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 September
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 x No
¨
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 November 13, 2015 was 67,484,214.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
| |
September 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
(Unaudited) | | |
| |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 153,087 | | |
$ | 221,437 | |
Accounts receivable, net of allowance | |
| 1,121,112 | | |
| 1,109,524 | |
Inventories | |
| 3,987,870 | | |
| 5,980,457 | |
Prepaid expenses | |
| 127,252 | | |
| 294,053 | |
Total current assets | |
| 5,389,321 | | |
| 7,605,471 | |
| |
| | | |
| | |
Property and equipment, net | |
| 8,660,157 | | |
| 8,678,932 | |
Goodwill | |
| 1,492,132 | | |
| 1,492,132 | |
Total assets | |
$ | 15,541,610 | | |
$ | 17,776,535 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 2,836,521 | | |
$ | 2,417,803 | |
Accrued liabilities | |
| 2,489,436 | | |
| 1,161,120 | |
Customer deposits | |
| 98,050 | | |
| - | |
Derivative liabilities | |
| 176,000 | | |
| 2,053,000 | |
12% convertible promissory notes | |
| 1,000,000 | | |
| 965,838 | |
12% revolving credit agreement, net of discounts | |
| 2,295,670 | | |
| 1,907,957 | |
12% secured notes | |
| 6,394,664 | | |
| 1,950,000 | |
Current portion of long term debt | |
| 189,942 | | |
| 187,943 | |
Total current liabilities | |
| 15,480,283 | | |
| 10,643,661 | |
| |
| | | |
| | |
8% convertible promissory notes, net of discounts | |
| 16,242,253 | | |
| 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 | |
| 124,192 | | |
| 191,900 | |
Dividends payable on 10% convertible preferred stock | |
| 82,272 | | |
| 143,024 | |
Fair value of 10% convertible preferred stock warrants | |
| 121 | | |
| 52,720 | |
Total liabilities | |
| 40,229,121 | | |
| 33,725,051 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
10% convertible preferred stock, no par value; authorized 880,000 shares; 682,998 shares issued and outstanding at September 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; 75,474,892 and 70,825,215 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively | |
| 54,640,554 | | |
| 52,780,363 | |
Accumulated deficit | |
| (86,158,045 | ) | |
| (75,558,859 | ) |
Total stockholders' deficit | |
| (31,517,491 | ) | |
| (22,778,496 | ) |
Total liabilities and stockholders' deficit | |
$ | 15,541,610 | | |
$ | 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 SEPTEMBER
30, 2015 AND 2014
(Unaudited)
| |
2015 | | |
2014 | |
| |
| | |
| |
Revenue | |
$ | 3,534,210 | | |
$ | 3,122,912 | |
Costs of sales: | |
| | | |
| | |
Production | |
| 3,594,367 | | |
| 3,902,250 | |
Excess capacity & inventory adjustments | |
| 1,380,448 | | |
| 369,806 | |
Gross margin (loss) | |
| (1,440,605 | ) | |
| (1,149,144 | ) |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
Product development and quality management | |
| - | | |
| 52,219 | |
Marketing and sales | |
| 156,043 | | |
| 126,047 | |
General and administrative | |
| 1,235,392 | | |
| 1,069,672 | |
Impairment of intangible assets | |
| - | | |
| 545,750 | |
Total operating expenses | |
| 1,391,435 | | |
| 1,793,688 | |
| |
| | | |
| | |
Loss from operations | |
| (2,832,040 | ) | |
| (2,942,832 | ) |
| |
| | | |
| | |
Other (income) expenses: | |
| | | |
| | |
Interest expense | |
| 779,122 | | |
| 478,496 | |
Amortization of debt discount | |
| 581,260 | | |
| 1,196,807 | |
Fair value of common shares issued in excess of fair value of warrants tendered | |
| - | | |
| (54 | ) |
Change in fair value of derivative liabilities | |
| - | | |
| (7,337,983 | ) |
Total other expense (income) | |
| 1,360,382 | | |
| (5,662,734 | ) |
| |
| | | |
| | |
Net income (loss) | |
| (4,192,422 | ) | |
| 2,719,902 | |
Accretion of preferred stock dividends | |
| (82,272 | ) | |
| (152,237 | ) |
Net (loss) income attributable to common shareholders | |
$ | (4,274,694 | ) | |
$ | 2,567,665 | |
| |
| | | |
| | |
Weighted average common shares – | |
| | | |
| | |
Basic | |
| 75,459,570 | | |
| 69,066,096 | |
Diluted | |
| 75,459,570 | | |
| 127,971,683 | |
Net income (loss) per share – | |
| | | |
| | |
Basic | |
$ | (0.06 | ) | |
$ | 0.04 | |
Diluted | |
| (0.06 | ) | |
| 0.02 | |
(See accompanying notes to the unaudited
consolidated financial statements.)
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2015 AND 2014
(Unaudited)
| |
2015 | | |
2014 | |
| |
| | |
| |
Revenue | |
$ | 9,305,631 | | |
$ | 12,027,909 | |
Costs of sales: | |
| | | |
| | |
Production | |
| 8,979,008 | | |
| 14,718,367 | |
Excess capacity & inventory adjustments | |
| 3,914,434 | | |
| 1,829,700 | |
Gross margin (loss) | |
| (3,587,811 | ) | |
| (4,520,158 | ) |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
Product development and quality management | |
| - | | |
| 226,273 | |
Marketing and sales | |
| 650,611 | | |
| 801,633 | |
General and administrative | |
| 4,058,883 | | |
| 22,175,376 | |
Impairment of intangible assets | |
| - | | |
| 545,750 | |
Total operating expenses | |
| 4,709,494 | | |
| 23,749,032 | |
| |
| | | |
| | |
Loss from operations | |
| (8,297,305 | ) | |
| (28,269,190 | ) |
| |
| | | |
| | |
Other (income) expenses: | |
| | | |
| | |
Interest expense | |
| 2,261,098 | | |
| 1,320,127 | |
Amortization of debt discount | |
| 1,970,382 | | |
| 2,055,894 | |
Fair value of common shares issued in excess of fair value of warrants tendered | |
| - | | |
| 883,422 | |
Change in fair value of derivative liabilities | |
| (1,929,599 | ) | |
| (18,385,978 | ) |
Total other (income) expense | |
| 2,301,881 | | |
| (14,126,535 | ) |
| |
| | | |
| | |
Net loss | |
| (10,599,186 | ) | |
| (14,142,655 | ) |
Accretion of preferred stock dividends and beneficial conversion feature | |
| (424,364 | ) | |
| (717,615 | ) |
Net loss attributable to common shareholders | |
$ | (11,023,550 | ) | |
$ | (14,860,270 | ) |
| |
| | | |
| | |
Weighted average common shares – basic and diluted | |
| 73,868,089 | | |
| 46,382,952 | |
Net loss per share – basic and diluted | |
$ | (0.15 | ) | |
$ | (0.32 | ) |
(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
SEPTEMBER 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 | |
| 2,325,055 | | |
| 485,116 | | |
| | | |
| 485,116 | |
Shares issued for interest payments | |
| 2,016,591 | | |
| 693,585 | | |
| | | |
| 693,585 | |
Share-based compensation | |
| 308,031 | | |
| 1,105,854 | | |
| | | |
| 1,105,854 | |
Dividend on 10% convertible preferred stock | |
| | | |
| (424,364 | ) | |
| | | |
| (424,364 | ) |
Net loss | |
| | | |
| | | |
| (10,599,186 | ) | |
| (10,599,186 | ) |
| |
| | | |
| | | |
| | | |
| | |
Balance, September 30, 2015 | |
| 75,474,892 | | |
$ | 54,640,554 | | |
$ | (86,158,045 | ) | |
$ | (31,517,491 | ) |
(See accompanying notes to the unaudited
consolidated financial statements.)
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2015 AND 2014
(Unaudited)
| |
2015 | | |
2014 | |
Cash flow from operating activities: | |
| | | |
| | |
Net loss | |
$ | (10,599,186 | ) | |
$ | (14,142,655 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 964,257 | | |
| 781,232 | |
Amortization of identifiable intangible assets | |
| - | | |
| 59,250 | |
Amortization of debt discounts | |
| 1,970,382 | | |
| 2,055,894 | |
Change in fair value of derivative liabilities | |
| (1,877,000 | ) | |
| (18,142,504 | ) |
Change in fair value of 10% convertible preferred stock warrants | |
| (52,599 | ) | |
| (243,474 | ) |
Change in allowance for doubtful accounts | |
| 58,418 | | |
| 74,025 | |
Interest expense paid in shares of common stock | |
| 693,585 | | |
| 1,069,537 | |
Share-based compensation | |
| 1,105,854 | | |
| 666,601 | |
Fair value of common stock issued in excess of fair value of warrants tendered | |
| - | | |
| 19,957,800 | |
Impairment of intangible assets | |
| - | | |
| 545,750 | |
Changes in operating assets and liability: | |
| | | |
| | |
Accounts receivable | |
| (70,006 | ) | |
| (274,369 | ) |
Inventories | |
| 1,992,587 | | |
| (569,735 | ) |
Prepaid expenses and deposits | |
| 166,801 | | |
| 74,928 | |
Accounts payable | |
| 418,718 | | |
| (38,237 | ) |
Accrued liabilities | |
| 1,328,316 | | |
| 675,695 | |
Customer deposits | |
| 98,050 | | |
| - | |
Net cash used in operating activities | |
| (3,801,823 | ) | |
| (7,450,262 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of property and equipment | |
| (945,482 | ) | |
| (1,105,716 | ) |
Net cash used in investing activities | |
| (945,482 | ) | |
| (1,105,716 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from issuance of 8% convertible promissory notes, net | |
| - | | |
| 5,527,951 | |
Proceeds from 12% revolving credit facility | |
| 300,000 | | |
| - | |
Proceeds from 12% convertible promissory notes | |
| - | | |
| 1,000,000 | |
Proceeds from 12% secured notes | |
| 4,444,664 | | |
| - | |
Proceeds from 5% bank term loan | |
| - | | |
| 4,000,000 | |
Repayments of other debt | |
| (65,709 | ) | |
| (84,053 | ) |
Net cash provided by financing activities | |
| 4,678,955 | | |
| 10,443,898 | |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (68,350 | ) | |
| 1,887,920 | |
Cash and cash equivalents at beginning of period | |
| 221,437 | | |
| 883,936 | |
Cash and cash equivalents at end of period | |
$ | 153,087 | | |
$ | 2,771,856 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | 580,061 | | |
$ | 221,824 | |
Non-cash investing and financing activities: | |
| | | |
| | |
Dividends on 10% convertible preferred stock | |
| 424,364 | | |
| 496,229 | |
Conversion of 10% convertible preferred stock | |
| - | | |
| 116,250 | |
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 | |
| - | | |
| 4,544,139 | |
Fair value of common stock issued in exchange for warrants tendered and cancelled | |
| - | | |
| 24,824,069 | |
(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. 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 nine months ended September 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 September 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 nine months ended September 30, 2015, we established an allowance for certain receivables in the amount of $121,408 and wrote
off certain other receivables which had previously been reserved for in the amount of $62,990. At September 30, 2015 and December
31, 2014 our reserve for uncollectable accounts receivables was $69,208 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:
| |
September 30, 2015 | | |
December 31, 2014 | |
Office furniture and equipment | |
$ | 112,049 | | |
$ | 110,173 | |
Machinery and equipment | |
| 11,503,999 | | |
| 10,560,393 | |
Purchased software | |
| 147,547 | | |
| 147,547 | |
Subtotal – property and equipment, at cost | |
| 11,763,595 | | |
| 10,818,113 | |
Less accumulated depreciation | |
| (3,103,438 | ) | |
| (2,139,181 | ) |
Net property and equipment | |
$ | 8,660,157 | | |
$ | 8,678,932 | |
Depreciation expense charged to
production costs and operating expenses during the three and nine months ended September 30, 2015 was $324,953 and $964,257,
respectively. For the three and nine months ended September 30, 2014, depreciation expense charged to production costs and
income was $268,316 and $781,232, respectively.
In accordance with the FASB ASC 360 “Impairment and Disposal of Long-Lived Assets”, long-lived
assets such as property and equipment that is held and used should be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the long-lived assets might not be recoverable and information indicates that an impairment
might exist. As discussed in (g) below, we have determined that our year to date 2015 financial results indicate that an impairment
might exist. In connection with our review of potential goodwill impairment, we are also evaluating our property and equipment
for potential impairment. We have engaged a third party to evaluate and determine whether impairments exist and the carrying values
of our tangible assets and goodwill should be adjusted accordingly. However, that evaluation is in process and not complete. We
will complete this evaluation prior to December 31, 2015.
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 since 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). The Rutgers patents
have limited remaining lives and will start expiring in 2016. 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 us to
market our products in countries licensed to others in which patents have not been filed, such as Australia and New Zealand.
We continue to pursue a resolution of these license issues with Rutgers. In the event these issues cannot be resolved to our
satisfaction or that of Rutgers, we may be forced to pursue legal action to enforce our rights under the license.
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 September 30, 2015 and 2014 were both $50,000. Likewise, for the nine months ended September 30, 2015
and 2014, royalties payable to Rutgers were both $100,000.
(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.
(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.
Additionally, based on our year
to date financial results in 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 September 30, 2015 and December 31,
2014. We have engaged a third party to evaluate and determine whether impairments exist and the carrying value of our
tangible assets and goodwill should be adjusted accordingly. However, the evaluation is in process and not complete. We will
complete this evaluation prior to December 31, 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. 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 and capacity utilized for 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 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
warranty 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 nine months ended September 30, 2015 there was no dilutive effects of such
securities as we incurred a net loss for the periods.
The following table sets forth the computation
of basic and diluted earnings per share for the three months ended September 30, 2014:
Numerator for basic earnings per share calculation - income attributable to common shareholders | |
$ | 2,567,665 | |
Interest on various convertible promissory notes | |
| 361,414 | |
Dividends for 10% convertible preferred stock | |
| 152,237 | |
Numerator for diluted earnings per share calculation - income attributable to common shareholders | |
$ | 3,081,316 | |
| |
| | |
Denominator for basic earnings per share - weighted-average shares outstanding | |
| 69,066,096 | |
Incremental shares attributable to: | |
| | |
Options and warrants | |
| 194,762 | |
Various convertible promissory notes | |
| 50,360,850 | |
10% convertible preferred stock | |
| 8,349,975 | |
Denominator for diluted earnings per share | |
| 127,971,683 | |
| |
| | |
Basic earnings per share | |
$ | 0.04 | |
| |
| | |
Diluted earnings per share | |
$ | 0.02 | |
For the nine months ended September 30,
2014 there was no dilutive effects of such securities as we incurred a net loss for the 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 at a major U.S. domestic
bank. The amount held in the bank exceeds the insured limit of $250,000 from time to time. We have not incurred losses related
to these deposits.
At September 30, 2015, three of our customers
had unpaid accounts due us representing 26%, 26%, and 15% of our accounts receivable balance at September 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 September 30, 2015, we had a working capital deficit of $10.1 million, a stockholders’
deficit of $31.5 million and have accumulated losses to date of $86.2 million.
Subsequent to September 30, 2015, we entered
into an agreement with certain debt holders and investors whereby the investors agreed to sell back to us an aggregate of $19.7
million at a nominal price to facilitate our ability to restructure our balance sheet and raise additional capital. After this
debt cancellation, $2.4 million of our 12% secured notes and $0.3 million of our 12% convertible promissory notes, were due on
June 30, 2015 and are due upon demand by the noteholders (see Note 6). Our recurring losses from operations, negative operating
cash flows and working capital deficits, raise 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. Over the past
six months, we have engaged strategic, financial and legal advisors to assist us in raising additional capital. As
of the date of this Form 10-Q, there are no probable options available to us for such capital and our sole source of cash is from
operations which is insufficient to maintain our operations and meet our obligations. For this reason, we soon may
be forced to further curtail manufacturing activities and/or file for bankruptcy protection.
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:
| |
September 30, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
Finished products | |
$ | 3,649,937 | | |
$ | 5,202,608 | |
Production materials | |
| 337,933 | | |
| 777,849 | |
Total inventories | |
$ | 3,987,870 | | |
$ | 5,980,457 | |
Note 4 - Accrued Liabilities
The components of accrued liabilities are:
| |
September 30, 2015 | | |
December 31, 2014 | |
Interest | |
$ | 1,467,962 | | |
$ | 398,157 | |
Rent | |
| 516,410 | | |
| 335,096 | |
Payroll | |
| 121,926 | | |
| 127,635 | |
Royalties | |
| 159,305 | | |
| 132,593 | |
Real estate taxes | |
| 155,106 | | |
| 92,549 | |
Board of director fees | |
| 62,500 | | |
| 31,000 | |
Miscellaneous | |
| 6,227 | | |
| 44,090 | |
Total accrued liabilities | |
$ | 2,489,436 | | |
$ | 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 September
30, 2015 was insignificant. The $2.0 million decrease in the fair value of the conversion option derivative liability during
the nine months ended September 30, 2015, 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 September 30, 2015 was $176,000. The $107,000 increase in the fair value of this derivative
liability during the nine months ended September 30, 2015 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 September 30, 2015 were computed by a third party using Monte Carlo simulations based on the following ranges for each assumption:
| |
At Issuances | | |
September 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
September 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 September 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 September 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 September 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 September 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 nine months ended September 30, 2015 and 2014:
| |
For the Three Months Ended September 30, 2015 | |
| |
| | |
Fair Value | | |
| | |
| |
| |
Balance - July 1, | | |
of Derivative | | |
Change in | | |
Balance - September 30, | |
| |
2015 | | |
Liability | | |
Fair Value | | |
2015 | |
| |
| | |
| | |
| | |
| |
8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
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 | |
| |
For the Nine Months Ended September 30, 2015 | |
| |
| | |
Fair Value | | |
| | |
| |
| |
Balance - January 1, | | |
of Derivative | | |
Change in | | |
Balance - September 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 September 30, 2014 | |
| |
| | |
Fair Value | | |
| | |
| |
| |
Balance - July 1, | | |
of Derivative | | |
Change in | | |
Balance - September 30, | |
| |
2014 | | |
Liability | | |
Fair Value | | |
2014 | |
| |
| | |
| | |
| | |
| |
8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
$ | 10,695,000 | | |
$ | 402,000 | | |
$ | (7,225,000 | ) | |
$ | 3,872,000 | |
Warrants | |
| - | | |
| - | | |
| - | | |
| - | |
12% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
| - | | |
| 157,000 | | |
| (46,000 | ) | |
| 111,000 | |
Derivative liabilities - Current | |
| 10,695,000 | | |
| 559,000 | | |
| (7,271,000 | ) | |
| 3,983,000 | |
Placement agent warrants - Non-current | |
| 119,703 | | |
| - | | |
| (66,983 | ) | |
| 52,720 | |
Derivative liabilities - Total | |
$ | 10,814,703 | | |
$ | 559,000 | | |
$ | (7,337,983 | ) | |
$ | 4,035,720 | |
| |
For the nine Months Ended September 30, 2014 | |
| |
| | |
Fair Value | | |
| | |
| |
| |
Balance - January 1, | | |
of Derivative | | |
Change in | | |
Balance - September 30, | |
| |
2014 | | |
Liability | | |
Fair Value | | |
2014 | |
| |
| | |
| | |
| | |
| |
8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
$ | 12,400,000 | | |
$ | 4,387,139 | | |
$ | (12,915,139 | ) | |
$ | 3,872,000 | |
Warrants | |
| 4,790,000 | | |
| 391,365 | | |
| (5,181,365 | ) | |
| - | |
12% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
Conversion option | |
| - | | |
| 157,000 | | |
| (46,000 | ) | |
| 111,000 | |
Derivative liabilities - Current | |
| 17,190,000 | | |
| 4,935,504 | | |
| (18,142,504 | ) | |
| 3,983,000 | |
Placement agent warrants - Non-current | |
| 296,194 | | |
| - | | |
| (243,474 | ) | |
| 52,720 | |
Derivative liabilities - Total | |
$ | 17,486,194 | | |
$ | 4,935,504 | | |
$ | (18,385,978 | ) | |
$ | 4,035,720 | |
Note 6 - Debt
The components of our debt are summarized as follows:
| |
Due | |
September 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 | |
| 214,134 | | |
| 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 | |
(on demand) | |
| 1,000,000 | | |
| 1,000,000 | |
5% bank promissory note | |
September 18, 2017 | |
| 4,000,000 | | |
| 4,000,000 | |
12% secured notes | |
(on demand) | |
| 6,394,664 | | |
| 1,950,000 | |
Subtotal | |
| |
| 36,936,986 | | |
| 32,258,031 | |
Less debt discount | |
| |
| (2,390,265 | ) | |
| (4,360,647 | ) |
Subtotal – net of debt discount | |
| |
| 34,546,721 | | |
| 27,897,384 | |
Less current portion | |
| |
| (9,880,276 | ) | |
| (5,011,738 | ) |
Total – long term debt | |
| |
$ | 24,666,445 | | |
$ | 22,885,646 | |
8% Convertible Promissory Notes (2012)
Through March 31, 2014, 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 September 30, 2015 and 2014 was $339,954 and $316,300, respectively. For the nine months ended September 30,
2015 and 2014, interest expense was $1,023,802 and $922,198, respectively. Accrued interest at September 30, 2015 and
December 31, 2014 was $676,213 and $271,530, respectively.
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 September 30, 2015, and 2014 we amortized $326,497 and $1.1 million, respectively
of the discount to other expenses in our statement of operations. During the nine months ended September 30, 2015 and 2014, we
amortized $1.1 million and $1.9 million, respectively. At September 30, 2015, the unamortized discount was $1.4 million. See Note
5 for further discussion of these derivative liabilities.
Subsequent to September 30, 2015, we entered
into an agreement with certain of the Investors whereby they agreed to sell back to us an aggregate of $11.4 million of the 2012
Notes at a nominal price to facilitate our ability to restructure our balance sheet and raise additional capital.
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
September 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 now outstanding borrowings under this Revolving Loan
Agreement in the total amount of $300,000. Letters of credit, aggregating $140,000, remain outstanding at September 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 September 30, 2015 and 2014 was $64,333 and $58,489. For the nine months ended September 30, 2015 and 2014, interest
expense was $182,497 and $186,827, respectively.
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 September 30, 2015 and 2014, we amortized $17,072 and $23,423,
respectively of the discount to other expenses in our statement of operations. For the nine months ended September 30, 2015 and
2014, we amortized $87,713 and $120,343, respectively.
Subsequent to September 30, 2015, we
entered into an agreement with the Lenders whereby they agreed to sell back to us an aggregate of $2.3 million of the
obligations outstanding under the Revolving Loan Agreement at a nominal price to facilitate our ability to restructure our
balance sheet and raise additional capital.
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”). 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 $214,134 as of September 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
September 30, 2015 and 2014 of $1,716 and $2,368, respectively and for the nine months ended September 30, 2015 and 2014 of $5,642
and $7,582, 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
September 30, 2015 and 2014 of $47,800 and $48,875, respectively and for the nine months ended September 30, 2015 and 2014 of $142,362
and $145,563, 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 nine months ended September 30, 2015, we amortized
$237,691 and $778,771, respectively of the discount to other expenses in our statement of operations. At September 30, 2015, the
unamortized discount was $1.0 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 nine
months ended September 30, 2015 was $40,889 and $127,644, respectively and the corresponding periods for 2014 was $36,741 and $43,185,
respectively and was paid in cash.
Subsequent to September 30, 2015, we entered
into an agreement with certain of the Investors whereby they agreed to sell back to us an aggregate of $1.3 million of the 2014
Notes at a nominal price to facilitate our ability to restructure our balance sheet and raise additional capital.
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 fair values at issuances of
the conversion option derivative liability were recorded as a discount to the 12% Notes. This debt discount was amortized
to other expenses in our statement of operations over the initial term of the 12% Notes and was fully amortized on June
30, 2015. During the nine months ended September 30, 2015, and 2014 we amortized $34,162 and $38,800, respectively of
the discount to other expenses in our statement of operations. During the three months ended September 30, 2014 we amortized
$84,038. See Note 5 for further discussion of these derivative liabilities.
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 nine months ended September 30, 2015 was $30,667 and
$91,000, respectively and was paid in cash.
Subsequent to September 30, 2015, we entered
into an agreement with certain of the Investors whereby they agreed to sell back to us an aggregate of $666,666 of the 12% Notes
at a nominal price to facilitate our ability to restructure our balance sheet and raise additional capital.
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
nine months ended September 30, 2015 of $51,111 and $151,667, respectively was paid in cash. For the three and nine months
ended September 30, 2014, interest expense of $6,111 was paid in cash.
12% Secured Notes
Through February 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.
Interest accrues on the 12% Secured Notes
at a rate of 12% per annum. Interest expense for the three and nine months ended September 30, 2015 was $196,103 and $529,244,
respectively and to be paid in cash, at maturity.
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.
Subsequent to September 30, 2015, we entered
into an agreement with certain of the Investors whereby they agreed to sell back to us an aggregate of $3,966,776 of the 12% Secured
Notes at a nominal price to facilitate our ability to restructure our balance sheet and raise additional capital.
Note 7 - 10% Convertible Redeemable
Preferred Stock
Our 10% convertible preferred
stock, classified as temporary equity in our balance sheet, was $6,829,980 at September 30, 2015 and December 31, 2014.
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 nine months ended September 30, 2015. During the three and nine months ended September 30, 2014, we issued 116,250
shares of our common stock upon conversion of 11,625 shares of our Preferred Stock.
The Preferred Stock outstanding at September
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 September 30, 2015 of $82,272 was paid,
in lieu of cash, with 1,028,401 shares of common stock, which were issued subsequent to September 30, 2015.
Subsequent to September 30, 2015, we entered
into an agreement with certain holders of our Preferred Stock whereby they agreed to sell back to us an aggregate of 275,000 shares
at a nominal price to facilitate our ability to restructure our balance sheet and raise additional capital.
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 75,474,892 and 70,825,215
shares of common stock issued and outstanding at September 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 September 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 Nine
Months Ended September 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 April 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 April 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 April 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.
During July 2015, we issued 1,409,638 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 $169,157.
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 nine months ended September
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 vested 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, certain options that we amortize over multiple vesting periods, where amortized over the nine
months ended September 30, 2015 and we charged to operating expenses $44,339 during the nine months ended September 30, 2015.
During the three months ended September
30, 2015, the board of directors approved a modification to the exercise price of certain outstanding options, resetting those
exercise prices to the closing price of the stock on the date of board approval. The effect of this modification was an increase
of $172,761 to the fair value of those options when compared to the unmodified options immediately before the modification. During
the three months ended September 30, 2015, we charged $159,069 of this increase to operations with the remainder amortized over
the vesting period through November 2016.
The following table summarizes our stock
option activity for the nine months ended September 30, 2015:
| |
| | |
Weighted- | |
| |
Number | | |
Average | |
| |
of Shares | | |
Exercise | |
| |
Issuable | | |
Price | |
| |
| | |
| |
Balance, January 1, 2015 | |
| 4,128,128 | | |
$ | 1.04 | |
Granted | |
| 3,900,000 | | |
| 0.10 | |
Exercised | |
| - | | |
| - | |
Cancelled | |
| (488,128 | ) | |
| 0.57 | |
Balance, September 30, 2015 | |
| 7,540,000 | | |
$ | 0.20 | |
The following table summarizes options
outstanding at September 30, 2015:
| |
| | |
| | |
Weighted- | | |
| |
| |
| | |
Weighted- | | |
Average | | |
| |
| |
Number | | |
Average | | |
Remaining | | |
Aggregate | |
| |
of Shares | | |
Exercise | | |
Term | | |
Intrinsic | |
| |
Issuable | | |
Price | | |
(Years) | | |
Value | |
| |
| | |
| | |
| | |
| |
Exercisable | |
| 7,010,000 | | |
$ | 0.21 | | |
| 3.4 | | |
$ | - | |
Not vested | |
| 530,000 | | |
| 0.10 | | |
| 2.5 | | |
| - | |
Balance, September 30, 2015 | |
| 7,540,000 | | |
$ | 0.20 | | |
| 3.3 | | |
$ | - | |
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 nine months ended September 30, 2015:
| |
| | |
Weighted- | |
| |
Number | | |
Average | |
| |
of Shares | | |
Exercise | |
| |
Issuable | | |
Price | |
| |
| | |
| |
Balance, January 1, 2015 | |
| 1,166,146 | | |
$ | 1.13 | |
Granted | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | |
Expired | |
| (355,313 | ) | |
| 1.17 | |
Balance, September 30, 2015 | |
| 810,833 | | |
$ | 1.11 | |
The following table sets forth the warrants
outstanding at September 30, 2015:
| |
| | |
Weighted- | |
| |
Number | | |
Average | |
| |
of Shares | | |
Exercise | |
| |
Issuable | | |
Price | |
| |
| | |
| |
10% convertible preferred stock – warrants | |
| 580,000 | | |
| 1.00 | |
Consultants | |
| 230,833 | | |
| 1.39 | |
Total | |
| 810,833 | | |
$ | 1.11 | |
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 September 30, 2015 and 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 nine months ended
September 30, 2015, we sold products to four customers accounting for 86% and 65% of our total revenues, respectively. During the
three and nine months ended September 30, 2014, we sold products to five customers accounting for 72%, and 54%, respectively of
our total revenues.
During the three and nine months ended
September 30, 2015, no vendors accounted for more than 10% of our purchases of raw materials and other products and services. During
the three and nine months ended September 30, 2014, we purchased approximately 37% and 33%, respectively of all products and services
from five vendors.
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. Our monthly rent
for September 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 nine months ended September 30, 2015 was $95,785 and $287,353, respectively and our deferred
rent at September 30, 2015 was $121,897. 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 September 2016 was $23,207. 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 nine months ended September 30, 2015 was $113,367 and $340,099 and
our deferred rent at September 30, 2015 was $394,513.
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”). See Note 1(e) for further discussion. 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 September 30, 2015 and 2014 was $50,395 and $22,371, respectively. For the nine months ended
September 30, 2015 and 2014, royalties on product sales, payable to Rutgers, was $127,330 and $125,437, 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
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.
Since 2011, Mr. Rose has participated in
various financings benefiting the Company, and as of September 30, 2015 holds the following securities:
| |
| | |
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.
Subsequent to September 30, 2015, we entered
into an agreement with Mr. Rose whereby he has agreed to sell back to us all of the above securities totaling $10,637,147 at a
nominal price to facilitate our ability to restructure our balance sheet and raise additional capital.
MLTM Lending, LLC and the ML Dynasty
Trust
MLTM Lending, LLC and the ML Dynasty Trust
(together “MLTM”) 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.
Since 2011, MLTM has participated in various
financings benefiting the Company, and as of September 30, 2015 holds the following securities:
| |
| | |
Common Stock | |
| |
| | |
Equivalent, | |
| |
Principal | | |
If Converted | |
| |
| | |
| |
8% convertible notes (2012) | |
$ | 4,888,444 | | |
| 12,221,112 | |
12% revolving | |
| 1,300,000 | | |
| - | (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 | |
$ | 8,727,333 | | |
| 17,751,421 | |
(i) not convertible into shares of common stock.
(ii) assumes 10-day volume weighted average price was $0.11.
Subsequent to September 30, 2015, we entered
into an agreement with MLTM whereby they have agreed to sell back to us all of the above securities totaling $8,727,333 at a nominal
price to facilitate our ability to restructure our balance sheet and raise additional capital.
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.
Since 2011, Mr. Kronstadt has participated
in various financings benefiting the Company, and as of September 30, 2015 holds the following securities:
| |
| | |
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
Agreement To Significantly Restructure
Balance Sheet
Effective October 28, 2015, Axion International
Holdings, Inc. (“Holdings”) entered into an Agreement (the “Agreement”), by and among Samuel G. Rose, Melvin
Lenkin, Edward Lenkin, Julie Walters, RPM Greenbaum and the 401(k) Plan dated December 1, 1992, Judy Lenkin Lerner, Judy Lenkin
Lerner Revocable Trust, ML Dynasty Trust, MLTM Lending, LLC , TM Investments LP, Thomas O. Bowersox, Southern Management Corporation
(all of the foregoing parties collectively and individually referred to as the “Rose Lenkin SM Parties”), Holdings,
Axion International, Inc. (“International”) and Axion Recycled Plastics Incorporated (collectively with Holdings and
International, “Axion”), with the objective of eliminating Axion’s debt obligations held by the Rose Lenkin SM
Parties and reducing the equity interests in Holdings held by the Rose Lenkin SM Parties in order to facilitate Axion’s ability
to restructure its consolidated balance sheet and raise additional capital.
Under the terms of the Agreement, each
of the Rose Lenkin SM Parties has sold to Axion all of its debt obligations in the aggregate of $19.7 million issued by Axion to
such party (‘Cancelled Debt”), for an aggregate total sales price of Two Dollars ($2.00). Except for (i) these sales
of Cancelled Debt, (ii) the shares of common stock in Holdings which such party obtained in exchange for the warrants granted to
them (collectively, “Rose Lenkin SM Parties Warrant Stock”) as set forth below, and (iii) the preferred shares of Holdings
stock (“Preferred Shares”) as set forth below, each of the Rose Lenkin SM Parties agrees that the remainder of the
Axion shares, interests and rights he, she or it holds are surrendered to Axion for cancellation, including the cancellation of
all other indebtedness owing from Axion to such parties, including any unpaid interest, and the termination of all rights they
possess under any ancillary agreements pertaining to such indebtedness or shares, as well as the full release of all claims which
they may possess against Axion and its respective officers, directors, employees, and representatives.
The Rose Lenkin SM Parties will retain
the shares of Rose Lenkin SM Parties Warrant Stock, being specifically the following shares: 10,864,529 owned by Samuel G. Rose,
10,204,109 shares owned by MLTM, 294,153 shares owned by Edward Lenkin, 364,944 shares owned by Judy Lenkin Lerner, and 717,090
owned by Southern Management. The Rose Lenkin SM Parties agree to return 9.0 million shares of Holdings common stock.
The Rose Lenkin SM Parties have also agreed
to sell, assign and transfer an aggregate of 275,000 of Preferred Shares of Holdings to a designee of Axion for an aggregate total
sales price of Two Dollars ($2.00).
Under the Agreement, Holdings agrees to
maintain in full force and effect directors and officers liability insurance policies covering former officers and directors, which
policies shall provide coverage for such parties that is at least as extensive as the coverage under the policies that are in force
as of the date of this Agreement. In the event Holdings is unable to maintain or renew all such policies upon the same or better
terms and conditions with respect to former officers and directors, then Holdings agrees to provide written notice to the Rose
Lenkin SM Parties at least 60 days prior to the expiration, cancellation or other termination of such policies.
Pursuant to a bank term loan to Axion which
was guaranteed by Melvin Lenkin and Samuel G. Rose and another individual, Melvin Lenkin and Samuel G. Rose agree to remain as
guarantors of such loan and agree to cooperate with Axion in regards to possible modifications to such loan. Melvin Lenkin’s
and Samuel G. Rose’s obligations for cooperation are contingent upon the remaining individual similarly agreeing to remain
as a guarantor of such loan and agreeing to cooperate.
Axion in regards to the Rose Lenkin SM
Parties and the Rose Lenkin SM Parties in regards to Axion, have agreed to fully, finally and forever settle and release all claims
that now exist, may exist or previously existed, whether known or unknown.
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 derived from patent rights
licensed to us from Rutgers University we hold as well as manufacturing processes, formulations and other know how we
have developed. 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 us to market our
products in countries licensed to others in which patents have not been filed. We continue to pursue a resolution of
these license issues, but in the event they cannot be resolved to our satisfaction or that of Rutgers, we may be forced to
pursue legal action to enforce our rights under the license.
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
Tangible Assets
In accordance with the FASB ASC 360 “Impairment and Disposal of Long-Lived Assets”, long-lived
assets such as property and equipment that is held and used should be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the long-lived assets might not be recoverable and information indicates that an impairment
might exist. We have determined that our year to date 2015 financial results indicate that an impairment might exist. In connection
with our review of potential goodwill impairment, we are also evaluating our property and equipment for potential impairment. We
have engaged a third party to evaluate and determine whether impairments exist and the carrying values of our tangible assets and
goodwill should be adjusted accordingly. However, that evaluation is in process and not complete. We will complete this evaluation
prior to December 31, 2015.
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.
Based on our year to date financial results in 2015, we determined that our recent experience of financial
results represents a triggering event requiring a goodwill impairment test. We have engaged a third-party to evaluate and determine
whether impairments exist and the carrying value of our tangible assets and goodwill should be adjusted accordingly. However, the
evaluation is in process and not complete. We will complete this evaluation prior to December 31, 2015.
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 warranty 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 Nine Months Ended September 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.
Overview
Since April 2015 and continuing, we
have been actively seeking but have not received external capital. Consequently, we have (i) adjusted our capacity expansion
projects, (ii) engaged in discussions with our industry partners, (iii) realigned and curtailed manufacturing activities
based on existing customer obligations, and (iv) continue to actively manage our inventory to meet customer expectations and
commitments and to provide operating liquidity. Over the past six months, we have engaged strategic, financial and legal
advisors to assist us in raising additional capital. As of the date of this Form 10-Q, there are no probable
options available to us for such capital and our sole source of cash is from operations which is insufficient to
maintain our operations and meet our obligations. For this reason, we soon may be forced to further curtail
manufacturing activities and/or file for bankruptcy protection.
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 are 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 financing allows, we will continue to
commercialize our various STRUXURE matting solutions, and 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 September 30,
2015 and 2014, we recognized revenue of $3.5 million and $3.1 million, respectively. Of the $3.1 million for the three months ended
September 30, 2014, $1.7 million was attributable to our engineered products with the remainder attributable to our reprocessed
plastics business. Revenue of our engineered products increased during the three months ended September 30, 2015, as we recognized
a large order of our heavy construction mats. As we exited the reprocessed plastics business during the prior year, as expected
our revenue attributable to that business decreased.
For the nine months ended September 30,
2015 and 2014, we recognized revenue of $9.3 million and $12.0 million, respectively. Of the $12.0 million for the nine months
ended September 30, 2014, $6.6 million was attributable to our engineered products with the remainder 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 and as funding allows.
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. If economically advantageous,
this facility will be able 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 September 30,
2015 and 2014, our costs of sales – production was $3.6 million and $3.9 million, respectively. For the three months ended
September 30, 2014, costs of sales – production for our engineered products was $1.7 million with the remaining 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 corresponding period in 2015.
For the nine months ended September 30,
2015 and 2014, our costs of sales – production was $9.0 million and $14.7 million, respectively. For the nine months ended
September 30, costs of sales – production for our engineered products was $6.4 million, 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 costs associated with the production of our
engineered products are aggregated during the period and applied to the inventory produced during that period based on a standard
cost per pound based. This standard production cost per pound is based on the 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. In addition, when circumstances warrant we charge any adjustments to the carrying value of inventory to align
that cost with our net realizable value.
During the three months ended September
30, 2015 and 2014, we charged to costs of sales – excess capacity and inventory adjustments $1.4 million and $0.4 million,
respectively, relating to the excess costs and expenses incurred to provide production capacity at our facilities. During the nine
months ended September 30, 2015 and 2014, we charged to costs of sales – excess capacity and inventory adjustments $3.9 million
and $1.8 million, respectively, relating to the excess costs and expenses incurred to provide production capacity at our facilities.
The significant increases for the
2015 periods when compared to the corresponding periods in 2014, is a result of halting production during the current quarter
at our Ohio plant and reducing production at our Texas plant by two-thirds due to liquidity constraints. 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 these factors at both of our facilities, including the increased excess capacity within both production facilities as a result
of our liquidity shortfall, and still being in the early stages of our manufacturing and commercial activities.
Total costs of sales amounted to $5.0 million
and $4.3 million for the three months ended September 30, 2015 and 2014, respectively, resulting in gross margin (loss) of ($1.4)
million and ($1.1) million, respectively resulting primarily from the costs associated with carrying excess capacity due to our
liquidity constraints. For the nine months ended September 30, 2015 and 2014, total costs of sales amounted to $12.9 million and
$16.5 million, respectively resulting in gross margin (loss) of ($3.6) million and ($4.5) million, respectively. The gross margin
(loss) for all periods presented are a result primarily from the costs associated with carrying excess production capacity and
our effort to liquidate certain inventory below normal selling prices, both due to our liquidity situation. For example, during
the three and nine months ended September 30, 2015, we liquidated certain products within a specific segment of our inventory at
lower sales prices in order to induce our customers to accept shorter payment terms to assist with our cash management situation.
For the three and nine months ended September 30, 2015, our costs of sales – production and resulting gross margin (loss)
were negatively impacted by these specific orders for a total of $0.4 million.
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 nine months ended September
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
$52,219 and $226,273 for the three and nine months ended September 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 $156,043
for the three months ended September 30, 2015 compared to $126,047 for the three months ended September 30, 2014. For the nine
months ended September 30, 2015 and 2014, we incurred $650,611 and $801,633, 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
$1.2 million and $1.1 million for the three months ended September 30, 2015 and 2014, respectively.
For the nine months ended September 30,
2015 and 2014, general and administrative costs were $4.1 million and $22.2 million, 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.
Impairment of 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 reviewed for potential impairment at least annually or whenever events or
circumstances indicate that carrying amounts may not be recoverable.
Our financial results for the reprocessed
plastics business during the six months ended June 30, 2014 and our decision subsequent to June 30, 2014 to transition the assets
acquired of the reprocessing plastics business to a business extruding our proprietary products, represented a triggering event
requiring intangible assets impairment tests. During the three months ended September 30, 2014, we determined that our definite
life intangible assets 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 approximately $545,800.
Depreciation and Amortization
For the three and nine months ended September
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 operating 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 $964,257
and $781,232, for the nine months ended September 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 September 30, 2015 and 2014, was $779,122 and $478,496, respectively, and represented the
contractual interest rates payable on our debt obligations. Interest expense recognized during the nine months ended
September 30, 2015 and 2014, was $2.3 million and $1.3 million, 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 nine months ended September
30, 2015 and 2014, we received proceeds of $4.7 million and $10.6 million from the sale of various debt securities or loans, 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 September
30, 2015 and 2014, we amortized $581,260 and $1.2 million, respectively, 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 nine months ended September 31, 2015 and 2014, the amortization
of debt discounts are primarily related to the discounts associated with our 8% convertible promissory notes of 2012.
At September 30, 2015, the unamortized
discounts for our convertible securities were approximately $2.4 million, primarily associated with our 8% convertible promissory
notes of 2012. This unamortized discount is amortized to expense over the lives of the underlying convertible securities.
Change in Fair Value of Derivative Liabilities.
Through September 30, 2015, we 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 $7.3 million for the three
months ended September 30, 2014, as a change in fair value of this derivative liability which was recognized in our statements
of operations. For the corresponding period in 2015, there was no change in the fair value of the remaining derivative liabilities.
For the nine months ended September 30, 2015 and 2014, we recognized similar gains of $1.9 million and $18.4 million, respectively
as a change in fair value in our statement of operations. The fair value of this derivative liability at September 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
September 30, 2014, we recorded the change in fair value of this derivative liability in our statement of operations as a minimal
gain. For the corresponding period in 2015, there was no change in the fair value of this derivative liability The fair value of
this derivative liability at September 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
September 30, 2015 has been recorded.
Liquidity and Capital Resources –
Nine Months Ended September 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.
Since April 2015 and continuing, we have
been actively seeking but have not received external capital. Consequently, we have (i) adjusted our capacity expansion projects,
(ii) engaged in discussions with our industry partners, (iii) realigned and curtailed manufacturing activities based on existing
customer obligations, and (iv) continue to actively manage our inventory to meet customer expectations and commitments and to
provide operating liquidity.
At September 30, 2015 we had $5.4 million
in current assets and $15.5 million in current liabilities resulting in a working capital deficit of $10.1 million. This compares
to a working capital deficit of $3.0 million as of December 31, 2014.
We used $3.8 million and $7.5 million in
our operating activities for the nine months ended September 30, 2015 and 2014, respectively. Our net loss for the nine months
ended September 30, 2015 of $10.6 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 $3.8 million consisting primarily
of amortization of several debt discounts and payment for interest via stock-based methods. In addition, we were able to provide
operating cash by selling existing inventory at distressed prices in certain instances, which resulted in a reduction of inventory
of $2.0 million.
Even though we reduced our production activities
due to our liquidity situation, during the nine months ended September 30, 2015 we purchased $945,482 of equipment. If we expand
production capacity in the future, we would anticipate purchasing additional production equipment.
During the three months ended March 31,
2015, we issued and sold to certain investors an aggregate principal amount of $4.4 million of our 12% secured notes. At September
30, 2015, we had $36.9 million in principal amount of debt securities and bank loans. Interest accrues on these obligations at
various rates of interest, for which 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.
Subsequent to September 30, 2015, we entered
into an agreement with certain debt holders and investors whereby they agreed to sell back to us an aggregate of $19.7 million
of debt obligations, at a nominal price to facilitate our ability to restructure our balance sheet and raise additional capital.
After this debt cancellation, $2.4 million of our 12% secured notes and $0.3 million of our 12% convertible promissory notes which
were due on June 30, 2015, are now due upon demand by the noteholder, and $5.9 million of various 8% convertible promissory notes
have maturities beyond one year. We are in discussions with the remaining note holder regarding modification to the terms of the
original debt securities. In addition, we have several bank term loans which total $4.0 million and $4.4 million with maturities
of September 2017 and November 2018, respectively. There is no assurance that we will be successful with these negotiations with
the note holder or any initiated with the banks 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. Over the past six months, we have engaged
strategic, financial and legal advisors to assist us in raising additional capital. As of the date of this Form 10-Q,
there are no probable options available to us for such capital and our sole source of cash is from operations which is insufficient to
maintain our operations and meet our obligations. For this reason, we soon may be forced to further curtail manufacturing
activities and/or file for bankruptcy protection.
During the nine months ended September
30, 2015, we repaid principal under the terms of a loan from a governmental organization in the amount of $65,709.
At September 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. Subsequent
to September 30, 2015, we entered into an agreement with certain preferred stock holders whereby they agreed to sell back to us
an aggregate of 275,000 shares of preferred stock at a nominal price to facilitate our ability to restructure our balance sheet
and raise additional capital.
At September 30, 2015, we had a working
capital deficit of $10.1 million, cumulative face value of redeemable preferred stock and various debt instruments of $43.8 million,
a stockholders’ deficit of $31.5 million and have accumulated losses to date of $86.2 million. Our recurring losses
from operations, negative operating cash flows and working capital deficit, raise 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 to explore additional financing sources
and there can be no assurance that we will achieve our financing needs at all or upon terms acceptable to us. Over the past six
months, we have engaged strategic, financial and legal advisors to assist us in raising additional capital. As of
the date of this Form 10-Q, there are no probable options available to us for such capital and our sole source of cash is from
operations which is insufficient to maintain our operations and meet our obligations. For this reason, we soon may
be forced to further curtail manufacturing activities and/or file for bankruptcy protection.
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 of the end of the period covered by this Quarterly Report
on Form 10-Q, our disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under
the Exchange Act as a result of the material weaknesses in our internal control over financial reporting. 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. |
|
|
(ii) |
Due to our small size, we do not have complete 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 improved our 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 continuing improvements to our 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 nine months ended September 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 April 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 April 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 April 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.
During July 2015, we issued 1,409,638 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 $169,157.
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: November 16, 2015 |
/s/ Claude Brown, Jr. |
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Claude Brown, Jr. |
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Chief Executive Officer |
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Date: November 16, 2015 |
/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: November 16, 2015 |
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/s/ Claude Brown, Jr. |
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Claude Brown, Jr. |
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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: November 16, 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 September
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: November 16, 2015 |
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/s/ Claude Brown, Jr. |
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Claude Brown, Jr. |
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President and Chief Executive Officer |
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Date: November 16, 2015 |
/s/ Donald Fallon |
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Donald Fallon |
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Chief Financial Officer |