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AXPW > SEC Filings for AXPW > Form 10-Q on 15-Nov-2012All Recent SEC Filings

Show all filings for AXION POWER INTERNATIONAL, INC. | Request a Trial to NEW EDGAR Online Pro



Quarterly Report


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 carbonelectrode 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 26th, 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. thestring 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.

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 1st. This has added to our credibility with numerous utilities. We were invited to present at the Southeast Utility Conference on September 18th. 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.


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.

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

Product Sales

Productsales 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 servicesales 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.

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 Arrangements

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.

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