2012  
Product   $ 2,178,077     $ 2,097,413     $ 6,690,502     $ 4,832,226     $ 18,982,494  
Service     -       -       -       411,645       1,279,726  
Net sales     2,178,077       2,097,413       6,690,502       5,243,871       20,262,220  
                                         
Costs and expenses                                        
Product costs     2,014,731       1,844,088       6,014,886       4,205,057       16,611,842  
Research & development     1,198,834       1,329,783       3,738,955       3,599,545       32,609,846  
Selling, general & administrative     1,114,993       1,020,352       3,316,201       3,215,518       33,080,882  
Interest expense     4,090       4,680       13,313       14,095       2,390,488  
Impairment of assets     -       -       -       -       2,062,160  
Derivative revaluations     (17,176 )     (128,187 )     (12,465 )     (119,166 )     (1,639,101 )
Mega C Trust share augmentation     -       -       -       -       400,000  
Interest  income & other     (1,393 )     (7 )     (1.421 )     (7,735 )     (570,705 )
Loss before income taxes     (2,136,002 )     (1,973,296 )     (6,378,967 )     (5,663,443 )     (64,683,192 )
                                         
Income taxes                                     4,300  
Accumulated deficit     (2,136,002 )     (1,973,296 )     (6,378,967 )     (5,663,443 )     (64,687,492 )
                                         
Less preferred stock dividends and beneficial conversion feature     -       -       -       -       (17,693,369 )
Net loss applicable to common shareholders   $ (2,136,002 )   $ (1,973,296 )   $ (6,378,967 )   $ (5,663,443 )   $ (82,380,861 )
                                         
Foreign Translation Adjustment     (1 )             (4 )             (251,676 )
                                         
Comprehensive Income(Loss)     (2,136,003 )     (1,973,296 )     (6,378,971 )     (5,663,443 )     (82,632,537 )
                                         
Basic and diluted net loss per share   $ (0.02 )   $ (0.02 )   $ (0.06 )   $ (0.07 )   $ (2.05 )
                                         
Weighted average common shares outstanding     113,249,335       85,511,255       109,826,629       85,475,579       40,127,504  

 

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

 

5
 

 

AXION POWER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(A Development Stage Company)

UNAUDITED

 

    Nine Months Ended     Inception  
    September 30,     9/18/2003  to  
    2012     2011     9/30/2012  
                   
Cash Flows from Operating Activities                        
Accumulated deficit   $ (6,378,967 )   $ (5,663,443 )   $ (64,687,492 )
                         
Adjustments to reconcile deficit accumulated for noncash items                        
Depreciation     1,035,336       710,850       3,707,458  
Interest expense     -       -       1,970,251  
Impairment of assets     -       -       2,062,160  
Derivative revaluations     (12,465 )     (119,166 )     (1,639,101 )
Mega C Trust share augmentation     -       -       400,000  
Share based compensation expense     311,637       351,509       6,547,874  
                         
Changes in operating assets & liabilities                        
Accounts receivable     3,169       (247,162 )     (313,054 )
Other receivables- current     140,389       (326,579 )     100  
Prepaid expenses     (85,575 )     (103,903 )     (228,429 )
Inventory, net     (512,002 )     (1,660,053 )     (3,229,174 )
Accounts payable     219,559       57,169       2,394,561  
Other current liabilities     (116,489 )     8,440       334,075  
Liability to issue equity instruments     -       -       178,419  
Deferred grant  revenue and other     (226,682 )     240,557       1,434,798  
                         
Net cash used by operating activities     (5,622,090 )     (6,751,781 )     (51,167,554 )
                         
Cash Flows from Investing Activities                        
Other receivables –long term     5,000       9,000       (1,265,016 )
Property & equipment, net     (742,834 )     (2,533,765 )     (12,499,503 )
Investment in intangible assets     -       -       (167,888 )
Net cash used by investing activities     (737,834 )     (2,524,765 )     (13,932,407 )
                         
Cash Flows from Financing Activities                        
Net proceeds from related party debt     -       -       5,445,458  
Net proceeds (to) from notes payable     (80,870 )     (78,484 )     463,387  
Net proceeds from sale of common stock     8,625,979       -       53,797,344  
Net proceeds from exercise of warrants     -       -       2,014,766  
Net proceeds from sale of preferred stock     -       -       7,472,181  
Net cash (used) provided by financing activities     8,545,109       (78,484 )     69,193,136  
                         
Net change in cash and cash equivalents     2,185,185       (9,355,030 )     4,193,175  
Effect of exchange rate on cash     (4 )     (19 )     (20,358 )
Cash and cash equivalents - beginning     1,987,637       13,330,009       -  
Cash and cash equivalents - ending   $ 4,172,818     $ 3,974,960     $ 4,172,818  

 

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

 

6
 

 

AXION POWER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(A Development Stage Company)

 

1. Basis of Presentation

 

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

 

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

 

2. Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. At September 30, 2012 the Company’s working capital was $6.8 million. During the first nine months of 2012, the Company had revenue of $6.7 million and a net loss of $6.4 million. The financial resources of the Company will not provide sufficient funds for the Company’s operations beyond March 31, 2013, as those operations currently exist. Subsequent funding will be required to fund the Company’s ongoing operations, working capital, and capital expenditures beyond March 31, 2013. No assurances can be given that the Company will be successful in arranging the further 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.

 

3. Recent Accounting Pronouncements

 

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

 

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

 

7
 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

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

 

4. Inventory

 

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

 

    September 30,
2012
    December 31,
2011
 
Raw materials and components   $ 951,220     $ 1,534,957  
Work in process     2,197,737       1,070,901  
Finished goods     337,456       359,540  
Inventory reserves     (257,238 )     (248,225 )
    $ 3,229,175     $ 2,717,173  

 

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

 

5. Warrants

 

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

 

    Shares     Weighted average
exercise price
    Weighted average remaining
contract term (years)
 
Warrants outstanding at December 31, 2011     11,896,070     $ 0.85       1.3  
Granted     -       -       -  
Exercised     -       -       -  
Forfeited or lapsed     -       -       -  
Warrants outstanding at September 30, 2012     11,896,070     $ 0.85       .6  

 

6. Equity Compensation

 

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

 

8
 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

  

The Company has adopted an outside directors’ stock option plan covering an aggregate of 500,000 shares of common stock which provides that each eligible director will automatically be granted an option to purchase shares having an aggregate fair market value on the date of grant of twenty thousand dollars ($20,000) for each year of his term in office. The outside directors’ stock option plan was amended subsequent to September 30, 2012 to increase the number of plan shares to 1,000,000 – see Note No. 9 – Subsequent Events to the Consolidated Financial Statements. The board of directors also adopted an officers and employees non-qualified stock options plan that has not been approved by the shareholders, covering an aggregate of 2,000,000 shares of common stock.

 

During the three month ended September 30, 2012 there were no additional options granted. During the nine months ended September 30, 2012, the Company granted a total of 365,000 non – qualified stock options.

 

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

 

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

 

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

 

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

 

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

 

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

 

The total stock based compensation expense for all non-qualified options was $311,637 for the nine months ended September 30, 2012 and had no impact on diluted loss per share.  

 

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

 

9
 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

The following table provides a summary of all outstanding non-qualified options based on grant date as of September 30, 2012:

 

          2012        
          Weighted Average        
All Plan & Non-Plan Compensatory
Non-Qualified Options
  Number of
Options
    Exercise     Fair Value     Remaining
Life
(years)
    Aggregate
Intrinsic
Value
 
Options outstanding at December 31, 2011     3,721,800     $ 1.91     $ 0.65       4.7     $ -  
Granted     365,000       1.50       0.12       -       -  
Exercised     -       -       -       -       -  
Forfeited or lapsed     (277,768 )     2.41       0.90       -       -  
Options outstanding at September  30, 2012     3,809,032       1.83       0.59       3.7       -  
Options exercisable at September   30, 2012     2,993,247     $ 1.93     $ 0.66       3.1     $ -  

 

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

 

The following table provides a summary of all non-vested non-qualified stock options as of September 30, 2012:

 

    All Plan & Non-Plan 
Compensatory Non-Qualified Options
 
    Shares     Weighted average
grant date fair value
 
Options subject to future vesting at December 31, 2011     1,206,140     $ 0.44  
Granted     365,000       0.12  
Forfeited or lapsed     (73,768 )     0.24  
Vested at September 30, 2012     (681,587 )     0.43  
Options subject to future vesting at September 30, 2012     815,785     $ 0.30  

 

As of September 30, 2012, there was $539,860 of unrecognized compensation expense related to non-vested non-qualified options granted under the plans. The Company expects to recognize the compensation expense over a weighted average period of 6.9 years. The total fair value of options which vested during the nine months ended September 30, 2012 and September 30, 2011 was $292,635 and $466,557, respectively. 

 

7. Earnings/Loss Per Share

 

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

 

There were no dilutive effects of stock options for the nine months ended September 30, 2012 and 2011.

 

10
 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

  

8. Stockholder’s Equity

 

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

 

9. Subsequent Events

 

Subsequent to September 30, 2012 the following events have occurred:

 

On October 17, 2012, the Board of Directors amended the Axion Power International, Inc. independent directors stock option plan to increase the number of shares of common stock available thereunder from 500,000 shares to 1,000,000 shares.

 

On October 25, 2012, Norfolk Southern issued us the second purchase order for $88,850 for the remaining balance of a $475,000 total purchase order for PbC batteries for use in their initial all electric battery powered locomotive.

 

11
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

Since inception, we have received $69.2 million in cash generated from financing activities of which $65.0 million was used to fund research and development activities, capital expenditures, infrastructure and working capital.

 

Key Performance Indicators, Material Trends and Uncertainties

 

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

 

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

 

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

 

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

 

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

 

Financing Activities

 

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

 

Award Activities: Grants and Contracts :

 

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

 

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

 

Results of Operations

 

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

 

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

 

On April 26 th , Norfolk Southern (“NS”) issued us an order for the first $400,000 of a $475,000 total purchase order order for PbC batteries for use in their initial all electric, battery powered locomotive. While we have not received final confirmation from NS, it is anticipated that the first ‘yard” locomotive will be commissioned in the first quarter of 2013. On a parallel path, development of an “over the road” hybrid locomotive continues. As part of our agreement with NS, Penn State University is performing duplicate string testing on our PbC batteries that so far have confirmed our claims of string “self equalization”. Simply stated, this means that one of the unique characteristics of our PbC batteries is its inherent ability to equalize battery (even cell) voltage during charging at any rate. This is particularly important when the PbC is used in large string configurations (such as the locomotive, or the PowerCube) where the string is only as strong as its weakest (lowest voltage) battery (i.e. the string output is reduced by the lowest performing battery). The success of this testing will continue to allow us to expand the locomotive application to include other locomotive end users and locomotive integrators. On October 25, 2012, Norfolk Southern issued us the second purchase order for $88,850 for the remaining balance of a $475,000 total purchase order. – see Note No. 9 - Subsequent Events to the Consolidated Financial Statements.

 

12
 

 

Other highlights through the third quarter of 2012 include:

 

· In August, we executed an exclusive Global Distribution Agreement (“Agreement”) with Rosewater. As previously discussed, Rosewater has proven expertise in the distribution and marketing of electronic systems to the consumer retail markets in the United States and access to a network of installers for such electronic systems which we feel may be beneficial to the distribution of our “HUB”. This Agreement is for a three year term subject to the attainment of agreed upon annual sales objectives. Subsequent to the implementation of this agreement, Axion and Rosewater introduced the residential energy “HUB” at the CEDIA show in Indianapolis (September 2012). The reception of this product was very positive and the “HUB” won two awards at the show including one for ‘best new product’. Rosewater began an ‘awareness campaign’ right after the show, but were reluctant to take actual orders until there was better definition on an end date for 1741 and other testing protocols. Clarity has now been reached for testing completion in early December. Completion and in house testing of our prototype unit has given us confidence to market the ‘residential size’ unit for other applications and in areas that do not require extensive third party validation testing.

 

August also saw us revisit an initiative that we spent some time on two years earlier. At the urging of our potential customer, and with the full backing of our VP of sales (Vani Dantam), who has an extensive history of providing products to the trucking industry, we began discussions and testing aimed at using our PbC batteries for “boost up-hill performance” for 18- wheel over the road heavy duty trucks. That process has evolved.

 

Also in August, relying further on Vani Dantam’s trucking experience and reputation, we began exploratory talks with an OEM leader in the heavy duty trucking industry. We resurrected an initiative aimed at providing a product that would be a well - suited solution to the issues that arose in the trucking industry because of “anti-idling” legislation.

 

Work continues with the hybrid vehicle manufacturers in the United States, Europe and Asia. As discussed previously, this work is in various stages of development and we are encouraged by the progress, although it continues to move at a pace that is slower, by comparison, than other initiatives we have undertaken.

 

We have continued our “demand response” participation with PJM and Viridity utilizing our onsite PowerCube™. In October we increased our participation in the partnership arrangement, partially in response to PJM’s October 1, , 2012, implementation of “pay for performance” criteria, first legislated by FERC regulations that were approved in November of 2011. Our grading in the PJM system has averaged over 92 (out of 100) since October 1 st . This has added to our credibility with numerous utilities. We were invited to present at the Southeast Utility Conference on September 18 th . This conference was attended by 22 of the 26 invited utilities. As a result of all of our activities in this area, several RFP’s have been developed in both North America and offshore.

 

13
 

 

Overview

 

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

 

· Our primary activity in our current development stage consists of R&D efforts for advanced battery applications, initial development, sales and marketing efforts to commercialize our advanced battery applications and the manufacture of PbC carbon electrode devices for testing, pilot demonstrations and potential customer applications.
· Net sales are derived from the sale of lead acid batteries for specialty collector and racing cars; sales of AGM batteries and flooded batteries; and from sales of product and services related to advanced battery applications for our PbC® technology.
· Product costs include raw materials, components, labor, and allocated manufacturing overhead to produce batteries sold to customers. Due to the development stage of our business, current product costs represented in our current financial statements may not be indicative of the future costs to produce batteries. Product costs also include provisions for inventory valuation and obsolescence reserves.
· Research & development includes expenses to design, develop, and test advanced batteries and carbon electrode assemblies for our energy storage products based on our patented lead carbon technology. Also included in R&D are the materials consumed in production of pilot products, manufacturing costs not assigned to product sales and costs attributable to service sales.
· Selling, general and administrative expenses include employee compensation, selling and marketing expense, legal, auditing and other expenses associated with being a public company.

 

Selected Financial Data

 

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

 

    2012     2011     Change  
Product sales   $ 6,690,502     $ 4,832,226       1,858,276  
Service sales     -       411,645       (411,645 )
Total sales     6,690,502       5,243,871       1,446,631  
Product costs     6,014,886       4,205,057       1,809,829  
Research & development expenses     3,738,955       3,599,545       139,410  
Selling, general & administrative  expenses     3,316,201       3,215,518       100,683  
Derivative revaluations(gains) losses     (12,465 )     (119,166 )     106,701  
Loss before income taxes   $ (6,378,967 )   $ (5,663,443 )   $ (715,524 )

 

Reconciliation of net loss to EBITDA

    2012     2011     Change  
GAAP loss before income taxes   $ (6,378,967 )   $ (5,663,443 )   $ (715,524 )
Plus: Interest expense     13,313       14,095       (782 )
Depreciation  expense     1,035,336       710,850       324,486  
Share based compensation expense     311,637       351,509       (39,872 )
Derivative revaluation gains     (12,465 )     (119,166 )     106,701  
EBITDA (1)   $ (5,031,146 )   $ (4,706,155 )   $ (324,991 )

 

(1)

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

 

14
 

 

Summary of Consolidated Results for the three months and nine months ended September 30, 2012 compared with September 30, 2011

 

  Product Sales

 

Product sales for the three months ended September 30, 2012 were $2.2 million compared to $2.1 million for the same period in 2011. Net product sales for the nine months ended September 30, 2012 were $6.7 million compared to $4.8 million for the same period in 2011. We have one customer that accounted for approximately 87% and 83% of product sales for the three and nine month periods ended September 30, 2012, respectively, and one customer that accounted for approximately 86% and 80% of product sales for the three and nine month periods ended September 30, 2011, respectively. The increase in net product sales in 2012 compared to 2011 is due to a series of orders for the production and immediate delivery of specialty flooded lead acid batteries with the purchaser financing the cost of inventory and providing the raw materials required for production.

 

Service Sales

 

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

 

Product Costs

 

Product costs for the three months ended September 30, 2012 were $2.0 million compared to $1.8 million for the same period in 2011. Product costs for the nine months ended September 30, 2012 were $6.0 million compared to $4.2 million for the same period in 2011. The increase in product costs resulted primarily from increases in net product sales.

 

Research & Development Expenses

 

Research and development expenses for the three months ended September 30, 2012 were $1.2 million compared to $1.3 million for the same period in 2011. Research and development expenses for the nine months ended September 30, 2012 were $3.7 million compared to $3.6 million for the same period in 2011.

 

Selling, General & Administrative Expenses

 

Selling, general & administrative expenses for the three months ended September 30, 2012 were $1.1 million compared to $1.0 million for the same period in 2011. Selling, general & administrative expenses for the nine months ended September 30, 2012 and 2011 were $3.3million and $3.2 million, respectively.

 

Liquidity and Capital Resources

 

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

 

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

 

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

 

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

 

15
 

 

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

  

Cash, Cash Equivalents and Working Capital

 

Cash and cash equivalents at September 30, 2012 totaled $4.2 million compared to $2.0 million at December 31, 2011. Cash equivalents consist of short-term liquid investments with original maturities of no more than six months that are readily convertible into cash.

 

At September 30, 2012 working capital was $6.8 million compared to working capital of $4.3 million at December 31, 2011. One customer accounted for $0.8 million or 12% of working capital at September 30, 2012.

 

Cash Flows from Operating Activities

 

Net cash used by operations for the nine months ended September 30, 2012 was $5.6 million compared to $6.8 million for the same period in 2011. Our negative cash flow is consistent with the development stage of our business.

 

  Cash Flows from Investing Activities

 

Net cash used by investing activities for the nine months ended September 30, 2012 was $0.7 million compared to $2.5 million for the same period in 2011. Investing activities were for the purchase of equipment.

 

Cash Flows from Financing Activities

 

Net cash provided from financing activities for the nine months ended September 30, 2012 was $8.6 million compared to less than $0.1 net cash used for the same period in 2011.

 

Financing Activities

 

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

 

Critical Accounting Policies, Judgments, and Estimates

 

Our significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies are described in “Critical Accounting Policies, Judgments and Estimates” and Note 2 (Accounting Policies) to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011. During 2012, there were no modifications to our critical accounting policies as defined on Form 10-K for the year ended December 31, 2011.

 

Off Balance Sheet Arr angements

 

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

 

16
 

 

ITEM 4. CONT ROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

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

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

There is an addition to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as follows:

 

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

 

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

 

ITEM 4. MINE SAFETY DISCLOSURES

 


Not Applicable

 

17
 

 

ITEM 6. EXHIBITS

 

10.45 Axion Power International, Inc. Amended and Restated Independent Directors Stock Option Plan and Amendment No . 1
   
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
   
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)

 

32.1 Statement of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the United States Code

 

32.2

Statement of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the United States Code

 

101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema*
101.CAL XBRL Taxonomy Extension Calculation Linkbase*
101.DEF XBRL Taxonomy Extension Definition Linkbase*
101.LAB XBRL Taxonomy Extension Label Linkbase*
101.PRE XBRL Taxonomy Extension Presentation Linkbase*

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

AXION POWER INTERNATIONAL, INC.  
   
/s/ Thomas Granville  
   
Thomas Granville,  
Chief Executive Officer  
(Principal Executive Officer)  
Dated:  November 14, 2012  
   
   
/s/ Charles R. Trego  
   
Charles R. Trego,  
Chief Financial Officer  
(Principal Financial Officer and  
Principal Accounting Officer)  
Dated:  November 14, 2012  

 

18

  

AXION POWER INTERNATIONAL, INC.

AMENDED AND RESTATED INDEPENDENT DIRECTORS' STOCK OPTION PLAN

 

PREAMBLE

 

This Independent Directors Stock Option is intended to promote the interests of Axion Power International, a Delaware corporation (the "Company"), by providing the Company's independent directors with a proprietary interest in the Company. This Plan was first adopted by the Company's board of directors on January 8, 2004 and approved by the shareholders at the Company's 2004 Annual Meeting. On April 8, 2005, the board of directors voted to amend the Plan, subject to shareholder ratification at the Company's 2005 Annual Meeting, to increase the number of shares subject to the Plan from 125,000 to 500,000, and better accommodate the needs of a company with directors who serve for staggered three-year terms.

 

ARTICLE I
DEFINITIONS

 

As used herein, the following terms have the meanings hereinafter set forth unless the context clearly indicates to the contrary:

 

(a) "Board" shall mean the Board of Directors of the Company.

 

(b) "Company" shall mean Axion Power International, Inc.

 

(c) "Date of Grant" shall mean each date after the Effective Date of the Plan on which Eligible directors are appointed to fill a vacancy on the Board or elected to serve a regular term by the stockholders of the company.

 

(d) "Fair Market Value" shall mean the closing sales price, or the mean between the closing high "bid" and low "asked" prices, as the case may be, of the Stock in the over-the-counter market on the day on which such value is to be determined, as reported by the National Association of Securities Dealers Automated Quotation System or successor national quotation service. If the Stock is listed on a national securities exchange, "Fair Market Value" shall mean the closing price of the Stock on such national securities exchange on the day on which such value is to be determined, as reported in the composite quotations for securities traded on such exchange provided by the National Association of Securities Dealers or successor national quotation service. In the event no such quotations are available for the day in question, "Fair Market Value" shall be determined by reference to the appropriate prices on the next preceding day for which such prices are reported. In all other events, the Board of Directors in good faith shall determine "Fair Market Value".

 

(e) "Eligible Director" shall mean any director of the Company who meets the eligibility requirements for an 'independent director' under Securities and Exchange Commission Rule 10A-3 and the applicable listing standards of any national securities exchange or other market where the Company's shares are quoted or listed for trading.

 

(f) "Option" shall mean an Eligible Director's stock option to purchase stock granted pursuant to the provisions of Article V hereof.

 

(g) "Optionee" shall mean an Eligible Director to whom an Option has been granted hereunder.

 

(h) "Option Price" shall mean the price at which an Optionee may purchase a share of Stock under a Stock Option Agreement.

 

(i) "Plan" shall mean the Ax ion Power International, Inc. Amended and Restated Independent Directors' Stock Option Plan, as it may be further amended from time to time.

  

 
 

 

(j) "Stock" shall mean the common stock, par value $.0001 per share, of the Company or, in the event that the outstanding shares of Stock are hereafter changed into or exchanged for different stock or securities of the Company or some other corporation, such other stock or securities.

 

(k) "Stock Option Agreement" shall mean an agreement between the Company and the Optionee under which the Optionee may purchase Stock in accordance with the Plan.

 

ARTICLE II
THE PLAN

 

2.1 Name. This Plan shall be known as the "Axion Power International, Inc. Amended Directors' Stock Option Plan."

 

2.2 Purpose. The purpose of the Plan is to advance the interests of the Company and its stockholders by affording Eligible Directors of the Company an opportunity to acquire or increase their proprietary interests in the Company, and thereby to encourage their continued service as directors and to provide them additional incentives to achieve the growth objectives of the Company.

 

2.3 Effective Date. The effective date of the Original Plan was February 2, 2004. The shareholders of the Company subsequently approved the Plan on June 4, 2004. The Plan was amended by the board of directors on April 8, 2005 and will be submitted for the approval of the Company's stockholders at the Company's 2005 Annual Meeting. Options may be granted under the Plan prior to the receipt of such shareholder approval provided, however, that all such Option grants shall be subject to stockholder approval. If the Company's shareholders do not approve the Plan, then the Plan and all Options then outstanding hereunder shall forthwith automatically terminate and be of no force and effect.

 

2.4 Termination Date. The Plan shall terminate and no further Options shall be granted hereunder upon the tenth anniversary of the Effective Date of the Plan.

 

ARTICLE III
PARTICIPANTS

 

Each Eligible Director who has been or is subsequently appointed to fill a vacancy on the Board or elected to serve as a member of the Board shall participate in the Plan.

 

ARTICLE IV

SHARES OF STOCK SUBJECT TO PLAN

 

4.1 Limitations. Subject to any anti-dilution adjustment pursuant to the provisions of Section 4.2 hereof, the maximum number of shares of Stock that may be issued and sold hereunder shall not exceed 500,000 shares of Stock. Shares of Stock subject to an Option may be either authorized and unissued shares or shares issued and later acquired by the Company; provided however, the shares of Stock with respect to which an Option has been exercised shall not again be available for Option hereunder. If outstanding Options granted hereunder shall terminate or expire for any reason without being wholly exercised prior to the end of the period during which Options may be granted hereunder, new Options may be granted hereunder covering such unexercised shares.

 

4.2 Anti-dilution. In the event that the outstanding shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of merger, consolidation, reorganization, recapitalization, reclassification, combination of shares, stock split or stock dividend:

 

(a) The aggregate number and kind of shares of Stock for which Options may be granted hereunder shall be adjusted appropriately;

 

(b) The rights under outstanding Options granted hereunder, both as to the number of subject shares and the Option price, shall be adjusted appropriately; and

  

 
 

 

(c) Where dissolution or liquidation of the Company or any merger or combination in which the ·   Company is not a surviving corporation is involved, each outstanding Option granted hereunder shall terminate, but the Optionee shall have the right, immediately prior to such dissolution, liquidation, merger or combination, to exercise his Option, in whole or in part, to the extent that it shall not have been exercised, without regard to the date on which such Option would otherwise have become exercisable pursuant to Sections 5.4 and 5.5.

 

The Board shall have the sole authority to determine the manner in which any of the foregoing adjustments are made and any such adjustment may provide for the elimination of fractional share interests. The adjustments required under this Article shall apply to any successor or successors of the Company and shall be made regardless of the number or type of successive events requiring adjustments hereunder.

 

ARTICLE V
OPTIONS

 

5.1 Option Grant, Number of Shares and Agreement.

 

(a) In connection with the 2004 Annual Meeting of Stockholders, three Eligible Directors were elected to serve for terms of more than one year and the provisions of the original Plan were unclear with respect to the Options issuable to those Eligible Directors. To resolve certain ambiguities arising from the adoption of the Original Plan, which contemplated the annual election of directors, and the subsequent adoption of bylaws that provide for the election of directors for staggered three-year terms, the Company has previously treated the three Eligible Directors as holders of multiple grants under the Original plan. In connection with the amendment of the Plan, the multiple grants are hereby rescinded and Eligible Directors who have been elected for term of more than one-year are granted the options specified in the following table:

 

Eligible Director New Option Grants Vesting Dates
Robert Averill 16,000 shares at $2.50 8,000 shares at 2006 and 2007 Annual Meetings
Glenn Patterson 8,000 shares at $2.50 2006 Annual Meeting
Joseph Souccar 8,000 shares at $2.50 2006 Annual Meeting

 

(b) Each Eligible Director who is appointed by the board of directors to fill a vacancy arising from the resignation of a director or an increase in the number of directors shall automatically receive on the date of his appointment an option to purchase $20,000 worth of the Corporation's common stock as partial compensation for serving as a director during the period between the date of such appointment and the next annual meeting of stockholders.

 

(c) Each Eligible Director who is elected for a regular term as a director of the Company at an annual meeting of stockholders (or any adjournment thereof) shall automatically receive on the date of his election an option to purchase $20,000 worth of the Company's common stock for each year of contemplated service. Each Option granted under the Plan shall be evidenced by a written Stock Option Agreement, dated as of the Date of Grant and executed by the Company and the Optionee, stating the Option's duration, time of exercise, and exercise price. The terms and conditions of the Option shall be consistent with the Plan.

 

5.2 Option Price. The Option price of the Stock subject to each Option shall be the Fair Market Value of the Stock on its Date of Grant.

 

5.3 Vesting of Options and Exercise Period. Options shall vest on the first anniversary of the date of grant, provided that in the event Options for more than $20,000 worth of the Company's common stock are granted to Eligible Directors who have been elected to serve for terms of more than one year, such Options shall vest ratably over the period of appointment. All Options granted pursuant to the plan shall be exercisable for a period of four years after the applicable vesting date.

 

 
 

 

5.4 Option Exercise.

 

(a) 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. An Option shall remain exercisable after its exercise date at all times during the exercise period, regardless of whether the Optionee continues to serve as a member of the Board.

 

(b) An Option may be exercised at any time or from time to time during the term of the Option as to any or all full shares which have become exercisable in accordance with this Section, but not as to less than 25 shares of Stock unless the remaining shares of Stock that ate so exercisable are less than 25 shares of Stock. The Option price is to be paid in full in cash upon the exercise of the Option. The holder of an Option shall not have any of the rights of a Stockholder with respect to the shares of Stock subject to the Option until such shares of Stock have been issued or transferred to him upon the exercise of his Option.

 

(c) An Option shall be exercised by written notice of exercise of the Option, with respect to a specified number of shares of Stock, delivered to the Company at its principal office, and by cash payment to the Company at said office of the full amount of the Option price for such number of shares.

 

5.5 Nontransferability of Option. Options may not be transferred by an Optionee otherwise than by will or the laws of descent and distribution. During his lifetime, an Optionee shall be the only person entitled to exercise his Options. An Option held by a deceased Optionee may be exercised by his personal representative or heirs.

 

ARTICLE VI

STOCK CERTIFICATES

 

The Company shall not be required to issue or deliver any certificate for shares of Stock purchased upon the exercise of any Option granted hereunder or any portion thereof unless, in the opinion of counsel to the Company, there has been compliance with all applicable legal requirements. An Option granted under the Plan may provide that the Company's obligation to deliver shares of Stock upon the exercise thereof may be conditioned upon the receipt by the Company of a representation as to the investment intention of the holder thereof in such form as the Company shall determine to be necessary or advisable solely to comply with the provisions of the Securities Act of 1933, as amended, or any other federal, state or local securities laws.

 

ARTICLE VII

TERMINATION, AMENDMENT AND MODIFICATION OF PLAN

 

The Board may at any time terminate the Plan, and may at any time and from time to time and, in any respect amend or modify the Plan, No suspension, termination, modification or amendment of the Plan may, without the consent of the person to whom an Option shall theretofore have been granted, affect the rights of such person under such Option.

 

ARTICLE VII

RELATIONSHIP TO OTHER COMPENSATION PLANS

 

The adoption of the Plan shall neither affect any other stock option, incentive or other compensation plans in effect for the Company or any of its subsidiaries, nor shall the adoption of the Plan preclude the Company from establishing any other forms of incentive or other compensation plan for directors of the Company.

 

ARTICLE VIII
MISCELLANEOUS

 

8.1 Plan Binding on Successors. The Plan shall be binding upon the successor and assigns of the Company.

 

 
 

 

8.2 Singular, Plural; Gender. Whenever used herein, nouns in the singular shall include the plural, and the masculine pronoun shall include the feminine gender.

 

8.3 Headings, etc., No Part of Plan. Headings of articles and paragraphs hereof are inserted for convenience and reference, and do not constitute a part of the Plan.

 

IN WITNESS WHEREOF, this Independent Directors' Stock Option Plan of Axion Power International, Inc. has been executed this 8th day of April 2005.

 

/s/ Thomas Granville
Thomas Granville, chief executive officer

 
 

 

AMENDMENT NO. 1 TO AXION POWER INTERNATIONAL, INC. AMENDED AND RESTATED INDEPENDENT DIRECTORS’ STOCK OPTION PLAN

 

 

 

This Amendment No. 1 (“Amendment”) to the Axion Power International, Inc. Amended and Restated Independent Directors’ Stock Option Plan (“Plan”) amends Section 4.1 of the Plan as set forth below. Except as amended below, the entirety of the Plan remains in full force and effect as set forth in the original Plan. The Amendment was approved by Axion Power International, Inc.’s Board of Directors on October 17, 2012, pursuant to Article VII of the Plan which provides that the Board may amend the Plan.

 

1. Section 4.1 of the Plan is hereby amended by replacing “500,000” in the second line thereof with “1,000,000”. Except as amended by this paragraph 1., the Plan remains in full force and effect as originally stated.

 

IN WITNESS WHEREOF, this Amendment No. 1 to Independent Directors’ Stock Option Plan of Axion Power International, Inc. has been executed this 1 st day of November, 2012.

  

/s/ Charles R. Trego
Charles R. Trego
Chief Financial Officer

 

 

 

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)

 

I, Thomas Granville, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Axion Power International, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

  Dated:  November 14,  2012  
     
  /s/ Thomas Granville  
  Thomas Granville, Chief Executive Officer
(Principal Executive Officer)
 

 

 

 

 

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER)

 

I, Charles R. Trego, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Axion Power International, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

  Dated:  November 14, 2012  
     
  /s/ Charles R. Trego  
 

Charles R. Trego, Chief Financial Officer (Principal
Financial Officer and

Principal Accounting Officer)

 

 

 

 

 

EXHIBIT 32.1

 

STATEMENT OF CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)

PURSUANT TO SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE

 

Pursuant to Section 1350 of Title 18 of the United States Code, the undersigned, Thomas Granville, Chief Executive Officer of Axion Power International, Inc. (the “Company”), hereby certifies that:

 

1.      The Company’s Quarterly report on Form 10-Q for the quarter ended September 30, 2012 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.      The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

  /s/ Thomas Granville  
 

Thomas Granville, Chief Executive Officer (Principal
Executive Officer)

 Dated: November 14, 2012

 

 

 

 

 

EXHIBIT 32.2

 

STATEMENT OF CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL

ACCOUNTING OFFICER)

PURSUANT TO SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE

 

Pursuant to Section 1350 of Title 18 of the United States Code, the undersigned, Charles R. Trego, Chief Financial Officer of Axion Power International, Inc. (the “Company”), hereby certifies that:

 

1. The Company’s Quarterly report on Form 10-Q for the quarter ended September 30, 2012 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

   /s/ Charles R. Trego  
  Charles R. Trego, Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
 
  Dated:  November 14,  2012