10-Q

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, 2013

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)

180 South Street, Suite 104, New Providence, NJ 07974

(Address of principal executive offices)

908-542-0888

(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 12, 2013 was 31,018,605. 

TABLE OF CONTENTS

		PAGE
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	38
	SIGNATURES	39

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

AXION INTERNATIONAL HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,		December 31,
	2013		2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	599,743	$	346,905
Accounts receivable, net of allowance		438,950		192,015
Inventories		3,625,821		3,088,953
Prepaid expenses and deposits		168,358		165,339
Total current assets		4,832,872		3,793,212
Property and equipment, net		3,023,131		2,005,215
Other long-term and intangible assets		-		68,284
Total assets	$	7,856,003	$	5,866,711
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	1,254,422	$	890,394
Accrued liabilities		653,162		446,434
Due to investor		400,000		-
Derivative liabilities – 8% convertible promissory notes		1,330,000		830,000
Total current liabilities		3,637,584		2,166,828
8% convertible promissory notes, net of discounts		7,041,112		5,671,162
Fair value of 10% convertible preferred stock warrants		122,357		81,716
Total liabilities		10,801,053		7,919,706
Commitments and contingencies
10% convertible preferred stock, no par value; authorized 880,000 shares; 702,123 and      706,023 shares issued and outstanding at September 30, 2013 and December      31, 2012, respectively, net of discounts		6,568,316		5,922,612
Stockholders' deficit:
Common stock, no par value; authorized 100,000,000 shares; 30,315,663 and      28,820,173 shares issued and outstanding at September 30, 2013 and December      31, 2012, respectively		29,878,727		27,103,454
Accumulated deficit		(39,392,093)		(35,079,061)
Total stockholders' deficit		(9,513,366)		(7,975,607)
Total liabilities and stockholders' deficit	$	7,856,003	$	5,866,711

(See accompanying notes to the unaudited condensed consolidated financial statements.)

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AXION INTERNATIONAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

	2013		2012
Revenue	$	1,272,689	$	800,007
Costs of sales		1,189,172		787,078
Gross margin		83,517		12,929
Operating expenses:
Product development, quality management and excess production capacity		507,466		320,137
Marketing and sales		202,106		362,851
General and administrative		732,427		581,561
Total operating costs and expenses		1,441,999		1,264,549
Loss from operations		(1,358,482)		(1,251,620)
Other (income) expense:
Interest expense		190,318		108,395
Amortization of debt discount		132,497		-
Change in fair value of derivative liabilities		(730,000)		(445,684)
Total other income		(407,185)		(337,289)
Net loss		(951,297)		(914,331)
Accretion of preferred stock dividends and beneficial conversion feature		(405,936)		(438,922)
Net loss attributable to common shareholders	$	(1,357,233)	$	(1,353,253)
Weighted average common shares – basic and diluted		30,307,925		26,766,317
Net loss per share – basic and diluted	$	(0.04)	$	(0.05)

(See accompanying notes to the unaudited condensed consolidated financial statements.)

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AXION INTERNATIONAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

	2013		2012
Revenue	$	4,532,274	$	4,892,802
Costs of sales		4,145,008		4,828,647
Gross margin		387,266		64,155
Operating expenses:
Product development, quality management and excess production capacity		1,076,881		883,979
Marketing and sales		703,201		749,913
General and administrative		2,216,656		2,788,381
Total operating costs and expenses		3,996,738		4,422,273
Loss from operations		(3,609,472)		(4,358,118)
Other (income) expense:
Interest expense		542,970		241,944
Amortization of debt discount		414,525		373,553
Change in fair value of derivative liabilities		(253,935)		(919,361)
Total other (income) expenses		703,560		(303,864)
Net loss		(4,313,032)		(4,054,254)
Accretion of preferred stock dividends and beneficial conversion feature		(1,218,273)		(1,262,126)
Net loss attributable to common shareholders	$	(5,531,305)	$	(5,316,380)
Weighted average common shares - basic and diluted		29,583,289		26,157,795
Net loss per share – basic and diluted	$	(0.19)	$	(0.20)

(See accompanying notes to the unaudited condensed consolidated financial statements.) 

5

 

AXION INTERNATIONAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD FROM JANUARY 1, 2013 THROUGH SEPTEMBER 30, 2013

(Unaudited)

	Common Shares		Additional Paid-in Capital and Common Stock		Accumulated Deficit		Total
Balance, January 1, 2013		28,820,173	$	27,103,454	$	(35,079,061)	$	(7,975,607)
Shares issued upon conversion of 10% convertible preferred stock		39,000		39,000				39,000
Shares issued for services rendered		225,000		139,750				139,750
Shares issued for dividend payments		609,811		356,579				356,579
Shares issued for interest payments		621,679		360,005				360,005
Share-based compensation				2,904				2,904
Dividend on 10% convertible preferred stock				(533,569)				(533,569)
Amortization of discounts of 10% convertible preferred stock				(684,704)				(684,704)
Recovery of shareholder short swing profit				3,095,308				3,095,308
Net loss						(4,313,032)		(4,313,032)
Balance, September 30, 2013		30,315,663	$	29,878,727	$	(39,392,093)	$	(9,513,366)

(See accompanying notes to the unaudited condensed consolidated financial statements.)

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AXION INTERNATIONAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

	2013		2012
Cash flows from operating activities:
Net loss	$	(4,313,032)	$	(4,054,254)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		147,605		90,163
Amortization of convertible debt discount		414,525		-
Amortization of preferred stock discount		-		68,346
Amortization of revolving credit agreement discount		-		305,206
Change in fair value of derivative liabilities		(294,576)		(517,400)
Change in fair value of 10% convertible preferred stock warrants		40,641		(401,961)
Share-based compensation		142,654		395,947
Change in allowance for doubtful accounts		-		86,665
Changes in operating assets and liability:
Accounts receivable		(246,935)		243,133
Inventories		(536,868)		(881,689)
Prepaid expenses and deposits		65,265		(127,791)
Accounts payable		364,028		158,222
Accrued liabilities		389,743		335,880
Net cash used in operating activities		(3,826,950)		(4,299,533)
Cash flows from investing activities:
Purchase of property and equipment		(1,165,521)		(1,010,701)
Net cash used in investing activities		(1,165,521)		(1,010,701)
Cash flows from financing activities:
Proceeds from issuance of 8% convertible promissory notes, net		1,750,001		1,378,877
Proceeds from issuance of demand promissory notes		400,000		5,000,001
Recovery of shareholder short swing profits		3,095,308
Repayments of convertible debt				(772,500)
Repayments of revolving credit agreement				(466,000)
Net cash provided by financing activities		5,245,309		5,140,378
Net increase (decrease) in cash		252,838		(169,856)
Cash and cash equivalents at beginning of period		346,905		1,982,772
Cash and cash equivalents at end of period	$	599,743	$	1,812,916
Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,971	$	67,834
Conversion of 10% convertible preferred stock and debt		39,000		462,500
Dividends on 10% convertible preferred stock		533,569		519,020
Fair value of warrants issued on reset of 10% convertible preferred stock		-		1,875,463
Amortization of 10% convertible preferred stock discount		684,704		743,106
Fair value of warrants issued with 8% convertible promissory notes		249,151		427,888
Fair value of conversion option of 8% convertible promissory notes		545,425		982,932
Redeemable common stock reclassified to permanent equity		-		242,500
Fair value of bonus warrants granted		-		57,034

(See accompanying notes to the unaudited condensed consolidated financial statements.)

7

 

AXION INTERNATIONAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

Note 1 - Summary of Significant Accounting Policies

(a) Business and Basis of Financial Statement Presentation

Axion International Holdings, Inc. (the “Company,” “we” or “us”) was formed in 1981.  In November 2007, the Company entered into an Agreement and Plan of Merger, among the Company, Axion Acquisition Corp., a Delaware corporation and a newly created direct wholly-owned subsidiary of the Company (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 the Company consummated the merger (the “Merger”) of Merger Sub into Axion, with Axion continuing as the surviving corporation and a wholly-owned subsidiary of the Company.

We develop, manufacture, market and sell composite rail ties and structural building products, such as pilings, I-beams, T-beams and boards, which, based upon patented technology developed at Rutgers University, are fully derived from common recycled plastics and high-density polymers, such as polyethylene, polystyrene and polypropylene. These recycled plastics, which are combined with recycled plastic composites containing encapsulated fiberglass, achieve structural thickness and strength and are resistant to changing shape under constant stress. Our products, manufactured through an extrusion process, are eco-friendly, non-corrosive, moisture impervious, non-chemical leaching and insect and rot resistant. Our products possess superior lifecycles and generally have greater durability and require less maintenance than competitive products made from wood, steel or concrete. We market our products through two lines - ECOTRAX™, our line of rail ties, and STRUXURE™, our line of structural building products.

Our consolidated financial statements include the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements of the Company 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, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2012 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, 2013 and December 31, 2012, 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, 2013, we determined certain receivables which we had previously accrued a reserve for, were not collectible and wrote off the receivable balances against the reserve. We did not require an allowance for doubtful accounts at September 30, 2013, but at December 31, 2012 it was $131,996.

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(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, 2013		December 31, 2012
Equipment	$	15,344	$	13,754
Machinery and equipment		3,759,994		2,611,933
Purchased software		145,623		129,753
Furniture and fixtures		13,090		13,090
Subtotal – property and equipment, at cost		3,934,051		2,768,530
Less accumulated depreciation		(910,920)		(763,315)
Net property and leasehold improvements	$	3,023,131	$	2,005,215

Depreciation expense during the three and nine months ended September 30, 2013 was $75,038 and $147,605, respectively, and for the corresponding periods in 2012, was $16,972 and $90,163, respectively. Of the depreciation expense during the three and nine months ended September 30, 2013, $70,485 and $134,813, respectively was charged to production and the remainder to operating expenses. For the corresponding periods of 2012, $13,179 and $82,356, respectively was charged to production.

(e) Exclusive Agreement

In February 2007, we acquired an exclusive, royalty-bearing license in specific but broad global territories to make, have made, use, sell, offer for sale, modify, develop, import, and export products made using patent applications owned by Rutgers University (“Rutgers”).  We are using these patented technologies in the production of our composite rail ties and structural building products such as pilings, I-beams, T-beams and boards of various sizes.

Subject to the minimum royalty pursuant to the terms of the license, royalties incurred and payable to Rutgers, for the three and nine months ended September 30, 2013 were $50,000 and $150,000, respectively. For the corresponding periods of 2012, the amounts were the same.

(f) 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.

We recognize revenue when a fixed commitment to purchase the products is received, title or ownership has passed to the customer and we do not have any performance obligations remaining, such that the earnings process is complete. 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 effort of the finished product. Currently, to manufacture our products, we lease a manufacturing facility, purchase the raw materials and employ the staffing and own the equipment necessary for our production processes. Previously under other arrangements, we either purchased and supplied the raw materials to the third-party manufacturer who we paid a per-pound cost to produce the finished product, or the third-party manufacturer sourced and paid for the raw materials and we purchased the finished product from them at a cost per unit, and we were responsible for any costs of raw materials purchased by the third-party manufacturer in excess of the arrangement’s reference prices and we shared any savings for purchases below the reference prices.  We believe our current manufacturing processes allow us to more efficiently control the quality and costs of production. 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, and do not believe we will in the future.

9

(g) Income Taxes

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, 2012, 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.

In the past, we were not current with our filings of our federal and state income tax returns. Due to these delinquent filings, our income tax returns are open to examination by federal and state authorities, generally for the tax years ended September 30, 2008 and later.

(h) 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 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.

(i) 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.

10

(j) Loss Per Share

Basic loss per share are computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share, includes the effects of the potential dilution of outstanding options, warrants, and convertible debt on our common stock as determined using the treasury stock method. For the three and nine months ended September 30, 2013 and 2012, there were no dilutive effects of such securities because we incurred a net loss in each period. As of September 30, 2013, we have approximately 66 million potential common shares issuable under our convertible instruments, warrant and stock option agreements.

(k) 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.

(l) Concentration of Credit Risk

We maintain our cash with two major U.S. domestic banks. The amount held in both of the banks exceeds the insured limit of $250,000 from time to time. The amount which exceeded the insured limit was approximately $0.3 million at September 30, 2013 and December 31, 2012. We have not incurred losses related to these deposits.

(m) Use of Estimates

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.

11

 

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, 2013, we had working capital of $1.2 million, a stockholders’ deficit of $9.5 million and had accumulated losses of $39.4 million and net cash used in operations for the nine months ended September 30, 2013 was $3.8 million.  This raises substantial doubt about our ability to continue as a going concern.  In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon our ability to meet our financing requirements, either by raising additional capital or the success of our business plan and future operations.  We may seek additional means of financing to fund our business plan.  There is no assurance that we will be successful in raising sufficient funds to assure our eventual profitability.  We believe that actions planned and presently being taken to revise our operating and financial requirements provide us the opportunity to continue as a going concern. The financial statements do not include any adjustments that might result from these uncertainties.

Note 3 - Inventories

Inventories are priced at the lower of cost or market and consist primarily of raw materials and finished products.

Our inventories consisted of:

	September 30, 2013		December 31, 2012
Finished products	$	2,913,368	$	2,509,797
Production materials		712,453		579,156
Total inventories	$	3,625,821	$	3,088,953

Since we had engage third-party contract manufacturers to produce our finished products, and in certain situations we provide them the raw materials, certain of our inventories at September 30, 2013 and December 31, 2012 were located at the third-party contract manufacturing locations, as well as our leased facility. We carry adequate insurance for loss on this inventory.

Note 4 - Accrued Liabilities

The components of accrued liabilities are:

	September 30, 2013		December 31, 2012
Royalties	$	229,045	$	351,846
10% convertible preferred stock dividends		176,990		-
Interest		181,509		-
Payroll		55,790		77,757
Miscellaneous		9,828		16,831
Total accrued liabilities	$	653,162	$	446,434

Note 5 - Derivative Liabilities

8% Convertible Promissory Notes – Conversion Option and Warrants

During the nine months ended September 30, 2013, we issued 8% convertible promissory notes (the “8% Notes”). See Note 6 for further discussion. The 8% Notes met the definition of a hybrid instrument, as defined in 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, into shares of our common stock. The 8% Notes 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 derivative liabilities are immediately recognized in earnings and classified as a change in fair value in the statement of operations.

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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 the conversion options on September 30, 2013 was $1.1 million, and the decrease in fair value of $0.5 million for the three months ended September 30, 2013 was recorded as a change in derivative liability in the statement of operations. The aggregate fair value of the warrants on September 30, 2013 was $270,000. The decrease in fair value of $270,000 for the three months ended September 30, 2013 was recorded as a change in fair value of derivative liability in the statement of operations.

The estimated fair values of the derivative liabilities for the conversion options on the 8% Notes issued during the nine months ended September 30, 2013 and the warrants issued therewith, were computed by a third party using Monte Carlo simulations based on the following ranges for each assumption:

	At Issuances			September 30, 2013
Volatility		50.0	%		45.0	%
Risk-free interest rate		0.4	%		0.3	%
Dividend yield		0.0	%		0.0	%
Expected life, in years		2.4 to 2.6			1.9

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 initial fair value 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 129%, (iii) a risk-free interest rate 2.1%, and (iv) an expected life of five years. The fair value of the warrant liability at September 30, 2013 and December 31, 2012 was $122,357 and $81,716, respectively and we recognized the change in fair value of the warrant liability for the nine months ended September 30, 2013 of $40,641 in our statement of operations.

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, 2013 and December 31, 2012 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.

13

Additional Disclosures Regarding Fair Value Measurements

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term maturity of those items.

The fair value of our debt, which approximates its carrying value, as of September 30, 2013 and December 31, 2012 was estimated at $7.9 million and $5.7 million, respectively. Factors that we considered when estimating the fair value of our debt include market conditions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of debt. The level would be considered as level 2.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	As of September 30, 2013
							Derivative
							Liabilities at
	Level 1		Level 2		Level 3		Fair Value
8% convertible promissory notes:
Conversion option	$	-	$	-	$	1,060,000	$	1,060,000
Warrants		-		-		270,000		270,000
Derivative liabilities - Current		-		-		1,330,000		1,330,000
Placement agent warrants - non-current		-		-		122,357		122,357
Derivative liabilities - Total	$	-	$	-	$	1,452,357	$	1,452,357

	As of December 31, 2012
							Derivative
							Liabilities at
	Level 1		Level 2		Level 3		Fair Value
8% convertible promissory notes:
Conversion option	$	-	$	-	$	610,000	$	610,000
Warrants		-		-		220,000		220,000
Derivative liabilities - Current		-		-		830,000		830,000
Placement agent warrants - non-current		-		-		81,716		81,716
Derivative liabilities - Total	$	-	$	-	$	911,716	$	911,716

14

The following tables are 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, 2013 and 2012:

	For the Three Months Ended September 30, 2013
							Credited to
							Common
	Balance -		Fair Value of				Stock		Balance -
	July 1,		Derivative		Change in		Upon Issuance		September 30,
	2013		Liability		Fair Value		of Warrants		2013
8% convertible promissory notes:
Conversion option	$	1,520,000	$	-	$	(460,000)	$	-	$	1,060,000
Warrants		540,000		-		(270,000)		-		270,000
Derivative liabilities - current		2,060,000		-		(730,000)		-		1,330,000
Placement agent warrants - non-current		122,357		-		-		-		122,357
Derivative liabilities - total	$	2,182,357	$	-	$	(730,000)	$	-	$	1,452,357

	For the Three Months Ended September 30, 2012
							Credited to
							Common
	Balance -		Fair Value of				Stock		Balance -
	July 1,		Derivative		Change in		Upon Issuance		September 30,
	2012		Liability		Fair Value		of Warrants		2012
8% convertible promissory notes:
Conversion option	$	-	$	982,932	$	(262,932)	$	-	$	720,000
Warrants		-		427,888		(127,888)		-		300,000
Derivative liabilities - current		-		1,410,820		(390,820)		-		1,020,000
Placement agent warrants - non-current		140,458		-		(54,864)		-		85,594
Derivative liabilities - total	$	140,458	$	1,410,820	$	(445,684)	$	-	$	1,105,594

	For the Nine Months Ended September 30, 2013
							Credited to
			Fair Value of				Common Stock		Balance -
	Balance -		Derivative		Change in		Upon Issuance		September 30,
	January 1, 2013		Liability		Fair Value		of Warrants		2013
8% convertible promissory notes:
Conversion option	$	610,000	$	545,426	$	(95,426)	$	-	$	1,060,000
Warrants		220,000		249,151		(199,151)		-		270,000
Derivative liabilities - current		830,000		794,577		(294,577)		-		1,330,000
Placement agent warrants - non-current		81,716				40,641		-		122,357
Derivative liabilities - total	$	911,716	$	794,577	$	(253,936)	$	-	$	1,452,357

15

	For the Nine Months Ended September 30, 2012
							Credited to
			Fair Value of				Common Stock		Balance -
	Balance -		Derivative		Change in		Upon Issuance		September 30,
	January 1, 2012		Liability		Fair Value		of Warrants		2012
8% convertible promissory notes:
Conversion option	$	-	$	982,932	$	(262,932)	$	-	$	720,000
Warrants		-		427,888		(127,888)		-		300,000
12% convertible revolving credit agreement:
Conversion option		113,271		-		(113,271)		-		-
10% convertible preferred stock:
Warrants		1,875,463		-		-		(1,875,463)		-
10% convertible debentures:
Warrants		70,343		-		(13,309)		(57,034)		-
Derivative liabilities - current		2,059,077		1,410,820		(517,400)		(1,932,497)		1,020,000
Placement agent warrants - non-current		487,555		-		(401,961)		-		85,594
Derivative liabilities - total	$	2,546,632	$	1,410,820	$	(919,361)	$	(1,932,497)	$	1,105,591

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Note 6 – 8% Convertible Promissory Notes

The components of our convertible debt are summarized as follows:

	Due	September 30, 2013		December 31, 2012
8% convertible promissory notes	Beginning August 2017	$	8,878,188	$	7,128,187
Less debt discount			(1,837,076)		(1,457,025)
Total – long term debt		$	7,041,112	$	5,671,162

During the nine months ended September 30, 2013 pursuant to the same terms of our existing 8% convertible promissory notes (the “8% Notes”), we issued and sold to Samuel Rose, Allen Kronstadt, MLTM, Lending , LLC and the Judy Lenkin Lerner Revocable Trust (see Note 14 regarding related party transactions) (i) an aggregate principal amount of $1,750,001 of our 8% Notes which are initially convertible into shares of our common stock, at a conversion price equal to $0.40 per share of common stock, subject to adjustment as provided on the terms of the 8% Notes, and (ii) associated warrants to purchase, in the aggregate, 4,375,004 shares of common stock, subject to adjustment as provided on the terms of the warrants.

The 8% 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 8% Notes). We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes. During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.

Accrued but unpaid interest due on September 30, 2013 for the three months ended September 30, 2013 of $181,509 was paid with 355,903 shares of common stock, in lieu of cash, which were issued subsequent to September 30, 2013.

The warrants are exercisable at an exercise price of $0.60 per share of common stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of common stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the 8% Note to which the applicable warrant is related has been repaid in full.

The issuance costs of the 8% Notes, plus the fair values of the conversion option derivative liability and the warrants derivative liability were recorded as a discount to the 8% Notes. During the nine months ended September 30, 2013, the fair value of the conversion options and related warrants for the 8% Notes issued during this period was $794,576, which was recorded as an increase to the debt discount. This debt discount is amortized to other expenses in our statement of operations over the initial term of the 8% Notes. During the nine months ended September 30, 2013, we amortized $414,525 of the discount to other expenses in our statement of operations. There was no such transaction for the corresponding period in 2012. See Note 5 for further discussion of these derivative liabilities.

17

 

Note 7 - 10% Convertible Redeemable Preferred Stock

The components of our Preferred Stock, classified as temporary equity in our balance sheet, are summarized as follows:

	September 30,		December 31,
	2013		2012
10% convertible preferred stock - face value	$	7,021,230	$	7,060,230
Unamortized discount		(452,914)		(1,137,618)
10% convertible preferred stock, net of discount	$	6,568,316	$	5,922,612

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 of $1.00 per share, 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 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. The Preferred Stock shall be redeemable for cash by the holder any time after the three-year anniversary from the initial purchase. 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 (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 6 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 March and April 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 approximately $828,300, 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 effect 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 are 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. During the three and nine months ended September 30, 2013, we amortized $228,946 and $684,704, respectively to additional paid-in capital. For the corresponding periods in 2012 we amortized $268,425 and $811,452, respectively to additional paid-in capital. At September 30, 2013, the unamortized Preferred Stock discount balance was $452,914.

18

During the nine months ended September 30, 2013 and the year ended December 31, 2012, we issued 39,000 and 462,500 shares of our common stock, respectively upon conversion of 3,900 and 46,250 shares of our Preferred Stock, respectively.

The Preferred Stock outstanding at September 30, 2013, was convertible into 7.0 million shares of our common stock. 

Since the Preferred Stock at September 30, 2013 may ultimately be redeemed at the option of the holder, the carrying value of the Preferred Stock, net of unamortized discount has been classified as temporary equity.

Our dividend payable on September 30, 2013 was paid with 347,039 shares of common stock in lieu of cash, which were issued subsequent to September 30, 2013, and with a value of $176,990. 

Placement Agent Warrants

We issued warrants to the placement agents for the sale of our Preferred Stock, to purchase 58,352 shares of 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 100,000,000 shares of common stock, no par value, and up to 2,500,000 shares of preferred stock, no par value. There were 30,315,663 and 28,820,173 shares of common stock issued and outstanding at September 30, 2013 and December 31, 2012, 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 702,123 and 706,023 shares of 10% convertible preferred stock at September 30, 2013 and December 31, 2012, respectively. 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, 2013

During February 2013, we issued 39,000 shares of common stock upon conversion of 3,900 shares of our 10% convertible preferred stock, with a value of $39,000.

During March 2013, we issued 125,000 shares of common stock to a consultant. The shares of common stock had a fair value on the date of issuance of $78,750, which was charged to general and administrative expenses in our statement of operations upon issuance. 

During April 2013, we issued 266,954 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 $181,529.

During April 2013, we issued 252,639 shares of common stock as payment of our interest on our 8% convertible promissory notes, in lieu of cash, with a fair value on the date of issue of $171,795.

During May 2013, we issued 100,000 shares of common stock to a consultant. The shares of common stock had a fair value on the date of issuance of $61,000, which was charged to general and administrative expenses in our statement of operations upon issuance. 

During July 2013, we issued 342,857 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 $175,050.

During July 2013, we issued 369,040 shares of common stock as payment of our interest on our 8% convertible promissory notes, in lieu of cash, with a fair value on the date of issue of $188,210.

Recovery of Stockholder Short Swing Profit

In April 2006, we commenced an action against Tonga Partners, L.P. (“Tonga”), Cannell Capital, L.L.C. and J. Carlo Cannell in the United States District Court of New York, for disgorgement of short-swing profits pursuant to Section 16 of the Securities Exchange Act of 1934, as amended. On November 10, 2004, Tonga converted a convertible promissory note into 1,701,341 shares of common stock, and thereafter, between November 10 and November 15, 2004, sold such shares for short-swing profits. In September 2008, the District Court granted us summary judgment against Tonga for disgorgement of short-swing profits in the amount of $5.0 million. The defendants appealed the order granting the summary judgment to the U.S. Court of Appeals for the 2nd Circuit. The three judge panel held in our favor. The defendants petitioned the Court for a full judge review. The petition was denied.  The defendants’ petition to the United States Supreme Court for a writ of certiorari was denied. As a result, during the three months ended June 30, 2013, we received $3.1 million representing the disgorgement of the short-swing profits less legal fees. This amount was recorded as additional paid-in capital.

19

 

Note 9 - Share-based Compensation

Options

We have two nonqualified stock option plans approved by shareholders with an aggregate of 950,000 shares remaining available for grant under one plan as of September 30, 2013. The other plan terminated during the three months ended September 30, 2013.  The exercise price of the options are established by the Board of Directors on the date of grant and are 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.

We estimate the fair value of each option award at the grant date by using the Black-Scholes option pricing model. We did not award any options during the three or nine months ended September 30, 2013.

Certain options awarded prior to the year ended December 31, 2012 are amortized over certain future vesting periods or contained performance-based vesting terms, and consequently during the nine months ended September 30, 2013, we charged to operating expenses $5,894 for these options.

The following table summarizes our stock option activity for the nine months ended September 30, 2013:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
Balance, January 1, 2013		5,710,125	$	1.10
Granted		-		-
Exercised		-		-
Expired		(962,076)		0.13
Balance, September 30, 2013		4,748,049	$	1.30

The following table summarizes options outstanding at September 30, 2013:

			Weighted-		Weighted-
	Number		Average		Average		Aggregate
	of Shares		Exercise		Remaining		Intrinsic
	Issuable		Price		Term (Years)		Value
Exercisable		3,348,049	$	1.11		2.4	$	6,000
Not vested		1,400,000		1.77		3.8		-
Balance, September 30, 2013:		4,748,049	$	1.30		2.8	$	6,000

20

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, 2013:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
Balance, January 1, 2013		27,353,151	$	0.76
Granted		4,375,004		0.60
Exercised		-		-
Cancelled		(400,000)		1.79
Balance, September 30, 2013		31,328,155	$	0.73

The following table sets forth the warrants outstanding at September 30, 2013:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
10% convertible debenture - bonus warrants		483,357	$	0.60
10% convertible preferred stock – warrants		3,761,365		1.00
8% convertible promissory notes – warrants		22,195,474		0.60
Consultants		4,887,959		1.12
Total		31,328,155	$	0.73

During the nine months ended September 30, 2013, pursuant to our 8% convertible promissory notes, we issued warrants to purchase 4,375,004 shares of our common stock pursuant to our issuance and sale of our 8% convertible promissory notes, at an initial exercise price of $0.60 per share. These warrants had fair values on their dates of issuances of $249,151 which was recorded as a credit to derivative liabilities and a charge to debt discount associated with our 8% convertible promissory notes. See Notes 5 and 6 for further discussion of these warrants. The estimated fair value of the warrants was computed by a third party using Monte Carlo simulation models.

In addition, the fair value of a previously issued warrant which is being amortized over a service period spanning multiple reporting periods, was revalued using the Black-Scholes option pricing model, at the end of each reporting period. No revaluation was necessary for the three months ended September 30, 2013 and during the nine months ended September 30, 2013, we decreased the fair value by $2,990 and recorded a credit in our statement of operations.

21

 

Note 11 - 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.

As of December 31, 2012, we had U.S. federal net operating loss carryforwards of approximately $17.4 million, which, if unused, expire through 2032. We do not believe that we have had a change in control as defined by Section 382 of the Internal Revenue Code, which could potentially limit our ability to utilize these net operating losses. At December 31, 2012, 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 12 - Business Concentration

During the nine months ended September 30, 2013 and 2012, we sold our products to 20 and 12 different customers, respectively and with sales of our ECOTRAX rail ties to one customer representing approximately 53% and 73%, respectively of our total revenue.

During the nine months ended September 30, 2013 and 2012, we sold our products to 57 and 25 different customers, respectively and with sales of our ECOTRAX rail ties to one customer representing approximately 46% and 65%, respectively of our total revenue.

Our purchases of raw materials and contract manufacturing services and products, was concentrated in approximately twenty to thirty vendors, during the three and nine months ended September 30, 2013 and 2012.

Note 13 - Commitments and Contingencies

Operating leases

We lease our office space in New Providence, New Jersey pursuant to a three-year lease agreement for monthly lease payments of approximately $3,700.  These premises serve as our corporate headquarters. The lease is currently in its second one-year extension which expires on October 31, 2014.  Facility rent expense totaled approximately $11,100 and $11,300 for the three months ended September 30, 2013 and 2012, respectively, and for the nine months ended September 30, 2013 and 2012 totaled approximately $33,100 and $33,900, respectively.

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. We are using these patented technologies in the production of our composite rail ties and structural building products. The term of the license agreement with Rutgers runs until the expiration of the last-to-expire issued patent within the Rutgers’ technologies licensed under this license agreement, unless terminated earlier.

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. For the three months ended September 30, 2013 and 2012, we accrued royalties payable to Rutgers on product sales of $19,195 and $13,200, respectively. In addition, for the three months ended September 30, 2013 and 2012, since we did not meet the minimum royalty due pursuant to the license, we accrued $30,805 and $66,800, respectively which was charged to operating expenses in our statement of operations. We also pay annual membership dues to Rutgers Center for Advanced Materials via Immiscible Polymer Processing, or AMIPP, a department of Rutgers.  The membership allows us to use AMIPP for basic research and development at no additional cost, with access to more comprehensive R&D services available to us for fees determined on a per-project basis.

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Note 14 - Related Party Transactions

Allen Kronstadt

Allen Kronstadt beneficially owns in excess of 5% of our outstanding voting securities and was appointed to our Board of Directors on September 11, 2012 pursuant to the terms of the Purchase Agreement. Effective April 25, 2012, we entered into a Memorandum of Understanding with Mr. Kronstadt and several other investors and accordingly we issued to Mr. Kronstadt a demand promissory note in the principal amount of $1,666,667 with interest at a rate of 8.0% per annum. At the initial closing under the Purchase Agreement, in consideration for the issuance of the 8% convertible promissory note, (the “8% Notes”) and associated warrants to purchase Common Stock (the “8% Note Warrants”) at such closing, Mr. Kronstadt converted the aggregate principal amount outstanding, together with all accrued and unpaid interest, under the demand note and paid us in cash for the balance.

Pursuant to the Purchase Agreement, as of September 30, 2013, we have issued and sold to Mr. Kronstadt an aggregate principal amount of $2,959,297 of our 8% Notes and 8% Note Warrants to purchase, in the aggregate, 7,398,243 shares of Common Stock, subject to adjustment as provided on the terms of the 8% Note Warrants. As of September 30, 2013, Mr. Kronstadt has received an aggregate of 353,547 shares of Common Stock as interest payments under the 8% Notes that he holds.

The 8% 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 8% Notes). We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes. During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.

The 8% Note Warrants are exercisable at an exercise price of $0.60 per share of Common Stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of Common Stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the 8% Notes to which the applicable 8% Note Warrant is related has been repaid in full.

In connection with the entry into the Purchase Agreement, pursuant to the terms thereof, on August 24, 2012, we granted to the Investors (i) certain demand and piggyback registration rights with respect to the registration of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder, and (ii) a security interest and lien in all of our assets and rights (including a security interest in all of the assets and rights of our subsidiary, Axion International, Inc.) to secure our obligations under the 8% Notes.

23

 

Note 15 – Subsequent Events

$3.2 Million Funding

On October 21, 2013, pursuant to the Note Purchase Agreement, dated August 24, 2012, (see Note 6 – 8% Convertible Promissory Notes), we issued and sold to MLTM Lending, LLC (“MLTM”), Samuel Rose (“Rose”), and Allen Kronstadt (“Kronstadt”) (collectively, the “Investors”) an aggregate principal amount of $596,992.80 of our 8.0% convertible promissory notes (the “8% Notes”) which are initially convertible into shares of our common stock, no par value (the “Common Stock”), at a conversion price equal to $0.40 per share of Common Stock, subject to adjustment as provided on the terms of the 8% Notes, and associated warrants (the “Warrants”) to purchase, in the aggregate, 1,492,482 shares of Common Stock, subject to adjustment as provided on the terms of the Warrants. In consideration for the issuance of the 8% Notes and the Warrants, the Investors paid us cash in the aggregate amount of $596,992.80.

The 8% Notes and the Warrants were offered and sold to the Investors in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D promulgated thereunder. The Investors are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act.

The 8% Notes, including all outstanding principal and accrued and unpaid interest, are due and payable on the earlier of October 21, 2018 or upon the occurrence of an Event of Default (as defined in the 8% Notes). We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes. During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.

The Warrants are exercisable at an exercise price of $0.60 per share of Common Stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of Common Stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the 8% Note to which the applicable Warrant is related has been repaid in full.

In addition, on October 21, 2013 and November 6, 2013, the Investors loaned the Company an aggregate principal amount of $2,603,007.20  pursuant to our secured promissory notes (the “Secured Notes”), each of which shall be exchanged by us on a future date, when the authorized shares of capital stock of the Company are available, for an 8% Note and Warrants, on the terms set forth in the Secured Notes. In connection with the issuance of the Secured Notes, we entered into an amendment to our existing Security Agreement with the Investors to provide that our obligations under the Secured Notes are secured by a security interest and lien in all of our assets and the assets of our wholly-owned subsidiaries.

The Secured Notes, including all outstanding principal and accrued and unpaid interest, are due and payable on the earlier of November 29, 2013 or upon the occurrence of an Event of Default (as defined in the Secured Notes). We may prepay the Secured Notes, in whole or in part, upon 5 calendar days prior written notice to the holders thereof. Interest accrues on the Secured Notes at a rate of 8.0% per annum, payable in arrears on the date the Secured Notes are repaid or prepaid in full. 

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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 condensed 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 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 condensed 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

Our predecessor company was formed in 1981 under the name Analytical Surveys, Inc. Upon the consummation of the Agreement and Plan of Merger, on March 20, 2008, we changed our name to Axion International Holdings, Inc. The Merger was accounted for as a reverse merger in the form of a recapitalization with Axion International Holdings, Inc. as the successor.

We develop, manufacture, market and sell composite rail ties and structural building products, such as pilings, I-beams, T-beams, boards, used in a variety of applications such as construction and heavy equipment mats, railroad tracks, vehicular bridges, pedestrian walkways, marinas and boardwalks which, based upon patented technology developed at Rutgers University, are fully derived from common recycled plastics and high-density polymers, such as polyethylene, polystyrene and polypropylene. These recycled plastics, which are combined with recycled plastic composites containing encapsulated fiberglass, achieve structural thickness and strength and are resistant to changing shape under constant stress. Our products, manufactured through an extrusion process, are eco-friendly, non-corrosive, moisture impervious, non-chemical leaching and insect and rot resistant. Our products possess superior lifecycles and generally have greater durability and require less maintenance than competitive products made from wood, steel or concrete and can be recycled at the end of their useful life. We market our products through two lines (i) ECOTRAX™, our line of rail ties, and (ii) STRUXURE™, our line of structural building products. 

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Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is 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 the Company’s 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 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.

Revenue and Cost Recognition

We recognize revenue when a fixed commitment to purchase our products is received, title or ownership has passed to the customer, the amount due from the customer is fixed or determinable, collectability is reasonably assured, and we do not have any specific performance obligations remaining, such that the earnings process is complete. 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.

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.

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.

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Results of Operations

The following discussion should be read in conjunction with the information set forth in the condensed consolidated financial statements and the related notes thereto appearing elsewhere in this Form 10-Q. 

Comparison of the Three and Nine Months Ended September 30, 2013 and 2012

Revenues

We derive our revenues through the sale of our ECOTRAX rail ties and STRUXURE building products including fully assembled construction and heavy equipment mats. Our current strategic focus is to continue (i) to advance the sale of our ECOTRAX rail ties, (ii) to create a broad-based market for our STRUXURE building products and (iii) to expand and improve our manufacturing processes to include the utilization of raw materials in a less processed stage, and therefore less expensive.

In 2011, we emerged from our proof-of-concept phase of development, to our growth phase, expanding our customer base and engaging in multiple sales opportunities around the globe. We have been undertaking strategic initiatives, including establishing global standards for composite rail ties and sleepers, the ongoing development and deployment of guidance materials, such as supporting documentation, research and other publications of the structural properties and performance of our products, with the goal to educate engineers, developers and others who might use our products in projects for their clients, as well as potential customers.

Having completed a number of commercially engineered-solution projects, we have been concentrating our activities on advancing from a proof-of-concept stage to a strategically focused, sales-oriented growth company. Over the past several years, our activities centered upon advancing the development of our technology and products.  As proof-of-concept, we completed the deployment of our products across multiple customers, applications and industries. We began introducing our ECOTRAX rail products to mass markets globally and, during the year ended December 31, 2011, we developed and began implementing a sales strategy for our STRUXURE building products to other public- and private-sector buyers which included a focus on the development of construction and heavy equipment mats where we have a solution that is lighter in weight, has stronger properties and a larger life cycle than competitive products on the market. Our strategic focus is on the continued growth of sales, within both the rail tie and the structural building products sectors, the expansion of our technology within and across markets, and the expansion of our infrastructure in order to manufacture our products and support our growing sales order pipeline.

For the three months ended September 30, 2013 and 2012, we recognized revenue of $1.3 million and $0.8 million, respectively. Revenue from the sale of our ECOTRAX rail ties was $1.0 million and $0.7 million for the corresponding periods, respectively, with the remainder resulting from the sale of our STRUXURE composite structural building products. For the three months ended September 30, 2013 and 2012, approximately 53% and 73%, respectively of our revenues were to one Class 1 railroad customer pursuant to a three-year supply agreement. During the three months ended September 30, 2013 and 2012, we recognized revenue for the sale of approximately 6,800 and 5,900 rail ties, respectively for the customer’s maintenance program.

For the nine months ended September 30, 2013 and 2012, we recognized revenue of $4.5 million and $4.9 million, respectively. Revenue from the sale of our ECOTRAX rail ties was approximately $3.9 million and $4.4 million for the corresponding periods, respectively, with the remainder resulting from the sale of our STRUXURE composite structural building products. For the nine months ended September 30, 2013 and 2012, approximately 46% and 65%, respectively of our revenues were to one Class 1 railroad customer pursuant to a three-year supply agreement. During the nine months ended September 30, 2013 and 2012, we recognized revenue for the sale of approximately 20,900 and 32,200 rail ties, respectively for the customer’s maintenance program.

Based on sources and properties of certain raw materials we began using in the production of our rail ties during the year ended December 31, 2012, we delivered rail ties with improved properties to our Class 1 railroad customer. During the three months ended September 30, 2012, this customer notified us they wished to further evaluate these improved rail ties for use in their track maintenance programs. Although the ECOTRAX rail ties that we have supplied to this customer to date have met the specifications they required pursuant to the agreement, late in the year ended December 31, 2012 we halted production at our Texas facility which had been brought on line initially for the primary purpose of producing the ECOTRAX rail ties for this three-year supply agreement. During February 2013 we restarted production at our Texas facility and resumed delivery under the agreement. As disclosed in prior periods, this contract contains challenging pricing terms resulting in minimal gross margin, but it has provided us with a base to develop and expand our manufacturing capacity and processes.

To date, we have made the necessary investments in tooling, molds and other production equipment to run a maximum of three production lines which would be capable of producing $30 to $40 million in revenue of our ECOTRAX and STRUXURE products. Through September 30, 2013, this equipment was located at our Texas facility and our Pennsylvania contract manufacturer’s facilities. During the shutdown at our Texas facility in late-2012, we evaluated the feasibility, costs and benefits of replacing our existing subcontracted production model with a production model where we staff, manage and direct the manufacture of our products with our own employees, management and processes. Upon restart in February 2013, production within our Texas facility was under this new production model, whereby we leased the facility and certain equipment, initially on a month-to-month basis for use of the facility and the existing production equipment. During the three months ended September 30, 2013, we purchased the equipment we had been leasing and have begun the consolidation of our production within this facility.

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During the three and nine months ended September 30, 2013, we shipped products to eight and 24 existing customers, respectively and to 12 and 33 new customers, respectively. Our ECOTRAX rail ties are currently in track test or undergoing purchase approval with leading passenger and freight lines in the following countries – Australia, Brazil, Chile, Mexico, New Zealand, Russia and Singapore as well as various other countries in Europe. We continue to expand the possibilities where our STRUXURE products may be beneficial when compared to traditional products such as vehicular bridges and pedestrian walk ways. In addition, we’ve engaged third-party fabricators to assemble our composite rail tie products into heavy equipment or construction mats. Historically, these mats have been constructed from traditional lumber. Our STRUXURE Mats can withstand the impact of heavy construction equipment and will last longer than traditional mats. Testing of our STRUXURE Mats with several oil and gas pipeline and other infrastructure contractors has proven successful and we continue to seek out other applications of this product concept. There can be no assurance that the results of these and other test orders or the approval processes currently underway for other orders will materialize into additional orders for our ECOTRAX rail ties. Our focus will continue to be on diversifying our customer base and the pricing of our products, as well as the continuing development of opportunities we foresee with our STRUXURE composite structural building products.

Since the products produced utilizing our technology are new to the various markets and regions we’ve identified, we continue to work with various organizations to create the necessary specifications for use of our products. This is a time-consuming process and varies by product line and geographic region.

Cost of Sales and Operating Expenses

Costs of Sales

Our costs of sales are primarily comprised of the cost of raw materials and the costs and expenses associated with our manufacturing process and arrangements.  The price of the raw materials depends principally on the stage and source of the supply. To date, we’ve primarily purchased 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 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 current 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 our specific raw materials from unique sources and recycled materials from municipal and other recycling collection sources. Previously, due to the limited amount of time and personnel we could devote to raw materials sourcing, we acquired our raw materials primarily from intermediaries, and purchased production-stage material, which resulted in the acquisition of raw materials at less-than favorable prices. But dealing in the recycled plastics market, whether through intermediaries or bulk purchases, we encountered and 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, we continue to (i) seek out agreements with sources of cheaper and less processed raw materials, while ensuring those materials meet or exceed our quality standards, (ii) evaluate and test our in-house preparation of the less-processed raw materials for use in our production streams, and (iii) expand our research and development effort of different raw materials which may provide a cost and/or performance advantage over existing materials.

Over the years, our manufacturing arrangements have allowed for the production of our products utilizing our manifolds, molds and controllers, but we continually evaluate the costs and benefits of our manufacturing arrangements. Our current manufacturing strategy strives to achieve as much production within a facility as possible to maximize the spread of the fixed and variable costs of production.

To date, our contract manufacturing arrangements have been structured under different requirements. Our contract manufacturing arrangements have included situations where we’ve sourced, purchased and supplied the raw materials and paid a per pound manufacturing cost to them to produce the finished products. This contract manufacturing model, although expensive, provides flexibility in matching production to order flow without the investment in personnel, facilities and equipment. Through September 30, 2013, we operated this model with an early contract manufacturer and benefited through the flexibility it provided us.

In another situation, we contracted to purchase a finished product for a pre-determined cost plus any impact of changing raw material costs during the term of that arrangement. We employed this model initially at our Texas facility through a contract manufacturer. During the three months ended December 31, 2012 when the production at the Texas facility was halted pursuant to the request of our Class 1 railroad customer, this manufacturing arrangement was terminated. Upon the restart of manufacturing at that facility during February 2013, we initiated a new manufacturing arrangement and in addition to sourcing the raw materials for production, we provide the personnel to produce our products and lease the facility and equipment, initially under a month-to-month arrangement. Under this new manufacturing approach, we anticipate reducing the costs of our products by spreading our costs of production, such as the personnel costs, facility rental, and equipment maintenance and depreciation, over a larger volume of production by adding additional production lines. In addition, we have initiated the evaluation and testing of equipment, processes and the resulting raw materials for use in our production processes. We continually monitor our production capacity requirements and plan to adjust our production capacity as the need arises.

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Additionally, we continued our efforts in driving unnecessary costs and expenses out of our manufacturing processes. Each step of the manufacturing process, from raw material acquisition, handling and storage through the quality control review and inventory handling steps, we continue to examine best practices and other methods to improve and streamline the processes to eliminate unnecessary costs and expenses. We continue to search out ways to continue to reduce the costs of manufacturing our products.

Our costs of sales of $1.2 million and $0.8 million for the three months ended September 30, 2013 and 2012, respectively resulted in gross margins of $83,517 and $12,929, respectively. These gross margins of 6.6% and 1.6%, respectively are a result of the fixed pricing impact of our three-year supply agreement with our Class 1 railroad customer. During the three months ended September 30, 2013, sales pursuant to that three-year supply agreement were 53% of our revenue compared to 73% in the corresponding quarter of the previous year. During the nine months ended September 30, 2013 and 2012, our costs of sales of $4.1 million and $4.8 million, respectively, resulted in gross margins of $387,266 and $64,155, or 8.5% and 1.3 %, respectively. Sales to our Class 1 railroad customer pursuant to the three-year supply agreement represented 46% and 65% of our sales, respectively.

Because we remain in the early stages of commercial and production activities, cost of sales may not be indicative of cost of sales in the future, which may vary significantly and are highly dependent on the price of raw materials, concurrent production activities, use of subcontractors and timing and mix of the sales and services.

Product Development, Quality Management and Excess Production Capacity.

Product development, quality management and excess production capacity expenses are incurred as we perform oversight of our manufacturing operations and relationships and include our ongoing evaluations of materials and processes for existing products, development of new products and processes, and the excess costs and expenses of our manufacturing processes not absorbed in the inventory produced during the period. Product development expenses typically include costs associated with the design and the required testing procedures associated with our existing production lines. In addition to our investment in both our product development efforts and insuring the products we produce meet the high quality specifications we have set, we work from time to time, with the scientific team at Rutgers University to enhance our product formulations, develop innovative products and expand the reach of our existing products. Our production facility in Texas includes capacity for four production lines and ancillary equipment and related services. Since we operate at less than the capacity of the facility, the allocable costs of the facility to production has been adjusted accordingly and the excess costs are charged to product development.

Product development and quality management expenses were $213,526 and $320,137 for the three months ended September 30, 2013 and 2012, respectively and for the nine months ended September 30, 2013 and 2012 were $682,142 and $883,979, respectively. The costs of the excess capacity of our manufacturing facility for the three and nine months ended September 30, 2013 were $293,940 and 394,739, respectively. There were no such costs in the corresponding periods of the prior year as we were operating under a contract manufacturing arrangements. Our product development and quality management expenses may increase as we expand our efforts to innovate our manufacturing processes, enhance our product formulations, develop new innovative products, and expand the reach of our existing products. As our actual production approaches the capacity of our existing facility, our excess capacity costs and expenses should decrease.

Marketing and Sales.

Expenses related to marketing and sales consist primarily of compensation for our sales and marketing personnel, sales commissions and incentives, advertising, samples, trade shows and related travel and the effect of the minimum royalty required under our licensing agreements. We continue to increase our marketing and sales effort and 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. We expect that in the future, marketing and sales expenses will increase in absolute dollars.

Marketing and sales expenses decreased to $202,106 for the three months ended September 30, 2013 compared to $362,851 for the corresponding period in 2012. And during the nine months ended September 30, 2013 and 2012, marketing and sales expenses were $703,201 and $749,913, respectively. We anticipate our marketing and sales expenses to fluctuate as we continue the continued implementation of our standard setting, branding strategy and marketing efforts in support thereof.

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 $732,427 and $581,561 million for the three months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2013 and 2012, we incurred $2.2 million and $2.8 million, respectively in general and administrative expenses. We anticipate as we continue to grow our business, our general and administrative expenses will increase.

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Depreciation and Amortization.

For the three and nine months ended September 30, 2013 and 2012, we recorded depreciation expense for manufacturing and production equipment as a charge to production. As we continue to increase our production capacity, we anticipate acquiring additional production equipment and would anticipate an increase in depreciation and amortization expenses. Additionally, depreciation of certain of our office equipment and acquired software is charged general and administrative expenses.

Depreciation and amortization was $75,038, including $70,485 charged to production for the three months ended September 30, 2013, compared to $16,972, including $13,179 charged to production for the corresponding period of 2012. We depreciate our production equipment as it is utilized in producing our products. During the nine months ended September 30, 2013 and 2012, we incurred $147,605 and $90,163, respectively in depreciation expense of which $134,813 and $82,356, respectively was charged to production.

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, 2013 and 2012, was $190,318 and $108,395, respectively. During the nine months ended September 30, 2013 and 2012, we recognized $542,971 and $241,944, respectively. At September 30, 2013, we had an outstanding balance of $8.9 million of our 8% convertible promissory notes.

Amortization of Debt Discounts.

Amortization of debt discounts consists of the periodic amortization of the debt discounts associated with our convertible debt.

During the three months ended September 30, 2013, we recognized $132,497, and during the nine months ended September 30, 2013 and 2012, we recognized $414,525 and $373,553, respectively for the amortization of various convertible security discounts. During the three months ended September 30, 2012, amortization of debt discounts was immaterial. At the time of issuance, we recorded discounts on our convertible 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.

At September 30, 2013, the unamortized discounts for our 8% convertible promissory notes were $1.8 million. This unamortized discount is being amortized to other expense over the five year lives of the underlying convertible promissory notes.

Change in Fair Value of Derivative Liabilities.

8% Convertible Promissory Notes – Conversion Option and Warrants. During the year ended December 31, 2012 and through September 30, 2013, we issued and sold $8.9 million of our 8% convertible promissory notes, which gives the holders the right to convert the outstanding debt into shares of our common stock. We recorded the initial fair values of the conversion options of $1.6 million on the dates of issuance, as a derivative liability and recognized the amounts as a discount of our 8% convertible promissory notes. The fair value of this derivative liability at September 30, 2013 was estimated to be $1.1 million. We account for this derivative liability pursuant to ASC 815, and accordingly, we recognized the decrease in fair value of $460,000 and $95,426 during the three and nine months ended September 30, 2013 as a change in fair value of this derivative liability which was recognized in our statements of operations. For the three and nine months ended September 30, 2012, we recognized the decrease in fair value of $262,932 in our statements of operations.

In addition, in conjunction with the sale and issuance of these 8% convertible promissory notes, we issued warrants to purchase our common stock for which we calculated the initial fair value of the warrants to be approximately $692,460 on the dates of issuance and recorded a derivative liability and recognized the amount as a discount of our 8% convertible promissory notes. At September 30, 2013, we estimated the fair value of this derivative liability to be $270,000. This derivative liability does not qualify as a fair value or cash flow hedge under ASC 815, and accordingly, we recognized the decrease in fair value of $270,000 and $199,151 during the three and nine months ended September 30, 2013 as a change in the fair value of this derivative liability which was recognized in our statements of operations. For the three and nine months ended September 30, 2012, we recognized the decrease in fair value of $127,888 in our statement of operations.

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10% Convertible Preferred Stock 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 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 nine months ended September 30, 2013, we recorded the increase in fair value of this derivative liability in our statement of operations of $40,641. During the three and nine months ended September 30, 2012, we recognized the decreases in fair value of $54,864 and $401,961, respectively in our statement of operations.

10% Convertible Debentures – Warrants. Effective January 14, 2011, we agreed to amend the terms of our 10% convertible debentures, which among other things extended the maturity dates and required us to issue warrants for each calendar month after the original maturity dates that these debentures remained outstanding. Since it was probable that we would issue these warrants, we calculated the fair value of the warrants and recorded a derivative liability of approximately $797,200 on the date of amendment and recognized the amount as a loss in our statement of operations. This derivative liability did not qualify as a fair value or cash flow hedge under ASC 815, and accordingly, changes in the fair value of the derivative liability were immediately recognized in earnings and classified as a gain or loss from change in fair value in the statements of operations. During the nine months ended September 30, 2012, we recorded the decrease in fair value of the derivative liability of $13,309 in our statement of operations.

Revolving Credit Agreement – Conversion Option. During the year ended December 31, 2011, we entered into a revolving credit agreement which gave the holder the right to convert a portion of the outstanding debt into shares of our common stock. We recognized the fair value of this beneficial conversion feature as a derivative liability. During the three months ended June 30, 2012, this revolving credit agreement was terminated. During the nine months ended September 30, 2012, we recognized the decrease in fair value of the derivative liability of $113,271 in our statement of operations.

Income Taxes.

We have unused net operating loss carry forwards, which included losses incurred from inception through December 31, 2012. 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 December 31, 2012 has been recorded.

Liquidity and Capital Resources

At September 30, 2013 we had $4.8 million in current assets and $3.6 million in current liabilities resulting in working capital of $1.2 million. This compares to working capital of $1.6 million as of December 31, 2012. Our working capital at September 30, 2013 includes $1.3 million in fair value of the derivative liabilities associated with our 8% convertible promissory notes (“8% Notes”). These derivative liabilities represent the estimated fair value of the conversion feature of the 8% Notes and the warrants issued in conjunction with the 8% Notes. If or when the 8% Notes convert, the fair value of the imbedded conversion feature will become zero. No use of working capital will be necessary to extinguish this liability. Likewise, if or when the note holders exercise their warrants to purchase shares of our common stock, the corresponding derivative liabilities will be valued at zero, and no use of working capital will have occurred.

We used $3.8 million and $4.3 million in our operating activities during the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2013, we purchased $1.2 million in property and equipment, primarily for the Texas facility. During the corresponding period in 2012, we added $1.0 million in property and equipment. We anticipate purchasing additional property and equipment as we continue to expand our manufacturing capacity.

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During nine months ended September 30, 2013, we issued and sold to certain investors an aggregate principal amount of $1.8 million of our 8% Notes, due on the five year anniversary of the date of the 8% Notes. At September 30, 2013, we had aggregate principal of 8% Notes of $8.9 million. We may prepay the notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof and interest accrues at the rate of 8.0% per annum, payable during the first three years that the 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 notes. During the fourth and fifth years that the notes are outstanding, interest that accrues under the notes shall be payable in cash. In addition, we received $400,000 as an advance for additional 8% Notes issued and sold subsequent to September 30, 2013.

In April 2006, we commenced an action against a shareholder for disgorgement of short-swing profits pursuant to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the nine months ended September 30, 2013, we received $3.1 million representing the disgorgement of the short-swing profits less legal fees. This amount was recorded as additional paid-in capital.

Pursuant to the terms of our 10% convertible preferred stock, the preferred stock may be redeemed for cash by the holder any time after the three-year anniversary from the initial purchase. We initially sold the preferred stock via several closings in March and April 2011. The aggregate stated value of 10% preferred stock outstanding at September 30, 2013 of $7.0 million may be redeemed beginning in March 2014. Pursuant to the terms of the 10% convertible preferred stock, to date we have elected to pay our quarterly dividends in shares of our common stock, rather than in cash. Whether or not we make the same election for future quarters will have an impact on our cash balances.

Our ability to redeem our convertible preferred stock when, and if, redeemed by the holders, pay principal and interest on our 8% convertible promissory notes and to fund our planned operations, including certain minimum royalties pursuant to our license agreement with Rutgers University, depends on our future operating performance and our ability to raise capital. The timing and amount of our financing needs will be highly dependent on our ability to manufacture our products at a cost which provides for an appropriate return, the success of our sales and marketing programs, our ability to obtain purchase commitments, the size of such purchase commitments and any associated working capital requirements.

At September 30, 2013, we had working capital of $1.2 million, cumulative face value of redeemable preferred stock and promissory notes of $15.9 million, a stockholders’ deficit of $9.5 million and accumulated losses of $39.4 million.  This raises substantial doubt about our ability to continue as a going concern.  In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon our ability to meet our financing requirements, raise additional capital, and the success of our business plan and future operations. Our current operating plans are to enhance and expand our manufacturing capacity when necessary to meet our customer commitments, continue to expand our marketing and sales capabilities to increase our pipeline of sales orders, and continue to develop innovative solutions for our customers. Although we have raised additional funds through the issuance of our 8% convertible promissory notes and continue exploring other financing sources, there can be no assurance that we will achieve our financing needs at all or upon terms acceptable to us. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock.

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 for the years ended December 31, 2012 and 2011, based on the significant operating losses and a lack of external financing.  Our financial statements do not include any adjustments that resulted from the outcome of this uncertainty.

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 Risk.

Not applicable.

32

 

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

Our principal executive officer and principal financial officer 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 their evaluation, our principal executive officer and principal financial officer concluded that, as a result of the material weaknesses described below, during the three months ended September 30, 2013, we did not maintain effective internal control over financial reporting, based on criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission. The material weaknesses, which relate to internal control over financial reporting, that were identified are:

 (i) We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and 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.  For example, on May 10, 2012, we became aware that we had failed to recognize a warrant derivative liability with respect to our 10% Convertible Preferred Stock and the subsequent measurement of fair value of the warrant derivative liability, as required by Accounting Standards Codification 815-40.  As a result, we determined that our consolidated financial statements for the year ended December 31, 2011 filed in the Annual Report on Form 10-K and our consolidated financial statements as of and for the three month period ended September 30, 2011 filed in the quarterly report on Form 10-Q (collectively, the “Reports”) should not be relied upon and needed to be restated; and on August 15, 2012, we became aware that we had failed (i) to initially record and subsequently fair value our derivative liabilities for our bonus warrants and (ii) to properly account for the loss on extinguishment of the debentures upon amendment. As a result, we determined that our consolidated financial statements for the interim periods ended March 31, 2011, June 30, 2011, September 30, 2011, for the year ended December 31, 2011, and for the interim period ended March 31, 2012 should not be relied upon and needed to be restated, and

 (ii) Due to our small size, we do not have proper segregation of duties in certain areas of our financial reporting and other accounting processes and procedures. This control deficiency results in a reasonable possibility that material misstatements of our consolidated financial statements will not be prevented or detected on a timely basis.

We are committed to the continual improvement of our financial organization, and we continue to adopt additional processes and procedures over financial reporting. If the issuance of any securities is contemplated, we 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.

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 an appropriate level of 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 do engage consultants and will in the future in order to ensure proper accounting for our consolidated financial statements.

We believe that engaging additional knowledgeable personnel with specific technical accounting expertise will remedy the following material weakness: insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements.

We believe that, when the circumstances allow, the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical accounting issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that we have a limited internal accounting staff, additional personnel will also allow for the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turn-over occurs within the department. We believe this will greatly decrease any control and procedure issues we may encounter in the future. 

33

(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 nine months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

34

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

On April 15, 2013, the United States Supreme Court denied a petition for a writ of certiorari filed by the defendants in the legal proceeding described in Note 8 to our condensed consolidated financial statements included in this Form 10-Q. The defendants have exhausted all opportunities for judicial review of the District Court’s summary judgment and as a result, during the three months ended June 30, 2013, the District Court released the cash bond originally posted by the defendants and we received $3.1 million representing the disgorgement of the short-swing profits less legal fees.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During April 2013, we issued 266,954 shares of common stock as payment of our dividends on our 10% convertible preferred stock, in lieu of cash, with a value of $181,529.

During April 2013, we issued 252,639 shares of common stock as payment of our interest on our 8% convertible promissory notes, in lieu of cash, with a value of $171,795.

During May 2013, we issued 100,000 shares of common stock to a consultant. The shares of common stock had a fair value on the date of issuance of $61,000, which was charged to general and administrative expenses in our statement of operations upon issuance. 

During July 2013, we issued 342,857 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 $175,050.

During July 2013, we issued 369,040 shares of common stock as payment of our interest on our 8% convertible promissory notes, in lieu of cash, with a fair value on the date of issue of $188,210.

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.

35

Item 4. Mine Safety Disclosures.

(Not Applicable)

Item 5. Other Information.

None.

36

Item 6. Exhibits.

Exhibits:
31.1	Section 302 Certification of Chief Executive Officer
31.2	Section 302 Certification of Chief Financial Officer
32.1	Section 906 Certification of Chief Executive Officer and Chief Financial Officer

37

SIGNATURES

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

	Axion International Holdings, Inc.
Date: November 14, 2013	/s/ Steven Silverman
	Steven Silverman
	Chief Executive Officer
Date: November 14, 2013	/s/ Donald Fallon
	Donald Fallon
	Chief Financial Officer

38

 

EX-31.1

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, Steven Silverman, 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 14, 2013

/s/ Steven Silverman

Steven Silverman,

Chief Executive Officer

EX-31.2

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 14, 2013

/s/ Donald Fallon

Donald Fallon,

Chief Financial Officer

 

EX-32.1

Exhibit 32.1

CERTIFICATIONS OF

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Axion International Holdings, Inc. (the Company”) on Form 10-Q for the three months ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report”), Steven Silverman, 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 14, 2013
	/s/ Steven Silverman
	Steven Silverman
	President and Chief Executive Officer
Date: November 14, 2013	/s/ Donald Fallon
	Donald Fallon
	Chief Financial Officer

 

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Business Concentration

9 Months Ended

Sep. 30, 2013

Risks and Uncertainties [Abstract]

Business Concentration

Note 12 - Business Concentration

During the nine months ended September 30, 2013 and 2012, we sold our products to 20 and 12 different customers, respectively and with sales of our ECOTRAX rail ties to one customer representing approximately 53% and 73%, respectively of our total revenue.

During the nine months ended September 30, 2013 and 2012, we sold our products to 57 and 25 different customers, respectively and with sales of our ECOTRAX rail ties to one customer representing approximately 46% and 65%, respectively of our total revenue.

Our purchases of raw materials and contract manufacturing services and products, was concentrated in approximately twenty to thirty vendors, during the three and nine months ended September 30, 2013 and 2012.

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenue	$ 1,272,689	$ 800,007	$ 4,532,274	$ 4,892,802
Costs of sales	1,189,172	787,078	4,145,008	4,828,647
Gross margin	83,517	12,929	387,266	64,155
Operating expenses:
Product development, quality management and excess production capacity	507,466	320,137	1,076,881	883,979
Marketing and sales	202,106	362,851	703,201	749,913
General and administrative	732,427	581,561	2,216,656	2,788,381
Total operating costs and expenses	1,441,999	1,264,549	3,996,738	4,422,273
Loss from operations	(1,358,482)	(1,251,620)	(3,609,472)	(4,358,118)
Other (income) expense:
Interest expense	190,318	108,395	542,970	241,944
Amortization of debt discount	132,497	0	414,525	373,553
Change in fair value of derivative liabilities	(730,000)	(445,684)	(253,935)	(919,361)
Total other income	(407,185)	(337,289)	703,560	(303,864)
Net loss	(951,297)	(914,331)	(4,313,032)	(4,054,254)
Accretion of preferred stock dividends and beneficial conversion feature	(405,936)	(438,922)	(1,218,273)	(1,262,126)
Net loss attributable to common shareholders	$ (1,357,233)	$ (1,353,253)	$ (5,531,305)	$ (5,316,380)
Weighted average common shares - basic and diluted	30,307,925	26,766,317	29,583,289	26,157,795
Net loss per share - basic and diluted	$ (0.04)	$ (0.05)	$ (0.19)	$ (0.20)

XML

Accrued Liabilities

9 Months Ended

Sep. 30, 2013

Accrued Liabilities [Abstract]

Accrued Liabilities

Note 4 - Accrued Liabilities

The components of accrued liabilities are:

	September 30, 2013		December 31, 2012
Royalties	$	229,045	$	351,846
10% convertible preferred stock dividends		176,990		-
Interest		181,509		-
Payroll		55,790		77,757
Miscellaneous		9,828		16,831
Total accrued liabilities	$	653,162	$	446,434

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Accrued Liabilities (Tables)

9 Months Ended

Sep. 30, 2013

Accrued Liabilities [Abstract]

Accrued Liabilities

The components of accrued liabilities are:

	September 30, 2013		December 31, 2012
Royalties	$	229,045	$	351,846
10% convertible preferred stock dividends		176,990		-
Interest		181,509		-
Payroll		55,790		77,757
Miscellaneous		9,828		16,831
Total accrued liabilities	$	653,162	$	446,434

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 13 - Commitments and Contingencies

Operating leases

We lease our office space in New Providence, New Jersey pursuant to a three-year lease agreement for monthly lease payments of approximately $3,700.  These premises serve as our corporate headquarters. The lease is currently in its second one-year extension which expires on October 31, 2014.  Facility rent expense totaled approximately $11,100 and $11,300 for the three months ended September 30, 2013 and 2012, respectively, and for the nine months ended September 30, 2013 and 2012 totaled approximately $33,100 and $33,900, respectively.

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. We are using these patented technologies in the production of our composite rail ties and structural building products. The term of the license agreement with Rutgers runs until the expiration of the last-to-expire issued patent within the Rutgers’ technologies licensed under this license agreement, unless terminated earlier.

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.  For the three months ended September 30, 2013 and 2012, we accrued royalties payable to Rutgers on product sales of $19,195 and $13,200, respectively. In addition, for the three months ended September 30, 2013 and 2012, since we did not meet the minimum royalty due pursuant to the license, we accrued $30,805 and $66,800, respectively which was charged to operating expenses in our statement of operations. We also pay annual membership dues to Rutgers Center for Advanced Materials via Immiscible Polymer Processing, or AMIPP, a department of Rutgers.  The membership allows us to use AMIPP for basic research and development at no additional cost, with access to more comprehensive R&D services available to us for fees determined on a per-project basis.

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Income Taxes - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Income Tax [Line Items]
Operating loss carryforwards		$ 17.4
Operating loss carryforwards, Expiration Dates	2032

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Debt (Detail) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Debt Instrument [Line Items]
Less debt discount	$ (1,837,076)	$ (1,457,025)
Total - long term debt	7,041,112	5,671,162
8% convertible promissory notes due on august 2017
Debt Instrument [Line Items]
Convertible debt, due date	2017-08
Convertible debt	$ 8,878,188	$ 7,128,187

XML

10% Convertible Redeemable Preferred Stock (Tables)

9 Months Ended

Sep. 30, 2013

Features Of Convertible Preferred Stock [Abstract]

Ten Percent Convertible Redeemable Preferred Stock

The components of our Preferred Stock, classified as temporary equity in our balance sheet, are summarized as follows:

	September 30,		December 31,
	2013		2012
10% convertible preferred stock - face value	$	7,021,230	$	7,060,230
Unamortized discount		(452,914)		(1,137,618)
10% convertible preferred stock, net of discount		6,568,316		5,922,612

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8% Convertible Promissory Notes (Tables)

9 Months Ended

Sep. 30, 2013

Convertible Debt [Abstract]

Debt

The components of our convertible debt are summarized as follows:

	Due	September 30, 2013		December 31, 2012
8% convertible promissory notes	Beginning August 2017	$	8,878,188	$	7,128,187
Less debt discount			(1,837,076)		(1,457,025)
Total – long term debt		$	7,041,112	$	5,671,162

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Warrant Activity (Detail) (Warrant, USD $)	9 Months Ended
	Sep. 30, 2013
Warrant
Number of Shares Issuable
Balance, Beginning	27,353,151
Granted	4,375,004
Exercised	0
Cancelled	(400,000)
Balance, Ending	31,328,155
Weighted Average Exercise Price
Balance, Beginning	$ 0.76
Granted	$ 0.60
Exercised	$ 0
Cancelled	$ 1.79
Balance, Ending	$ 0.73

XML

Derivative Liabilities - Additional Information (Detail) (USD $)	9 Months Ended			9 Months Ended					3 Months Ended		3 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Dec. 31, 2011	Sep. 30, 2013 Placement Agent	Sep. 30, 2013 Issuances date	Sep. 30, 2013 10% Convertible Redeemable Preferred Stock	Sep. 30, 2013 Placement Agent Warrants	Dec. 31, 2012 Placement Agent Warrants	Sep. 30, 2013 Conversion Options	Sep. 30, 2013 Conversion Options Issuances date	Sep. 30, 2013 Warrant	Sep. 30, 2013 Warrant Issuances date
Derivative [Line Items]
Derivative liability at fair value										$ 1,100,000		$ 270,000
Increase decrease in fair value of un hedged derivative instruments									500,000		270,000
Warrant exercise price			1.00			10
Warrants to purchase 10% Convertible Preferred Stock						10.00%
Class of Warrant or Right, Number of Securities Called by Warrants or Rights						58,352
Expected life, in years	1 year 10 months 24 days					5 years
Fair value assumptions, expected dividend rate	0.00%				0.00%	0.00%
Volatility	45.00%				50.00%	129.00%
Risk-free interest rate	0.30%				0.40%	2.10%
Warrants Not Settleable in Cash, Fair Value Disclosure							122,357	81,716
Change in fair value of warrant liability				40,641
Convertible debt, noncurrent	$ 7,041,112	$ 5,671,162

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Ten Percent Convertible Redeemable Preferred Stock - Additional Information (Detail) (USD $)	0 Months Ended	1 Months Ended			2 Months Ended	9 Months Ended		12 Months Ended	9 Months Ended		9 Months Ended	12 Months Ended			3 Months Ended		9 Months Ended		12 Months Ended	9 Months Ended
	Nov. 10, 2004	Jul. 31, 2013	Apr. 30, 2013	Feb. 28, 2013	Apr. 30, 2011	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2013 Subsequent Event	Oct. 21, 2013 Subsequent Event	Sep. 30, 2013 10% Convertible Preferred Stock	Dec. 31, 2012 10% Convertible Preferred Stock	Dec. 31, 2011 10% Convertible Preferred Stock	Apr. 30, 2011 Preferred Stock	Sep. 30, 2013 Beneficial Conversion Feature	Sep. 30, 2012 Beneficial Conversion Feature	Sep. 30, 2013 Beneficial Conversion Feature	Sep. 30, 2012 Beneficial Conversion Feature	Dec. 31, 2012 Beneficial Conversion Feature	Sep. 30, 2013 Minimum
Temporary Equity [Line Items]
10% Convertible preferred stock, authorized											880,000	880,000	880,000
10% Convertible preferred stock, stated value								$ 10.00
Minimum weighted average price of common stock for 60 consecutive trading days to convert preferred stock																				$ 4.00
10% Convertible preferred stock, conversion rate								$ 1.00
Warrant exercise price								1.00		0.60	10
10% Convertible preferred stock, issued					759,773						702,123	706,023
10% Convertible preferred stock, issuance price per share					$ 10
10% Convertible preferred stock, gross proceeds from issuance					$ 7,597,730
10% Convertible preferred stock, unamortized discount														828,300	452,914		452,914
Conversion rate at issuance								2,100,000
Amortization of preferred stock discount						0	68,346								228,946	268,425	684,704	811,452
Common stock issued upon conversion Preferred Stock, shares	1,701,341			39,000							39,000	462,500
Preferred Stock shares converted				3,900													3,900		46,250
Common stock shares required to be issued if the remaining holders of Preferred Stock elect to convert						7,000,000
Common stock dividends, shares		342,857	266,954			347,039
Shares issued for dividend payments		$ 175,050	$ 181,529			$ 356,579			$ 176,990
Shares of stock called by warrants										1,492,482	58,352

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Business Concentration - Additional Information (Detail)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Number of customer	20	12	57	25
Minimum | Supplier Concentration Risk
Number of vendor	20	20	20	20
Maximum | Supplier Concentration Risk
Number of vendor	30	30	30	30
ECOTRAX rail ties
Concentration risk percentage	53.00%	73.00%	46.00%	65.00%

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Going Concern - Additional Information (Detail) (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Going Concern [Line Items]
Working capital	$ 1,200,000
Stockholders' deficit	9,513,366		7,975,607
Accumulated deficit	39,392,093		35,079,061
Net cash used in operation	$ (3,826,950)	$ (4,299,533)

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Share-based Compensation - Additional Information (Detail) (USD $)	3 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2013
Share-Based Compensation [Line Items]
Shares available for grant	950,000	950,000
Sharebased compensation arrangement by share based payment award options amortized expenses remaining amount		$ 5,894
Warrant
Share-Based Compensation [Line Items]
Change in fair value of derivative	2,990	2,990
Convertible Promissory Notes Warrants
Share-Based Compensation [Line Items]
Share-based compensation arrangement by share-based payment award, equity instruments other than options, grants in period, weighted average grant date fair value		$ 0.60
Fair value of warrants for 8% convertible promissory notes		$ 249,151
Share based compensation arrangement by share-based payment award, options, grants in period, gross		4,375,004

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Derivative Liabilities (Tables)

9 Months Ended

Sep. 30, 2013

Derivative Liabilities [Abstract]

Schedule of Assumptions Used

The estimated fair values of the derivative liabilities for the conversion options on the 8% Notes issued during the nine months ended September 30, 2013 and the warrants issued therewith, were computed by a third party using Monte Carlo simulations based on the following ranges for each assumption:

	At Issuances			September 30, 2013
Volatility		50.0	%		45.0	%
Risk-free interest rate		0.4	%		0.3	%
Dividend yield		0.0	%		0.0	%
Expected life, in years		2.4 to 2.6			1.9

Financial Liabilities Measured at Fair Value on Recurring Basis

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	As of September 30, 2013
							Derivative
							Liabilities at
	Level 1		Level 2		Level 3		Fair Value
8% convertible promissory notes:
Conversion option	$	-	$	-	$	1,060,000	$	1,060,000
Warrants		-		-		270,000		270,000
Derivative liabilities - Current		-		-		1,330,000		1,330,000
Placement agent warrants - non-current		-		-		122,357		122,357
Derivative liabilities - Total	$	-	$	-	$	1,452,357	$	1,452,357

	As of December 31, 2012
							Derivative
							Liabilities at
	Level 1		Level 2		Level 3		Fair Value
8% convertible promissory notes:
Conversion option	$	-	$	-	$	610,000	$	610,000
Warrants		-		-		220,000		220,000
Derivative liabilities - Current		-		-		830,000		830,000
Placement agent warrants - non-current		-		-		81,716		81,716
Derivative liabilities - Total	$	-	$	-	$	911,716	$	911,716

Reconciliation of Derivative Liability Used in Determining Fair Value

The following tables are 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, 2013 and 2012:

	For the Three Months Ended September 30, 2013
							Credited to
							Common
	Balance -		Fair Value of				Stock		Balance -
	July 1,		Derivative		Change in		Upon Issuance		September 30,
	2013		Liability		Fair Value		of Warrants		2013
8% convertible promissory notes:
Conversion option	$	1,520,000	$	-	$	(460,000)	$	-	$	1,060,000
Warrants		540,000		-		(270,000)		-		270,000
Derivative liabilities - current		2,060,000		-		(730,000)		-		1,330,000
Placement agent warrants - non-current		122,357		-		-		-		122,357
Derivative liabilities - total	$	2,182,357	$	-	$	(730,000)	$	-	$	1,452,357

	For the Three Months Ended September 30, 2012
							Credited to
							Common
	Balance -		Fair Value of				Stock		Balance -
	July 1,		Derivative		Change in		Upon Issuance		September 30,
	2012		Liability		Fair Value		of Warrants		2012
8% convertible promissory notes:
Conversion option	$	-	$	982,932	$	(262,932)	$	-	$	720,000
Warrants		-		427,888		(127,888)		-		300,000
Derivative liabilities - current		-		1,410,820		(390,820)		-		1,020,000
Placement agent warrants - non-current		140,458		-		(54,864)		-		85,594
Derivative liabilities - total	$	140,458	$	1,410,820	$	(445,684)	$	-	$	1,105,594

	For the Nine Months Ended September 30, 2013
							Credited to
			Fair Value of				Common Stock		Balance -
	Balance -		Derivative		Change in		Upon Issuance		September 30,
	January 1, 2013		Liability		Fair Value		of Warrants		2013
8% convertible promissory notes:
Conversion option	$	610,000	$	545,426	$	(95,426)	$	-	$	1,060,000
Warrants		220,000		249,151		(199,151)		-		270,000
Derivative liabilities - current		830,000		794,577		(294,577)		-		1,330,000
Placement agent warrants - non-current		81,716				40,641		-		122,357
Derivative liabilities - total	$	911,716	$	794,577	$	(253,936)	$	-	$	1,452,357

	For the Nine Months Ended September 30, 2012
							Credited to
			Fair Value of				Common Stock		Balance -
	Balance -		Derivative		Change in		Upon Issuance		September 30,
	January 1, 2012		Liability		Fair Value		of Warrants		2012
8% convertible promissory notes:
Conversion option	$	-	$	982,932	$	(262,932)	$	-	$	720,000
Warrants		-		427,888		(127,888)		-		300,000
12% convertible revolving credit agreement:
Conversion option		113,271		-		(113,271)		-		-
10% convertible preferred stock:
Warrants		1,875,463		-		-		(1,875,463)		-
10% convertible debentures:
Warrants		70,343		-		(13,309)		(57,034)		-
Derivative liabilities - current		2,059,077		1,410,820		(517,400)		(1,932,497)		1,020,000
Placement agent warrants - non-current		487,555		-		(401,961)		-		85,594
Derivative liabilities - total	$	2,546,632	$	1,410,820	$	(919,361)	$	(1,932,497)	$	1,105,591

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net loss	$ (4,313,032)	$ (4,054,254)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	147,605	90,163
Amortization of convertible debt discount	(414,525)	0
Amortization of preferred stock discount	0	68,346
Change in fair value of derivative liabilities	(294,576)	(517,400)
Change in fair value of 10% convertible preferred stock warrants	40,641	(401,961)
Share-based compensation	142,654	395,947
Change in allowance for doubtful accounts	0	86,665
Changes in operating assets and liability:
Accounts receivable	(246,935)	243,133
Inventories	(536,868)	(881,689)
Prepaid expenses and deposits	65,265	(127,791)
Accounts payable	364,028	158,222
Accrued liabilities	389,743	335,880
Net cash used in operating activities	(3,826,950)	(4,299,533)
Cash flows from investing activities:
Purchase of property and equipment	(1,165,521)	(1,010,701)
Net cash used in investing activities	(1,165,521)	(1,010,701)
Cash flows from financing activities:
Proceeds from issuance of demand promissory notes	400,000	5,000,001
Recovery of shareholder short swing profits	3,095,308
Repayments of convertible debt		(772,500)
Repayments of revolving credit agreement		(466,000)
Net cash provided by financing activities	5,245,309	5,140,378
Net increase (decrease) in cash	252,838	(169,856)
Cash and cash equivalents at beginning of period	346,905	1,982,772
Cash and cash equivalents at end of period	599,743	1,812,916
Supplemental disclosures of cash flow information:
Cash paid for interest	1,971	67,834
Fair value of conversion option of 8% convertible promissory notes	545,425	982,932
Redeemable common stock reclassified to permanent equity	0	242,500
Fair value of bonus warrants granted	0	57,034
8% Convertible promissory note
Cash flows from financing activities:
Proceeds from issuance of demand promissory notes	1,750,001	1,378,877
Supplemental disclosures of cash flow information:
Fair value of warrants issued	249,151	427,888
Revolving Credit Agreement
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of convertible debt discount	0	(305,206)
10% Convertible Preferred Stock
Supplemental disclosures of cash flow information:
Conversion of 10% convertible preferred stock and debt	39,000	462,500
Dividends on 10% convertible preferred stock	533,569	519,020
Fair value of warrants issued	0	1,875,463
Amortization of 10% convertible preferred stock discount	$ 684,704	$ 743,106

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Going Concern

9 Months Ended

Sep. 30, 2013

Going Concern [Abstract]

Going Concern

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, 2013, we had working capital of $1.2 million, a stockholders’ deficit of $9.5 million and had accumulated losses of $39.4 million and net cash used in operations for the nine months ended September 30, 2013 was $3.8 million.  This raises substantial doubt about our ability to continue as a going concern.  In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon our ability to meet our financing requirements, either by raising additional capital or the success of our business plan and future operations.   We may seek additional means of financing to fund our business plan.  There is no assurance that we will be successful in raising sufficient funds to assure our eventual profitability.  We believe that actions planned and presently being taken to revise our operating and financial requirements provide us the opportunity to continue as a going concern. The financial statements do not include any adjustments that might result from these uncertainties.

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Derivative Liabilities

9 Months Ended

Sep. 30, 2013

Derivative Liabilities [Abstract]

Derivative Liabilities

Note 5 - Derivative Liabilities

8% Convertible Promissory Notes – Conversion Option and Warrants

During the nine months ended September 30, 2013, we issued 8% convertible promissory notes (the “8% Notes”). See Note 6 for further discussion. The 8% Notes met the definition of a hybrid instrument, as defined in 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, into shares of our common stock. The 8% Notes 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 derivative 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 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 the conversion options on September 30, 2013 was $1.1 million, and the decrease in fair value of $0.5 million for the three months ended September 30, 2013 was recorded as a change in derivative liability in the statement of operations. The aggregate fair value of the warrants on September 30, 2013 was $270,000. The decrease in fair value of $270,000 for the three months ended September 30, 2013 was recorded as a change in fair value of derivative liability in the statement of operations.

The estimated fair values of the derivative liabilities for the conversion options on the 8% Notes issued during the nine months ended September 30, 2013 and the warrants issued therewith, were computed by a third party using Monte Carlo simulations based on the following ranges for each assumption:

	At Issuances			September 30, 2013
Volatility		50.0	%		45.0	%
Risk-free interest rate		0.4	%		0.3	%
Dividend yield		0.0	%		0.0	%
Expected life, in years		2.4 to 2.6			1.9

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 initial fair value 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 129%, (iii) a risk-free interest rate 2.1%, and (iv) an expected life of five years. The fair value of the warrant liability at September 30, 2013 and December 31, 2012 was $122,357 and $81,716, respectively and we recognized the change in fair value of the warrant liability for the nine months ended September 30, 2013 of $40,641 in our statement of operations.

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, 2013 and December 31, 2012 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.

Additional Disclosures Regarding Fair Value Measurements

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term maturity of those items.

The fair value of our debt, which approximates its carrying value, as of September 30, 2013 and December 31, 2012 was estimated at $7.9 million and $5.7 million, respectively. Factors that we considered when estimating the fair value of our debt include market conditions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of debt. The level would be considered as level 2.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	As of September 30, 2013
							Derivative
							Liabilities at
	Level 1		Level 2		Level 3		Fair Value
8% convertible promissory notes:
Conversion option	$	-	$	-	$	1,060,000	$	1,060,000
Warrants		-		-		270,000		270,000
Derivative liabilities - Current		-		-		1,330,000		1,330,000
Placement agent warrants - non-current		-		-		122,357		122,357
Derivative liabilities - Total	$	-	$	-	$	1,452,357	$	1,452,357

	As of December 31, 2012
							Derivative
							Liabilities at
	Level 1		Level 2		Level 3		Fair Value
8% convertible promissory notes:
Conversion option	$	-	$	-	$	610,000	$	610,000
Warrants		-		-		220,000		220,000
Derivative liabilities - Current		-		-		830,000		830,000
Placement agent warrants - non-current		-		-		81,716		81,716
Derivative liabilities - Total	$	-	$	-	$	911,716	$	911,716

The following tables are 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, 2013 and 2012:

	For the Three Months Ended September 30, 2013
							Credited to
							Common
	Balance -		Fair Value of				Stock		Balance -
	July 1,		Derivative		Change in		Upon Issuance		September 30,
	2013		Liability		Fair Value		of Warrants		2013
8% convertible promissory notes:
Conversion option	$	1,520,000	$	-	$	(460,000)	$	-	$	1,060,000
Warrants		540,000		-		(270,000)		-		270,000
Derivative liabilities - current		2,060,000		-		(730,000)		-		1,330,000
Placement agent warrants - non-current		122,357		-		-		-		122,357
Derivative liabilities - total	$	2,182,357	$	-	$	(730,000)	$	-	$	1,452,357

	For the Three Months Ended September 30, 2012
							Credited to
							Common
	Balance -		Fair Value of				Stock		Balance -
	July 1,		Derivative		Change in		Upon Issuance		September 30,
	2012		Liability		Fair Value		of Warrants		2012
8% convertible promissory notes:
Conversion option	$	-	$	982,932	$	(262,932)	$	-	$	720,000
Warrants		-		427,888		(127,888)		-		300,000
Derivative liabilities - current		-		1,410,820		(390,820)		-		1,020,000
Placement agent warrants - non-current		140,458		-		(54,864)		-		85,594
Derivative liabilities - total	$	140,458	$	1,410,820	$	(445,684)	$	-	$	1,105,594

	For the Nine Months Ended September 30, 2013
							Credited to
			Fair Value of				Common Stock		Balance -
	Balance -		Derivative		Change in		Upon Issuance		September 30,
	January 1, 2013		Liability		Fair Value		of Warrants		2013
8% convertible promissory notes:
Conversion option	$	610,000	$	545,426	$	(95,426)	$	-	$	1,060,000
Warrants		220,000		249,151		(199,151)		-		270,000
Derivative liabilities - current		830,000		794,577		(294,577)		-		1,330,000
Placement agent warrants - non-current		81,716				40,641		-		122,357
Derivative liabilities - total	$	911,716	$	794,577	$	(253,936)	$	-	$	1,452,357

	For the Nine Months Ended September 30, 2012
							Credited to
			Fair Value of				Common Stock		Balance -
	Balance -		Derivative		Change in		Upon Issuance		September 30,
	January 1, 2012		Liability		Fair Value		of Warrants		2012
8% convertible promissory notes:
Conversion option	$	-	$	982,932	$	(262,932)	$	-	$	720,000
Warrants		-		427,888		(127,888)		-		300,000
12% convertible revolving credit agreement:
Conversion option		113,271		-		(113,271)		-		-
10% convertible preferred stock:
Warrants		1,875,463		-		-		(1,875,463)		-
10% convertible debentures:
Warrants		70,343		-		(13,309)		(57,034)		-
Derivative liabilities - current		2,059,077		1,410,820		(517,400)		(1,932,497)		1,020,000
Placement agent warrants - non-current		487,555		-		(401,961)		-		85,594
Derivative liabilities - total	$	2,546,632	$	1,410,820	$	(919,361)	$	(1,932,497)	$	1,105,591

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Inventories

9 Months Ended

Sep. 30, 2013

Inventory, Net [Abstract]

Inventories

Note 3 - Inventories

Inventories are priced at the lower of cost or market and consist primarily of raw materials and finished products.

Our inventories consisted of:

	September 30, 2013		December 31, 2012
Finished products	$	2,913,368	$	2,509,797
Production materials		712,453		579,156
Total inventories	$	3,625,821	$	3,088,953

Since we had engage third-party contract manufacturers to produce our finished products, and in certain situations we provide them the raw materials, certain of our inventories at September 30, 2013 and December 31, 2012 were located at the third-party contract manufacturing locations, as well as our leased facility. We carry adequate insurance for loss on this inventory.

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Ten Percent Convertible Redeemable Preferred Stock (Detail) (Redeemable Preferred Stock, USD $)	Sep. 30, 2013	Dec. 31, 2012
Redeemable Preferred Stock
Temporary Equity [Line Items]
10% convertible preferred stock - face value	$ 7,021,230	$ 7,060,230
Unamortized discount	(452,914)	(1,137,618)
10% convertible preferred stock, net of discount	$ 6,568,316	$ 5,922,612

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Share-based Compensation (Tables)

9 Months Ended

Sep. 30, 2013

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock Option Activity

The following table summarizes our stock option activity for the nine months ended September 30, 2013:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
Balance, January 1, 2013		5,710,125	$	1.10
Granted		-		-
Exercised		-		-
Expired		(962,076)		0.13
Balance, September 30, 2013		4,748,049	$	1.30

Options Outstanding

The following table summarizes options outstanding at September 30, 2013:

			Weighted-		Weighted-
	Number		Average		Average		Aggregate
	of Shares		Exercise		Remaining		Intrinsic
	Issuable		Price		Term (Years)		Value
Exercisable		3,348,049	$	1.11		2.4	$	6,000
Not vested		1,400,000		1.77		3.8		-
Balance, September 30, 2013:		4,748,049	$	1.30		2.8	$	6,000

Schedule of Stockholders' Equity Note, Warrants or Rights

The following table sets forth our warrant activity during the nine months ended September 30, 2013:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
Balance, January 1, 2013		27,353,151	$	0.76
Granted		4,375,004		0.60
Exercised		-		-
Cancelled		(400,000)		1.79
Balance, September 30, 2013		31,328,155	$	0.73

The following table sets forth the warrants outstanding at September 30, 2013:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
10% convertible debenture - bonus warrants		483,357	$	0.60
10% convertible preferred stock – warrants		3,761,365		1.00
8% convertible promissory notes – warrants		22,195,474		0.60
Consultants		4,887,959		1.12
Total		31,328,155	$	0.73

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Inventories (Detail) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Schedule of Inventory [Line Items]
Finished products	$ 2,913,368	$ 2,509,797
Production materials	712,453	579,156
Total inventories	$ 3,625,821	$ 3,088,953

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Reconciliation of Derivative Liability Used in Determining Fair Value (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Derivative [Line Items]
Beginning Balance			$ 830,000
Fair value of derivative liability			294,576	517,400
Ending Balance	1,330,000		1,330,000
Conversion options | 12% convertible revolving credit agreement conversion options
Derivative [Line Items]
Beginning Balance				113,271
Fair value of derivative liability				0
Change in fair value				(113,271)
Credited to common stock upon issuance of warrants				0
Ending Balance		0		0
Conversion options | 8% convertible promissory notes
Derivative [Line Items]
Beginning Balance	1,520,000	0	610,000	0
Fair value of derivative liability	0	982,932	545,426	982,932
Change in fair value	(460,000)	(262,932)	(95,426)	(262,932)
Credited to common stock upon issuance of warrants	0	0	0	0
Ending Balance	1,060,000	720,000	1,060,000	720,000
Warrant | 10% convertible preferred stock warrants
Derivative [Line Items]
Beginning Balance				1,875,463
Fair value of derivative liability				0
Change in fair value				0
Credited to common stock upon issuance of warrants				(1,875,463)
Ending Balance		0		0
Warrant | 8% convertible promissory notes
Derivative [Line Items]
Beginning Balance	540,000	0	220,000	0
Fair value of derivative liability	0	427,888	249,151	427,888
Change in fair value	(270,000)	(127,888)	(199,151)	(127,888)
Credited to common stock upon issuance of warrants	0	0	0	0
Ending Balance	270,000	300,000	270,000	300,000
Warrant | 10% convertible debenture
Derivative [Line Items]
Beginning Balance				70,343
Fair value of derivative liability				0
Change in fair value				(13,309)
Credited to common stock upon issuance of warrants				(57,034)
Ending Balance		0		0
Placement agent | Warrant
Derivative [Line Items]
Beginning Balance	122,357	140,458	81,716	487,555
Fair value of derivative liability	0	0		0
Change in fair value	0	(54,864)	40,641	(401,961)
Credited to common stock upon issuance of warrants	0	0	0	0
Ending Balance	122,357	85,594	122,357	85,594
Derivative liabilities - current
Derivative [Line Items]
Beginning Balance	2,060,000	0	830,000	2,059,077
Fair value of derivative liability	0	1,410,820	794,577	1,410,820
Change in fair value	(730,000)	(390,820)	(294,577)	(517,400)
Credited to common stock upon issuance of warrants	0	0	0	(1,932,497)
Ending Balance	1,330,000	1,020,000	1,330,000	1,020,000
Derivative liabilities - total
Derivative [Line Items]
Beginning Balance	2,182,357	140,458	911,716	2,546,632
Fair value of derivative liability	0	1,410,820	794,577	1,410,820
Change in fair value	(730,000)	(445,684)	(253,936)	(919,361)
Credited to common stock upon issuance of warrants	0	0	0	(1,932,497)
Ending Balance	$ 1,452,357	$ 1,105,594	$ 1,452,357	$ 1,105,594

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Commitments and Contingencies - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Commitments and Contingencies [Line Items]
Lease agreement, Current monthly lease payments	$ 3,700		$ 3,700
Facility rent expense	11,100	11,300	33,100	33,900
Royalty payment to Rutgers, minimum rate	1.50%		1.50%
Royalty payment to Rutgers, maximum rate	3.00%		3.00%
Royalties accrued	229,045		229,045		351,846
Lease Expiration Date			Oct. 31, 2014
Charged to costs of sales
Commitments and Contingencies [Line Items]
Royalties accrued	19,195	13,200	19,195	13,200
Charged to operating expenses
Commitments and Contingencies [Line Items]
Royalties accrued	$ 30,805	$ 66,800	$ 30,805	$ 66,800

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Options Outstanding (Detail) (USD $)	9 Months Ended
	Sep. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercisable, Number of Shares Issuable	3,348,049
Not vested, Number of Shares Issuable	1,400,000
Balance, Number of Shares Issuable	4,748,049
Exercisable, Weighted-Average Exercise Price	$ 1.11
Not vested, Weighted-Average Exercise Price	$ 1.77
Balance, Weighted-Average Exercise Price	$ 1.30
Exercisable, Weighted-Average Remaining Term (Years)	2 years 4 months 24 days
Not vested, Weighted-Average Remaining Term (Years)	3 years 9 months 18 days
Balance, Weighted-Average Remaining Term (Years)	2 years 9 months 18 days
Exercisable, Aggregate Intrinsic Value	$ 6,000
Not vested, Aggregate Intrinsic Value	0
Balance, Aggregate Intrinsic Value	$ 6,000

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 10% Convertible Preferred Stock	Dec. 31, 2012 10% Convertible Preferred Stock
Temporary Equity, no par value			$ 0	$ 0
Temporary Equity, authorized			880,000	880,000
Temporary Equity, issued			702,123	706,023
Temporary Equity, outstanding			702,123	706,023
Common stock, no par value	$ 0	$ 0
Common stock, authorized	100,000,000	100,000,000
Common stock, shares issued	30,315,663	28,820,173
Common stock, shares outstanding	30,315,663	28,820,173

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Stockholders' Equity

9 Months Ended

Sep. 30, 2013

Stockholders' Equity Note [Abstract]

Stockholders' Equity

Note 8 - Stockholders’ Equity

We are authorized to issue up to 100,000,000 shares of common stock, no par value, and up to 2,500,000 shares of preferred stock, no par value. There were 30,315,663 and 28,820,173 shares of common stock issued and outstanding at September 30, 2013 and December 31, 2012, 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 702,123 and 706,023 shares of 10% convertible preferred stock at September 30, 2013 and December 31, 2012, respectively. 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, 2013

During February 2013, we issued 39,000 shares of common stock upon conversion of 3,900 shares of our 10% convertible preferred stock, with a value of $39,000.

During March 2013, we issued 125,000 shares of common stock to a consultant. The shares of common stock had a fair value on the date of issuance of $78,750, which was charged to general and administrative expenses in our statement of operations upon issuance. 

During April 2013, we issued 266,954 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 $181,529.

During April 2013, we issued 252,639 shares of common stock as payment of our interest on our 8% convertible promissory notes, in lieu of cash, with a fair value on the date of issue of $171,795.

During May 2013, we issued 100,000 shares of common stock to a consultant. The shares of common stock had a fair value on the date of issuance of $61,000, which was charged to general and administrative expenses in our statement of operations upon issuance. 

During July 2013, we issued 342,857 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 $175,050.

During July 2013, we issued 369,040 shares of common stock as payment of our interest on our 8% convertible promissory notes, in lieu of cash, with a fair value on the date of issue of $188,210.

Recovery of Stockholder Short Swing Profit

In April 2006, we commenced an action against Tonga Partners, L.P. (“Tonga”), Cannell Capital, L.L.C. and J. Carlo Cannell in the United States District Court of New York, for disgorgement of short-swing profits pursuant to Section 16 of the Securities Exchange Act of 1934, as amended.  On November 10, 2004, Tonga converted a convertible promissory note into 1,701,341 shares of common stock, and thereafter, between November 10 and November 15, 2004, sold such shares for short-swing profits.  In September 2008, the District Court granted us summary judgment against Tonga for disgorgement of short-swing profits in the amount of $5.0 million.  The defendants appealed the order granting the summary judgment to the U.S. Court of Appeals for the 2nd Circuit. The three judge panel held in our favor. The defendants petitioned the Court for a full judge review.  The petition was denied.   The defendants’ petition to the United States Supreme Court for a writ of certiorari was denied.  As a result, during the three months ended June 30, 2013, we received $3.1 million representing the disgorgement of the short-swing profits less legal fees. This amount was recorded as additional paid-in capital.

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (USD $)	Total USD ($)	10% Convertible Preferred Stock USD ($)	Common Shares	Common Shares 10% Convertible Preferred Stock	Additional Paid-in Capital and Common Stock USD ($)	Additional Paid-in Capital and Common Stock 10% Convertible Preferred Stock USD ($)	Accumulated Deficit USD ($)
Balance at Dec. 31, 2012	$ (7,975,607)				$ 27,103,454		$ (35,079,061)
Balance (in shares) at Dec. 31, 2012			28,820,173
Shares issued upon conversion of 10% convertible preferred stock (in shares)				39,000
Shares issued upon conversion of 10% convertible preferred stock		39,000				39,000
Shares issued for services rendered (in shares)			225,000
Shares issued for services rendered	139,750				139,750
Shares issued for dividend payments (in shares)			609,811
Shares issued for dividend payments	356,579				356,579
Shares issued for interest payments (in shares)			621,679
Shares issued for interest payments	360,005				360,005
Share-based compensation	2,904				2,904
Dividend on 10% convertible preferred stock		(533,569)				(533,569)
Amortization of discounts of 10% convertible preferred stock		(684,704)				(684,704)
Recovery of shareholder short swing profit	3,095,308				3,095,308
Net loss	(4,313,032)						(4,313,032)
Balance at Sep. 30, 2013	$ (9,513,366)				$ 29,878,727		$ (39,392,093)
Balance (in shares) at Sep. 30, 2013			30,315,663

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Sep. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 599,743	$ 346,905
Accounts receivable, net of allowance	438,950	192,015
Inventories	3,625,821	3,088,953
Prepaid expenses and deposits	168,358	165,339
Total current assets	4,832,872	3,793,212
Property and equipment, net	3,023,131	2,005,215
Other long-term and intangible assets	0	68,284
Total assets	7,856,003	5,866,711
Current liabilities:
Accounts payable	1,254,422	890,394
Accrued liabilities	653,162	446,434
Due to investor	400,000	0
Derivative liabilities - 8% convertible promissory notes	1,330,000	830,000
Total current liabilities	3,637,584	2,166,828
8% convertible promissory notes, net of discounts	7,041,112	5,671,162
Fair value of 10% convertible preferred stock warrants	122,357	81,716
Total liabilities	10,801,053	7,919,706
Commitments and contingencies
10% convertible preferred stock, no par value; authorized 880,000 shares; 702,123 and 706,023 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively, net of discounts	6,568,316	5,922,612
Stockholders' deficit:
Common stock, no par value; authorized, 100,000,000 shares; 30,315,663 and 28,820,173 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively	29,878,727	27,103,454
Accumulated deficit	(39,392,093)	(35,079,061)
Total stockholders' deficit	(9,513,366)	(7,975,607)
Total liabilities and stockholders' deficit	$ 7,856,003	$ 5,866,711

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Related Party Transaction - Additional Information (Detail) (USD $)						9 Months Ended
	Oct. 21, 2013	Jul. 31, 2013	Apr. 30, 2013	Dec. 31, 2011	Sep. 30, 2013 Allen Kronstadt	Sep. 30, 2013 Allen Kronstadt 8% convertible promissory notes	Sep. 30, 2013 Allen Kronstadt 8% convertible promissory notes Purchase Agreement	Sep. 30, 2013 Allen Kronstadt 8% convertible promissory notes Memorandum Of Understanding
Related Party Transaction [Line Items]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights						353,547	7,398,243
Class Of Warrant Or Right Exercise Price Of Warrants Or Rights				1.00		0.60
Minority interest ownership percentage by noncontrolling owners					5.00%
Debt issued, principal amount	$ 596,992.80						$ 2,959,297	$ 1,666,667
Debt instrument, interest rate, stated percentage		8.00%	8.00%					8.00%
Debt Instrument Payment Terms						The 8% 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 8% Notes). We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes. During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.
Warrant Terms						subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of Common Stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the 8% Notes to which the applicable 8% Note Warrant is related has been repaid in full.

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Summary of Significant Accounting Policies - Additional Information (Detail) (USD $) Share data in Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Summary Of Significant Accounting Policies [Line Items]
Allowance for doubtful accounts					$ 131,996
Depreciation expense	75,038	16,972	147,605	90,163
Depreciation Charged To Production	70,485	13,179	134,813	82,356
Potential common shares issuable			66
Cash, insured limit	250,000		250,000
Number of banks where cash is maintained	2		2
Bank One
Summary Of Significant Accounting Policies [Line Items]
Cash, insured limit	300,000		300,000		300,000
Rutgers
Summary Of Significant Accounting Policies [Line Items]
Royalty Expense	$ 50,000		$ 150,000
Minimum
Summary Of Significant Accounting Policies [Line Items]
Property and equipment, estimated useful lives			2 years
Maximum
Summary Of Significant Accounting Policies [Line Items]
Property and equipment, estimated useful lives			20 years

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Inventories (Tables)

9 Months Ended

Sep. 30, 2013

Inventory, Net [Abstract]

Inventories

Our inventories consisted of:

	September 30, 2013		December 31, 2012
Finished products	$	2,913,368	$	2,509,797
Production materials		712,453		579,156
Total inventories	$	3,625,821	$	3,088,953

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Stock Option Activity (Detail) (USD $)	9 Months Ended
	Sep. 30, 2013
Number of Shares Issuable
Balance, Ending	4,748,049
Weighted-average exercise price
Balance, Ending	$ 1.30
Stock Option
Number of Shares Issuable
Balance, Beginning	5,710,125
Granted	0
Exercised	0
Expired	(962,076)
Balance, Ending	4,748,049
Weighted-average exercise price
Balance, Beginning	$ 1.10
Granted	$ 0
Exercised	$ 0
Expired	$ 0.13
Balance, Ending	$ 1.30

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Eight Percent Convertible Promissory Notes - Additional Information (Detail) (USD $)	9 Months Ended					3 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Jul. 31, 2013	Apr. 30, 2013	Dec. 31, 2011	Sep. 30, 2013 Unpaid Interest	Sep. 30, 2013 Unpaid Interest	Sep. 30, 2013 8% convertible promissory notes	Sep. 30, 2013 8% convertible promissory notes Investor
Debt Disclosure [Line Items]
Convertible debt									$ 1,750,001
Convertible debt, interest rate			8.00%	8.00%				8.00%
Convertible debt, conversion price									$ 0.40
Warrants to purchase common stock, shares									4,375,004
Debt Instrument Payment Terms								The 8% 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 8% Notes). We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes. During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.
Stock issued during period, shares, new issues							355,903
Warrant exercise price					1.00			0.60
Warrant Terms								for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of common stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the 8% Note to which the applicable warrant is related has been repaid in full.
Amortization of convertible debt discount	414,525	0							414,525
Accrued unpaid interest						181,509
Increase Debt Discount	$ 794,576

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Conversion Option and Warrant Derivative Liabilities (Detail)	9 Months Ended
	Sep. 30, 2013
Derivative [Line Items]
Volatility	45.00%
Risk-free interest rate	0.30%
Dividend yield	0.00%
Expected life, in years	1 year 10 months 24 days
Issuances date
Derivative [Line Items]
Volatility	50.00%
Risk-free interest rate	0.40%
Dividend yield	0.00%
Issuances date | Minimum
Derivative [Line Items]
Expected life, in years	2 years 4 months 24 days
Issuances date | Maximum
Derivative [Line Items]
Expected life, in years	2 years 7 months 6 days

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Financial Liabilities Measured at Fair Value on Recurring Basis (Detail) (USD $)	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring Basis [Line Items]
Derivative liability current	$ 1,330,000		$ 830,000
Derivative liability non-current	122,357		81,716
Fair value of derivative liability	1,452,357		911,716
Conversion Options | 8% convertible promissory notes
Fair Value, Assets and Liabilities Measured on Recurring Basis [Line Items]
Derivative liability current	1,060,000	1,520,000	610,000	720,000	0	0
Warrant | 8% convertible promissory notes
Fair Value, Assets and Liabilities Measured on Recurring Basis [Line Items]
Derivative liability current	270,000	540,000	220,000	300,000	0	0
Placement Agent | Warrant
Fair Value, Assets and Liabilities Measured on Recurring Basis [Line Items]
Derivative liability current	122,357	122,357	81,716	85,594	140,458	487,555
Derivative liability non-current	122,357		81,716
Fair Value, Inputs, Level 3 | Conversion Options | 8% convertible promissory notes
Fair Value, Assets and Liabilities Measured on Recurring Basis [Line Items]
Derivative liability current	1,060,000		610,000
Fair Value, Inputs, Level 3 | Warrant | 8% convertible promissory notes
Fair Value, Assets and Liabilities Measured on Recurring Basis [Line Items]
Derivative liability current	270,000		220,000
Fair Value, Measurements, Recurring | Fair Value, Inputs, Level 3
Fair Value, Assets and Liabilities Measured on Recurring Basis [Line Items]
Derivative liability current	1,330,000		830,000
Fair value of derivative liability	1,452,357		911,716
Fair Value, Measurements, Recurring | Fair Value, Inputs, Level 3 | Placement Agent | Warrant
Fair Value, Assets and Liabilities Measured on Recurring Basis [Line Items]
Derivative liability non-current	$ 122,357		$ 81,716

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10% Convertible Redeemable Preferred Stock

9 Months Ended

Sep. 30, 2013

Features Of Convertible Preferred Stock [Abstract]

10% Convertible Redeemable Preferred Stock

Note 7 - 10% Convertible Redeemable Preferred Stock

The components of our Preferred Stock, classified as temporary equity in our balance sheet, are summarized as follows:

	September 30,		December 31,
	2013		2012
10% convertible preferred stock - face value	$	7,021,230	$	7,060,230
Unamortized discount		(452,914)		(1,137,618)
10% convertible preferred stock, net of discount	$	6,568,316	$	5,922,612

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 of $1.00 per share, 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 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. The Preferred Stock shall be redeemable for cash by the holder any time after the three-year anniversary from the initial purchase. 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 (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 6 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 March and April 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 approximately $828,300, 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 effect 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 are 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. During the three and nine months ended September 30, 2013, we amortized $228,946 and $684,704, respectively to additional paid-in capital. For the corresponding periods in 2012 we amortized $268,425 and $811,452, respectively to additional paid-in capital. At September 30, 2013, the unamortized Preferred Stock discount balance was $452,914.

During the nine months ended September 30, 2013 and the year ended December 31, 2012, we issued 39,000 and 462,500 shares of our common stock, respectively upon conversion of 3,900 and 46,250 shares of our Preferred Stock, respectively.

The Preferred Stock outstanding at September 30, 2013, was convertible into 7.0 million shares of our common stock. 

Since the Preferred Stock at September 30, 2013 may ultimately be redeemed at the option of the holder, the carrying value of the Preferred Stock, net of unamortized discount has been classified as temporary equity.

Our dividend payable on September 30, 2013 was paid with 347,039 shares of common stock in lieu of cash, which were issued subsequent to September 30, 2013, and with a value of $176,990. 

Placement Agent Warrants

We issued warrants to the placement agents for the sale of our Preferred Stock, to purchase 58,352 shares of 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. 

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Property and Equipment (Detail) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Property, equipment, and leasehold improvements, at cost:
Equipment	$ 15,344	$ 13,754
Machinery and equipment	3,759,994	2,611,933
Purchased software	145,623	129,753
Furniture and fixtures	13,090	13,090
Subtotal - property and equipment, at cost	3,934,051	2,768,530
Less accumulated depreciation	(910,920)	(763,315)
Net property and leasehold improvements	$ 3,023,131	$ 2,005,215

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Stockholders Equity - Additional Information (Detail) (USD $)	0 Months Ended	1 Months Ended					3 Months Ended	9 Months Ended			1 Months Ended		9 Months Ended	12 Months Ended
	Nov. 10, 2004	Jul. 31, 2013	May 31, 2013	Apr. 30, 2013	Feb. 28, 2013	Sep. 30, 2008	Jun. 30, 2013	Sep. 30, 2013	Dec. 31, 2012	Apr. 30, 2011	Mar. 31, 2013 General and Administrative Expense	Mar. 31, 2013 Consulting Services	Sep. 30, 2013 10% Convertible Preferred Stock	Dec. 31, 2012 10% Convertible Preferred Stock	Dec. 31, 2011 10% Convertible Preferred Stock
Stockholders Equity Note [Line Items]
Common stock, authorized								100,000,000	100,000,000
Preferred stock, authorized								2,500,000	2,500,000
Preferred stock, no par value								$ 0	$ 0
Common stock, shares issued								30,315,663	28,820,173
Common stock, shares outstanding								30,315,663	28,820,173
10% Convertible preferred stock, authorized													880,000	880,000	880,000
10% Convertible preferred stock, issued										759,773			702,123	706,023
10% Convertible preferred stock, outstanding													702,123	706,023
Common stock issued upon conversion Preferred Stock, shares	1,701,341				39,000								39,000	462,500
Preferred Stock shares converted					3,900
Conversion of 10% convertible preferred stock and debt					$ 39,000
Shares issued for services			100,000									125,000
Value of shares Issued for services			61,000					139,750			78,750
Common stock dividends, shares		342,857		266,954				347,039
Preferred stock, dividend rate, percentage		10.00%		10.00%
Shares issued for dividend payments		175,050		181,529				356,579
Stock issued during period shares interest payments		369,040		252,639
Stock issued during period value interest payments		188,210		171,795				360,005
Convertible debt, interest rate		8.00%		8.00%
Proceeds from recovery of shareholder short swing profits						5,000,000		3,095,308
Short swing profits less legal fees							$ 3,100,000

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Income Taxes

9 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Income Taxes

Note 11 - 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.

As of December 31, 2012, we had U.S. federal net operating loss carryforwards of approximately $17.4 million, which, if unused, expire through 2032. We do not believe that we have had a change in control as defined by Section 382 of the Internal Revenue Code, which could potentially limit our ability to utilize these net operating losses. At December 31, 2012, 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.

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8% Convertible Promissory Notes

9 Months Ended

Sep. 30, 2013

Convertible Debt [Abstract]

8% Convertible Promissory Notes

Note 6 – 8% Convertible Promissory Notes

The components of our convertible debt are summarized as follows:

	Due	September 30, 2013		December 31, 2012
8% convertible promissory notes	Beginning August 2017	$	8,878,188	$	7,128,187
Less debt discount			(1,837,076)		(1,457,025)
Total – long term debt		$	7,041,112	$	5,671,162

During the nine months ended September 30, 2013 pursuant to the same terms of our existing 8% convertible promissory notes (the “8% Notes”), we issued and sold to Samuel Rose, Allen Kronstadt, MLTM, Lending , LLC and the Judy Lenkin Lerner Revocable Trust (see Note 14 regarding related party transactions) (i) an aggregate principal amount of $1,750,001 of our 8% Notes which are initially convertible into shares of our common stock, at a conversion price equal to $0.40 per share of common stock, subject to adjustment as provided on the terms of the 8% Notes, and (ii) associated warrants to purchase, in the aggregate, 4,375,004 shares of common stock, subject to adjustment as provided on the terms of the warrants.

The 8% 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 8% Notes). We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes. During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.

Accrued but unpaid interest due on September 30, 2013 for the three months ended September 30, 2013 of $181,509 was paid with 355,903 shares of common stock, in lieu of cash, which were issued subsequent to September 30, 2013.

The warrants are exercisable at an exercise price of $0.60 per share of common stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of common stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the 8% Note to which the applicable warrant is related has been repaid in full.

The issuance costs of the 8% Notes, plus the fair values of the conversion option derivative liability and the warrants derivative liability were recorded as a discount to the 8% Notes. During the nine months ended September 30, 2013, the fair value of the conversion options and related warrants for the 8% Notes issued during this period was $794,576, which was recorded as an increase to the debt discount. This debt discount is amortized to other expenses in our statement of operations over the initial term of the 8% Notes. During the nine months ended September 30, 2013, we amortized $414,525 of the discount to other expenses in our statement of operations. There was no such transaction for the corresponding period in 2012. See Note 5 for further discussion of these derivative liabilities.

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 1 - Summary of Significant Accounting Policies

(a) Business and Basis of Financial Statement Presentation

Axion International Holdings, Inc. (the “Company,” “we” or “us”) was formed in 1981.   In November 2007, the Company entered into an Agreement and Plan of Merger, among the Company, Axion Acquisition Corp., a Delaware corporation and a newly created direct wholly-owned subsidiary of the Company (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 the Company consummated the merger (the “Merger”) of Merger Sub into Axion, with Axion continuing as the surviving corporation and a wholly-owned subsidiary of the Company.

We develop, manufacture, market and sell composite rail ties and structural building products, such as pilings, I-beams, T-beams and boards, which, based upon patented technology developed at Rutgers University, are fully derived from common recycled plastics and high-density polymers, such as polyethylene, polystyrene and polypropylene. These recycled plastics, which are combined with recycled plastic composites containing encapsulated fiberglass, achieve structural thickness and strength and are resistant to changing shape under constant stress. Our products, manufactured through an extrusion process, are eco-friendly, non-corrosive, moisture impervious, non-chemical leaching and insect and rot resistant. Our products possess superior lifecycles and generally have greater durability and require less maintenance than competitive products made from wood, steel or concrete. We market our products through two lines - ECOTRAX™, our line of rail ties, and STRUXURE™, our line of structural building products.

Our consolidated financial statements include the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements of the Company 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, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2012 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, 2013 and December 31, 2012, 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, 2013, we determined certain receivables which we had previously accrued a reserve for, were not collectible and wrote off the receivable balances against the reserve. We did not require an allowance for doubtful accounts at September 30, 2013, but at December 31, 2012 it was $131,996.

(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, 2013		December 31, 2012
Equipment	$	15,344	$	13,754
Machinery and equipment		3,759,994		2,611,933
Purchased software		145,623		129,753
Furniture and fixtures		13,090		13,090
Subtotal – property and equipment, at cost		3,934,051		2,768,530
Less accumulated depreciation		(910,920)		(763,315)
Net property and leasehold improvements	$	3,023,131	$	2,005,215

Depreciation expense during the three and nine months ended September 30, 2013 was $75,038 and $147,605, respectively, and for the corresponding periods in 2012, was $16,972 and $90,163, respectively. Of the depreciation expense during the three and nine months ended September 30, 2013, $70,485 and $134,813, respectively was charged to production and the remainder to operating expenses. For the corresponding periods of 2012, $13,179 and $82,356, respectively was charged to production.

(e) Exclusive Agreement

In February 2007, we acquired an exclusive, royalty-bearing license in specific but broad global territories to make, have made, use, sell, offer for sale, modify, develop, import, and export products made using patent applications owned by Rutgers University (“Rutgers”).  We are using these patented technologies in the production of our composite rail ties and structural building products such as pilings, I-beams, T-beams and boards of various sizes.

Subject to the minimum royalty pursuant to the terms of the license, royalties incurred and payable to Rutgers, for the three and nine months ended September 30, 2013 were $50,000 and $150,000, respectively. For the corresponding periods of 2012, the amounts were the same.

(f) 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.

We recognize revenue when a fixed commitment to purchase the products is received, title or ownership has passed to the customer and we do not have any performance obligations remaining, such that the earnings process is complete. 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 effort of the finished product. Currently, to manufacture our products, we lease a manufacturing facility, purchase the raw materials and employ the staffing and own the equipment necessary for our production processes. Previously under other arrangements, we either purchased and supplied the raw materials to the third-party manufacturer who we paid a per-pound cost to produce the finished product, or the third-party manufacturer sourced and paid for the raw materials and we purchased the finished product from them at a cost per unit, and we were responsible for any costs of raw materials purchased by the third-party manufacturer in excess of the arrangement’s reference prices and we shared any savings for purchases below the reference prices.  We believe our current manufacturing processes allow us to more efficiently control the quality and costs of production. 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, and do not believe we will in the future.

(g) Income Taxes

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, 2012, 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.

In the past, we were not current with our filings of our federal and state income tax returns. Due to these delinquent filings, our income tax returns are open to examination by federal and state authorities, generally for the tax years ended September 30, 2008 and later.

(h) 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 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.

(i) 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.

(j) Loss Per Share

Basic loss per share are computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share, includes the effects of the potential dilution of outstanding options, warrants, and convertible debt on our common stock as determined using the treasury stock method. For the three and nine months ended September 30, 2013 and 2012, there were no dilutive effects of such securities because we incurred a net loss in each period.  As of September 30, 2013, we have approximately 66 million potential common shares issuable under our convertible instruments, warrant and stock option agreements.

(k) 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.

(l) Concentration of Credit Risk

We maintain our cash with two major U.S. domestic banks. The amount held in both of the banks exceeds the insured limit of $250,000 from time to time. The amount which exceeded the insured limit was approximately $0.3 million at September 30, 2013 and December 31, 2012.  We have not incurred losses related to these deposits.

(m) Use of Estimates

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.

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Subsequent Events - Additional Information (Detail) (USD $)					0 Months Ended	9 Months Ended
	Oct. 21, 2013	Jul. 31, 2013	Apr. 30, 2013	Dec. 31, 2011	Oct. 10, 2013 Subsequent Event	Sep. 30, 2013 Subsequent Event	Nov. 06, 2013 Subsequent Event	Oct. 21, 2013 Subsequent Event	Oct. 21, 2013 Subsequent Event Secured Notes
Subsequent Event [Line Items]
Debt Instrument, Face Amount	$ 596,992.80						$ 2,603,007.20	$ 2,603,007.20
Convertible Debt, Conversion Price								$ 0.40
Class Of Warrant Or Right, Number Of Securities Called By Warrants Or Rights								1,492,482
Warrant Terms						subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of Common Stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the 8% Note to which the applicable Warrant is related has been repaid in full.
Debt Instrument, Interest Rate, Stated Percentage		8.00%	8.00%						8.00%
Initial Term Of Lease					10 years
Cash Received from Investors	$ 596,992.80
Class Of Warrant Or Right, Exercise Price Of Warrants Or Rights				1.00				0.60
Debt Instrument, Payment Terms						The 8% Notes, including all outstanding principal and accrued and unpaid interest, are due and payable on the earlier of October 21, 2018 or upon the occurrence of an Event of Default (as defined in the 8% Notes).  We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof.  Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes.  During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.

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Warrrnts Granted (Detail) (USD $)	9 Months Ended
	Sep. 30, 2013
10% convertible debenture - bonus warrants
Share-Based Compensation [Line Items]
Number of Shares Issuable	483,357
Weighted - Average Exercise Price	$ 0.60
10% convertible preferred stock - warrants
Share-Based Compensation [Line Items]
Number of Shares Issuable	3,761,365
Weighted - Average Exercise Price	$ 1.00
8% convertible promissory notes - warrants
Share-Based Compensation [Line Items]
Number of Shares Issuable	22,195,474
Weighted - Average Exercise Price	$ 0.60
Consultants
Share-Based Compensation [Line Items]
Number of Shares Issuable	4,887,959
Weighted - Average Exercise Price	$ 1.12
Warrant
Share-Based Compensation [Line Items]
Number of Shares Issuable	31,328,155
Weighted - Average Exercise Price	$ 0.73

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Accrued Liabilities (Detail) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Schedule of Accrued Liabilities [Line Items]
Royalties	$ 229,045	$ 351,846
Interest	181,509	0
Payroll	55,790	77,757
Miscellaneous	9,828	16,831
Total accrued liabilities	653,162	446,434
Redeemable Preferred Stock
Schedule of Accrued Liabilities [Line Items]
10% convertible preferred stock dividends	$ 176,990	$ 0

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Related Party Transactions

9 Months Ended

Sep. 30, 2013

Related Party Transactions [Abstract]

Related Party Transactions

Note 14 - Related Party Transactions

Allen Kronstadt

Allen Kronstadt beneficially owns in excess of 5% of our outstanding voting securities and was appointed to our Board of Directors on September 11, 2012 pursuant to the terms of the Purchase Agreement. Effective April 25, 2012, we entered into a Memorandum of Understanding with Mr. Kronstadt and several other investors and accordingly we issued to Mr. Kronstadt a demand promissory note in the principal amount of $1,666,667 with interest at a rate of 8.0% per annum. At the initial closing under the Purchase Agreement, in consideration for the issuance of the 8% convertible promissory note, (the “8% Notes”) and associated warrants to purchase Common Stock (the “8% Note Warrants”) at such closing, Mr. Kronstadt converted the aggregate principal amount outstanding, together with all accrued and unpaid interest, under the demand note and paid us in cash for the balance.

Pursuant to the Purchase Agreement, as of September 30, 2013, we have issued and sold to Mr. Kronstadt an aggregate principal amount of $2,959,297 of our 8% Notes and 8% Note Warrants to purchase, in the aggregate, 7,398,243 shares of Common Stock, subject to adjustment as provided on the terms of the 8% Note Warrants. As of September 30, 2013, Mr. Kronstadt has received an aggregate of 353,547 shares of Common Stock as interest payments under the 8% Notes that he holds.

The 8% 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 8% Notes). We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes. During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.

The 8% Note Warrants are exercisable at an exercise price of $0.60 per share of Common Stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of Common Stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the 8% Notes to which the applicable 8% Note Warrant is related has been repaid in full.

In connection with the entry into the Purchase Agreement, pursuant to the terms thereof, on August 24, 2012, we granted to the Investors (i) certain demand and piggyback registration rights with respect to the registration of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder, and (ii) a security interest and lien in all of our assets and rights (including a security interest in all of the assets and rights of our subsidiary, Axion International, Inc.) to secure our obligations under the 8% Notes.

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Share-based Compensation

9 Months Ended

Sep. 30, 2013

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Share-based Compensation

Note 9 - Share-based Compensation

Options

We have two nonqualified stock option plans approved by shareholders with an aggregate of 950,000 shares remaining available for grant under one plan as of September 30, 2013. The other plan terminated during the three months ended September 30, 2013.  The exercise price of the options are established by the Board of Directors on the date of grant and are 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.

We estimate the fair value of each option award at the grant date by using the Black-Scholes option pricing model. We did not award any options during the three or nine months ended September 30, 2013.

Certain options awarded prior to the year ended December 31, 2012 are amortized over certain future vesting periods or contained performance-based vesting terms, and consequently during the nine months ended September 30, 2013, we charged to operating expenses $5,894 for these options.

The following table summarizes our stock option activity for the nine months ended September 30, 2013:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
Balance, January 1, 2013		5,710,125	$	1.10
Granted		-		-
Exercised		-		-
Expired		(962,076)		0.13
Balance, September 30, 2013		4,748,049	$	1.30

The following table summarizes options outstanding at September 30, 2013:

			Weighted-		Weighted-
	Number		Average		Average		Aggregate
	of Shares		Exercise		Remaining		Intrinsic
	Issuable		Price		Term (Years)		Value
Exercisable		3,348,049	$	1.11		2.4	$	6,000
Not vested		1,400,000		1.77		3.8		-
Balance, September 30, 2013:		4,748,049	$	1.30		2.8	$	6,000

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, 2013:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
Balance, January 1, 2013		27,353,151	$	0.76
Granted		4,375,004		0.60
Exercised		-		-
Cancelled		(400,000)		1.79
Balance, September 30, 2013		31,328,155	$	0.73

The following table sets forth the warrants outstanding at September 30, 2013:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price
10% convertible debenture - bonus warrants		483,357	$	0.60
10% convertible preferred stock – warrants		3,761,365		1.00
8% convertible promissory notes – warrants		22,195,474		0.60
Consultants		4,887,959		1.12
Total		31,328,155	$	0.73

During the nine months ended September 30, 2013, pursuant to our 8% convertible promissory notes, we issued warrants to purchase 4,375,004 shares of our common stock pursuant to our issuance and sale of our 8% convertible promissory notes, at an initial exercise price of $0.60 per share. These warrants had fair values on their dates of issuances of $249,151 which was recorded as a credit to derivative liabilities and a charge to debt discount associated with our 8% convertible promissory notes. See Notes 5 and 6 for further discussion of these warrants. The estimated fair value of the warrants was computed by a third party using Monte Carlo simulation models.

In addition, the fair value of a previously issued warrant which is being amortized over a service period spanning multiple reporting periods, was revalued using the Black-Scholes option pricing model, at the end of each reporting period. No revaluation was necessary for the three months ended September 30, 2013 and during the nine months ended September 30, 2013, we decreased the fair value by $2,990 and recorded a credit in our statement of operations.

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Property and Equipment

Our property and equipment is comprised of the following:

	September 30, 2013		December 31, 2012
Equipment	$	15,344	$	13,754
Machinery and equipment		3,759,994		2,611,933
Purchased software		145,623		129,753
Furniture and fixtures		13,090		13,090
Subtotal – property and equipment, at cost		3,934,051		2,768,530
Less accumulated depreciation		(910,920)		(763,315)
Net property and leasehold improvements	$	3,023,131	$	2,005,215

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Subsequent Events

9 Months Ended

Sep. 30, 2013

Subsequent Events [Abstract]

Subsequent Events

Note 15 – Subsequent Events

$3.2 Million Funding

On October 21, 2013, pursuant to the Note Purchase Agreement, dated August 24, 2012, (see Note 6 – 8% Convertible Promissory Notes), we issued and sold to MLTM Lending, LLC (“MLTM”), Samuel Rose (“Rose”), and Allen Kronstadt (“Kronstadt”) (collectively, the “Investors”) an aggregate principal amount of $596,992.80 of our 8.0% convertible promissory notes (the “8% Notes”) which are initially convertible into shares of our common stock, no par value (the “Common Stock”), at a conversion price equal to $0.40 per share of Common Stock, subject to adjustment as provided on the terms of the 8% Notes, and associated warrants (the “Warrants”) to purchase, in the aggregate, 1,492,482 shares of Common Stock, subject to adjustment as provided on the terms of the Warrants. In consideration for the issuance of the 8% Notes and the Warrants, the Investors paid us cash in the aggregate amount of $596,992.80.

The 8% Notes and the Warrants were offered and sold to the Investors in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D promulgated thereunder. The Investors are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act.

The 8% Notes, including all outstanding principal and accrued and unpaid interest, are due and payable on the earlier of October 21, 2018 or upon the occurrence of an Event of Default (as defined in the 8% Notes). We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes. During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.

The Warrants are exercisable at an exercise price of $0.60 per share of Common Stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of Common Stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the 8% Note to which the applicable Warrant is related has been repaid in full.

In addition, on October 21, 2013 and November 6, 2013, the Investors loaned the Company an aggregate principal amount of $2,603,007.20  pursuant to our secured promissory notes (the “Secured Notes”), each of which shall be exchanged by us on a future date, when the authorized shares of capital stock of the Company are available, for an 8% Note and Warrants, on the terms set forth in the Secured Notes. In connection with the issuance of the Secured Notes, we entered into an amendment to our existing Security Agreement with the Investors to provide that our obligations under the Secured Notes are secured by a security interest and lien in all of our assets and the assets of our wholly-owned subsidiaries.

The Secured Notes, including all outstanding principal and accrued and unpaid interest, are due and payable on the earlier of November 29, 2013 or upon the occurrence of an Event of Default (as defined in the Secured Notes). We may prepay the Secured Notes, in whole or in part, upon 5 calendar days prior written notice to the holders thereof. Interest accrues on the Secured Notes at a rate of 8.0% per annum, payable in arrears on the date the Secured Notes are repaid or prepaid in full. 

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 12, 2013
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3
Trading Symbol	AXIH
Entity Common Stock, Shares Outstanding		31,018,605
Entity Registrant Name	AXION INTERNATIONAL HOLDINGS, INC.
Entity Central Index Key	0000753048
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company

XML

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Business and Basis of Financial Statement Presentation

(a) Business and Basis of Financial Statement Presentation

Axion International Holdings, Inc. (the “Company,” “we” or “us”) was formed in 1981.   In November 2007, the Company entered into an Agreement and Plan of Merger, among the Company, Axion Acquisition Corp., a Delaware corporation and a newly created direct wholly-owned subsidiary of the Company (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 the Company consummated the merger (the “Merger”) of Merger Sub into Axion, with Axion continuing as the surviving corporation and a wholly-owned subsidiary of the Company.

We develop, manufacture, market and sell composite rail ties and structural building products, such as pilings, I-beams, T-beams and boards, which, based upon patented technology developed at Rutgers University, are fully derived from common recycled plastics and high-density polymers, such as polyethylene, polystyrene and polypropylene. These recycled plastics, which are combined with recycled plastic composites containing encapsulated fiberglass, achieve structural thickness and strength and are resistant to changing shape under constant stress. Our products, manufactured through an extrusion process, are eco-friendly, non-corrosive, moisture impervious, non-chemical leaching and insect and rot resistant. Our products possess superior lifecycles and generally have greater durability and require less maintenance than competitive products made from wood, steel or concrete. We market our products through two lines - ECOTRAX™, our line of rail ties, and STRUXURE™, our line of structural building products.

Our consolidated financial statements include the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements of the Company 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, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2012 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.

Cash and Cash Equivalents

(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, 2013 and December 31, 2012, we maintained all of our cash in demand or interest-bearing accounts at commercial banks.

Allowance for Doubtful Accounts

(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, 2013, we determined certain receivables which we had previously accrued a reserve for, were not collectible and wrote off the receivable balances against the reserve. We did not require an allowance for doubtful accounts at September 30, 2013, but at December 31, 2012 it was $131,996.

Property and Equipment

(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, 2013		December 31, 2012
Equipment	$	15,344	$	13,754
Machinery and equipment		3,759,994		2,611,933
Purchased software		145,623		129,753
Furniture and fixtures		13,090		13,090
Subtotal – property and equipment, at cost		3,934,051		2,768,530
Less accumulated depreciation		(910,920)		(763,315)
Net property and leasehold improvements	$	3,023,131	$	2,005,215

Depreciation expense during the three and nine months ended September 30, 2013 was $75,038 and $147,605, respectively, and for the corresponding periods in 2012, was $16,972 and $90,163, respectively. Of the depreciation expense during the three and nine months ended September 30, 2013, $70,485 and $134,813, respectively was charged to production and the remainder to operating expenses. For the corresponding periods of 2012, $13,179 and $82,356, respectively was charged to production.

Exclusive Agreement

(e) Exclusive Agreement

In February 2007, we acquired an exclusive, royalty-bearing license in specific but broad global territories to make, have made, use, sell, offer for sale, modify, develop, import, and export products made using patent applications owned by Rutgers University (“Rutgers”).  We are using these patented technologies in the production of our composite rail ties and structural building products such as pilings, I-beams, T-beams and boards of various sizes.

Subject to the minimum royalty pursuant to the terms of the license, royalties incurred and payable to Rutgers, for the three and nine months ended September 30, 2013 were $50,000 and $150,000, respectively. For the corresponding periods of 2012, the amounts were the same.

Revenue and Related Cost Recognition

(f) 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.

We recognize revenue when a fixed commitment to purchase the products is received, title or ownership has passed to the customer and we do not have any performance obligations remaining, such that the earnings process is complete. 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 effort of the finished product. Currently, to manufacture our products, we lease a manufacturing facility, purchase the raw materials and employ the staffing and own the equipment necessary for our production processes. Previously under other arrangements, we either purchased and supplied the raw materials to the third-party manufacturer who we paid a per-pound cost to produce the finished product, or the third-party manufacturer sourced and paid for the raw materials and we purchased the finished product from them at a cost per unit, and we were responsible for any costs of raw materials purchased by the third-party manufacturer in excess of the arrangement’s reference prices and we shared any savings for purchases below the reference prices.  We believe our current manufacturing processes allow us to more efficiently control the quality and costs of production. 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, and do not believe we will in the future.

Income Taxes

(g) Income Taxes

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, 2012, 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.

In the past, we were not current with our filings of our federal and state income tax returns. Due to these delinquent filings, our income tax returns are open to examination by federal and state authorities, generally for the tax years ended September 30, 2008 and later.

Derivative Instruments

(h) 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 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.

Share-Based Compensation

(i) 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.

Loss Per Share

(j) Loss Per Share

Basic loss per share are computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share, includes the effects of the potential dilution of outstanding options, warrants, and convertible debt on our common stock as determined using the treasury stock method. For the three and nine months ended September 30, 2013 and 2012, there were no dilutive effects of such securities because we incurred a net loss in each period.  As of September 30, 2013, we have approximately 66 million potential common shares issuable under our convertible instruments, warrant and stock option agreements.

Fair Value of Financial Instruments

(k) 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.

Concentration of Credit Risk

(l) Concentration of Credit Risk

We maintain our cash with two major U.S. domestic banks. The amount held in both of the banks exceeds the insured limit of $250,000 from time to time. The amount which exceeded the insured limit was approximately $0.3 million at September 30, 2013 and December 31, 2012.  We have not incurred losses related to these deposits.

Use of Estimates

(m) Use of Estimates

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.