UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
OR
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-13111
AXION INTERNATIONAL HOLDINGS, INC
(Exact name of registrant as specified in
its charter)
Colorado |
|
84-0846389 |
(State or other jurisdiction of incorporation or |
|
(IRS Employer Identification No.) |
organization) |
|
|
4005 All American Way, Zanesville, Ohio 43701
(Address of principal executive offices)
740-452-2500
(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 ¨
No x
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 x
No ¨
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.
|
Large accelerated filer ¨ |
Accelerated filer ¨ |
|
Non-accelerated filer ¨ |
Smaller reporting company x |
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨ No
x
The number of outstanding shares of the registrant’s
common stock, without par value, as of August 12, 2015 was 75,474,892.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
(Unaudited) | | |
| |
| |
| | | |
| | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 426,039 | | |
$ | 221,437 | |
Accounts receivable, net of allowance | |
| 1,466,697 | | |
| 1,109,524 | |
Inventories | |
| 6,581,848 | | |
| 5,980,457 | |
Prepaid expenses | |
| 366,567 | | |
| 294,053 | |
Total current assets | |
| 8,841,151 | | |
| 7,605,471 | |
| |
| | | |
| | |
Property and equipment, net | |
| 8,984,094 | | |
| 8,678,932 | |
Goodwill | |
| 1,492,132 | | |
| 1,492,132 | |
Total assets | |
$ | 19,317,377 | | |
$ | 17,776,535 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 3,092,689 | | |
$ | 2,417,803 | |
Accrued liabilities | |
| 1,837,278 | | |
| 1,161,120 | |
Customer deposits | |
| 803,150 | | |
| - | |
Derivative liabilities | |
| 176,000 | | |
| 2,053,000 | |
12% convertible promissory notes, net of discounts | |
| 1,000,000 | | |
| 965,838 | |
12% revolving credit agreement, net of discounts | |
| 2,278,598 | | |
| 1,907,957 | |
12% secured notes | |
| 6,394,664 | | |
| 1,950,000 | |
Current portion of long term debt | |
| 189,271 | | |
| 187,943 | |
Total current liabilities | |
| 15,771,650 | | |
| 10,643,661 | |
| |
| | | |
| | |
8% convertible promissory notes, net of discounts | |
| 15,678,065 | | |
| 14,393,746 | |
4.25% bank term loans | |
| 4,300,000 | | |
| 4,300,000 | |
5% bank promissory note | |
| 4,000,000 | | |
| 4,000,000 | |
Other debt | |
| 146,930 | | |
| 191,900 | |
Dividends payable on 10% convertible preferred stock | |
| 169,157 | | |
| 143,024 | |
Fair value of 10% convertible preferred stock warrants | |
| 121 | | |
| 52,720 | |
Total liabilities | |
| 40,065,923 | | |
| 33,725,051 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
10% convertible preferred stock, no par value; authorized 880,000 shares; 682,998 shares issued and outstanding at June 30, 2015 and December 31, 2014, net of discounts | |
| 6,829,980 | | |
| 6,829,980 | |
| |
| | | |
| | |
Stockholders' deficit: | |
| | | |
| | |
Common stock, no par value; authorized, 250,000,000 shares; 74,065,254 and 70,825,215 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively | |
| 54,387,097 | | |
| 52,780,363 | |
Accumulated deficit | |
| (81,965,623 | ) | |
| (75,558,859 | ) |
Total stockholders' deficit | |
| (27,578,526 | ) | |
| (22,778,496 | ) |
Total liabilities and stockholders' deficit | |
$ | 19,317,377 | | |
$ | 17,776,535 | |
(See accompanying notes to the unaudited consolidated
financial statements.)
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2015
AND 2014
(Unaudited)
| |
2015 | | |
2014 | |
| |
| | | |
| | |
Revenue | |
$ | 3,478,554 | | |
$ | 4,054,054 | |
Costs of sales: | |
| | | |
| | |
Production | |
| 2,934,968 | | |
| 5,208,692 | |
Excess capacity & inventory adjustments | |
| 1,389,526 | | |
| 994,228 | |
Gross margin (loss) | |
| (845,940 | ) | |
| (2,148,866 | ) |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
Product development and quality management | |
| - | | |
| 94,572 | |
Marketing and sales | |
| 128,400 | | |
| 374,875 | |
General and administrative | |
| 1,514,451 | | |
| 20,125,270 | |
Total operating expenses | |
| 1,642,851 | | |
| 20,594,717 | |
| |
| | | |
| | |
Loss from operations | |
| (2,488,791 | ) | |
| (22,743,583 | ) |
| |
| | | |
| | |
Other (income) expenses: | |
| | | |
| | |
Interest expense | |
| 766,371 | | |
| 457,974 | |
Amortization of debt discount | |
| 646,140 | | |
| 422,678 | |
Fair value of common shares issued in excess of fair value of warrants tendered | |
| - | | |
| 883,476 | |
Change in fair value of derivative liabilities | |
| (415,599 | ) | |
| (4,075,518 | ) |
Total other (income) expense | |
| 996,912 | | |
| (2,311,390 | ) |
| |
| | | |
| | |
Net loss | |
| (3,485,703 | ) | |
| (20,432,193 | ) |
Accretion of preferred stock dividends | |
| (169,157 | ) | |
| (184,195 | ) |
Net loss attributable to common shareholders | |
$ | (3,654,860 | ) | |
$ | (20,616,388 | ) |
| |
| | | |
| | |
Weighted average common shares – basic and diluted | |
| 74,045,320 | | |
| 37,799,845 | |
Net loss per share – basic and diluted | |
$ | (0.05 | ) | |
$ | (0.55 | ) |
(See accompanying notes to the unaudited consolidated
financial statements.)
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND
2014
(Unaudited)
| |
2015 | | |
2014 | |
| |
| | | |
| | |
Revenue | |
$ | 5,771,421 | | |
$ | 8,904,997 | |
Costs of sales: | |
| | | |
| | |
Production | |
| 5,384,641 | | |
| 10,816,117 | |
Excess capacity & inventory adjustments | |
| 2,533,986 | | |
| 1,459,894 | |
Gross margin (loss) | |
| (2,147,206 | ) | |
| (3,371,014 | ) |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
Product development and quality management | |
| - | | |
| 174,054 | |
Marketing and sales | |
| 494,568 | | |
| 675,586 | |
General and administrative | |
| 2,823,491 | | |
| 21,105,704 | |
Total operating expenses | |
| 3,318,059 | | |
| 21,955,344 | |
| |
| | | |
| | |
Loss from operations | |
| (5,465,265 | ) | |
| (25,326,358 | ) |
| |
| | | |
| | |
Other (income) expenses: | |
| | | |
| | |
Interest expense | |
| 1,481,976 | | |
| 841,631 | |
Amortization of debt discount | |
| 1,389,122 | | |
| 859,087 | |
Fair value of common shares issued in excess of fair value of warrants tendered | |
| - | | |
| 883,476 | |
Change in fair value of derivative liabilities | |
| (1,929,599 | ) | |
| (11,047,995 | ) |
Total other (income) expense | |
| 941,499 | | |
| (8,463,801 | ) |
| |
| | | |
| | |
Net loss | |
| (6,406,764 | ) | |
| (16,862,557 | ) |
Accretion of preferred stock dividends and beneficial conversion feature | |
| (342,092 | ) | |
| (565,378 | ) |
Net income loss attributable to common shareholders | |
$ | (6,748,856 | ) | |
$ | (17,427,935 | ) |
| |
| | | |
| | |
| |
| | | |
| | |
Weighted average common shares – basic and diluted | |
| 73,059,159 | | |
| 50,650,392 | |
Net loss per share – basic and diluted | |
$ | (0.09 | ) | |
$ | (0.34 | ) |
(See accompanying notes to the unaudited consolidated
financial statements.)
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’
DEFICIT
FOR THE PERIOD FROM JANUARY 1, 2015 THROUGH
JUNE 30, 2015
(Unaudited)
| |
Common Shares | | |
Additional Paid-in Capital and Common Stock | | |
Accumulated Deficit | | |
Total | |
| |
| | | |
| | | |
| | | |
| | |
Balance, January 1, 2015 | |
| 70,825,215 | | |
$ | 52,780,363 | | |
$ | (75,558,859 | ) | |
$ | (22,778,496 | ) |
| |
| | | |
| | | |
| | | |
| | |
Shares issued for dividend payments | |
| 915,417 | | |
| 315,959 | | |
| | | |
| 315,959 | |
Shares issued for interest payments | |
| 2,016,591 | | |
| 693,585 | | |
| | | |
| 693,585 | |
Share-based compensation | |
| 308,031 | | |
| 939,282 | | |
| | | |
| 939,282 | |
Dividend on 10% convertible preferred stock | |
| | | |
| (342,092 | ) | |
| | | |
| (342,092 | ) |
Net loss | |
| | | |
| | | |
| (6,406,764 | ) | |
| (6,406,764 | ) |
| |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2015 | |
| 74,065,254 | | |
$ | 54,387,097 | | |
$ | (81,965,623 | ) | |
$ | (27,578,526 | ) |
(See accompanying notes to the unaudited consolidated
financial statements.)
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND
2014
(Unaudited)
| |
2015 | | |
2014 | |
Cash flow from operating activities: | |
| | | |
| | |
Net loss | |
$ | (6,406,764 | ) | |
$ | (16,862,557 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 639,304 | | |
| 512,916 | |
Amortization of identifiable intangible assets | |
| - | | |
| 39,500 | |
Amortization of debt discounts | |
| 1,389,122 | | |
| 859,086 | |
Change in fair value of derivative liabilities | |
| (1,877,000 | ) | |
| (10,871,504 | ) |
Change in fair value of 10% convertible preferred stock warrants | |
| (52,599 | ) | |
| (176,491 | ) |
Change in allowance for doubtful accounts | |
| 51,534 | | |
| 154,280 | |
Interest expense paid in shares of common stock | |
| 693,585 | | |
| 688,465 | |
Share-based compensation | |
| 939,282 | | |
| 618,594 | |
Fair value of common stock issued in excess of fair value of warrants tendered | |
| - | | |
| 19,957,854 | |
Changes in operating assets and liability: | |
| | | |
| | |
Accounts receivable | |
| (408,707 | ) | |
| (639,723 | ) |
Inventories | |
| (601,391 | ) | |
| 608,504 | |
Prepaid expenses and deposits | |
| (72,514 | ) | |
| 80,952 | |
Accounts payable | |
| 674,886 | | |
| 767,933 | |
Accrued liabilities | |
| 676,158 | | |
| 444,399 | |
Customer deposits | |
| 803,150 | | |
| - | |
Net cash used in operating activities | |
| (3,551,954 | ) | |
| (3,817,792 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of property and equipment | |
| (944,466 | ) | |
| (689,442 | ) |
Net cash used in investing activities | |
| (944,466 | ) | |
| (689,442 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from issuance of 8% convertible promissory notes, net | |
| - | | |
| 5,027,951 | |
Proceeds from 12% secured notes | |
| 4,444,664 | | |
| - | |
Proceeds from 12% revolving credit facility | |
| 300,000 | | |
| - | |
Repayments of other debt | |
| (43,642 | ) | |
| (62,638 | ) |
Net cash provided by financing activities | |
| 4,701,022 | | |
| 4,965,313 | |
| |
| | | |
| | |
Net increase in cash | |
| 204,602 | | |
| 458,079 | |
Cash and cash equivalents at beginning of period | |
| 221,437 | | |
| 883,936 | |
Cash and cash equivalents at end of period | |
$ | 426,039 | | |
$ | 1,342,015 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | 193,646 | | |
$ | 150,124 | |
Non-cash investing and financing activities: | |
| | | |
| | |
Shares issued in payments of dividends on 10% convertible preferred
stock | |
| 342,092 | | |
| 343,992 | |
Amortization of 10% convertible preferred stock discount | |
| - | | |
| 221,386 | |
Fair value of warrants issued with 8% convertible promissory notes | |
| - | | |
| 391,365 | |
Fair value of conversion option of 8% convertible promissory notes | |
| - | | |
| 3,985,139 | |
Fair value of common stock issued in exchange for warrants tendered and cancelled | |
| - | | |
| 24,817,086 | |
(See accompanying notes to the unaudited consolidated
financial statements.)
AXION INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Summary of Significant Accounting
Policies
(a) |
Business and Basis of Financial Statement Presentation |
Axion International Holdings, Inc. (“Holdings”)
was formed in 1981. In November 2007, Holdings entered into an Agreement and Plan of Merger, among Holdings, Axion Acquisition
Corp., a Delaware corporation and a newly created direct wholly-owned subsidiary of Holdings (the “Merger Sub”), and
Axion International, Inc., a Delaware corporation which incorporated on August 6, 2006 with operations commencing in November 2007
(“Axion”). On March 20, 2008 Holdings consummated the merger (the “Merger”) of Merger Sub into Axion,
with Axion continuing as the surviving corporation and a wholly-owned subsidiary of Holdings. Axion Recycled Plastics Incorporated,
an Ohio corporation and a wholly-owned subsidiary of Axion, was established to purchase certain tangible and intangible assets
of a plastics recycling company during November 2013.
The Company was founded in 2007 to exploit
a proprietary technology that enabled the conversion of recycled plastics into a benchmark structural plastic material yielding
components which demonstrated significant strength, durability and application versatility. We manufacture, market and sell ECOTRAX®
rail ties and STRUXURE® building products, with significant focus on construction mats. Our ECOTRAX® and STRUXURE®
products are fully derived from post-consumer and post-industrial recycled plastics, such as high-density polyethylene, polystyrene
and polypropylene.
Our consolidated financial statements include
the accounts of our wholly-owned subsidiaries and all intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated
financial statements of Holdings have been prepared in accordance with Rule S-X of the Securities and Exchange Commission and with
the instructions to Form 10-Q, and accordingly, they do not include all of the information and footnotes which may be required
by 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. However, the results
from operations for the three and six months ended June 30, 2015, are not necessarily indicative of the results that may be expected
for the year ending December 31, 2015. The unaudited condensed consolidated financial statements should be read in conjunction
with the consolidated December 31, 2014 financial statements and footnotes thereto included in the Company's Form 10-K filed with
the SEC.
(b) |
Cash and Cash Equivalents |
For purposes of our balance sheet and statement
of cash flows, we consider all highly liquid debt instruments, purchased as an investment, with an original maturity of three months
or less to be cash equivalents. At June 30, 2015 and December 31, 2014, we maintained all of our cash in demand or interest-bearing
accounts at commercial banks.
(c) |
Allowance for Doubtful Accounts |
We accrue a reserve on a receivable when, based upon the judgment
of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. During
the six months ended June 30, 2015, we accrued $51,534 net of collections, for doubtful accounts. During the three months ended
June 30, 2015, we did not accrue any amounts for doubtful accounts. At June 30, 2015 and December 31, 2014 our reserve for uncollectable
accounts receivables was $62,324 and $10,790, respectively.
(d) |
Property and Equipment |
Property and equipment are recorded at cost
and depreciated and amortized using the straight-line method over estimated useful lives of two to twenty years. Costs incurred
that extend the useful life of the underlying asset are capitalized and depreciated over the remaining useful life. Repairs and
maintenance are charged directly to operations as incurred.
Our property and equipment is comprised of
the following:
| |
June 30, 2015 | | |
December 31, 2014 | |
Office furniture and equipment | |
$ | 112,049 | | |
$ | 110,173 | |
Machinery and equipment | |
| 11,502,983 | | |
| 10,560,393 | |
Purchased software | |
| 147,547 | | |
| 147,547 | |
Subtotal – property and equipment, at cost | |
| 11,762,579 | | |
| 10,818,113 | |
Less accumulated depreciation | |
| (2,778,485 | ) | |
| (2,139,181 | ) |
Net property and equipment | |
$ | 8,984,094 | | |
$ | 8,678,932 | |
Depreciation expense charged to production
costs and income during the three and six months ended June 30, 2015 was $323,048 and $639,304, respectively. For the three and
six months ended June 30, 2014, depreciation expense charged to production costs and income was $258,101 and $512,916, respectively.
Our proprietary technologies are derived in
part from material compositions of matter, processing and use and design patents held by Rutgers University, which have been exclusively
licensed to us in February 2007 for United States, Canada, Central and South America, the Caribbean Territory, South Korea, Saudi
Arabia, Russia, Mexico and China (where we are a co-licensee). Patents do not exist in all countries for which a license has been
granted to us. Although our license agreement with Rutgers also includes know-how, we do not believe that any proprietary know-how
is attributable to, or has been obtained by us from Rutgers so that we may not have exclusivity in all countries licensed to us
where patents do not exist. Conversely, our position as to our licensed rights also enables Axion to market its products in countries
licensed to others in which patents have not been filed, such as Australia and New Zealand. We are in the process of pursuing a
resolution of these license issues with Rutgers. The Rutgers patents have limited remaining lives and will start expiring in 2016.
The Rutgers royalty-bearing license includes
certain minimum royalty provisions. Royalties, assuming the minimum threshold is not met on an annual basis, payable to Rutgers
for the three months ended June 30, 2015 and 2014 were $50,000 and $50,000, respectively. For the six months ended June 30, 2015
and 2014, royalties payable to Rutgers were $100,000 and $100,000, respectively.
(f) |
Definite Life Intangible Assets |
During the year ended December 31, 2013, we
acquired a plastic reprocessing business which gave rise to certain definite life intangible assets associated with the acquired
customer list and trademark. In accordance with FASB ASC topic, “Goodwill and Other Intangible Assets”, acquired definite
life intangibles, are subject to amortization over their useful lives. The method of amortization selected reflects the pattern
in which the economic benefits of the specific intangible asset is consumed or otherwise used up. Since that pattern cannot be
reliably determined, a straight-line amortization method has been used over the estimated useful life. Intangible assets that are
subject to amortization are reviewed for potential impairment at least annually or whenever events or circumstances indicate that
carrying amounts may not be recoverable.
During the three months ended September 30, 2014, we determined
that our definite life intangible assets primarily associated with our acquired customer list was impaired and of no further value
and accordingly we recorded a charge to other expenses for the remaining unamortized balance of $545,750, therefore we did not
record any further amortization of definite life intangible assets during the three or six months ended June 30, 2015. For the
three and six months ended June 30, 2014 we amortized to operating expenses $19,750 and $39,500, respectively of these intangible
assets.
(g) |
Indefinite Life Intangible Assets - Goodwill |
In accordance with the FASB ASC topic, “Goodwill
and Other Intangible Assets”, indefinite life assets, such as goodwill, acquired as a result of our acquisition of the plastic
reprocessing business and which are not subject to amortization are tested for impairment annually, or more frequently if events
and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount
exceeds the asset’s fair value.
During the year ended December 31, 2014,
our financial results for the reprocessed plastics business and our decision to transition the reprocessing plastics business
to a facility extruding our historical proprietary products, represented a triggering event requiring a
goodwill impairment test. During the year ended December 31, 2014, we tested the goodwill intangible asset associated
with the acquisition in November 2013 of the reprocessed plastics business. Based on our test for impairment done during the
year ended December 31, 2014, we determined there was no impairment of the goodwill. Based on the results of six months ended
June 30, 2015, we determined that our recent experience of financial results represents a triggering event requiring a
goodwill impairment test. Goodwill totaled $1.5 million as of both June 30, 2015 and December 31, 2014. We were unable to
reasonably estimate the amount of goodwill impairment, if any, during the six months ended June 30, 2015 and will complete
our impairment test during the three months ended September 30, 2015.
(h) |
Revenue and Related Cost Recognition |
In accordance with FASB ASC 605 “Revenue
Recognition”, revenue is recognized when persuasive evidence of an agreement with the customer exists, products are shipped
or title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed or determinable,
collectability is reasonably assured, and there are no significant future performance obligations. In most cases, we receive a
purchase order from our customer specifying the products requested and delivery instructions. We recognize revenue upon our delivery
or shipment of the products as specified in the purchase order. In other cases where we have a contract which provides for a large
number of products and few actual deliveries, the revenues are recorded each month as the products are produced and the risk of
ownership passes to the customer upon pre-delivery acceptance. Prior to deliveries, our customer’s products are segregated
from our inventory and not available for fulfilling other orders.
Our costs of sales are predominately comprised
of the cost of raw materials and the costs and expenses associated with the production of the finished product. Prior to 2013,
we utilized third-party manufacturers, where under one arrangement we purchased and supplied the raw materials to the third-party
manufacturer and we paid them a per-pound cost to produce the finished product. Under another arrangement, the third-party manufacturer
sourced and paid for the raw materials and we purchased the finished product from them at a cost per unit. Beginning in 2013, we
initiated production of our finished products within a leased facility utilizing our own employees. Additionally, in late 2013
we acquired the assets of a plastics recycling company and during 2014 converted the production capabilities of the facility to
that of our finished products and continue to reprocess recycled plastics for use in our own finished products and to sell any
excess to customers for use in their finished products. Our costs of sales may vary significantly as a result of the variability
in the cost of our raw materials and the efficiency with which we plan and execute our manufacturing processes.
Historically, we have not had significant warranty
replacements, but from time to time due to the improper installation of certain of our rail ties, we agree to replace the rail
ties as a customer relationship matter. Although we have replaced our engineered products for various reasons, we do not anticipate
additional significant situations where we might again replace improperly installed products and therefore do not provide for future
warrant expenses.
Income tax provision consists of federal and
state corporate income taxes resulting from our operations in the United States. The income tax provision differs from the expected
tax provisions computed by applying the U.S. Federal statutory rate to loss before income taxes primarily because we have historically
maintained a full valuation allowance on our deferred tax assets and to a lesser extent because of the impact of state income taxes.
As described in our Form 10-K for the year ended December 31, 2014, we maintain a full valuation allowance in accordance with ASC
740, “Accounting for Income Taxes”, on our net deferred tax assets. Until we achieve and sustain an appropriate level
of profitability, we plan to maintain a valuation allowance on our net deferred tax assets.
We are current with the filing of our federal and state income tax
returns. Our income tax returns are open to examination by federal and state authorities, based on statute of limitations, which
is three years.
(j) |
Derivative Instruments |
For derivative instruments that are accounted
for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date,
with changes in fair value recognized in earnings each reporting period as a charge or credit to other expenses. We use the Monte
Carlo simulation, and other models, as appropriate to value the derivative instruments at inception and subsequent valuation dates
and the value is re-assessed at the end of each reporting period, in accordance with FASB ASC Topic 815, “Derivatives and
Hedging”. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether
or not the net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
(k) |
Share-Based Compensation |
We record share-based compensation for transactions
in which we exchange our equity instruments (shares of common stock, options and warrants) for services of employees, consultants
and others based on the fair value of the equity instruments issued on the measurement date. The fair value of common stock
awards is based on the observed market value of our stock. We calculate the fair value of options and warrants using the
Black-Scholes option pricing model. Expense is recognized, net of expected forfeitures, over the period of performance.
When the vesting of an award is subject to performance conditions, no expense is recognized until achievement of the performance
condition is deemed to be probable. Awards to consultants are marked to market at each reporting period as they vest, and the resulting
value is recognized as an adjustment against our earnings for the period.
(l) |
Earnings and Loss Per Share |
Basic earnings or loss per share are computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the effects on our weighted average number of common shares outstanding of the potential dilution of (i) outstanding options and warrants, as determined using the treasury stock method and (ii) convertible securities as determined using the as-if converted method. For the three and six months ended June 30, 2015 there was no dilutive effects of such securities as we incurred a net loss for that period.
| (m) | Fair Value of Financial
Instruments |
Fair value is defined as an exit price, which
is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between
market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities
generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively
quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing
observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely
traded or not quoted have less price observability and are generally measured at fair value using valuation models that require
more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is
dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. We have categorized
our financial assets and liabilities that are recurring at fair value into a three-level hierarchy in accordance with these provisions.
(n) |
Concentration of Credit Risk |
We maintain our cash with several major U.S.
domestic banks. The amount held in these banks exceeds the insured limit of $250,000 from time to time. We have not incurred
losses related to these deposits.
At June 30, 2015, four of our customers had
unpaid accounts due us representing 33%, 15%, 12% and 11% of our accounts receivable balance at June 30, 2015. At December 31, 2014, two of our customers had unpaid accounts due us representing
35% and 28% of our accounts receivable balance at December 31, 2014.
(o) |
New Accounting Pronouncements |
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606) . The core principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services, and the guidance defines a five step process to achieve
this core principle. The ASU is effective for the Company's 2018 fiscal year and may be applied either (i) retrospectively to each
prior reporting period presented with an election for certain specified practical expedients, or (ii) retrospectively with the
cumulative effect of initially applying the ASU recognized at the date of initial application, with additional disclosure requirements.
The Company is evaluating the potential impact of this new guidance, but does not currently anticipate that the application of
ASU No. 2014-09 will have a significant effect on its financial condition, results of operations or its cash flows. We have not
yet determined the method by which we will adopt the standard in 2018.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability
to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties
in an entity's financial statements. The new standard requires management to perform interim and annual assessments of an entity's
ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide
certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern.
The ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.
The Company does not currently anticipate that the application of ASU No. 2014-15 will have an effect on its financial condition,
results of operations or its cash flows.
The preparation of our financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.
Note 2 - Going Concern
The accompanying financial
statements have been prepared in conformity with generally accepted accounting principles in the United States of America,
which contemplates our continuation as a going concern. At June 30, 2015, we had a working capital deficit of $6.9
million, a stockholders’ deficit of $27.6 million and have accumulated losses to date of $82.0 million.
Additionally, $6.4 million of our 12% secured notes and $1.0 million of our 12% convertible promissory notes, were due
on June 30, 2015 and are due upon demand by the noteholders (see Note 6). This raises substantial doubt about our ability to
continue as a going concern. In view of these matters, realization of certain of the assets in the accompanying balance
sheet is dependent upon our ability to meet our financing requirements, either by raising additional capital or the success
of our business plan and future operations. We are actively seeking additional capital to take us through our current phase
of growth, and consequently, we have adjusted our capacity expansion projects, engaged in discussions with our industry
partners, realigned manufacturing activities with existing customer obligations, and continue to actively manage our
inventory to meet customer expectations and commitments. We have engaged strategic and financial advisors to hasten the
process of developing additional sources of public or private capital investments. There is no assurance that we will be
successful in raising sufficient funds to assure our eventual profitability. We believe that actions planned and presently
being taken to revise our operating and financial requirements provide us the opportunity to continue as a going concern. The
financial statements do not include any adjustments that might result from these uncertainties.
Note 3 - Inventories
Inventories are priced at the lower of cost
or market and consist primarily of raw materials, parts for assembling our finished products and finished products.
Our inventories consisted of:
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
Finished products | |
$ | 5,903,133 | | |
$ | 5,202,608 | |
Production materials | |
| 678,715 | | |
| 777,849 | |
Total inventories | |
$ | 6,581,848 | | |
$ | 5,980,457 | |
Note 4 - Accrued Liabilities
The components of accrued liabilities are:
| |
June 30, 2015 | | |
December 31, 2014 | |
Interest | |
$ | 789,856 | | |
$ | 398,157 | |
Rent | |
| 457,483 | | |
| 335,096 | |
Payroll | |
| 250,594 | | |
| 127,635 | |
Royalties | |
| 150,305 | | |
| 132,593 | |
Real estate taxes | |
| 124,043 | | |
| 92,549 | |
Board of director fees | |
| 62,500 | | |
| 31,000 | |
Miscellaneous | |
| 2,497 | | |
| 44,090 | |
Total accrued liabilities | |
$ | 1,837,278 | | |
$ | 1,161,120 | |
Note 5 - Derivative Liabilities
8% Convertible Promissory Notes (2012) – Conversion
Option and Warrants
Prior to, and through April 8, 2014, we issued
8% convertible promissory notes (the “8% Notes (2012)”). See Note 6 for further discussion. The 8% Notes (2012) met
the definition of a hybrid instrument, as defined in the ASC Topic 815 “Derivatives and Hedging” (“ASC 815”).
The hybrid instrument was composed of a debt instrument, as the host contract, and an option to convert the debt outstanding under
the terms of the 8% Notes (2012), into shares of our common stock. The 8% Notes (2012) were issued with a warrant to purchase shares
of our common stock. Both the conversion option and the warrants are derivative liabilities. The conversion option derives its
value based on the underlying fair value of the shares of our common stock which is not clearly and closely related to the underlying
host debt instrument since the economic characteristics and risk associated with the conversion option derivative are based on
the common stock fair value. The warrants do not qualify as equity under ASC 815. Accordingly, changes in the fair value of these
warrant and conversion option liabilities are immediately recognized in earnings and classified as a change in fair value in the
statement of operations.
During the three months ended June 30, 2014,
we offered all warrant holders the right to exchange their warrants for their fair value, as calculated using the Black-Scholes
option pricing model, for shares of common stock. All warrants associated with the 8% Notes (2012) were exchanged for shares of
common stock resulting in no derivative liability for the warrants at and after June 30, 2014.
We determined the fair value of the conversion
option and warrant derivative liabilities on the various dates of issuance and recorded these fair values as a discount to the
debt and a derivative liability. The aggregate fair value of all the conversion options on June 30, 2015 was insignificant.
The $381,000 and $2.0 million decrease in the fair value of this derivative liability during the three and six months ended June
30, 2015, respectively was recorded as a change in derivative liability in the statement of operations.
12% Convertible Promissory Notes – Conversion Option
During the three months ended September 30,
2014, we issued 12% convertible promissory notes (the “12% Notes”). See Note 6 for further discussion. The 12% Notes
met the definition of a hybrid instrument, as defined in the ASC Topic 815 “Derivatives and Hedging” (“ASC 815”).
The hybrid instrument was composed of a debt instrument, as the host contract, and an option to convert the debt outstanding under
the terms of the 12% Notes, into shares of our common stock. The conversion option is a derivative liability. The conversion option
derives its value based on the underlying fair value of the shares of our common stock which is not clearly and closely related
to the underlying host debt instrument since the economic characteristics and risk associated with the conversion option derivative
are based on the common stock fair value. Accordingly, changes in the fair value of the conversion option liabilities are immediately
recognized in earnings and classified as a change in fair value in the statement of operations.
We determined the fair value of the conversion
option derivative liability on the date of issuance and recorded the fair value as a discount to the debt and a derivative liability. The
fair value of the conversion option on June 30, 2015 was $176,000. The $18,000 and $107,000 increase in the fair value of this
derivative liability during the three and six months ended June 30, 2015, respectively was recorded as a change in derivative liability
in the statement of operations.
The estimated fair values of the derivative
liabilities associated with the 8% Notes (2012) and the 12% Notes, for the conversion options and warrants issued through and as
of June 30, 2015 were computed by a third party using Monte Carlo simulations based on the following ranges for each assumption:
|
|
At Issuances |
|
|
June 30,
2015 |
|
|
|
|
|
|
|
|
Volatility |
|
|
40.0% to 45.0 |
% |
|
|
35.0 |
% |
Risk-free interest rate |
|
|
0.11% to 0.3 |
% |
|
|
0.01 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected life |
|
|
1.1 to 1.6 years |
|
|
|
0.17 years |
|
Placement Agent Warrants
We issued warrants to the placement agents
for the sale of our 10% convertible preferred stock, to purchase 58,352 shares of 10% convertible preferred stock at $10 per share.
Since the underlying 10% convertible preferred stock is redeemable by the holder after three years from the date of purchase, we
recorded the fair value of the warrants at issuance, as a liability on our balance sheet and we re-measure this warrant liability
at each reporting date, with changes in fair value recognized in earnings each reporting period. We estimated the fair value at
June 30, 2015 of this derivative liability by using the Black-Scholes option pricing model with the following assumptions - (i)
no dividend yield, (ii) an expected volatility of 85%, (iii) a risk-free interest rate 0.3%, and (iv) an expected life of approximately
1 year. The fair value of the warrant liability at June 30, 2015 and December 31, 2014 was $121 and $52,720, respectively.
Accounting for Fair Value Measurements
We are required to disclose the fair value
measurements required by Accounting for Fair Value Measurements. The derivative liabilities recorded at fair value in the balance
sheet as of June 30, 2015 and December 31, 2014 is categorized based upon the level of judgment associated with the inputs used
to measure its fair value. Hierarchical levels, defined by Accounting for Fair Value Measurements are directly related to the amount
of subjectivity associated with the inputs to fair valuation of the liability is as follows:
Level 1 - |
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; |
|
|
Level 2 - |
Inputs other than Level 1 inputs that are either directly or indirectly observable; and |
|
|
Level 3 - |
Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own assumptions. |
The following table summarizes the financial
liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value:
| |
As of June 30, 2015 | |
| |
| | |
| | |
| | |
Derivative | |
| |
| | |
| | |
| | |
Liabilities at | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair Value | |
12% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
$ | - | | |
$ | - | | |
$ | 176,000 | | |
$ | 176,000 | |
Derivative liabilities - Current | |
| - | | |
| - | | |
| 176,000 | | |
| 176,000 | |
Placement agent warrants - Non-current | |
| - | | |
| - | | |
| 121 | | |
| 121 | |
Derivative liabilities - Total | |
$ | - | | |
$ | - | | |
$ | 176,121 | | |
$ | 176,121 | |
| |
As of December 31, 2014 | |
| |
| | |
| | |
| | |
Derivative | |
| |
| | |
| | |
| | |
Liabilities at | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair Value | |
8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
$ | - | | |
$ | - | | |
$ | 1,984,000 | | |
$ | 1,984,000 | |
12% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
| - | | |
| - | | |
| 69,000 | | |
| 69,000 | |
Derivative liabilities - Current | |
| - | | |
| - | | |
| 2,053,000 | | |
| 2,053,000 | |
Placement agent warrants - Non-current | |
| - | | |
| - | | |
| 52,720 | | |
| 52,720 | |
Derivative liabilities - Total | |
$ | - | | |
$ | - | | |
$ | 2,105,720 | | |
$ | 2,105,720 | |
The following table is a reconciliation of the derivative liabilities
for which Level 3 inputs were used in determining fair value during the three and six months ended June 30, 2015 and 2014:
| |
For the Three Months Ended June 30, 2015 | |
| |
| | |
Fair Value | | |
| | |
| |
| |
Balance - April 1, | | |
of Derivative | | |
Change in | | |
Balance - June 30, | |
| |
2015 | | |
Liability | | |
Fair Value | | |
2015 | |
| |
| | |
| | |
| | |
| |
8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
$ | 381,000 | | |
$ | - | | |
$ | (381,000 | ) | |
$ | - | |
12% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
| 158,000 | | |
| - | | |
| 18,000 | | |
| 176,000 | |
Derivative liabilities - Current | |
| 539,000 | | |
| - | | |
| (363,000 | ) | |
| 176,000 | |
Placement agent warrants - Non-current | |
| 52,720 | | |
| - | | |
| (52,599 | ) | |
| 121 | |
Derivative liabilities - Total | |
$ | 591,720 | | |
$ | - | | |
$ | (415,599 | ) | |
$ | 176,121 | |
| |
For the Six Months Ended June 30, 2015 | |
| |
| | |
Fair Value | | |
| | |
| |
| |
Balance - January 1, | | |
of Derivative | | |
Change in | | |
Balance - June 30, | |
| |
2015 | | |
Liability | | |
Fair Value | | |
2015 | |
| |
| | |
| | |
| | |
| |
8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
$ | 1,984,000 | | |
$ | - | | |
$ | (1,984,000 | ) | |
$ | - | |
12% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
| 69,000 | | |
| - | | |
| 107,000 | | |
| 176,000 | |
Derivative liabilities - Current | |
| 2,053,000 | | |
| - | | |
| (1,877,000 | ) | |
| 176,000 | |
Placement agent warrants - Non-current | |
| 52,720 | | |
| - | | |
| (52,599 | ) | |
| 121 | |
Derivative liabilities - Total | |
$ | 2,105,720 | | |
$ | - | | |
$ | (1,929,599 | ) | |
$ | 176,121 | |
| |
For the Three Months Ended June 30, 2014 | |
| |
| | |
Fair Value | | |
| | |
| |
| |
Balance - April 1, | | |
of Derivative | | |
Change in | | |
Balance - June 30, | |
| |
2014 | | |
Liability | | |
Fair Value | | |
2014 | |
| |
| | |
| | |
| | |
| |
8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
$ | 8,404,000 | | |
$ | 2,960,000 | | |
$ | (669,000 | ) | |
$ | 10,695,000 | |
Warrants | |
| 3,351,000 | | |
| - | | |
| (3,351,000 | ) | |
| - | |
Derivative liabilities - Current | |
| 11,755,000 | | |
| 2,960,000 | | |
| (4,020,000 | ) | |
| 10,695,000 | |
Placement agent warrants - Non-current | |
| 175,221 | | |
| - | | |
| (55,518 | ) | |
| 119,703 | |
Derivative liabilities - Total | |
$ | 11,930,221 | | |
$ | 2,960,000 | | |
$ | (4,075,518 | ) | |
$ | 10,814,703 | |
| |
For the Six Months Ended June 30, 2014 | |
| |
| | |
Fair Value | | |
| | |
| |
| |
Balance - January 1, | | |
of Derivative | | |
Change in | | |
Balance - June 30, | |
| |
2014 | | |
Liability | | |
Fair Value | | |
2014 | |
| |
| | |
| | |
| | |
| |
8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
$ | 12,400,000 | | |
$ | 3,985,139 | | |
$ | (5,690,139 | ) | |
$ | 10,695,000 | |
Warrants | |
| 4,790,000 | | |
| 391,365 | | |
| (5,181,365 | ) | |
| - | |
Derivative liabilities - Current | |
| 17,190,000 | | |
| 4,376,504 | | |
| (10,871,504 | ) | |
| 10,695,000 | |
Placement agent warrants - Non-current | |
| 296,194 | | |
| - | | |
| (176,491 | ) | |
| 119,703 | |
Derivative liabilities - Total | |
$ | 17,486,194 | | |
$ | 4,376,504 | | |
$ | (11,047,995 | ) | |
$ | 10,814,703 | |
Note 6 - Debt
The components of our debt are summarized as follows:
| |
Due | |
June 30, 2015 | | |
December 31, 2014 | |
8% convertible promissory notes (2012) | |
Beginning in August 2017 | |
$ | 16,628,188 | | |
$ | 16,628,188 | |
12% revolving credit facility | |
December 31, 2015 | |
| 2,300,000 | | |
| 2,000,000 | |
3% promissory note | |
February 1, 2018 | |
| 236,201 | | |
| 279,843 | |
4.25% bank term loans | |
November 15, 2018 | |
| 4,400,000 | | |
| 4,400,000 | |
8% convertible promissory notes (2014) | |
June 11, 2019 | |
| 2,000,000 | | |
| 2,000,000 | |
12% convertible promissory notes | |
June 30, 2015 | |
| 1,000,000 | | |
| 1,000,000 | |
5% bank term loan | |
September 18, 2017 | |
| 4,000,000 | | |
| 4,000,000 | |
12% secured notes | |
June 30, 2015 | |
| 6,394,664 | | |
| 1,950,000 | |
Subtotal | |
| |
| 36,959,053 | | |
| 32,258,031 | |
Less debt discount | |
| |
| (2,971,525 | ) | |
| (4,360,647 | ) |
Subtotal – net of debt discount | |
| |
| 33,987,528 | | |
| 27,897,384 | |
Less current portion | |
| |
| (9,862,533 | ) | |
| (5,011,738 | ) |
Total – long term debt | |
| |
$ | 24,124,995 | | |
$ | 22,885,646 | |
8% Convertible Promissory Notes (2012)
Through March 31, 2015, pursuant to the terms of our 8% convertible
promissory notes (the “2012 Notes”), we issued and sold to Melvin Lenkin, Samuel Rose and Allen Kronstadt collectively
the “Investors”, (see Note 13 regarding related party transactions) and several unaffiliated investors (i) an aggregate
principal amount of $15,628,188 of 2012 Notes convertible into shares of our common stock at $0.40 per share and an aggregate principal
amount of $1,000,000 of 2012 Notes, convertible into shares of our common stock at a conversion price equal to $0.74 per share,
respectively subject to adjustment as provided on the terms of the 2012 Notes, and (ii) associated warrants to purchase, in the
aggregate, 37.8 million shares of common stock, subject to adjustment as provided on the terms of the warrants. During the three
months ended June 30, 2014, we offered all warrant holders the right to exchange their warrants for their fair value, as calculated
using the Black-Scholes option pricing model, for shares of common stock. All warrants associated with the 2012 Notes were exchanged
for shares of common stock.
The 2012 Notes, including all outstanding principal and accrued
and unpaid interest, are due and payable on the earlier of five years from date of issuance or upon the occurrence of an Event
of Default (as defined in the 2012 Notes). We may prepay the 2012 Notes, in whole or in part, upon 60 calendar-days prior written
notice to the holders thereof. Interest accrues on the 2012 Notes at a rate of 8.0% per annum, payable during the first three years
that the 2012 Notes are outstanding in shares of common stock, valued at the weighted average price of a share of common stock
for the twenty consecutive trading days prior to the interest payment date, pursuant to the terms of the 2012 Notes. During the
fourth and fifth years that the 2012 Notes are outstanding, interest that accrues under the 2012 Notes shall be payable in cash.
In connection with the sale of our 2012 Notes, we entered into a
Note Purchase Agreement, (i) we granted to the Investors certain demand and piggyback registration rights with respect to the registration
of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder, and (ii) we granted
a security interest and lien in all of our assets and rights to the Investors to secure our obligations under the 2012 Notes.
Interest expense for the three months ended
June 30, 2015 and 2014 was $336,259 and $340,014, respectively. For the six months ended June 30, 2015 and 2014, interest expense
was $683,848 and $605,896, respectively. Accrued interest at June 30, 2015 was $336,259.
The issuance costs of approximately $146,741, plus the fair values
at issuances of the conversion option derivative liability and the warrants derivative liability were recorded as a discount to
the 2012 Notes. This debt discount is amortized to other expenses in our statement of operations over the initial term of the 2012
Notes. During the three months ended June 30, 2015, and 2014 we amortized $356,922 and $468,673, respectively of the discount to
other expenses in our statement of operations. During the six months ended June 30, 2015 and 2014, we amortized $743,239 and $848,468,
respectively. At June 30, 2015, the unamortized discount was $1.7 million. See Note 5 for further discussion of these derivative
liabilities.
12% Revolving Credit Agreement
During the year ended December 31, 2013, we
entered into a Revolving Credit and Letter of Credit Support Agreement (the “Revolving Loan Agreement”) with MLTM Lending,
LLC, a Maryland limited liability company (“MLTM”), and Samuel G. Rose (“Rose” and together with MLTM,
the “Lenders”), pursuant to which the Lenders have agreed to lend us up to $2,000,000 on a revolving basis. In addition,
the Revolving Loan Agreement provides that MLTM will provide letter of credit support to us of up to $500,000 (the “LC Sublimit”).
Each revolving loan made under the Revolving Loan Agreement bears interest at 12% per annum, of which 4% is payable by us in cash
on the first business day of each month, and 8% is payable by us in shares of our common stock on the first business day of each
calendar quarter, valued at a price equal to the average of the Weighted Average Price (as such term is defined in the Revolving
Loan Agreement) of a share of our common stock for 20 consecutive trading days prior to the interest payment date. Under the terms
of the Revolving Loan Agreement, we may prepay the revolving loans at any time, in whole or in part, together with all accrued
and unpaid interest, without premium or penalty. The Lenders may accelerate all amounts due under the Revolving Loan Agreement,
together with accrued and unpaid interest, upon the occurrence of an Event of Default, as defined in the Revolving Loan Agreement.
The maturity date of the Revolving Loan Agreement is December 31, 2015 (the “Maturity Date”). During the year ended
December 31, 2013, we borrowed $2,000,000 less fees, under the Revolving Loan Agreement which remained outstanding through June
30, 2015. In addition, during the three months ended June 30, 2015, certain letters of credit supported by this Revolving
Loan Agreement were presented for payment and are outstanding under this Revolving Loan Agreement in the total amount of $300,000.
Letters of credit, aggregating $140,000, remain outstanding at June 30, 2015.
As consideration for the revolving loans extended under the Revolving
Loan Agreement, with respect to the year ending December 31, 2013, and prior to each of December 31, 2014 and 2015, we are required
to issue to the Lenders an aggregate of 200,000 shares of our common stock during each such calendar year, up to a total of 600,000
shares of our common stock. The fair value of this common stock on the date of issue is recorded as a discount to the revolving
loan debt and is amortized to other expenses in our statement of operations over the annual period. Pursuant to the terms of the
Revolving Loan Agreement, through June 30, 2015 we have issued 400,000 shares of common stock. As consideration for MLTM providing
letter of credit support, we are required to pay a letter of credit commission fee on the date of the Revolving Loan Agreement,
and on each one year anniversary of the date of the Revolving Loan Agreement prior to the Maturity Date, in the amount equal to
(i) 2% of the LC Sublimit in cash and (ii) shares of our common stock, with an aggregate value of 4% of the LC Sublimit, with each
such share of our common stock valued at a price equal to the average of the Weighted Average Price of a share of our common stock
for the 20 consecutive trading days prior to the date of payment. The issuance of the shares of common stock results in additional
interest expense.
In connection with the entry into the Revolving Loan Agreement,
pursuant to the terms thereof, we and the Lenders entered into a Security Agreement pursuant to which the Borrowers were granted
a security interest and lien in all of our accounts receivable and inventory to secure the Borrowers’ obligations under the
Revolving Loan Agreement.
Interest expense for the three months
ended June 30, 2015 and 2014 was $62,667 and $60,054. For the six months ended June 30, 2015, interest expense was $124,474
and $127,111, respectively. Of the $62,667 of interest expense for the three months ended June 30, 2015, $22,222 was paid in
cash or is to be paid in cash and the balance of $40,445 is to be paid in shares of common stock.
The issuance costs plus the fair values of the shares of our common
stock issued annually as consideration for the revolving loans and the letter of credit support, are recorded as a discount to
the revolving loans. This debt discount is amortized to other expenses in our statement of operations over the annual period ending
November 30. During the three months ended June 30, 2015 and 2014, we amortized $29,378 and $40,307, respectively of the discount
to other expenses in our statement of operations. For the six months ended June 30, 2015 and 2014, we amortized $70,641 and $96,920,
respectively.
3% Promissory Note
On November 15, 2013, our subsidiary, Axion Recycled Plastics Incorporated
(“Axion Recycling”), entered into an Asset Purchase Agreement (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, Axion Recycling acquired certain assets relating to
the operation of a recycled plastics facility located in Zanesville, Ohio (the “Facility”). As a component of the consideration
paid by Axion Recycling for these asset was the assumption of a 3% promissory note (the “Promissory Note”) with a remaining
principal balance of $236,201 as of June 30, 2015. The principal and interest at 3% per annum, is payable in eighty-four monthly
installments with the last installment due on February 1, 2018.
The payment of the Promissory Note and all interest thereon is secured
by a first interest in certain equipment owned by Axion Recycling. We may prepay the Promissory Note at any time, in whole or in
part, together with all accrued and unpaid interest, without premium or penalty.
Interest expense for the three months ended June 30, 2015 and 2014
of $1,881 and $2,528, respectively and for the six months ended June 30, 2015 and 2014 of $3,926 and $5,214, respectively was paid
in cash.
4.25% Bank Term Loans
During the year ended December 31, 2013, we purchased certain tangible
and intangible assets including property and equipment of a plastics recycling company, which
were funded, in part, by term loans (the “Bank Term Loans”) made by The Community Bank in the aggregate principal amounts
of $1,000,000 and $3,500,000. Each of the Bank Term Loans bears interest at 4.25% per annum and matures on November 15, 2018. With
respect to principal payments under the Bank Loans, $100,000 is due on each of November 15, 2014 and 2015, $250,000 is due on each
of November 15, 2016 and 2017, and the balance of the principal amounts outstanding under the Bank Term Loans is due on November
15, 2018. The Bank Term Loans may be prepaid in full or in part at any time without premium or penalty. The Community Bank may
accelerate all amounts due under the Bank Term Loans, together with accrued and unpaid interest, upon the occurrence of an Event
of Default, as defined in the documents.
The Bank Term Loans are secured by a security interested in all
of the equipment we purchased pursuant to this transaction and in certain of our equipment located at our Waco, Texas facility.
Interest expense for the three months ended June 30, 2015 and 2014
of $47,800 and $48,875, respectively and for the six months ended June 30, 2015 and 2014 of $94,562 and $96,688, respectively was
paid in cash.
8% Convertible Promissory Notes (2014)
During the year ended December 31, 2014 pursuant to the terms of
our 8% convertible promissory notes (the “2014 Notes”), we issued and sold to MLTM Lending, LLC, Samuel Rose and Allen
Kronstadt collectively the “Investors”, (see Note 13 regarding related party transactions) an aggregate principal amount
of $2,000,000 of our 2014 Notes which are initially convertible into 7.5 million shares of our common stock, subject to adjustment
as provided on the terms of the 2014 Notes, (i) at any time prescribed by the Investors or (ii) upon any date prior to June 11,
2019 (the “Maturity Date”) which the Company’s common shares are listed on a U.S. based stock exchange.
The fair value of the conversion option derivative liability at
issuance, was recorded as a discount to the 2014 Notes. This debt discount is amortized to other expenses in our statement of operations
over the term of the 2014 Notes. During the three and six months ended June 30, 2015, we amortized $259,840 and $541,080, respectively
of the discount to other expenses in our statement of operations. At June 30, 2015, the unamortized discount was $1.2 million.
See Note 5 for further discussion of this derivative liability.
The 2014 Notes, including all outstanding principal and accrued
and unpaid interest, are due and payable on the Maturity Date or upon the occurrence of an Event of Default (as defined in the
2014 Notes). We may prepay the 2014 Notes, in whole or in part, upon notice to the holders thereof. Interest accrues on the 2014
Notes at a rate of 8.0% per annum, payable quarterly starting with September 30, 2014. For the quarter ended December 31, 2014
and for each subsequent quarter that the 2014 Notes are outstanding, the Investors shall have the right to have the interest paid
in shares of common stock, valued at the weighted average price of a share of common stock for the twenty consecutive trading days
ending with the end of the quarter, pursuant to the terms of the 2014 Notes.
Interest expense for the three and six months ended June 30, 2015
was $40,444 and $80,444, respectively and the corresponding periods for 2014 was $6,444 and $6,444, respectively and was paid in
cash.
12% Convertible Promissory Notes
During the year ended December 31, 2014 pursuant to the terms of
our 12% convertible promissory notes (the “12% Notes”), we issued and sold to MLTM Lending, LLC, Samuel Rose and Allen
Kronstadt collectively the “Investors”, (see Note 13 regarding related party transactions) an aggregate principal amount
of $1,000,000 of our 12% Notes. Upon sixty days’ notice, the principal due under the 12% Notes is convertible into shares
of our common stock based on a Conversion Price which is 85% of the weighted average volume price per day of our common stock for
the ten consecutive trading days preceding the day upon which the notice of conversion is received by us, pursuant to the 12% Notes.
The 12% Notes, including all outstanding principal and accrued and
unpaid interest, was due and payable on June 30, 2015. We have not received a notice of default or demand for payment, as we have
been in negotiations with the Investors regarding the repayment of principal and unpaid interest of the 12% Notes.
Interest accrues on the 12% Notes at a rate of 12% per annum, payable
monthly. Interest expense for the three and six months ended June 30, 2015 was $30,333 and $60,333, respectively and was paid in
cash.
5% Bank Promissory Note
During the year ended December 31, 2014, we borrowed $4.0 million
from a commercial bank (the “Bank”) pursuant to the terms of a promissory note and loan agreement (the “5% Bank
Note”). Interest accrues on the outstanding principal at a fixed interest rate of 5% per annum and is payable monthly. All
outstanding principal and accrued but unpaid interest is due on September 18, 2017. The 5% Bank Note may be prepaid in full or
in part at any time without premium or penalty. The Bank may accelerate all amounts due under the Bank Term Loans, together with
accrued and unpaid interest, upon the occurrence of an Event of Default, as defined in the documents.
The Bank was induced to enter into the 5% Bank Note with the guarantee
of Melvin Lenkin, Samuel Rose and Allen Kronstadt, collectively the “Investors”, (see Note 13 regarding related party
transactions). In a separate agreement between the Bank and the Investors, the Investors agreed, among other terms, to guarantee
to the Bank the full and punctual payment of all obligations which we have with the Bank in connection with the 5% Bank Note.
Interest expense for the three and six months ended June 30, 2015
of $50,556 and $100,556, respectively was paid in cash prior.
12% Secured Notes
Through June 30, 2015 pursuant to the terms of our 12% secured notes
(the “12% Secured Notes”), we issued and sold to MLTM Lending, LLC, Samuel Rose and Allen Kronstadt collectively the
“Investors”, (see Note 13 regarding related party transactions) an aggregate principal amount of $6,394,664 of our
12% Secured Notes. Pursuant to the terms of the Pledge Agreement entered into contemporaneous with the 12% Secured Notes, we provided
a security interest in favor of the Investors in all of our rights, title and interest in the pledged shares of common stock of
certain wholly-owned subsidiaries of the Company.
The 12% Secured Notes, including all outstanding principal and accrued
and unpaid interest, were due and payable on June 30, 2015. We have not received a notice of default or demand for payment, as
we have been in negotiations with the Investors regarding the repayment of principal and unpaid interest of the 12% Secured Notes.
Interest accrues on the 12% Secured Notes at a rate of 12% per annum.
Interest expense for the three and six months ended June 30, 2015 was $193,971 and $333,141, respectively and will be paid in cash,
at maturity.
Note 7 - 10% Convertible Redeemable Preferred
Stock
The components of our 10% convertible preferred
stock, classified as temporary equity in our balance sheet, are summarized as follows:
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
10% convertible preferred stock - face value | |
$ | 6,829,980 | | |
$ | 6,829,980 | |
Unamortized discount | |
| - | | |
| - | |
10% convertible preferred stock, net of discount | |
$ | 6,829,980 | | |
$ | 6,829,980 | |
During the year ended December 31, 2011, we
designated 880,000 shares of preferred stock as 10% convertible redeemable preferred stock (the “Preferred Stock”).
The Preferred Stock has a stated value (the “Stated Value”) of $10.00 per share. The Preferred Stock and any dividends
thereon may be converted into shares of our common stock at any time by the holder at a conversion rate, as adjusted (the “Conversion
Rate”). The holders of the Preferred Stock are entitled to receive dividends at the rate of ten percent per annum payable
quarterly. Dividends shall not be declared, paid or set aside for any series or other class of stock ranking junior to the Preferred
Stock, until all dividends have been paid in full on the Preferred Stock. The dividends on the Preferred Stock are payable, at
our option, in cash, if permissible, or in additional shares of common stock. The Preferred Stock is not subject to any anti-dilution
provisions other than for stock splits and stock dividends or other similar transactions. The holders of the Preferred Stock shall
have the right to vote with our stockholders in any matter. The number of votes that may be cast by a holder of our Preferred Stock
shall equal the Stated Value of the Preferred Stock purchased divided by the Conversion Rate.
During the year ended December 31, 2011, we
sold 759,773 shares of Preferred Stock at a price per share of $10, for gross proceeds of $7,597,730. We paid commissions, legal
fees and other expenses of issuance of $828,340, which has been recorded as a discount and deducted from the face value of the
Preferred Stock. At issuance of the Preferred Stock, we attributed a conversion option to the Preferred Stock based upon the difference
between the Conversion Rate at the time of issuance and the closing price of our common stock on the date of issuance, which was
recorded as a discount and deducted from the face value of the Preferred Stock. Pursuant to the Make Good adjustment of the Conversion
Rate to $1.00, at December 31, 2011 the conversion option was recalculated as if the $1.00 Conversion Rate was in affect at issuance
which amounted to $2.1 million, and the amortization of the related discount was adjusted for the year ended December 31, 2011.
These discounts were amortized over three years consistent with the initial redemption terms, as a charge to additional paid-in
capital, due to our deficit in retained earnings. For the three months ended March 31, 2014, we amortized $221,386 of these discounts
to additional paid-in capital and at March 31, 2014, the Preferred Stock discount was fully amortized.
The Preferred Stock is redeemable for cash
by the holder any time after the three-year anniversary from the initial purchase. The Preferred Stock were purchased during March
and April 2011, therefore holders of the Preferred Stock have the right to redeem their Preferred Stock any time after March 2014.
Since we were precluded by Colorado law from redeeming any Preferred Stock upon the attainment of the redemption date, during the
three months ended June 30, 2014, in exchange for extending the redemption date to after December 31, 2016, we’ve offered
to reduce the conversion price to $0.70 for any conversions in 2015 and to $0.60 for any conversions in 2016 (the “Revised
Conversion Terms”). We also offered to extend the expiration date of the Preferred Stock Warrants an additional two years.
In exchange, the Preferred Stock Holders agreed to automatically convert their Preferred Stock on the date our common shares are
listed on a U.S. based stock exchange (the “Up-listing Date”). In addition, any Preferred Stock Warrants remaining
outstanding at the Up-listing Date, will be cancelled and the holder issued a number of shares of common stock equivalent to the
fair value of those warrants. Holders of $6,079,980 of the outstanding Preferred Stock accepted this offer. During the three months
ended September 30, 2014, we received the consent of a majority of both our common stock holders voting with the as-converted preferred
stock holders and the preferred stock holders only, to automatically convert the Preferred Stock still outstanding at the Up-listing
Date. Also, the Preferred Stock may be converted by us, provided that the variable weighted average price of our common stock has
closed at $4.00 per share or greater, for sixty consecutive trading days and during such sixty-day period, the shares of common
stock issuable upon conversion of the Preferred Stock have either been registered for resale or are issuable without restriction
pursuant to Rule 144 of the Securities Act of 1933, as amended.
The Preferred Stock when issued was a hybrid
instrument comprised of a (i) a preferred stock, (ii) an option to convert the preferred stock into shares of our common stock
(the “Conversion Option”) and (iii) a warrant to purchase shares of our common stock to be issued if a certain revenue
milestone (the “Revenue Milestone”) was not achieved (the “Make Good Warrant”), as an embedded derivative
liability. The Conversion Option derives its value based on the underlying fair value of the shares of our common stock as does
the Preferred Stock, and therefore is clearly and closely related to the underlying preferred stock. Since, at issuance the number
of shares of common stock which the Make Good Warrant would be exercisable into, was not determinable, and since the fair value
of the Make Good Warrants was deemed improbable, we did not record a derivative liability. See Note 5 for further discussion on
these derivative liabilities.
Since our Revenue Milestone for the twelve
months ended December 31, 2011 was not achieved (i) the Conversion Rate was reduced to $1.00, and (ii) each holder received a Make
Good Warrant to purchase a number of shares of our common stock equal to fifty percent of the number of shares of common stock
issuable upon conversion of the Preferred Stock at the Conversion Rate. The Make Good Warrants expire December 31, 2015, have
an initial exercise price of $1.00 per share and provide for cashless exercise at any time the underlying shares of common stock
have not been registered for resale under the Securities Act of 1933 or are issuable without restriction pursuant to Rule 144 of
the Securities Act. During the three months ended June 30, 2014, we offered all warrant holders the right to exchange their warrants
for their fair value, as calculated using the Black-Scholes option pricing model, for shares of common stock. Warrant holders holding
approximately 84% of these outstanding warrants elected the exchange offer.
There were no conversions during the three
and six months ended June 30, 2015 or 2014.
The Preferred Stock outstanding at June 30,
2015, is convertible into 9.4 million shares of our common stock pursuant to the Revised Conversion Terms or the original terms,
where applicable.
Historically, since the Preferred Stock could
ultimately be redeemed at the option of the holder, the carrying value of the shares, net of unamortized discount and accumulated
dividends, has been classified as temporary equity.
Our dividend payable on June 30, 2015 of $169,157
was paid, in lieu of cash, with 1,409,638 shares of common stock, which were issued subsequent to June 30, 2015.
Placement Agent Warrants
We issued warrants to the placement agents
for the sale of our Preferred Stock, to purchase 58,352 shares of 10% convertible preferred stock at $10 per share. Since at issuance,
the number of shares of common stock which these warrants would be exercisable into was not determinable, we recorded the fair
value of the warrants at issuance, as a liability on our balance sheet and we re-value this warrant liability at each reporting
date, with changes in fair value recognized in earnings each reporting period. See Note 5 for further discussion of derivative
liabilities.
Note 8 - Stockholders’ Equity
We are authorized to issue up
to 250,000,000 shares of Common Stock, no par value, and up to 2,500,000 shares of Preferred Stock, no par value. There
were 74,065,254 and 70,825,215 shares of common stock issued and outstanding at June 30, 2015 and December 31,
2014, respectively. During the year ended December 31, 2011, we designated 880,000 shares of preferred stock as
10% convertible preferred stock and had issued and outstanding 682,998 shares of 10% convertible preferred stock at June
30, 2015 and December 31, 2014. We may issue additional shares of preferred stock, with dividend requirements, voting
rights, redemption prices, liquidation preferences and premiums, conversion rights and other terms without a vote of
the shareholders.
Common Stock Issuances for the Six Months
Ended June 30, 2015
During January 2015, we issued 357,561 shares
of common stock as payment of our dividends on our 10% convertible preferred stock, in lieu of cash, with a fair value on the date
of issue of $143,024.
During January 2015, we issued 678,825 shares
of common stock as payment of our interest on our 8% convertible notes, in lieu of cash, with a fair value on the date of issue
of $271,530.
During January 2015, we issued 81,648 shares
of common stock as payment of our interest on our 12% revolving credit agreement, in lieu of cash, with a fair value on the date
of issue of $32,659.
During January 2015, we issued 1,667 shares
of common stock to a consultant pursuant to terms of an agreement, with a fair value on the date of issue of $600.
During February 2015, we issued 1,666 shares
of common stock to a consultant pursuant to terms of an agreement, with a fair value on the date of issue of $550.
During February 2015, we issued 303,031 shares
of common stock to a consultant pursuant to terms of an agreement, with a fair value on the date of issue of $100,000.
During March 2015, we issued 1,667 shares of
common stock to a consultant pursuant to terms of an agreement, with a fair value on the date of issue of $468.
During July 2015, we issued 557,856 shares
of common stock as payment of our dividends on our 10% convertible preferred stock, in lieu of cash, with a fair value on the date
of issue of $172,935.
During July 2015, we issued 1,121,256 shares
of common stock as payment of our interest on our 8% convertible notes, in lieu of cash, with a fair value on the date of issue
of $347,589.
During July 2015, we issued 134,862 shares
of common stock as payment of our interest on our 12% revolving credit agreement, in lieu of cash, with a fair value on the date
of issue of $41,807.
Note 9 - Share-based Compensation
Options
At our Annual Meeting of Shareholders during
the year ended December 31, 2013, our shareholders approved an amendment to our 2010 Stock Plan to increase the number of shares
of common stock reserved thereunder by 2,000,000 shares. In addition, during the three months ended March 31, 2014 the board approved
an additional 2,000,000 shares to be available for award under the 2010 Stock Plan, subject to shareholder approval, which brought
the total available for award under the 2010 Stock Plan to 7,000,000 shares. The exercise price of an option is established by
the Board of Directors on the date of grant and is generally equal to the market price of the stock on the grant date. The
Board of Directors may determine the vesting period for each new grant. Options issued are exercisable in whole or in part for
a period as determined by the Board of Directors of up to ten years from the date of grant.
During the six months ended June 30, 2015,
we awarded options to purchase 3.3 million shares of our common stock at an exercise price of $0.30 and 600,000 shares of our common
stock at an exercise price of $0.27, to our leadership team. The right to exercise these options vests in 90 days of the award. We
estimated the fair value of these options to be $800,826 which was charged to expense in our statement of operations during the
period. We use the Black-Scholes option pricing model to estimate the fair values, with the following range of assumptions: (i)
no dividend yield, (ii) expected volatility of 90%, (iii) risk-free interest rates of 1.5%, and (iv) expected lives of five years.
In addition to the options which vested on
the date of award during the six months ended June 30, 2015, certain options that we amortize over multiple vesting periods, where
amortized over the six months ended June 30, 2015. We charged to operating expenses $36,838 during the six months ended June 30,
2015.
The following table summarizes our stock option
activity for the six months ended June 30, 2015:
| |
| | |
Weighted- | |
| |
Number | | |
Average | |
| |
of Shares | | |
Exercise | |
| |
Issuable | | |
Price | |
| |
| | |
| |
Balance, January 1, 2015 | |
| 4,128,128 | | |
$ | 1.04 | |
Granted | |
| 3,900,000 | | |
| 0.30 | |
Exercised | |
| - | | |
| - | |
Cancelled | |
| (228,128 | ) | |
| 1.10 | |
Balance, June 30, 2015 | |
| 7,800,000 | | |
$ | 0.66 | |
The following table summarizes options outstanding
at June 30, 2015:
| |
| | |
| | |
Weighted- | | |
| |
| |
| | |
Weighted- | | |
Average | | |
| |
| |
Number | | |
Average | | |
Remaining | | |
Aggregate | |
| |
of Shares | | |
Exercise | | |
Term | | |
Intrinsic | |
| |
Issuable | | |
Price | | |
(Years) | | |
Value | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable | |
| 6,510,000 | | |
$ | 0.66 | | |
| 3.5 | | |
$ | - | |
Not vested | |
| 1,290,000 | | |
| 0.69 | | |
| 3.8 | | |
| - | |
Balance, June 30, 2015 | |
| 7,800,000 | | |
$ | 0.66 | | |
| 3.5 | | |
$ | - | |
Warrants
From time to time, we compensate consultants,
advisors and investors with warrants to purchase shares of our common stock, in lieu of cash payments. Net share settlement is
available to warrant holders.
The following table sets forth our warrant
activity during the six months ended June 30, 2015:
| |
| | |
Weighted- | |
| |
Number | | |
Average | |
| |
of Shares | | |
Exercise | |
| |
Issuable | | |
Price | |
| |
| | |
| |
Balance, January 1, 2015 | |
| 1,166,146 | | |
$ | 1.13 | |
Granted | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | |
Expired | |
| (176,176 | ) | |
| 0.94 | |
Balance, June 30, 2015 | |
| 989,970 | | |
$ | 1.16 | |
The following table sets forth the warrants
outstanding at June 30, 2015:
| |
| | |
Weighted- | |
| |
Number | | |
Average | |
| |
of Shares | | |
Exercise | |
| |
Issuable | | |
Price | |
| |
| | |
| |
10% convertible preferred stock – warrants | |
| 580,000 | | |
| 1.00 | |
Consultants | |
| 409,970 | | |
| 1.39 | |
Total | |
| 989,970 | | |
$ | 1.16 | |
Note 10 - Income Taxes
The income tax provision consists of federal
and state corporate income taxes resulting from our operations in the United States. The income tax provision differs from the
expected tax provisions computed by applying the U.S. Federal statutory rate to loss before income taxes primarily because we have
historically maintained a full valuation allowance on our deferred tax assets. We expect income tax expense to vary each reporting
period depending upon taxable income fluctuations and the availability of tax benefits from net loss carryforwards.
At December 31, 2014, we had available net
operating loss carry forwards of $37.9 million that expire through 2034. Through the year ended December 31, 2014 the Company
experienced a significant change in capital structure. As a result of the increase in shares outstanding, we believe that a greater
than 50% change in ownership as defined in section 382 of the IRC has occurred and therefore our ability to utilize our net operating
losses may be limited. We believe that a Sec. 382 study will confirm a change has occurred and therefore our ability to use our
net operating losses will be limited on an annual basis based on the value of the Company at the time of the ownership change.
Such limitation will have the effect of limiting on an annual basis the amount of net operating losses we can utilize as an offset
to future taxable income.
At December 31, 2014, we recorded a valuation
allowance against the full amount of our deferred tax assets, as our management believes it is uncertain that they will be fully
realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss, an adjustment
to our net operating loss carryforwards would increase net income in the period in which we make such a determination.
Note 11 - Business Concentration
During the three and six months ended June 30, 2015, we sold products
to two customers accounting for 47%, and 13%, and to two customers accounting for 26% and 14%, respectively of our total revenues.
During the three and six months ended June 30, 2014, we sold products to two customers accounting for 16%, and 14%, and to two
customers accounting for 19% and 14%, respectively of our total revenues.
During the three and six months ended June 30, 2015, no vendors
accounted for more than 10% of our purchases of raw materials and other products and services. During the three months ended June
30, 2014, two vendors accounted for 13% and 11% of our purchases. During the six months ended June 30, 2014, no vendors accounted
for more than 10% of our total purchases.
Note 12 - Commitments and Contingencies
Operating leases
During the year ended December 31, 2013, we
entered into an assignment of the original lease for our Zanesville, OH facility, effective November 15, 2013 at an initial monthly
lease payment of $25,750. Our monthly rent for June 2015 was $27,318. The original term of the lease expires at the end of April
2018, but provides two additional five-year extensions and includes an annual rent escalation clause based on the greater of the
change in a certain Consumer Price Index or 3%. We record rent expense based on the straight-line amortization of the full 15-year
term of the initial lease plus all extensions. Our rent expense, for the three and six months ended June 30, 2015 was $95,784 and
$191,568, respectively and our deferred rent at June 30, 2015 was $108,067. This facility also serves as our corporate headquarters.
Effective September 1, 2013, we signed a ten
year lease for our production facility in Waco, Texas which provides five additional five-year extensions. Monthly rent expense
for the first year of the lease and for June 2016 was $21,875 and $22,531, respectively. The lease includes an annual rent escalation
clause based on the greater of the change in a certain Consumer Price Index or 3%. We record rent expense based on the straight-line
amortization of the full 35-year term of the initial lease plus all extensions. Our rent expense for the three and six months ended
June 30, 2015 was $113,366 and $226,732 and our deferred rent at June 30, 2015 was $349,416.
Royalty Agreements
In February 2007, we acquired an exclusive,
royalty-bearing license in specific but broad global territories to make, have made, use, sell, offer for sale, modify, develop,
import, and export products made using patent applications owned by Rutgers University (Rutgers”). We are using these
patented technologies in the production of our composite rail ties and structural building products. The term of the License Agreement
runs until the expiration of the last-to-expire issued patent within the Rutgers’ technologies licensed under the License
Agreement, unless terminated earlier.
Our proprietary technologies are derived in
part from material compositions of matter, processing and use and design patents held by Rutgers University, which have been exclusively
licensed to us in February 2007 for United States, Canada, Central and South America, the Caribbean Territory, South Korea, Saudi
Arabia, Russia, Mexico and China (where we are a co-licensee). Patents do not exist in all countries for which a license has been
granted to us. Although our license agreement with Rutgers also includes know-how, we do not believe that any proprietary know-how
is attributable to, or has been obtained by us from, Rutgers so that we may not have exclusivity in all countries licensed to us
where patents do not exist. Conversely, our position as to our licensed rights also enables Axion to market its products in countries
licensed to others in which patents have not been filed. The Rutgers patents have limited remaining lives and will start expiring in 2016.
We are obligated to pay Rutgers royalties ranging from 1.5% to 3.0%
on various product sales, subject to certain minimum payments each year and to reimburse Rutgers for certain patent defense costs
in the case of patent infringement claims made against the Rutgers patents. The Rutgers royalty-bearing license includes
certain minimum royalty provisions of $200,000 per year. Royalties incurred and payable to Rutgers for product sales, for the three
months ended June 30, 2015 and 2014 was $40,465 and $29,215, respectively. For the six months ended June 30, 2015 and 2014, royalties
on product sales payable to Rutgers was $72,754 and $73,578, respectively.
Litigation
From time to time we may be subject to various
other routine legal matters incidental to our business, but we do not believe that they would have a material adverse effect on
our financial condition or results of operations.
Note 13 - Related Party Transactions
Samuel G. Rose and Julie Walters
Pursuant to the terms of the Purchase Agreement
associated with out 8% convertible promissory notes (see note 6), Samuel G. Rose was appointed to our board of directors on August
4, 2014 and resigned on June 9, 2015. Mr. Rose and Julie Walters own in excess of 5% of our outstanding common stock.
10% Convertible Redeemable Preferred Stock.
During the year ended December 31, 2011, we sold to Mr. Rose and Ms. Walters 100,000 shares of our Preferred Stock for $1.0 million.
The Preferred Stock may be converted into shares of our common stock at any time by Mr. Rose and Ms. Walters at a conversion price
effective January 1, 2015 of $0.70 per share, as adjusted. Mr. Rose and Ms. Walters are entitled to receive dividends at the rate
of 10% per annum payable quarterly, at our option, in cash, or in additional shares of common stock, and have the right to vote
the Preferred Stock with our common stockholders on any matter.
Since certain revenue targets for the twelve
months ended December 31, 2011 were not achieved, Mr. Rose and Ms. Walters received a warrant to purchase 500,000 shares of our
common stock. During June 2014, we extended an offer to exchange for shares of our common stock any and all of our outstanding
warrants from the holders thereof (the “Tender Offer”). Each warrant holder was provided with the terms of the Tender
Offer regarding their outstanding warrants. For every $10 of value attributed to the warrant, we offered to exchange 14.17707 shares
of our common stock. The value of the warrants was derived from third parties using Monte Carlo simulation models and the Black-Scholes
Option Pricing Model. Pursuant to this Tender Offer, Mr. Rose and Ms. Walters received approximately 259,300 shares of common stock
in exchange for the warrants to purchase 500,000 shares of common stock.
For the three and six months ended June 30,
2015, Mr. Rose and Ms. Walters received or will receive an aggregate of 206,381 and 288,062, respectively shares of common stock
as dividend payments on the Preferred Stock held by them.
8% Convertible Promissory Notes (2012).
Effective April 25, 2012, we entered into a Memorandum of Understanding (the “MOU”) with Mr. Rose and several other
investors. Pursuant to the MOU, we issued to Mr. Rose a demand promissory note (the “Demand Note”) in the principal
amount of $1,666,667. Interest accrued on the unpaid principal balance of the Demand Note at a rate of 8.0% per annum.
On August 24, 2012, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with Mr. Rose, MLTM Lending,
LLC, Allen Kronstadt and certain other investors (the “Note Purchase Agreement Investors”), pursuant to which, as of
June 30, 2015, we have issued and sold to Mr. Rose an aggregate principal amount of $5,209,260 of our 8.0% convertible promissory
notes (the “8% Notes - 2012”) which are initially convertible into shares of our common stock, at a conversion price
equal to $0.40 per share of common stock, subject to adjustment as provided on the terms of the 8% Notes - 2012, and associated
warrants (the “8% Note Warrants”) to purchase, in the aggregate, 13,023,151 shares of common stock, subject to adjustment
as provided on the terms of the 8% Note Warrants. At the initial closing under the Purchase Agreement, in consideration for the
issuance of the 8% Notes - 2012 and the 8% Note Warrants issued at such closing, Mr. Rose converted the aggregate principal amount
outstanding, together with all accrued and unpaid interest, under the Demand Note and paid us in cash for the balance. For the
six months ended June 30, 2015, Mr. Rose has received 351,265 shares of common stock as interest payments under the 8% Notes -
2012 held by him. We have accrued interest under the 8% Notes – 2012 for the three months ended June 30, 2015 in the amount
of $105,343, but shares of common stock in payment of this interest have not been issued subsequent to June 30, 2015.
In connection with the entry into the Purchase
Agreement, we granted to the Note Purchase Agreement Investors: (i) certain demand and piggyback registration rights with respect
to the registration of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder,
and (ii) a security interest and lien in all of our assets and rights to secure our obligations under the 8% Notes – 2012.
The 8% Notes - 2012, including all outstanding
principal and accrued and unpaid interest, are due and payable on the earlier of five years from date of issuance or upon the occurrence
of an Event of Default (as defined in the 8% Notes - 2012). We may prepay the 8% Notes - 2012, in whole or in part, upon 60 calendar
days prior written notice to the holders thereof. Interest accrues on the 8% Notes - 2012 at a rate of 8.0% per annum, payable
during the first three years that the 8% Notes - 2012 are outstanding in shares of common stock, valued at the weighted average
price of a share of common stock for the twenty consecutive trading days prior to the interest payment date, pursuant to the terms
of the 8% Notes - 2012. During the fourth and fifth years that the 8% Notes - 2012 are outstanding, interest that accrues under
the 8% Notes - 2012 shall be payable in cash.
Pursuant to our Tender Offer, Mr. Rose received
10.9 million shares of common stock in exchange for his 8% Note Warrants to purchase 13.0 million shares of common stock.
Revolving Credit and Letter of Credit Support
Agreement. During the year ended December 31, 2013, we entered into a Revolving Credit and Letter of Credit Support Agreement
(the “Revolving Loan Agreement”) pursuant to which Mr. Rose along with MLTM Lending LLC (the “Lenders”)
had agreed to lend us up to $1.0 million each on a revolving basis. Each revolving loan made under the Revolving Loan Agreement
bears interest at 12% per annum, of which 4% is payable by us in cash on the first business day of each month, and 8% is payable
by us in shares of common stock on the first business day of each calendar quarter, valued at a price equal to the average of the
Weighted Average Price (as such term is defined in the Revolving Loan Agreement) of a share of common stock for 20 consecutive
trading days prior to the interest payment date. The maturity date of the Revolving Loan Agreement is December 31, 2015 (the “Maturity
Date”). As of June 30, 2015, Mr. Rose had provided $1.0 million pursuant to the Revolving Loan Agreement.
Under the terms of the Revolving Loan Agreement,
we may prepay the revolving loans at any time, in whole or in part, together with all accrued and unpaid interest, without premium
or penalty. The Lenders may accelerate all amounts due under the Revolving Loan Agreement, together with accrued and unpaid interest,
upon the occurrence of an Event of Default, as defined in the Revolving Loan Agreement.
As consideration for the revolving loans extended
under the Revolving Loan Agreement, we agreed to issue to each Lender 100,000 shares of common stock, upon signing of the Revolving
Loan Agreement and again prior to December 31, 2014 and 2015. Through June 30, 2015, Mr. Rose has received a total of 200,000 shares
of common stock.
In connection with the entry into the Revolving
Loan Agreement, pursuant to the terms thereof, we entered into a Security Agreement pursuant to which we granted a security interest
and lien in all of our accounts receivable and inventory to secure the Lenders’ obligations under the Revolving Loan Agreement.
For the three and six months ended June 30,
2015, we paid $10,111 and $20,111, respectively in interest. In addition, we issued to Mr. Rose 67,431 shares of common stock as
payment of interest for the three months ended March 31, 2015 and accrued $20,222 for interest for the three months ended June
30, 2015.
8% Convertible Promissory Notes (2014).
During the months of June and August 2014 pursuant to the terms of our 8% convertible promissory notes (the “8% Notes - 2014”),
we issued and sold to Mr. Rose, an aggregate principal amount of $666,666 of our 8% Notes - 2014 which are initially convertible
into 2.5 million shares of our common stock, subject to adjustment as provided on the terms of the 8% Notes - 2014, (i) at any
time prescribed by the Investors or (ii) upon any date prior to the maturity date of June 11, 2019, on which the Company’s
common shares are listed on a U.S. based stock exchange.
For the three and six months ended June 30,
2015, we paid Mr. Rose $13,481 and $26,815, respectively of interest on the 8% Notes – 2014.
12% Convertible Promissory Notes. During the three months
ended September 30, 2014 pursuant to the terms of our 12% convertible promissory notes (the “12% Notes”), we issued
and sold to Mr. Rose, an aggregate principal amount of $333,333 of our 12% Notes which are initially convertible into shares of
our common stock, subject to adjustment as provided on the terms of the 12% Notes, at any time prescribed by the Investors at a
conversion price equal to 85% of the weighted average price of a share of common stock for the ten consecutive trading days prior
to the conversion date. The 12% Notes mature on June 30, 2015. We have not received a notice of default or demand for payment,
as we have been in negotiations with Mr. Rose regarding the repayment of principal and unpaid interest of the 12% Notes.
For the three and six months ended June 30,
2015, we paid Mr. Rose $10,111 and $20,111, respectively of interest on the 12% Notes.
12% Secured Notes. During the six months ended June 30, 2015
pursuant to the terms of our 12% secured notes (the “12% Secured Notes”), we issued and sold to Mr. Rose, an aggregate
principal amount of $1,777,888 of our 12% Secured Notes. Mr. Rose holds $2,427,888 of our 12% Secured Notes as of June 30, 2015.
The 12% Secured Notes mature on June 30, 2015 and are secured by a pledge of the common shares of Axion International, Inc. and
Axion Recycled Plastics Incorporated, owned by us. We have not received a notice of default or demand for payment, as we have been
in negotiations with Mr. Rose regarding the repayment of principal and unpaid interest of the 12% Secured Notes.
For the three and six months ended June 30,
2015, we’ve accrued interest for payment to Mr. Rose at maturity of $73,646 and $124,370 on the 12% Secured Notes.
A summary of the transactions entered into
through June 30, 2015 with Mr. Rose and Ms. Walter is as follows:
| |
| | |
Common Stock | |
| |
| | |
Equivalent, | |
| |
Principal | | |
If Converted | |
| |
| | | |
| | |
10% convertible preferred stock | |
$ | 1,000,000 | | |
| 1,428,571 | |
8% convertible notes (2012) | |
| 5,209,260 | | |
| 13,023,151 | |
12% revolving | |
| 1,000,000 | | |
| - | (i) |
8% convertible notes (2014) | |
| 666,666 | | |
| 2,500,000 | |
12% convertible promissory notes | |
| 333,333 | | |
| 3,030,300 | (ii) |
12% secured notes | |
| 2,427,888 | | |
| - | (i) |
| |
| | | |
| | |
TOTAL | |
$ | 10,637,147 | | |
| 19,982,022 | |
(i) not convertible into shares of common stock.
(ii) assumes a 10-day volume weighted average price was $0.11.
MLTM Lending, LLC and the ML Dynasty
Trust
MLTM Lending, LLC and the ML Dynasty Trust
beneficially own in excess of 5% of our outstanding stock. Pursuant to the Schedule 13D filings made by MLTM Lending, LLC and the
ML Dynasty Trust, the ML Dynasty Trust shares with MLTM the power to vote or direct the vote of, and to dispose or direct the disposition
of, greater than 5% of our outstanding stock. Thomas Bowersox, a prior member of our board of directors (resigned on
June 9, 2015), is a trustee of the ML Dynasty Trust.
8% Convertible Promissory Notes (2012).
Pursuant to the MOU, we issued to MLTM Lending, LLC a Demand Note (the “MLTM Demand Note”) in the principal amount
of $1,426,667. Interest accrued on the unpaid principal balance of the MLTM Demand Note at a rate of 8.0% per annum. Pursuant to
the Purchase Agreement, as of June 30, 2015, we have issued and sold to MLTM Lending, LLC an aggregate principal amount of $4,888,444
of our 8% Notes - 2012 and associated 8% Note Warrants to purchase, in the aggregate, 12,221,112 shares of common stock, subject
to adjustment as provided on the terms of the 8% Note Warrants. In consideration for the issuance of the 8% Notes - 2012 and the
8% Note Warrants, MLTM Lending, LLC converted the aggregate principal amount outstanding, together with all accrued and unpaid
interest, under the MLTM Demand Note and paid us in cash for the balance. For the three and six months ended June 30, 2015, MLTM
Lending, LLC has received 329,633 shares of common stock as interest payments under the 8% Notes that it holds. We have accrued
interest under the 8% Notes – 2012 for the three months ended June 30, 2015 in the amount of $98,855, but shares of common
stock in payment of this interest have not been issued subsequent to June 30, 2015.
Pursuant to our Tender Offer, MLTM Lending,
LLC received 10.2 million shares of common stock in exchange for their 8% Note Warrants to purchase 12.2 million shares of common
stock.
The terms of the 8% Notes – 2012, the
8% Note Warrants and the Tender Offer are described above.
Revolving Credit and Letter of Credit Support
Agreement. During the year ended December 31, 2013, we entered into a Revolving Credit and Letter of Credit Support Agreement
(the “Revolving Loan Agreement”) pursuant to which MLTM Lending LLC and Mr. Rose (the “Lenders”) have agreed
to lend us up to $1.0 million each on a revolving basis. In addition, the Revolving Loan Agreement provides that MLTM Lending,
LLC will provide letter of credit support to us of up to $500,000 (the “LC Sublimit”). Each revolving loan made under
the Revolving Loan Agreement bears interest at 12% per annum, of which 4% is payable by us in cash on the first business day of
each month, and 8% is payable by us in shares of common stock on the first business day of each calendar quarter, valued at a price
equal to the average of the Weighted Average Price (as such term is defined in the Revolving Loan Agreement) of a share of common
stock for 20 consecutive trading days prior to the interest payment date. The maturity date of the Revolving Loan Agreement is
December 31, 2015 (the “Maturity Date”). As of June 30, 2015, MLTM Lending, LLC had provided $1.0 million pursuant
to the Revolving Loan Agreement and supported $140,000 of outstanding letters of credit. In addition, during the three months ended
June 30, 2015, certain letters of credit issued under the LC Sublimit were presented for payment and are outstanding under this
Revolving Loan Agreement in the total amount of an additional $300,000.
Under the terms of the Revolving Loan Agreement,
we may prepay the revolving loans at any time, in whole or in part, together with all accrued and unpaid interest, without premium
or penalty. The Lenders may accelerate all amounts due under the Revolving Loan Agreement, together with accrued and unpaid interest,
upon the occurrence of an Event of Default, as defined in the Revolving Loan Agreement.
As consideration for the revolving loans extended
under the Revolving Loan Agreement, we agreed to issue to each Lender 100,000 shares of common stock, upon signing of the Revolving
Loan Agreement and again prior to December 31, 2014 and 2015. Through June 30, 2015, MLTM Lending, LLC has received a total of
200,000 shares of common stock. As consideration for MLTM Lending, LLC providing letter of credit support, we are required to pay
a letter of credit commission fee on the date of the Revolving Loan Agreement, and on each one year anniversary of the date of
the Revolving Loan Agreement prior to the Maturity Date, in the amount equal to (i) 2% of the LC Sublimit in cash and (ii) shares
of common stock, with an aggregate value of 4% of the LC Sublimit, with each such share of common stock valued at a price equal
to the average of the Weighted Average Price of a share of Common Stock for the 20 consecutive trading days prior to the date of
payment.
In connection with the entry into the Revolving
Loan Agreement, pursuant to the terms thereof, we entered into a Security Agreement pursuant to which we granted a security interest
and lien in all of our accounts receivable and inventory to secure the Lenders’ obligations under the Revolving Loan Agreement.
For the three and six months ended June 30,
2015, we paid MLTM Lending, LLC $10,111 and $20,111, respectively in interest. In addition, we issued to MLTM Lending, LLC 67,431
shares of common stock as payment of interest for the three months ended March 31, 2015 and accrued $20,222 for interest for the
three months ended June 30, 2015.
8% Convertible Promissory Notes (2014).
During the months of June and August 2014 pursuant to the terms of our 8% convertible promissory notes (the “8% Notes - 2014”),
we issued and sold to MLTM Lending, LLC, an aggregate principal amount of $666,667 of our 8% Notes - 2014 which are initially convertible
into 2.5 million shares of our common stock, subject to adjustment as provided on the terms of the 8% Notes - 2014, (i) at any
time prescribed by the Investors or (ii) upon any date prior to the maturity date of June 11, 2019, on which the Company’s
common shares are listed on a U.S. based stock exchange.
For the three and six months ended June 30,
2015, we paid MLTM Lending, LLC $13,481 and $26,814, respectively of interest on the 8% Notes – 2014.
12% Convertible Promissory Notes. During
the three months ended September 30, 2014 pursuant to the terms of our 12% convertible promissory notes (the “12% Notes”),
we issued and sold to MLTM Lending, LLC, an aggregate principal amount of $333,334 of our 12% Notes which are initially convertible
into shares of our common stock, subject to adjustment as provided on the terms of the 12% Notes, at any time prescribed by the
Investors at a conversion price equal to 85% of the weighted average price of a share of common stock for the ten consecutive trading
days prior to the conversion date. The 12% Notes mature on June 30, 2015. We have not received a notice of default or demand for
payment, as we have been in negotiations with MLTM Lending, LLC regarding the repayment of principal and unpaid interest of the
12% Notes.
For the three and six months ended June 30,
2015, we paid MLTM Lending, LLC $10,111 and $20,111, respectively of interest on the 12% Notes.
12% Secured Notes. During the three
months ended March 31, 2015 pursuant to the terms of our 12% secured notes (the “12% Secured Notes”), we issued and
sold to MLTM Lending, LLC, an aggregate principal amount of $888,888 of our 12% Secured Notes. The 12% Secured Notes mature on
June 30, 2015 and are secured by a pledge of the common shares of Axion International, Inc. and Axion Recycled Plastics Incorporated,
owned by us. We have not received a notice of default or demand for payment, as we have been in negotiations with MLTM Lending,
LLC regarding the repayment of principal and unpaid interest of the 12% Secured Notes.
For the three and six months ended June 30,
2015, we’ve accrued interest for payment to MLTM Lending, LLC at maturity of $46,680 and $84,106, respectively on the 12%
Secured Notes.
A summary of the transactions entered into
with MLTM Lending, LLC is as follows:
| |
| | |
Common Stock | |
| |
| | |
Equivalent, | |
| |
Principal | | |
If Converted | |
| |
| | |
| |
8% convertible notes (2012) | |
$ | 4,888,444 | | |
| 12,221,112 | |
12% revolving | |
| 1,000,000 | | |
| - | (i) |
8% convertible notes (2014) | |
| 666,667 | | |
| 2,500,000 | |
12% convertible promissory notes | |
| 333,334 | | |
| 3,030,309 | (ii) |
12% secured notes | |
| 1,538,888 | | |
| - | (i) |
| |
| | | |
| | |
TOTAL | |
$ | 8,427,333 | | |
| 17,751,421 | |
(i) not convertible into shares of common stock.
(ii) assumes 10-day volume weighted average price was $0.11.
Allen Kronstadt
Allen Kronstadt beneficially owns in excess
of 5% of our outstanding stock and was appointed to our board of directors on September 11, 2012 pursuant to the terms of the Purchase
Agreement and resigned on June 9, 2015.
8% Convertible Promissory Notes (2012).
Pursuant to the MOU, we issued to Mr. Kronstadt a demand promissory note (the “Kronstadt Demand Note”) in the principal
amount of $1,666,667. Interest accrued on the unpaid principal balance of the Kronstadt Demand Note at a rate of 8.0%
per annum. Pursuant to the Purchase Agreement, as of December 31, 2014, we have issued and sold to Mr. Kronstadt an aggregate principal
amount of $5,209,297 of our 8% Notes - 2012 and 8% Note Warrants to purchase, in the aggregate, 13,023,243 shares of common stock,
subject to adjustment as provided on the terms of the 8% Note Warrants. At the initial closing under the Purchase Agreement, in
consideration for the issuance of the 8% Notes - 2012 and the 8% Note Warrants at such closing, Mr. Kronstadt converted the aggregate
principal amount outstanding, together with all accrued and unpaid interest, under the Kronstadt Demand Note and paid us in cash
for the balance. For the three months ended March 31, 2015, Mr. Kronstadt has received 351,268 shares of common stock as interest
payments under the 8% Notes - 2012 that he holds. We have accrued interest under the 8% Notes – 2012 for the three months
ended June 30, 2015 in the amount of $105,344, but shares of common stock in payment of this interest have not been issued subsequent
to June 30, 2015.
Pursuant to our Tender Offer, Mr. Kronstadt
received 10.9 million shares of common stock in exchange for their 8% Note Warrants to purchase 13.0 million shares of common stock.
The terms of the 8% Notes – 2012, the
8% Note Warrants and the Tender Offer are described above.
8% Convertible Promissory Notes (2014).
During the months of June and August 2014 pursuant to the terms of our 8% convertible promissory notes (the “8% Notes - 2014”),
we issued and sold to Mr. Kronstadt, an aggregate principal amount of $666,667 of our 8% Notes - 2014 which are initially convertible
into 2.5 million shares of our common stock, subject to adjustment as provided on the terms of the 8% Notes - 2014, (i) at any
time prescribed by the Investors or (ii) upon any date prior to the maturity date of June 11, 2019, on which the Company’s
common shares are listed on a U.S. based stock exchange.
For the three and six months ended June 30,
2015, we paid Mr. Kronstadt $13,481 and $26,814, respectively of interest on the 8% Notes – 2014.
12% Convertible Promissory Notes. During
the three months ended September 30, 2014 pursuant to the terms of our 12% convertible promissory notes (the “12% Notes”),
we issued and sold to Mr. Kronstadt, an aggregate principal amount of $333,333 of our 12% Notes which are initially convertible
into shares of our common stock, subject to adjustment as provided on the terms of the 12% Notes, at any time prescribed by the
Investors at a conversion price equal to 85% of the weighted average price of a share of common stock for the ten consecutive trading
days prior to the conversion date. The 12% Notes mature on June 30, 2015. We have not received a notice of default or demand for
payment, as we have been in negotiations with Mr. Kronstadt regarding the repayment of principal and unpaid interest of the 12%
Notes.
For the three and six months ended June 30,
2015, we paid Mr. Kronstadt $10,111 and $20,111, respectively of interest on the 12% Notes.
12% Secured Notes. During the three
months ended March 31, 2015 pursuant to the terms of our 12% secured notes (the “12% Secured Notes”), we issued and
sold to Mr. Kronstadt, an aggregate principal amount of $1,777,888 of our 12% Secured Notes. The 12% Secured Notes mature on June
30, 2015 and are secured by a pledge of the common shares of Axion International, Inc. and Axion Recycled Plastics Incorporated,
owned by us. We have not received a notice of default or demand for payment, as we have been in negotiations with Mr. Kronstadt
regarding the repayment of principal and unpaid interest of the 12% Secured Notes.
For the three and six months ended June 30,
2015, we’ve accrued interest for payment to Mr. Kronstadt at maturity of $73,646 and $124,666 on the 12% Secured Notes.
A summary of the transactions entered into with Mr. Kronstadt is
as follows:
| |
| | |
Common Stock | |
| |
| | |
Equivalent, | |
| |
Principal | | |
If Converted | |
| |
| | |
| |
8% convertible notes (2012) | |
$ | 5,209,297 | | |
| 13,023,243 | |
8% convertible notes (2014) | |
| 666,667 | | |
| 2,500,000 | |
12% convertible promissory notes | |
| 333,333 | | |
| 3,030,300 | (ii) |
12% secured notes | |
| 2,427,888 | | |
| - | (i) |
TOTAL | |
$ | 8,637,185 | | |
| 18,553,543 | |
(i) not convertible into shares of common stock.
(ii) assumes 10-day volume weighted average price was $0.11.
Note 14 – Subsequent Events
Promissory Note and Security Agreement
Subsequent to June 30, 2015, we entered into
a Promissory Note and Security Agreement (“Note”) with Allen Kronstadt, who beneficially owns in excess of 5% of our
outstanding stock and was a member of our board of directors from September 11, 2012 to June 9, 2015, in the amount of $326,350
which guaranteed funds provided by Mr. Kronstadt in the form of a cashier’s check which served as a bid bond for a procurement
process by one of our municipal customers. The Note provides for interest of 12% per annum, matures on November 5, 2015 and allows
us to prepay the Note at any time. We secured the Note by providing Mr. Kronstadt with a security interest in all of our unencumbered
assets at any time.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
The discussion of our financial condition
and results of operations set forth below should be read in conjunction with the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements that involve risk and uncertainties.
The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the
Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q, or in the documents incorporated by reference into
this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “intend”, “expect”,
“may”, “will” and similar expressions are intended to identify such forward-looking statements. Such forward-looking
statements include, without limitation, statements relating to competition, management of growth, our strategy, future sales, future
expenses and future liquidity and capital resources. All forward-looking statements in this Form 10-Q are based upon information
available to us on the date of this Form 10-Q, and we assume no obligation to update any such forward-looking statements. Our actual
results, performance and achievements could differ materially from those discussed in this Form 10-Q. Factors that could cause
or contribute to such differences (“Cautionary Statements”) include, but are not limited to, those discussed in Item
1A. “Risk Factors” and elsewhere in our Annual Report on Form 10-K. All subsequent written and oral forward-looking
statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the Cautionary Statements.
Basis of Presentation
The financial information presented in this
Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations
or cash flows. Our fiscal year-end is December 31, and our fiscal quarters end on March 31, June 30 and September 30. Unless otherwise
stated, all dates refer to our fiscal year and fiscal periods.
Overview
Axion International Holdings, Inc. (“Holdings”)
was formed in 1981 under the name Analytical Surveys, Inc. In November 2007, Holdings entered into an Agreement and Plan
of Merger, among Holdings, Axion Acquisition Corp., a Delaware corporation and a newly created direct wholly-owned subsidiary of
Holdings (the “Merger Sub”), and Axion International, Inc., a Delaware corporation which incorporated on August 6,
2006 with operations commencing in November 2007 (“Axion”). On March 20, 2008 Holdings consummated the merger
of Merger Sub into Axion, with Axion continuing as the surviving corporation and a wholly-owned subsidiary of Holdings. The Merger
has been accounted for as a reverse merger in the form of a recapitalization with Axion as the successor.
Axion Recycled Plastics Incorporated, an Ohio
corporation and wholly-owned subsidiary of Axion (“Axion Recycled Plastics”) was established to purchase the certain
tangible and intangible assets of a plastics recycling company during November 2013. Through June 30, 2014, we operated Axion
Recycled Plastics as a separate business segment. In August, 2014, we announced an acceleration of our business strategy to use
the reprocessed plastics Axion Recycled Plastics produces and the facility in which it operates primarily in our engineered products
segment, thereby eliminating Axion Recycled Plastics as a separate business segment. We made this change because of the additional
manufacturing capacity we require to meet the expected demands for our engineered products coupled with the higher profit margins
we can achieve from our engineered products in comparison to our reprocessed plastics.
We design and manufacture innovative structural
polymer solutions, engineering sustainable products and systems for applications that provide improved long-term value, consistent
performance and reduced maintenance costs, offering a viable solution where stress and environmental factors cause degradation
and deterioration of traditional products. Our proprietary products are based on patent rights we hold as well as manufacturing
processes and formulations we have developed.
We manufacture, market and sell ECOTRAX®
rail ties, STRUXURE® building products, with current focus on construction mats and COMPOSX™ reprocessed polymers. Our
ECOTRAX® and STRUXURE® products are fully derived from post-consumer and post-industrial recycled plastics, such as high-density
polyethylene, polystyrene and polypropylene. In patented and proprietary formulations, our products achieve structural strength,
are capable of sustaining heavy loads and are resistant to changing shape under constant stress. Our products, manufactured through
an extrusion process, are eco-friendly, non-corrosive, impervious to moisture, do not leach chemicals and are resistant to insects
and rot. They possess superior lifecycles and generally have greater durability and require less maintenance than competitive traditional
products.
For the past seven years, our products have
been tested and validated in order to establish their structural strength. Our rail ties have been subjected to long-term performance
testing, in which they have been under constant traffic in various environmental conditions. Short-span bridges have been constructed
with our engineered products that have supported tanks and trains. We are in a position to expand upon this foundation we built
through years of successful applications. When coupled with enhanced manufacturing capacity and process refinements, these foundational
achievements should lead to a significant increase in commercial activity.
Critical Accounting Policies
Management’s Discussion and Analysis
of Financial Condition and Results of Operations are based upon our financial statements, which have been prepared in accordance
with generally accepted accounting principles (or GAAP) in the U.S. The preparation of financial statements in conformity with
GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Our critical accounting policies are those that affect our financial statements materially and
involve difficult, subjective or complex judgments by management.
An accounting policy is deemed to be critical
if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate
is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements.
Use of Estimates
The preparation of our financial statements
in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including fair values of
acquired tangible and intangible assets in a business combination, valuation allowances for receivables and deferred income tax
assets, derivative liabilities, stock-based compensation as well as the reported amounts of expenses during the reporting period.
The statements are evaluated on an ongoing basis and estimates are based on historical experience, current conditions and various
other assumptions believed to be reasonable under the circumstances. Actual results can differ from those estimates, and it is
possible that the differences could be material.
Impairment of Intangible Assets
In accordance with FASB ASC topic, “Goodwill
and Other Intangible Assets”, acquired definite life intangibles, are subject to amortization over their useful lives. The
method of amortization selected reflects the pattern in which the economic benefits of the specific intangible asset is consumed
or otherwise used up. Since that pattern cannot be reliably determined, a straight-line amortization method has been used over
the estimated useful life. Intangible assets that are subject to amortization are reviewed for potential impairment at least annually
or whenever events or circumstances indicate that carrying amounts may not be recoverable.
In accordance with the FASB ASC topic, “Goodwill
and Other Intangible Assets”, indefinite life assets, such as goodwill, acquired as a result of our acquisition of the plastic
reprocessing business and which are not subject to amortization are tested for impairment annually, or more frequently if events
and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount
exceeds the asset’s fair value. The fair value is determined by subtracting the fair value of all the identified tangible
and intangible assets included in the business acquisition from the fair value of the purchase price.
Revenue and Related Costs Recognition
In accordance with FASB ASC 605 “Revenue
Recognition”, revenue is recognized when persuasive evidence of an agreement with the customer exists, products are shipped
or title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed or determinable,
collectability is reasonably assured, and there are no significant future performance obligations. In most cases, we receive a
purchase order from our customer specifying the products requested and delivery instructions. We recognize revenue upon our delivery
or shipment of the products as specified in the purchase order. In other cases where we have a contract which provides for a large
number of products and few actual deliveries, the revenues are recorded each month as the products are produced and the risk of
ownership passes to the customer upon pre-delivery acceptance. Prior to deliveries, our customer’s products are segregated
from our inventory and not available for fulfilling other orders.
Our costs of sales are predominately comprised
of the cost of raw materials and the costs and expenses associated with the production of the finished product. Prior to 2013,
we utilized third-party manufacturers. Beginning in 2013, we initiated production of our finished products within a leased facility
utilizing our own employees. Additionally, in late 2013 we acquired the assets of a plastics recycling business and began to reprocess
recycled plastics for use in our own finished products and to sell to customers for use in their finished products. During
the three months ended September 30, 2014, we began the conversion of that facility from reprocessing plastics to processing of
both molded and continuously extruded engineered products. Our costs of sales may vary significantly as a result of the variability
in the cost of our raw materials and the efficiency with which we plan and execute our manufacturing processes.
Historically, we have not had significant warranty
replacements, but on occasion, due to our customer’s improper installation or handling of our engineered products, we will
replace product. Although from time to time we do replace our engineered products based on customer relationship reasons, we do
not anticipate additional significant situations where we might again replace improperly installed products and therefore do not
provide for future warrant expenses.
Share-based Compensation
We recognize share-based compensation for transactions
in which we exchange our equity instruments (shares of common stock, options and warrants) for services of directors, employees,
consultants and others based on the fair value of the equity instruments issued on the measurement date. The fair value
of common stock awards is based on the observed market value of our stock. We calculate the fair value of options and
warrants using the Black-Scholes option pricing model. The Black-Scholes model requires the input of subjective assumptions
including volatility, expected term, risk-free interest rate and dividend yield. We use a measure of volatility based on the historical
volatility of our common stock over a similar period to the expected life of the award. The expected term of an award is based
on the vesting period. We base the risk-free rate on the rate of U.S. Treasury obligations with maturities similar to the
expected term used in the model. Historically, we have not, and do not anticipate paying in the foreseeable future, dividends on
our common stock, and accordingly use an expected dividend yield of zero.
Derivative Instruments
For derivative instruments that are accounted
for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date,
with changes in fair value recognized in earnings each reporting period. We use various simulation models, including Black-Scholes
and Monte Carlo, to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative
instruments, including whether such instruments should be recorded as a liability or as equity, is re-assessed at the end of each
reporting period, in accordance with FASB ASC Topic 815, “Derivatives and Hedging”. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of the derivative
instrument could be required within twelve months of the balance sheet date.
Results of Operations - Comparison of the
Three and Six Months Ended June 30, 2015 and 2014
The following discussion should be read in
conjunction with the information set forth in the consolidated financial statements and the related notes thereto appearing elsewhere
in this Form 10-K.
Revenues
We derive our revenues through the sale of
our products to the domestic and international rail industries, the North American oil and gas and energy infrastructure markets
and to industrial engineering and contracting firms. Our current engineered products consist of:
|
· |
Composite rail ties marketed under the brand name ECOTRAX®; |
|
· |
Heavy equipment construction mats, temporary road mats, I-beams, T-beams, pilings along with tongue-and-groove planking and various sizes of boards, all marketed under the brand name STRUXURE®; and |
|
· |
COMPOSX™ our reprocessed polymer product line |
Our strategic focus is to (i) expand manufacturing
capacity to meet current demand for our ECOTRAX® rail ties and STRUXURE® construction and temporary road mats; (ii) further
penetrate chosen end-use markets in the railroad, transportation, and oil and gas industries; (iii) identify new applications for
our proprietary technologies based on market research and geographic segmentation; (iv) spread our exposure to risk and liability
through product stratification; and (v) expand awareness of and leveraging success in our key product categories.
During November 2013, we acquired a plastics
recycling business to bridge our transition to the manufacture of our higher margin product offerings through our ECOTRAX and STRUXURE
product lines, by providing additional revenue opportunities through the sale of reprocessed plastics, our COMPOSX product line.
In addition, this acquisition provided us the capability to procure potentially less expensive and more consistent sources of raw
materials for our engineered products, and the equipment and other facility infrastructure required to transition the reprocessing
plastics manufacturing facility to one for the production of our engineered products. For the nine months ended September 30, 2014,
we reported revenue from our two segments – the sale of our ECOTRAX and STRUXURE products and the sale of COMPOSX reprocessed
plastics. Subsequent to September 30, 2014, we do not consider the reprocessed plastic sales as a separate reporting segment as
the acquired infrastructure and equipment capacity to reprocess and sell recycled plastics has been converted to the production
of our engineered products. Any future revenue recognized from the sale of reprocessed plastics will be minimal.
Our ECOTRAX rail products line is marketed
as a solution for deterioration problems experienced by railroads globally. Our end-use applications are not unlimited, but they
are extensive. In North America where timber is relatively inexpensive, our sales efforts are directed toward what we term specialty
but large-volume applications, such as ties installed in road crossings, switches, and tunnels. In regions outside of North America,
market conditions are dissimilar. Factors such as bans on toxic preservatives, lack of availability of timber, and legislation
favoring so-called green alternatives lead to greater market adoption in more applications internationally. Our rail applications
are diverse, filling niches within a broad market spectrum within the railroad industry. Our capabilities and expertise have expanded
well beyond traditional supply to include pre-plating services, as well as whole systems, including our tunnel-tie system. We employ
sales strategies based on these factors to increase share and drive growth.
We’re currently marketing our STRUXURE®
construction mats, which are extremely strong, durable and highly resistant to degradation in service. These mats are used at field
construction sites, infrastructure expansion projects and in the oil and gas exploration industry to support heavy equipment and
to transport vehicles on unpaved, wet or soft surfaces. Our unique construction mats are experiencing a strong growth in demand,
enabling our next phase of production and product line expansion.
As we continue to commercialize our various
STRUXURE matting solutions, we will focus on expanding field installations, as well as the production and fabrication abilities
for our mats. In a recent 10-month trial comparing traditional wood mats and our mats, 100% of the STRUXURE® heavy construction
mats were intact and ready for shipment to the next jobsite while 80% of the wood mats had to be discarded and landfilled. This
trial illustrates how our construction mats are superior to traditional mats and can be rapidly deployed to new construction
sites, installed over all types of ground conditions and supports various construction vehicles. Our construction mats do not absorb
fluids, are easier to transport and minimize damage to site access, protecting existing roads. They are ideal in wet or other demanding
environments and are resistant to abrasion and tread-wear, giving them a life cycle over five times longer than traditional wood
mats.
Our products for the building and construction
markets, sold under our STRUXURE® line, have been generating exciting opportunities for us. Based on the success of our construction
mats in field performance testing, we have received a high level of interest from potential customers and distributors for this
application. Our new addition to the STRUXURE® construction mat product line, temporary road mats, offer significant additional
sales opportunities for us with potential uses at construction sites, access roads, electrical transmission projects, pipe installations
and oil and gas drilling sites. Our line of STRUXURE® construction mats has distinct advantages over wood mats in terms of
longevity, fluid absorption, economic value, disposal costs, recyclability, durability, ability to be reconditioned, job site safety
on difficult terrains and lower logistics cost expense.
Our product development strategy is straightforward:
develop valuable solutions for customers, test their value proposition across various criteria, and then commercialize the product
with well-coordinated sales, marketing and production efforts. Following the successful introduction of STRUXURE® construction
mats and the solidification of expanding ECOTRAX® rail tie opportunities, we are experiencing the need for faster transformation
of our production facilities to increase capacity. We have also diversified our technologies beyond the patented technologies developed
with Rutgers University and we are utilizing other structural polymer technologies in the development of construction mat lines
and other product extensions into infrastructure and transportation applications
For the three months ended June 30, 2015 and
2014, we recognized revenue of $3.5 million and $4.1 million, respectively, of which $3.5 million and $2.2 million for the three
months ended June 30, 2015 and 2014, respectively was attributable to our engineered products with the remainder of $1.9 million
for the three months ended June 30, 2014 attributable to our reprocessed plastics business. Revenue of our engineered products
increased during the three months ended June 30, 2015, as we continued to ship a large order of specialty rail products anticipated
to be completed during the next quarter. As we exited the reprocessed plastics business during the prior quarter, as expected our
revenue attributable to that business decreased.
For the six months ended June 30, 2015 and
2014, we recognized revenue of $5.7 million and $8.9 million, respectively, of which $5.4 million and $5.0 million, respectively
was attributable to our engineered products with the remainder for each year attributable to our reprocessed plastics business.
Costs of Sales and Operating Expenses
Costs of Sales – Production. Our
costs of sales are primarily comprised of the cost of raw materials and the costs associated with our manufacturing and production
efforts. The price of the raw materials depends principally on the stage and source of the supply. Historically, we
purchase the raw materials in various stages, from recycled plastic containers purchased in bulk, which require further processing
before use, to ready-for-production material. Typically, the more processed raw material is more expensive, on a per-pound basis,
than less processed material, but the less expensive and less processed material requires additional costs to prepare it for production.
Likewise, raw materials purchased through third-party brokers or other intermediaries are more expensive than materials purchased
directly from the source or collection point.
Our strategy to reduce our raw material costs
includes broadening our raw materials sources and purchasing other low-cost, unprocessed materials, such as other scrap materials
containing specific raw materials from unique sources and recycled materials from municipal and other recycling collection sources.
Due to the limited amount of time and personnel we can devote to raw materials sourcing, we acquire our raw materials primarily
from intermediaries, and purchase production-stage material, which results in the acquisition of raw materials at higher prices.
Dealing in the recycled plastics market, whether through intermediaries or our own bulk purchases, we will continue to encounter
increasing and decreasing prices typically seen in a commodities market. But since the cost of our raw materials is the single
largest determinant of our costs of sales in our engineered products segment, we continue (i) to expand our internal recycled plastics
processing capabilities (ii) to seek out sources of cheaper raw materials, while ensuring those materials meet or exceed our quality
standards and (iii) to expand our research and development effort of different raw materials which may provide a cost and/or performance
advantage over existing materials. We are continuing to take steps to reduce our production costs and expenses, while increasing
capacity, as necessary.
Initially, we did not own or operate the manufacturing
facilities for the production of our engineered products as we believed that our outsourced contract manufacturing model located
at facilities in Pennsylvania and Texas, provided us the business flexibility to maximize utilization of manufacturing capacity
available in the market, respond to the geographic diversity of our customers and minimize our capital requirements. The production
facilities were on direct industrial rail links or spurs, to allow for efficient product deliveries to customers and particularly
to rail customers. Flatbed and container trucks are also used to transport our products. Because of the weather-resistant properties
inherent in our products, we used outdoor storage extensively. These initial facilities supported the manufacture of large products
and were involved in the recycling business and therefore met our requirements. Under those contract manufacturing arrangements,
we designed and retained ownership of certain production equipment such as molds, manifolds or dies that were provided to our contract
manufacturers during production runs. All such production equipment is designed as component parts and can be transferred
between facilities or used interchangeably in a plug-and-play system as production needs dictate.
In late 2012, our Texas contract manufacturer
made a business decision to vacate the facility and cease producing our engineered products for us. In order to maintain production,
in early 2013 we hired a production and quality workforce to continue to operate the facility and subsequently we purchased the
production equipment and entered into a lease arrangement for the facility. At our Pennsylvania facility, we continued the third-party
contract manufacturing model into the second half of 2013, when we decided to terminate this manufacturing relationship and consolidate
all of our production at our facility in Texas. By the end of 2013, all of our engineered products production was at our leased
facility in Waco, Texas.
In November 2013, we acquired the business
assets and operations of a plastic recycling company in Ohio, which provided us the capability to procure potentially less expensive
and more consistent sources of raw materials for our engineered products, and the equipment and other facility infrastructure required
to eventually transition this reprocessing plastics manufacturing facility to supplement production of our engineered products.
During the three months ended September 30, 2014, we converted our extrusion equipment previously used in this plastics reprocessing
business to the production of our ECOTRAX® rail ties and STRUXURE® mats and building products. This facility continues
to process industrial and post-consumer recycled plastics primarily for internal use.
Our technology can be scaled to meet our manufacturing
requirements and we believe our facilities in Ohio and Texas can easily be augmented to support the current demand trajectory.
We are creating process improvements with a focus on high quality production and we continue to push advancements in our technologies
to create an even more compelling value proposition for our customers. We now have the capabilities of molded and continuous extrusion,
fabrication, structural design and internal materials processing.
For the three months ended June 30, 2015 and
2014, our costs of sales – production was $2.9 million and $5.2 million, respectively. For the three months ended June 30,
2015 and 2014, costs of sales – production for our engineered products was $2.9 million and $1.9 million, respectively with
the remaining $3.3 million for the three months ended June 30, 2014, attributable to the reprocessed plastics business. As we exited
the reprocess plastics business during the prior quarter, we did not have revenue or costs of sales – production for that
business for the three months ended June 30, 2015.
For the six months ended June 30, 2015 and
2014, our costs of sales – production was $5.4 million and $10.8 million, respectively. For the six months ended June 30,
2015 and 2014, costs of sales – production for our engineered products was $5.0 million and $4.7 million, respectively with
the remaining attributable to the reprocessed plastics business.
Costs of Sales - Excess Capacity & Inventory
Adjustments. Our production facilities in Texas and Ohio include space for additional production lines and ancillary equipment
and related services. Costs incurred associated with these facilities plus production costs incurred are aggregated during the
period and applied to the inventory produced during that period based on a standard cost per pound based on an assumption that
the facility is operating at or near capacity. Any production costs incurred in excess of this standard is charged to costs of
sales – excess capacity in the period incurred.
During the three months ended June 30, 2015
and 2014, we charged to costs of sales – excess capacity and inventory adjustments $1.4 million and $1.0 million, respectively,
relating to the excess costs and expenses incurred to provide production capacity at our facilities and certain inventory adjustments.
For the three months ended June 30, 2014, we charged $0.5 million as an adjustment to inventory to align our carrying cost with
our net realizable value. We did not have any significant adjustments for the three months ended June 30, 2015.
During the six months ended June 30, 2015 and
2014, we charged to costs of sales – excess capacity and inventory adjustments $2.5 million and $1.5 million, respectively,
relating to the excess costs and expenses incurred to provide production capacity at our facilities and certain inventory adjustments
during the three months ended June 30, 2014 as noted previously..
As we increase our production capabilities
in each facility closer to capacity and absorb the production costs incurred into our finished inventories, the excess capacity
charge to costs of sales should decrease.
Gross Margin (Loss). Gross margin (loss)
may vary significantly and are highly dependent on our ability to price our products properly, our price of raw materials, our
production capacity versus utilization and the timing and mix of our sales. Our gross margin (loss) was impacted by our all these
factors at both of our facilities, including the excess capacity within both production facilities, and still being in the early
stages of our manufacturing and commercial activities. In addition, it included, inefficient manufacturing processes and methods
and additional costs and expenses incurred to fulfill certain orders. In addition, during the six months ended June 30, 2015, we
liquidated certain products within our inventory at lower sales prices in order to induce our customers to accept shorter payment
terms to assist with our cash management.
Total costs of sales amounted to $4.3 million
and $6.2 million for the three months ended June 30, 2015 and 2014, respectively, resulting in gross margin (loss) of ($0.8) million
and ($2.1) million, respectively and are a result of the impacts discussed previously.
Product Development and Quality Management
In the past, product development and quality
management expenses were incurred as we perform oversight of our own and previously, our contract manufacturing relationships and
ongoing evaluations of materials and processes for existing engineered products, as well as the development of new products and
processes. Such expenses typically include costs associated with the design and required testing procedures associated with our
engineer product lines – ECOTRAX and STRUXURE.
For the three and six months ended June 30,
2015, costs and expenses associated with product development were minimal and quality management costs and expenses were included
in our production costs and allocated to finished inventory accordingly. Product development and quality management expenses were
$94,572 and $174,054 for the three and six months ended June 30, 2014.
Marketing and Sales
Expenses related to marketing and sales consist
primarily of compensation for our sales and marketing personnel, sales commissions and incentives, advertising, trade shows and
related travel and the effect of the minimum royalty required under our licensing agreements for certain engineered products. We
have decreased our marketing and sales effort as a result of limited resources, but we anticipate incurring significant marketing
and sales expenses in the future. The strategy we employ in reaching out to our target markets-whether through collaborative approaches,
such as joint ventures, by building our own sales and marketing infrastructure, or by sub-licensing our technology to others-will
have a significant effect on our marketing and sales expenses.
Marketing and sales expenses were $128,400
for the three months ended June 30, 2015 compared to $374,875 for the three months ended June 30, 2014. For the six months ended
June 30, 2015 and 2014, we incurred $494,568 and $675,586, respectively in marketing and sales expenses. We expect that in the
future, marketing and sales expenses will increase.
General and Administrative
General and administrative expenses consist
of compensation and related expenses for executive, finance, accounting, administrative, legal, shareholder services and other
corporate expenses. In addition, we anticipate as we continue to grow our business, our general and administrative expenses will
increase, including the effects of using share-based compensation arrangements with consultants in certain situations. As a result,
we expect that in subsequent periods, general and administrative expenses will increase in absolute dollars as revenue increases.
General and administrative costs totaled $1.5
million and $20.1 million for the three months ended June 30, 2015 and 2014, respectively. The significant difference between the
two periods was a charge resulting from the difference in the fair value of the common stock issued to affiliated shareholders,
in exchange for the warrants tendered pursuant to our tender offer we initiated during the three months ended June 30, 2014.
For the six months ended June 30, 2015 and
2014, general and administrative costs were $2.8 million and $21.1 million, respectively.
Depreciation and Amortization
For the three months ended June 30, 2015 and
2014, we recorded depreciation expense for manufacturing and production equipment as a charge to production and depreciation for
non-production equipment as a charge to general and administration expenses. As we continue to increase our production capacity,
we anticipate acquiring additional production equipment and would anticipate an increase in depreciation and amortization expenses.
Depreciation and amortization totaled $639,304
and $512,916, for the six months ended June 30, 2015 and 2014, respectively.
Other Expenses
Interest Expense. Interest expense primarily
consists of the contractual interest rate we pay on our debt instruments. Interest expense recognized during the three months ended
June 30, 2015 and 2014, was $766,371 and $457,974, respectively, and represented the contractual interest rates payable on our
debt obligations. Interest expense recognized during the six months ended June 30, 2015 and 2014, was $1.5 million and $841,631,
respectively. The increase from year to year is a result of an increase in our debt to continue to fund operations and acquire
fixed assets.
During the six months ended June 30, 2015 and
2014, we sold $4.7 million and $5.0 million of various debt securities, respectively.
Amortization of Debt Discounts. Amortization
of debt discounts consists of the periodic amortization of the debt discounts associated with our various obligations.
During the three months ended June 30, 2015
and 2014, we recognized $646,140 and $422,678, respectively, for the amortization of various debt discounts. At the time of issuance,
we recorded discounts on our debt securities primarily due to the fair value of the imbedded conversion features, the fair value
of any related warrants issued in conjunction with the securities and any costs incurred in issuing the security. These discounts
are amortized over the term of the underlying convertible security, to expense. Any unamortized discount remaining when the security
is repaid or converted is written off to expense in that period. For the three months ended March 31, 2015 and 2014, the amortization
of debt discounts primarily related to the discounts associated with our 8% convertible promissory notes.
At June 30, 2015, the unamortized discounts
for our convertible securities were approximately $3.0 million, primarily associated with our 8% convertible promissory notes.
This unamortized discount is amortized to expense over the lives of the underlying convertible securities.
Change in Fair Value of Derivative Liabilities.
Through June 30, 2015, we have issued and sold $19.6 million of our various convertible debt securities, which gives the holders
the right to convert the outstanding debt into shares of our common stock. We recorded the fair value of the conversion options
on the dates of issuance as a derivative liability and recognized that amount as a discount to our convertible debt securities.
We account for this derivative liability pursuant to ASC 815, and accordingly, we recognized gains of $363,000 and $669,000 million
for the three months ended June 30, 2015 and 2014, respectively as a change in fair value of this derivative liability which was
recognized in our statements of operations. The fair value of this derivative liability at June 30, 2015 was estimated to be $176,000.
In addition, in conjunction with the sale and
issuance of certain of these convertible debt securities, we issued warrants to purchase our common stock for which we calculated
the fair value of the warrants on the dates of issuance and recorded a derivative liability and recognized the amount as a discount
of our convertible debt securities. During the year ended December 31, 2014, pursuant to a tender offer to exchange all outstanding
warrants for shares of common stock, these warrants were tendered and therefore there was no derivative liability at June 30, 2014.
Since this derivative liability did not qualify as a fair value or cash flow hedge under ASC 815, accordingly, for the three months
ended March 31, 2014, we recognized a gain of $3.4 million as a change in fair value of this derivative liability in our statement
of operations.
We issued warrants to the placement agents
for the sale of our 10% convertible preferred stock, to purchase 58,352 shares of 10% convertible preferred stock at $10 per share.
Since at issuance, the number of shares of common stock which these warrants would be exercisable into was not determinable, we
recorded the fair value of the warrants at issuance, as a liability on our balance sheet and we re-value this warrant liability
at each reporting date, with changes in fair value recognized in earnings each reporting period. During the three months ended
June 30, 2015 and 2014, we recorded the change in fair value of this derivative liability in our statement of operations as a gain
of $52,599 and 55,518, respectively. The fair value of this derivative liability at June 30, 2015 was estimated to be $121.
Income Taxes
We have unused net operating loss carry forwards,
which included losses incurred from inception through December 31, 2014. Due to the uncertainty that sufficient future taxable
income will be recognized to realize associated deferred tax assets, no income tax benefit from inception through June 30, 2015
has been recorded.
Liquidity and Capital Resources –Six
Months Ended June 30, 2015
Our independent registered public accountants
issued an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern on our financial
statements in our Form 10-K for the years ended December 31, 2014 and 2013, based on our significant operating losses and our reliance
on and potential lack of external financing. Our financial statements do not include any adjustments that resulted from
the outcome of this uncertainty.
We are actively seeking capital, and consequently,
we have adjusted our capacity expansion projects, engaged in discussions with our industry partners, realigned manufacturing activities
based on existing customer obligations, and continue to actively manage our inventory to meet customer expectations and commitments.
We have engaged strategic, financial and legal advisors to hasten the process of developing additional sources of public or private
capital investments.
At June 30, 2015 we had $8.8 million in current
assets and $15.8 million in current liabilities resulting in a working capital deficit of $6.9 million. This compares to a working
capital deficit of $3.0 million as of December 31, 2014. Included in our current liabilities at June 30, 2015, are certain debt
securities of which $7.4 million had a maturity date of June 30, 2015 and $2.3 million has a maturity date of December 31, 2015.
Of the debt securities with a maturity date of June 30, 2015, we are in discussions with the debt security holders regarding modification
to the terms of the original debt securities. There is no assurance that we will be successful with these negotiations and that
any modifications to these debt securities will be agreed to. Our ability to pay any principal and interest on these or any other
of our debt securities and to fund our planned operations, including our accounts payable balance and other liabilities, depends
on our ability to raise capital and the success of our ongoing operating performance.
We used $3.6 million and $3.8 million in our
operating activities for the six months ended June 30, 2015 and 2014, respectively. Our net loss for the six months ended
June 30, 2015 of $6.4 million included significant impacts of several non-cash credits and charges including the effect of the
change in fair value of the derivative liabilities associated with our convertible debt securities of a credit in our statement
of operations for $1.9 million which was offset by several charges to other expenses aggregating $2.1 million consisting primarily
of amortization of several debt discounts and payment for interest via stock-based methods .
Even though we reduced our production activities
due to our liquidity situation, during the six months ended June 30, 2015 we purchased $944,466 of equipment. If we expand production
capacity in the future, we would anticipate purchasing additional production equipment.
During six months ended June 30, 2015, we issued
and sold to certain investors an aggregate principal amount of $4.7 million of our various debt securities. At June 30, 2015, we
had $37.0 million in principal amount of debt securities and bank loans. Interest accrues on these obligations at various rates
of interest, for which with certain debt or loans require the payment of interest in cash and others in shares of common stock.
As noted previously, $7.4 million of these debt securities matured on June 30, 2015 and an additional $2.3 million will mature
on December 31, 2015.
During the six months ended June 30, 2015,
we repaid principal under the terms of a loan from a governmental organization in the amount of $43,642.
At June 30, 2015, we had $6.8 million of our
10% convertible preferred stock outstanding of which $6.1 million may not be redeemed by the holder until after December 31, 2016,
pursuant to an agreement entered into between the Company and the preferred stock holders. Due to our current financial condition,
Colorado law has not allowed us to redeem the balance if so requested by the preferred stock holder. Pursuant to the terms of the
10% convertible preferred stock, to date we have elected to pay our quarterly dividends in shares of our common stock, rather than
in cash. Whether or not we make the same election for future quarters will have an impact on our cash balances.
Our ability to pay principal and interest on
our various debt securities and bank loans which total $37.0 million at June 30, 2015, and to fund our planned operations, including
certain minimum royalties pursuant to our license agreement with Rutgers University, depends on our ability to raise capital and
our future operating performance. The timing and amount of our financing needs will be highly dependent on our ability to manufacture
our products at a cost which provides for an appropriate return, the success of our sales and marketing programs, our ability to
obtain purchase commitments, the size of such purchase commitments and any associated working capital requirements.
At June 30, 2015, we had a working capital
deficit of $6.9 million, cumulative face value of redeemable preferred stock and various debt instruments of $43.8 million, a stockholders’
deficit of $27.6 million and have accumulated losses to date of $82.0 million. This raises substantial doubt about our
ability to continue as a going concern. In view of these matters, realization of certain of the assets in the accompanying
balance sheet is dependent upon our ability to meet our financing requirements, raise additional capital, and the success of our
business plan and future operations. Our current operating plans are to (i) negotiate the maturity and other terms of certain
debt securities, (ii) raise capital to fund operations, and to enhance and expand our manufacturing capacity when necessary to
meet our customer commitments, (iii) continue to expand our marketing and sales capabilities to increase our pipeline of sales
orders, and (iv) continue to develop innovative solutions for our customers. Although we have raised additional funds through
the issuance of our various convertible promissory notes and other debt instruments, we continue exploring additional financing
sources and there can be no assurance that we will achieve our financing needs at all or upon terms acceptable to us. Further,
if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities
may have rights, preferences or privileges senior to those of existing holders of our common stock.
Disclosure About Off-Balance Sheet Arrangements
We do not have any transactions, agreements
or other contractual arrangements that constitute off-balance sheet arrangements.
Item 3. Quantitative and Qualitative
Disclosures About Market Risks.
Not applicable.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and
procedures.
With the participation of our principal executive
officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule
13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, we recognize that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints
and that we are required to apply our judgment in evaluating the benefits of possible controls and procedures relative to their
costs.
Based on our evaluation, our principal
executive officer and principal financial officer concluded that, as a result of the material weakness described below, as of June
30, 2015, we did not maintain effective internal control over financial reporting, based on criteria issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The material weaknesses, which relate to internal control over financial
reporting, that were identified are:
(i) |
We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with the complexity of our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting regarding complex financial instruments. As a result, there is a reasonable possibility that material misstatements of the consolidated financial statements, including disclosures, will not be prevented or detected on a timely basis. |
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(ii) |
Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting and other accounting processes and procedures. This control deficiency results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis. |
We are committed to improving our financial
organization, and we continue to adopt additional processes and procedures over financial reporting. If the issuance of any securities
is contemplated, we will consult with legal counsel and appropriate accounting resources to evaluate the financial statement impact
that the issuance of such financial instruments may have prior to issuance. Additional measures may be implemented as we evaluate
the effectiveness of these efforts. We cannot assure you that these remediation efforts will be successful or that our
internal control over financial reporting will be effective in accomplishing the control objectives.
The relocation of our accounting and administrative
functions in 2014 to our facility in Ohio, has allowed for the proper segregation of duties and provided more checks and balances
within the department. The additional accounting and administrative personnel will continue to allow for the cross training needed
to support us if personnel turn-over occurs within the department. We believe this will greatly decrease any control and procedure
issues we may encounter in the future.
In addition, we will continue to evaluate the
need and costs to increase our personnel resources and technical accounting expertise within the accounting function to resolve
non-routine or complex accounting matters. As our operations are relatively small and we continue to have net cash losses
each quarter, we do not anticipate being able to hire additional internal personnel until such time as our operations are profitable
on a cash basis or until our operations are large enough to justify the hiring of additional accounting personnel. As necessary,
we may engage consultants in the future in order to ensure proper accounting for our consolidated financial statements.
We believe that engaging additional knowledgeable
personnel with specific technical accounting expertise will remedy the following material weakness: insufficient personnel with
an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our
complexity and our financial accounting and reporting requirements.
We believe that, when the circumstances allow,
the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical accounting
issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable
finance department as a whole. Due to the fact that we have a limited internal accounting staff, additional personnel will also
allow for the proper segregation of duties and provide more checks and balances within the department. Additional personnel will
also provide the cross training needed to support us if personnel turn-over occurs within the department. We believe this will
greatly decrease any control and procedure issues we may encounter in the future.
(b) Changes in internal control over financial
reporting.
We regularly review our system of internal control over financial
reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain
an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating
activities, and migrating processes. There were no changes in our internal control over financial reporting that occurred during
the three or six months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Unregistered Sales of Securities and Use of Proceeds.
During January 2015, we issued 357,561 shares
of common stock as payment of our dividends on our 10% convertible preferred stock, in lieu of cash, with a fair value on the date
of issue of $143,024.
During January 2015, we issued 678,825 shares
of common stock as payment of our interest on our 8% convertible notes, in lieu of cash, with a fair value on the date of issue
of $271,530.
During January 2015, we issued 81,648 shares
of common stock as payment of our interest on our 12% revolving credit agreement, in lieu of cash, with a fair value on the date
of issue of $32,659.
During January 2015, we issued 1,667 shares
of common stock to a consultant pursuant to terms of an agreement, with a fair value on the date of issue of $600.
During February 2015, we issued 1,666 shares
of common stock to a consultant pursuant to terms of an agreement, with a fair value on the date of issue of $550.
During February 2015, we issued 303,031 shares
of common stock to a consultant pursuant to terms of an agreement, with a fair value on the date of issue of $100,000.
During March 2015, we issued 1,667 shares of
common stock to a consultant pursuant to terms of an agreement, with a fair value on the date of issue of $468.
During July 2015, we issued 557,856 shares
of common stock as payment of our dividends on our 10% convertible preferred stock, in lieu of cash, with a fair value on the date
of issue of $172,935.
During July 2015, we issued 1,121,256 shares
of common stock as payment of our interest on our 8% convertible notes, in lieu of cash, with a fair value on the date of issue
of $347,589.
During July 2015, we issued 134,862 shares
of common stock as payment of our interest on our 12% revolving credit agreement, in lieu of cash, with a fair value on the date
of issue of $41,807.
We relied upon Section 4(2) of the Securities
Act and Regulation D under the Securities Act in connection with the issuance of the above described securities.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
(Not Applicable)
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibits: |
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31.1 |
Section 302 Certification of Chief Executive Officer |
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31.2 |
Section 302 Certification of Principal Financial Officer |
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32.1 |
Section 906 Certification of Chief Executive Officer and Chief Financial Officer |
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101.INS |
XBRL Instance Document |
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101.SCH |
XBRL Taxonomy Extension Schema Document |
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101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
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.
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Axion International Holdings, Inc. |
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Date: August 14, 2015 |
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/s/ Claude Brown |
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Claude Brown |
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Chief Executive Officer |
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Date: August 14, 2015 |
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/s/ Donald Fallon |
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Donald Fallon |
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Chief Financial Officer |
Exhibit 31.1
Certifications pursuant to Securities and Exchange Act of 1934
Rule 13a-14 as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002:
I, Claude Brown, certify that:
1. I have reviewed our Quarterly Report on
Form 10-Q of Axion International Holdings 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.
Date: August 14, 2015 |
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/s/ Claude Brown |
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Claude Brown, |
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Chief Executive Officer |
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Exhibit 31.2
Certifications pursuant to Securities and Exchange Act of 1934
Rule 13a-14 as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002:
I, Donald Fallon, certify that:
1. I have reviewed our Quarterly Report on
Form 10-Q of Axion International Holdings 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.
Date: August 14, 2015 |
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/s/ Donald Fallon |
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Donald Fallon, |
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Chief Financial Officer |
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Exhibit 32.1
CERTIFICATIONS OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection
with the Quarterly Report of Axion International Holdings, Inc. (the Company”) on Form 10-Q for the three months ended June
30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the Report”), Claude Brown, President and
Chief Executive Officer of the Company, and Donald Fallon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our best knowledge:
1. The Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 14, 2015 |
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/s/ Claude Brown |
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Claude Brown |
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President and Chief Executive Officer |
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Date: August 14, 2015 |
/s/ Donald Fallon |
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Donald Fallon |
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Chief Financial Officer |