UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| |
x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year ended December 31, 2014
| |
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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
organization) |
|
(IRS Employer Identification Number) |
4005 All American Way, Zanesville, OH 43701
(Address of principal executive offices)
(740) 452-2500
(Registrant’s telephone number, including
area code)
Securities registered under Section 12(b) of
the Exchange Act:
| Title of each class |
|
Name of each exchange on which registered |
| None |
|
None |
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
Common Stock, no par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 ¨ (Do not check if a smaller reporting company) |
Smaller reporting company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant was $20,994,491 based on the last sale price of the Common Stock on June 30, 2014.
The number of shares outstanding of the registrant’s Common
Stock, as of March 23, 2015 was 72,249,613.
TABLE OF CONTENTS
PART I
Item 1. Business
OVERVIEW
AXION creates innovative
structural polymer solutions, engineering sustainable products and systems for applications that provide improved long-term value,
consistent performance, and reduced maintenance costs in comparison to conventional products. Because our products are non-corrosive,
impervious to moisture, do not leach chemicals, are resistant to insects and rot, and are capable of sustaining heavy loads, they
offer a viable solution where stress and environmental factors cause degradation and deterioration of conventional products our
solutions replace. Our products, proprietary and based upon patent rights, are manufactured using formulations and processes we
have developed. Our products are eco-friendly as we use both consumer and industrial recycled plastics in our manufacturing processes.
In 2007, AXION was founded
to exploit a proprietary, unique and novel technology that enabled the conversion of recycled plastics into a benchmark structural
plastic material yielding components which demonstrated significant strength, durability and application versatility. Our foundation
in technology, immiscible polymer processing, has continued to evolve and strengthen over the years and we now commercially leverage
it along with other proprietary technological strengths beyond the original structural recycled plastics discovery. Our internal
technical agility includes unique production techniques, engineering and application expertise, product design and customization
abilities, and the use of other distinctive structural plastics materials. It is this combination of differentiated skills, coupled
with business development and market engagement methodologies, which we believe will allow AXION to grow and diversify its customer
portfolio and provide effective and affordable solutions.
In the late 1980s, materials
scientists at Rutgers University created the formulations that underlie our founding technology. This technology is based on material
formulations that combine recycled consumer and industrial plastic wastes to form a structural thermoplastic. AXION transforms
these materials through a unique extrusion and molding process into structural products that are more durable, have a substantially
greater useful life, and offer more flexible design features than traditional plastic lumber. The fundamental difference between
our products and traditional plastic lumber is that our products are engineered to support heavy loads
In November, 2013, we acquired
the assets of a recycled plastics processor in Zanesville, Ohio. This decision was based on our need to better understand and control
our raw material supply and establish a vertically-integrated operations environment. Our timeline to convert the facility to manufacture
engineered products has been accelerated to meet our rapidly growing demand. Fulfilling our internal raw material supply needs
is critical. We are also pursuing opportunistic sales in the recycled polymers industry as a secondary outlet for our excess reprocessed
plastics.
We are in a position to
expand upon the foundation we built through years of successful applications of our proprietary technologies. When coupled with
our enhanced manufacturing capacity and process refinements, these achievements will lead to a significant increase in commercial
activity.
We manufacture, market,
and sell our structural polymer solutions across three product divisions:
| · | STRUXURE® Building Products in three
lines: |
| o | Structural Systems, such as vehicular bridges and commercial boardwalks; |
| o | Structural Components, such as boards, joists, and beams; and |
| · | COMPOSX™ Reprocessed Polymers. |
Since our products are
inert, they resist rot, damage from insects without the use of chemical treatments, and require significantly less maintenance
throughout their lifecycles in applications where deterioration is a problem for traditional materials.
Our ECOTRAX® rail ties
have been extensively tested in a variety of applications by railroads, domestically and internationally, and are accepted as a
viable alternative to traditional wood or concrete rail ties. Preceded by more than four hundred thousand rail ties installed in
track that were produced based on our proprietary formulations, we continue to receive a growing number of orders from an expanding
customer base. ECOTRAX® rail ties have been tested and earned acceptance from many domestic and international railways.
The strength and durability
of our STRUXURE® building products have been well documented through their application in the construction of three short-span
bridges at Fort Bragg, North Carolina, designed to support armored military vehicles, such as tanks, as well as in other high-profile
bridges for the U.S. Army. The applications for our STRUXURE® building products are diverse and provide solutions across multiple
industries. We have narrowed our scope to focus on market segments that are the best fit with our technologies and that will drive
profitability for the Company. We have separated our building products division into three areas: construction mats, structural
systems, and structural components. Construction mats are the current driver in our STRUXURE® division.
COMPOSX™ reprocessed
polymers is our product line that resulted from our acquisition of a recycled plastics processor. Our strategic intent of this
acquisition was to vertically integrate our operations to reduce the supply chain costs involved in fulfilling our raw material
needs. Subsequently, our focus is to increase strict control over the sourcing and the refinement (i.e., processing and quality
control) of our raw material streams. Secondarily, is to pursue reprocessed polymer applications opportunistically after our raw
material needs are satisfied.
We market and sell our
products in the domestic and international railroad industries, domestic and international oil and gas industries, construction
infrastructure industry, and domestic and international energy industries. We believe that by combining our technology and established
products with our new manufacturing capabilities and management team, we will grow our revenue base, becoming the market leader
in structural polymer solutions. Our focus is on increasing revenue through the sales of our primary product lines: ECOTRAX®
rail ties and STRUXURE® building products.
We deploy direct, specialized
distribution, and agent-based methods to sell our products based on unique characteristics of the market segments that we have
entered. We believe our ECOTRAX® and STRUXURE® products have broad application across many markets. Each of these markets
has a different supply chain to support its business. Organizationally, we may implement a joint venture or other partnership-based
business strategy in order to maximize profitability in a timely and efficient manner. For example, we may explore potential collaborations
with companies that have the ability to expedite sales efforts into a particular market given their distribution position, supplemental
services offering, or engineering integration, whereby we supply our products and applied development knowledge, and our partner
contributes the market access and application insight . We will also continue to use traditional marketing methods as appropriate
to increase awareness and enforce segment messaging.
Through applied development
of polymer-based technologies, AXION creates structural polymer solutions, engineering sustainable products and systems for applications
that provide long-term value. Since our founding, we have practiced developed technology, and the origin of our proven engineered
solutions extends to pilot installations in 1994. Our evolution from research to development to manufacturing competence to application
success in our chosen markets has been steady since our formation. Our drive is to increase revenue, leveraging our foundational
achievements, such as exceeding 1,500 million gross tons of traffic on our railroad ties. Leading from success to execution is
our primary goal, and our strategy for growth includes proven commercial methods coupled with differentiated materials, products,
and applications capabilities.
Our Growth Strategy:
| · | Expand manufacturing capacity to meet
current demand for our ECOTRAX® rail ties and STRUXURE® construction mats; |
| · | Further penetrate chosen end-use markets
in the railroad, transportation, construction, and oil and natural gas industries; |
| · | Identify new applications for our proprietary
technologies based on market research and geographic segmentation; |
| · | Evaluate new opportunities beyond our
core business that create a potential sales pipeline that mitigates capital exposure and commercial risk; |
| · | Pursue natural extensions to our core
business through related industries—e.g., transportation and energy industries; |
| · | Continue to develop polymer-based structural
technologies that provide solutions to problems exhibited in chosen end-use market segments and valued by our customers; |
| · | Cultivate awareness, leveraging success
in key product categories and industries. |
Our predominant sales and
marketing focus is in rail applications and polymer composite matting solutions. The commercialization effort for infrastructure
systems, platforms, and components is secondary based on a combination of length of the sales cycle and the time required to serve
our product offerings. We believe the long-term opportunities for our structural polymer solutions are substantial.
We produce our engineered
products using a plastic extrusion process that serves to melt, blend, homogenize, and output under high pressure a melted stream
of plastic composite based on our proprietary formulations. This melt flow of plastic composite is then either packed into a large
static mold having integrated cooling capability and other control features to make a large component or forced through a series
of dies and sizers to create a continuous composite board for midrange profiles. The extrusion molding process is primarily used
in the production of railroad ties, heavy mat components and other structural products. The continuous extrusion process is employed
to make structural boards used in the fabrication of temporary road mats and other smaller products.
PRODUCTS
Our unique formulations
include recycled encapsulated fiberglass that create a 100%-recycled polymer composite product with structural stiffness, strength,
durability, and creep resistance. The encapsulated fiberglass blends thoroughly with high-density polyethylene (HDPE), creating
a structural and load-bearing product. The immiscible-polymer blending takes HDPE plastic (the second most common recycled plastic)
as an input and blends it with fiberglass encapsulated within polypropylene in a manner that orients the glass fibers and results
in properties that exceed the law of mixtures for the individual materials. Developments and refinements in the manufacturing technique
also produces a skin-to-core density gradient which adds a mechanical increase to the strength of individual components above the
properties of the base material. This creates products with the best features of both, including the durability and flexibility
of HDPE and the stiffness and strength of fiberglass. These stiffness and strength features have been documented in research, independent
testing and repeated field trials conducted over the past twenty years.
The benefits of the resultant
products are many. Our products neither contain nor leach harmful chemicals. They can withstand very hot and very cold temperatures
and do not biodegrade or oxidize. In one series of tests, our products were subjected to conditions that simulated decades of exposure
to various weather patterns. This accelerated-weather testing was stopped at 50 years, demonstrating that our products have the
ability to last more than 50 years with no degradation in mechanical properties.
Our products are impervious
to moisture absorption and maintain consistent performance in wet environments. In addition, our products are resistant to attack
by insects such as marine borers that have been shown to destroy the integrity of wood-based marine structures. Our products also
have a high resistance to the abrasion that may occur in construction applications caused by repeated impact of tracked vehicles
or in marine environments due to sand and salt content found there. The sand and salt-water resistance comes from the fact that
HDPE is one of the more resistant polymer materials, as demonstrated by Taber abrasion tests as well as chemical resistance tests.
For these reasons, our material is ideal for the harshest conditions as found around construction sites or marine conditions.
The advantages of our
engineered products over traditional products for different applications present significant opportunities for our primary product
lines, ECOTRAX® and STRUXURE®. Conditions affecting standard building materials such as corrosion, crumbling, material
rot, the application of toxic chemicals to retard product failure, and maintenance and repair cycles can be reduced or eliminated
by the use of our engineered products and the solutions they provide. Benefits include:
| · | Lifecycle savings based on lower maintenance,
due to greater durability and longevity; |
| · | Improved long-term performance resulting
from non-corrosive, rot and insect resistance, and non-chemical leaching attributes of our products; and |
| · | Consistent structural integrity and user
safety because our products do not deteriorate. |
We market and sell our products across three
divisions: ECOTRAX® rail products, STRUXURE® building products, and COMPOSX™ reprocessed polymers.
ECOTRAX® Rail Products
Our ECOTRAX® rail products
line is marketed as a solution for deterioration problems experienced by railroads globally. Our end-use applications are not unlimited,
but they are extensive. In North America where timber is relatively inexpensive, our sales efforts are directed toward what we
term specialty but large-volume applications, such as ties installed in road crossings, switches, and tunnels. In regions outside
of North America, market conditions are dissimilar. Factors such as bans on toxic preservatives, lack of availability of timber,
and legislation favoring so-called green alternatives lead to greater market adoption in more applications internationally. We
employ sales strategies based on those factors to increase share and drive growth.
Our strategic intent is
to increase the market acceptance and share of our ECOTRAX® rail products globally, employing methods that account for market
conditions, geographic differences, and potential velocity of sales. Our rail applications are diverse, filling niches within a
broad market spectrum within the railroad industry. Our capabilities and expertise have expanded well beyond traditional supply
to include pre-plating services, as well as whole systems, including our tunnel-tie system that is gaining market share this year.
We sell our ECOTRAX®
rail products line across five categories:
| · | Switch (i.e., long length) ties; |
| · | Tunnel-ties and tunnel-tie system; and |
For the past four years,
AXION has introduced and gained market adoption with its ECOTRAX® line internationally. We have engaged with rail authorities
and track engineers to create technical specifications and standards for composite rail ties—also known as sleepers in some
countries. We have been tested, specified and approved in Australia, New Zealand, Russia, in various transits in Canada, as well
as countries in Asia and Europe.
We recognize that there
are unmet transportation industry needs, and we are continually pursuing applications where our ECOTRAX® line provides a clear,
superior alternative. Our value-added solution is consistent performance over long periods of time. By not being subject to deterioration
or degradation, our ECOTRAX® line presents a reliable alternative to traditional products that degrade over time, especially
in areas of high moisture and other environmental conditions that accelerate deterioration.
The nation’s railroads
spend billions annually to repair and maintain the nation’s network of over 140,000 miles that are operated mainly by freight
railroads. Replacing degraded rail ties is one of the industry’s biggest ongoing expenses. Railroads have traditionally relied
on using wood ties. Polymer-based rail ties offer distinct advantages, key among them is consistent performance over time. Due
to their durability and longevity, our ECOTRAX® rail ties are positioned to take advantage of the spending on railroad infrastructure.
| · | According to the Policy & Economics
Department of the Association of American Railroads (AAR), over the 24 year period from 1980-2003, Class I railroads spent more
than $320 billion, a little more than $13 billion per year (approximately 44% of their operating revenue), on capital expenditures
and maintenance expenses related to infrastructure and equipment; |
| · | The AAR estimates that, including the
cost of maintenance, railroads in 2014 will spend roughly $26 billion in private investments in the nation’s rail infrastructure;
and |
| · | The Railway Tie Association estimates
that the total number of rail ties sold was 20.4 million units in 2011, 20.9 million units in 2012, and 21.4 million units in 2013. |
Our ECOTRAX® rail ties
have been tested and proven over many years in the U.S. and abroad. In 2011, we entered into a three-year supply agreement with
a Class 1 railroad, which provided mass-supply credibility for our ECOTRAX® rail ties. One of our customers requested third-party
structural testing on our rail ties that had been in track for ten years. After testing, our ties showed little wear, continuing
to exceed American Railway Engineering and Maintenance-of-Way Association (AREMA) standards.
A universally recognized
accomplishment in the railway industry is amount of time in track under heavy tonnage. The American Association of Railroads sponsors
a test track in Pueblo, Colorado, which is operated by the Transportation Technology Center, Inc. (TTCI). Since 2002, our ties
have accumulated more than 1.5 billion gross tons of traffic with heavy-axle load traffic. These are key performance indicators
for railroads, and AXION is the only producer to have accomplished this level of success in track.
| · | ECOTRAX® ties exceed 1.8 billion gross
tons of traffic under heavy-axle loads, showing little signs of wear at TTCI test track in Pueblo, Colorado; |
| · | ECOTRAX® is the standard engineered
polymer tie in Russia; and |
| · | ECOTRAX® is the standard engineered
polymer tie in Oceania. |
AXION has more than 400,000
rail ties in track. We believe that our testing and in track record, combined with our scalability and strict quality standards,
sets ECOTRAX® rail ties as the standard engineered polymer tie globally.
STRUXURE® Building Products
Building upon the foundation
of our applications with our ECOTRAX® line, our STRUXURE® division represents a natural extension, an evolution of our
structural polymer solutions for demanding environments. The applications for our STRUXURE® building products are diverse and
provide solutions across multiple industries. We have narrowed our scope to focus on market segments that are the best fit with
our technologies and that will drive profitability for the Company. Our STRUXURE® building products division consists of:
| · | STRUXURE® Construction Mats; |
| · | STRUXURE® Structural Systems; and |
| · | STRUXURE® Structural Components. |
Construction mats are the
current driver in our STRUXURE® division. Through the combination of shorter sales cycles and immediate return-on-investment
experienced by our customers, we foresee strong, short-term and sustainable growth in our line of mats. Our structural systems
are field-installed projects built from multiple profiles—e.g., bridges and commercial boardwalks constructed from our proprietary
products—that have enabled us to transition to our commercialization phase. We pursue sales of our structural systems on
a project-by-project basis. These projects are supported by technical services, fabrication, project management, and installation
oversight to assure successful completion of these structural systems.
Moving beyond the rail
business, in early 2013, we focused our efforts on the development and launch of our STRUXURE® construction mat line. Our initial
product offering was heavy construction equipment mats. With the success of our first test installations, we confirmed that our
STRUXURE® mats provide key advantages over traditional wood-based mats. Our mats proved more durable in side-by-side project
comparisons. Our STRUXURE® heavy construction mats are estimated to last more than five times longer than timber-based mats
in wet applications under heavy loads and do not lose structural integrity when wet.
STRUXURE® Construction Mats
AXION’s construction
mat line is the leader in our range of building products. The strategic intent of our construction mat line is to create value-added
polymer matting solutions to be used under active heavy equipment in challenging conditions, including environmentally sensitive
project sites with a focus on oil & gas upstream and midstream operations. Our value proposition is based on key advantages
in performance and services related to traditional product offerings.
| · | Consistent performance in wet conditions:
Surface durability and impermeable qualities provide reliable performance in challenging environments; |
| · | Long lifecycles: estimated more than five
times the useful life of mixed hardwood mats when used in wet conditions with active heavy equipment; |
| · | Smaller mat thickness result in lower
logistics costs: high compression capacity and surface hardness than mixed hardwoods, resulting in smaller profiles needed for
the same task; |
| · | Cradle to grave to cradle recycling: our
mats are recyclable by AXION at the end of their useful lives, providing an outlet for companies seeking to reduce their waste
disposal costs; |
| · | Environmentally positive: our mats neither
leach nor absorb liquids ; and are resistant to salt and most chemicals; |
| · | Flexible purchase options: purchase and
rental options are available; and |
| · | Channels of distribution for our STRUXURE®
construction mats are through a network of specialized distributors and agents worldwide. |
We are developing a range
of polymer matting products for use on energy and civil construction projects. Our STRUXURE® construction mat line has three
groups: heavy construction mats, temporary road and access mats, and specialty construction mats. Each construction mat group is
in a different phase of development, and the general sales cycle might last six months for large scale distribution programs.
Our heavy construction mats target
equipment weights greater than 100,000 pounds, and these have been fully launched in the market. Our line competes directly against
mixed-hardwood mats, and there are minimal polymer-based heavy construction mat competitors at this time. Our predominant barrier
is the difference in initial cost versus a mixed hardwood-based mat. The pricing difference varies based on availability, geographic
regions, shipping costs, and number of units. Our advantage is performance over time, and our offerings last significantly longer
in harsh conditions. The length of time varies by application, a combination of geographic location, type of equipment, and length
of project. We work closely with our customers to determine applicability and benefit after learning the unique attributes of their
applications. Educating potential customers about the general benefits of our heavy mats, along with consultation about specifics,
is leading to greater use in the marketplace.
| · | Temporary Road and Access Mats |
Our temporary road and access mats
target equipment weights less than 100,000 pounds, and are in final development. Unlike our heavy construction mats, we compete
against other polymer-based temporary road mats, as well as hardwood-based versions although wood based mats remain the dominant
product. The current market leader in the emerging polymer mat category is Newpark Resources, Inc. (NYSE:NR), offering its DURA-BASE®
mats under its Newpark Mats and Integrated Solutions division. Our STRUXURE® temporary road and access mats compete with DURA-BASE®
mats but the significant market opportunity is the conversion of customers from wood-based mats to polymer composites. Our market
research suggests that significant market opportunities exist for polymer-based mats, and our line of temporary road mats fills
a part of the market unaddressed by our competitors.
For our customer’s requiring
support for various equipment located on oil and natural gas sites, we are in early development of our specialty mats. We are evaluating
our competitive positioning and testing prototypes.
STRUXURE® Structural Systems
Our structural systems,
engineered using our multiple components, represents our second line within our STRUXURE® building products division. It consists
of two lines: vehicular bridges and commercial boardwalks. Our strategic intent is to supply assorted components for heavy load
platforms in challenging conditions. We maintain direct and distribution-based selling models, while engaging regional manufacturer
representatives and agents as needed. Our customers include departments of transportation and parks and recreation offices at local,
county, and state levels. Commercializing these structural systems requires us to engage indirect customers including engineers
and contractors involved with these projects. We interact with these indirect customers at all levels to educate them about the
function and applicability of our structural systems and components. These indirect customers are fragmented, but the engineering
community offers important technical guidance, and construction companies provide valuable input on project schedules and installation
practices. Both these secondary customers have influence on product purchasing decisions and are critical to the success of every
project.
Our recent structural systems
include vehicular bridges and commercial boardwalks, and we plan to extend our structural systems to include complete marine structures.
Key advantages of our vehicular
bridge systems are:
| · | Technical services: from design guidance
based on our pre-engineered “Standard Design of Thermoplastic Bridges” through installation and inspection, we work
with all stakeholders to ensure ease of installation and long-term success |
| · | Customizable: our products provide abutment
options for various terrains, structural joists and surface decking boards of different sizes |
| · | Fabrication: we provide cutting, drilling,
and fastening services of various components prior to delivery to the project site to accelerate completion |
| · | Logistics: delivery times are tied to
the project schedule and pre-fabricated systems lower shipping and installation costs; |
| · | Installation expertise: pre-installation
planning and field visits during installation are part of our complete engineered system. |
The origin for such use
of our proprietary engineered products extends to 1998 when our technology was used to engineer rectangular joists for a U.S. Army
vehicular bridge at Fort Leonard Wood, Missouri. In 2002 products based on this technology were used to construct a vehicular bridge
over the Mullica River in the New Jersey Pine Barrens. Based on a 2007 analysis performed by the U.S. Army Corps of Engineers,
these bridges were determined to be as durable as they were when first installed, requiring little maintenance. Collaborating with
the U.S. Army Corps of Engineers to build bridges that support tanks, we developed more profiles, such as I-beams, to increase
load-bearing capacity and reduce the amount of material required to achieve it.
In 2009, we supplied the
materials for, and participated in, the installation of the first of two polymer composite bridges designed for use by military
tanks. These bridges support over 70 tons for track vehicles and over 85 tons for wheeled vehicles.
In 2010, we participated
in a unique project, supplying the materials and helping in the design and installation of two bridges which were developed for
rail use and were engineered to support 130 tons. Market adoption of our products increases with each successful installation,
proving our systems are durable and maintain their structural properties over time under heavy loads. Meeting the U.S. Army Corps
of Engineers standards provided us with recognition for our proprietary structural systems in the large-form construction materials
market. Our list of successful installations have also include a vehicular bridge in Peeblesshire, Scotland.
Working with Villanova
University, we commissioned American Society of Testing and Materials (ASTM)-standardized tests of our structural components in
2012. Concurrently, we hired Parson Brinckerhoff to develop a design and standards guide for polymer-based bridges, including inspection
guidance. Published in 2012, it represents the first and only design guide for thermoplastic vehicular bridges. Our installations
based on our testing, design, and fabrication development with Villanova and Parsons Brinckerhoff include:
| · | Vehicular bridge in York, Maine; |
| · | Vehicular bridge in West Liberty, Ohio;
and |
| · | Bridge rehabilitation projects with St.
Lawrence County, New York. |
The market opportunities
for our structural systems extend to public and private installations, representing sales cycles from six months to three years.
We employ multiple methods to engage this diverse segment. Given the complexity of the customers and markets, our commercial engagement
differs based on applications and customer type. Currently, our target segments are vehicular bridges and complete marine structures.
Our STRUXURE® structural
systems are positioned to take advantage of the spending on various infrastructure projects:
| · | The American Society of Civil Engineers
has recommended that the U.S. spend $17 billion a year on bridge maintenance; |
| · | The Federal Highway Administration reports
that more than 140,000 bridges are classified as either structurally deficient or functionally obsolete; and |
| · | The GAO Report on Marine Transportation
stated that thirteen Federal agencies spent an average of $3.9 billion annually on the construction and maintenance of federally
authorized projects. |
We work directly with county-level
engineering offices, state departments of transportation, as well as local officials who recognize a need to lower maintenance
costs. A key advantage to our systems is accelerated construction and installation times. Compared with steel and concrete structures,
our proprietary polymer-based systems are lighter and pre-fabrication takes place prior to delivery to a project site. The sales
cycles for vehicular bridges is approximately one to three years in public projects.
STRUXURE® Commercial Boardwalks
We define commercial boardwalks
as public access platforms that can be used to support equipment or vehicle traffic or both. Applications include structures for
public park and recreation wetland walkways, marine docks and decks, golf course bridges, resort and hospitality decks and pedestrian
bridges. Although steel- and concrete-based systems are our dominant competition in infrastructure applications, timber-based products
are our primary competition in commercial boardwalk applications. Our entry-to-market was based on a similar problem recognized
by the U.S. Army Corps of Engineers in bridges on military bases. Deterioration- and corrosion-resistant systems and materials
are needed, especially in wet and humid environments. According to a Principia Partners market study commissioned by AXION in 2012:
| · | For 2015, total commercial boardwalk market
size at the contractor level is projected at greater than $240 million; |
| · | Approximately 30% or $72 million of the
contractor-level market is built using polymer-based composite or wood-plastic composite materials; |
| · | Approximately 20% or $48 million of the
contractor-level market is built using wood; and |
| · | 60% of the volume is for sub-structure,
and 40% is used for surface boards. |
The sales cycle for commercial
boardwalks and public walkways is six months to one year. Our systems combine multiple materials technologies to create a total
engineered system solution. Separating polymer technologies based on performance within a system sets us apart from competitors
who supply building materials for any application. We continue to work with licensed engineers who provide their design guidance,
including technical drawings, to our customers. Our involvement from conception to design to installation and inspection is critical,
as our proprietary technologies combine to form unique platform systems. Our walkway projects include:
| · | Pedestrian walkway at Fort Lee, Virginia; |
| · | Pedestrian walkway in West Chicago, Illinois; |
| · | Equestrian and pedestrian bridge in Santa
Rosa, California; |
| · | Pedestrian walkway in Centerville-Washington,
Ohio; and |
| · | Golf bridge decking and retaining wall
in Portsmouth, New Hampshire. |
STRUXURE® Structural Components
Structural components represent
our third line within our STRUXURE® building products division. Our components include boards, beams, headers, joists, planks,
and pilings. Our proprietary structural components are the same as used in our construction mats and structural systems. Our strategic
intent is to provide lasting polymer-based engineered products that maintain performance in demanding environments. The markets
in which we sell our diverse line is fragmented, and orders vary from regular supply to filling project-based needs. Applications
using our structural components include:
| · | Golf bridge decking in River Vale, New
Jersey; |
| · | Commercial decking for Wallkill Valley
Land Trust in Rosendale, New York; and |
| · | Industrial supports for temporary structures,
pipe supports, and containment berms used globally by energy companies. |
Our primary competitors
for our STRUXURE® building products are producers of traditional wood, steel, and concrete building materials. Our
deck board products are much different than other so-called plastic lumber. Domestically, producers of composite building materials—i.e.,
wood-plastic and all-plastic composite—focus their offerings on residential and home improvement applications, as their products
have lower structural capability, whereas our STRUXURE® products are uniquely suited and intended for use in heavy-load commercial
applications.
COMPOSX™ Reprocessed Polymers
The strategic intent of
our COMPOSX™ reprocessed polymer product line is to vertically integrate our internal operations, as we pursue opportunistic
sales of our raw material streams used in our proprietary engineered products. The primary application of our internally refined
waste polymers is our engineered products. After our internal needs are met, we will pursue viable short- and long-term opportunities
as they present themselves. Manufacturers are seeking alternatives to virgin raw materials, and our goal is to leverage our unique
combination of polymer processing capability, formulations knowledge, and manufacturing expertise.
In identifying and developing
three primary lines, we will continue to pursue early-stage market opportunities in industries that use reclaimed polymers in manufacturing
or where needs are present for durable, lasting structural polymer solution alternatives. These opportunities include applications
in transportation, military building materials, marine systems, mining, mobile infrastructure systems, and industrial packaging.
Sales cycles in reprocessed
polymers are thirty to sixty days or longer with strategic partnerships. Speed, service and quality separate competition. Our planned
offerings combine materials and associated services for:
| · | High-density polyethylene flake; |
| · | Glass-filled polypropylene flake; |
| · | Reprocessing, tolling, and conversion
services of various reclaimed polymers; and |
| · | Material brokerage of various reclaimed
polymers. |
Like our other product
lines, our approach is to offer a value-added solution, not a replacement product. In our vertically-integrated environment, our
processes produce consistent and reliable recycled plastic material. Consistency in creating value-added solutions using inconsistent
raw materials is key to growing this segment. Our competitive advantage is our unique knowledge and integration of proprietary
technology and its application, combined with a thorough understanding of processing reclaimed polymers for use in engineered products
with defined and elevated mechanical properties.
Our commercial engagement
activities include strategic relationships that we have formed with current suppliers, some of whom have become customers of our
reprocessed polymers. Forming a synergist internal and external balance is fundamental to our success in this segment. The growth
of our engineered product sales is directly related to increased demand for reclaimed polymers. As our internal use grows, our
relationships with other manufacturers and suppliers grows, forming engagement beyond a typical supplier-user relationship.
According to the market
analysis firm, Dunn & Bradstreet, there are approximately 100 manufacturers of recycled plastic materials in the United States.
They create a $2.0 billion industry, employing an average of 69 people with $20.5 million in annual sales. The range of firms in
the recycled plastics industry creates a diverse competitive landscape with room for quality-, service-, and solution-focused methods.
We believe our competitive advantage is our proprietary knowledge of structural polymer manufacturing and quality-assurance methods,
leading to advantaged solutions for many applications. Our reclaimed polymer material supply places us in the unique position of
being the user of it, as well as a processor and seller
SALES, MARKETING AND DISTRIBUTION
Our website serves as our
corporate hub, initially representing AXION to a diverse community. Our customer acquisition activities include trade show exhibitions,
print and electronic advertising, industry specific networking and aggressive new business development efforts. We have developed
brand equity through foundational projects, such as the tank bridges at Fort Bragg, and market engagement through trade associations
and conferences. These investments are positioning AXION as the global leader in structural polymer solutions.
We employ consultative
selling. Given the technical nature of our products and the complexity of the industries in which we operate, we develop long-term
relationships with potential and current customers as well as industry stakeholders, offering guidance and solutions for some of
the challenges they face. Predominantly, we are focused in the railroad, construction and oil and gas markets. Our marketing strategy
depends on several key characteristics, in order of priority:
1) Differentiated structural
performance;
2) Lower total lifecycle
costs;
3) Environmentally responsible
initiatives; and
4) Expand industry alliances
and connections.
Instead of focusing entirely
on one industry, our unique and environmentally-friendly products match a wide range of needs throughout various industries. We
approach each of these opportunities from a market-based solutions perspective, leveraging our products’ value-added features
sought by each customer, such as contaminant-resistant materials.
We have an aggressive and
flexible sales and distribution strategy that is intended to maximize our exposure in a given geography, as we deliver our products
in an economical and efficient manner.
Our international opportunities and installations
are growing. Based on our market research and applied development experience, we sell directly, employ specialized distributors,
or use agent-based methods to gain a position in a particular market. In each case, we employ a model that balances our applied
development and technical knowledge with a local firm’s understanding of the market. For example, for our ECOTRAX® line,
we deploy the method based on the region in which we want to sell:
| · | In the U.S., we sell directly; |
| · | In Australia and New Zealand, we work
through a distribution partner; |
| · | In Canada, we work through agents; |
| · | In Russia, we are forming a joint-venture
company; |
| · | In Europe, we work with the Rutgers license
holder in that region; and |
| · | AXION is actively vetting partners in
other regions. |
International markets present
several opportunities for us. Through a hybrid sales and market development model, we pursue market introduction and
adoption using direct and indirect methods. We are exploring other options, including sub-licensing and creating joint-venture
relationships in regions where they provide the most benefit to product adoption and sales growth.
Because of the costs involved
in learning about and being acquainted with international markets, our growth has come through a less direct model. Given the technical
complexities of our product offerings, combined with the requirements in our chosen industries, we remain the technical experts
in each relationship we form. We intend to retain control of the licensing of our intellectual property and of the formulations
and the manufacturing processes we employ. We have had or are currently engaged in discussions or product testing with various
parties and organizations within England, France, Germany, Mexico, Russia, Singapore, and South America.
GROWTH STRATEGY
Our success depends on
several factors:
| · | Continued market adoption of our proprietary
technology across rail applications and construction mat product line; |
| · | Deployment of leaner manufacturing techniques
to reduce costs while continuing to increase our capacity and diversify our material sourcing; and |
| · | Develop our global applications, building
international partnerships that provide for manufacturing in various regions. |
We believe that through
the combination of increased market adoption and acceptance, effective manufacturing, and global applications, our continued growth
is assured. We are positioned to be the market leaders wherever we introduce a new structural polymer solution. Our deliberate
evolution has led us to achieve that with our ECOTRAX® line. With a strong, applied foundation in place, we are in a position
to grow as market leaders in our other categories. Implementing our growth strategies through key activities is our focus.
Key 2015 Growth Activities
| · | Increase manufacturing capacity to meet
current demand for our ECOTRAX® rail ties and STRUXURE® construction mats; |
| · | Further penetrate chosen end-use markets
in the railroad, construction, transportation, and oil and natural gas industries; |
| · | Identify product line extensions and new
applications for our proprietary technologies based on market research and geographic segmentation; |
| · | Reduce our commercial and market risk
through product diversification and stratification; and |
| · | Continue to cultivate awareness, leveraging
success in key product categories. |
TECHNOLOGY
Our proprietary technologies
are based on material compositions of matter, processing and use, and design patents. The compositions are used to produce
structural polymer-based products from recycled waste materials. The processing capacity allows the production of efficient large-format
shapes from these blends, such as rail ties, bridge beams and boards. Our proprietary formulations yield structural-grade properties
in the resulting product. Rather than mixing homogenous materials with similar properties to yield a third material (a commonly
accepted industry practice), our proprietary technology blends two heterogonous materials thought to be incompatible in a manner
that enables them to physically bind together, creating a third enhanced material, a composite. In effect, a rugged, weather-resistant
material is mixed with a stiff and rigid material to yield a durable, strong, and stiff structural product. Third-party testing
to validate assumptions, proving the durability and strength of our various material formulations at Villanova University and the
Transportation Technology Center, Inc. sponsored by the American Association of Railroads, among other universities and third-party
structural testing laboratories.
Our technology is derived
in part from patents held by Rutgers University, which have been exclusively licensed to us for United States, Canada, Central
and South America, the Caribbean Territory, South Korea, Saudi Arabia, Russia, Mexico and China (where we are a co-licensee). Patents
do not exist in all countries for which a license has been granted to us. Although our license agreement with Rutgers also includes
know-how, we do not believe that any proprietary know-how is attributable to, or has been obtained by us from, Rutgers so that
we may not have exclusivity in all countries licensed to us where patents do not exist. Conversely, our position as to our licensed
rights also enables Axion to market its products in countries licensed to others in which patents have not been filed, such as
Australia and New Zealand. We are in the process of pursuing a resolution of these license issues with Rutgers. The Rutgers patents
have limited remaining lives and will start expiring in 2016. Currently, we are the only manufacturer of products that utilize
the Rutgers patents in the world.
Utilizing recycled plastics
and plastic composites, our products have the distinct advantage of being environmentally responsible. In our processes, we:
| · | Divert plastic from the waste stream; |
| · | Do not use any natural products (such
as wood) in our products; |
| · | Do not use any chemicals or toxins to
manufacture our products; and |
| · | Develop and sell products that can be
completely recycled and reused at the end of their previous application. |
The foundation for converting
select recycled plastics into a structural polymer-based product was formulated at Rutgers University. We hold an exclusive, royalty-bearing
license in specific but broad global territories in which patent protection exists to manufacture, sell and export products made
using these proprietary formulations. This license agreement extends us the right to grant sublicenses. We combine these patented
technologies with our other materials, production, and engineering processes and know how to create our unique engineered products.
Our royalty obligations
to Rutgers are based on the sale of various products but only for products or assembled components that utilize the original Rutgers
materials technology. There is a collaborative approach with Rutgers regarding the maintenance and defense of the patents. We
also are a member of the Rutgers Center for Advanced Materials via Immiscible Polymer Processing, or AMIPP, a department of Rutgers
which provides the technical support for the originating technology. The AMIPP Advanced Polymer Center is a group of collaborative
researchers dedicated to exploring immiscible-polymer blends and the novel structures and materials obtained by processing such
blends. The membership allows us to use AMIPP, as we desire, for basic research at no additional cost, with access to more comprehensive
research services on a per-project basis.
COMPETITION
Our general value proposition
is based on direct comparisons to legacy materials used in the industries in which we offer our structural polymer solutions, especially
in the transportation, infrastructure construction, and energy industries. There is no simple formula to compare our products generally.
We have learned that specific applications—e.g., rail ties installed in the southeastern United States—yield dramatically
different comparisons. As such, our approach to market is based on the application of our solution, geographic location, length
of project or installation, and in service-related factors, such as load capacity. Moreover, we are not without competition in
polymer-based products, such as rail ties, but our primary competition are products made from wood, concrete, or steel—i.e.,
legacy or traditional materials—depending on the product and industry. One dominant market driver is the current state of
the hardwood lumber industry in North America, which is helping create more demand for our products within several market segments.
Our market research has led us to understand the current supply and demand dynamics and determine the following conditions in the
hardwood lumber industry:
| · | Availability of and capacity for large
profile industrial hardwood lumber is not keeping pace with increasing demand; |
| · | More hardwood lumber is being used in
decorative residential and commercial construction interior finishing applications at higher mill-price realizations; |
| · | Less industrial hardwood lumber is available
for the market with increasing demand for decorative hardwood; |
| · | North America is a recognized hardwood
lumber supply source and is a global exporter; |
| · | A great majority of North American rail
ties and construction mats are made from hardwood lumber; |
| · | Demand for rail ties and construction
mats is projected to substantially increase over the next 10 years; |
| · | Oak timbers are being replaced by mixed
hardwoods from various tree species with lower structural properties and higher deterioration rates; |
| · | Wood absorbs liquids and loses structural
integrity when wet—i.e., compressive strength and surface durability; |
| · | Longer-length timbers (i.e., greater than
14 feet) are more difficult to procure and are more expensive per board foot as profile size and length increases; |
| · | Lower quality is combining with declining
availability of large timbers, leading to higher prices in the market; and |
| · | Companies are actively seeking alternative
solutions to hardwood lumber in multiple industries, including transportation, construction and energy. |
These market conditions
have contributed to our accelerated growth, especially in 2014. As conditions change, we adapt the implementation of our core growth
strategy. Our priority for growing our product lines is based upon practical knowledge in our existing markets. This deliberate
evolution, a strategy based on market assessment and validation, mitigates our commercial exposure or risks from changing market
and industry conditions through product and application stratification that is paramount to our continued success. Through applied
development of our technology, we have chosen to build upon successes, identifying adjacencies or natural extensions to our current
offerings, whether through new products or new applications of existing ones. By executing our balanced but flexible growth strategy,
we believe that sustained growth is achievable, a path that meets our short- to long-term revenue goals.
We are not without polymer-based
rail tie competition domestically. Integrico Composites and TieTek of America both manufacture polymer-based ties. That is where
similarity ends. We know of no other company with as strong an applied history as ours. These competitive rail ties are not structural
polymer composites, and we do not view these plastic rail tie manufactures as competition for some of the applications for which
our products are most suitable. To our knowledge, these other polymer-based tie products have significantly less testing and success
in application or have failed repeatedly in the field.
Before we launched our
current business, there were other companies in the composite rail tie industry, which demonstrated the enthusiasm of the railroad
industry for composites. One composite tie manufacturer supplied more than one million rail ties to a Class I freight
railroad, but the ties experienced many quality-control and general performance problems, leading to a high failure rate in track
and the company’s eventual closure. The failures notwithstanding, this company established the potential demand for composite
rail ties by the rail industry. A Japan-based company produces composite rail ties from virgin materials and, as a result, the
company’s products are significantly more expensive and less environmentally beneficial than our ECOTRAX® products.
Fundamental to our success
is how tested and proven our ECOTRAX® line is in track. We are not without competition domestically or internationally, but
the barriers to entry are complex. Given the technical requirements set by railway engineers combined with the length of time required
to be approved for use in track, we believe that we are the most applied and approved polymer-based rail tie. Our testing extends
to 1998 with the introduction of first generation ties based on the original Rutgers formulations that we license. Through our
development, we have continued to enhance our offering, and our current ECOTRAX® line is an evolution of our initial rail ties.
Through our proprietary technology, unique process, and quality control, we have distinguished ourselves among our competitors.
For example, in Russia, we worked with our local technical partner to introduce and establish the engineered polymer tie category.
Using our technical knowledge of testing and specifications, along with laboratory testing by the Russian Rail Institute, the category
was created after one year of work with our partner.
MANUFACTURING
We employ extrusion-molding
and continuous-extrusion processes to create our proprietary ECOTRAX® and STRUXURE® engineered products. Our key profile
is a rail tie in lengths up to thirty-two feet, and our assembly capabilities include the fabrication of construction mats, assembly
of bridge components, and the pre-plating of rail ties. Our equipment and capabilities extend beyond these engineered products
to include reclaimed polymer processing equipment to refine recycled plastics. We employ grinders, washers, dryers, and blenders
to process recycled plastics for internal use primarily, as well as pursue recycled-polymer sales opportunistically.
We are experts in creating
structural polymer solutions that include reclaimed plastics. Our solutions-based approach has offered greater market penetration
and acceptance of our products as viable alternatives. We do not see our products as applicable wherever traditional materials
are used. We base our entry to market on conditions that arise from environmental deterioration, opportunities for our products
to outperform legacy products. Our expertise is a product of unique, proprietary formulations, and the processing by which we create
our engineered products. Our processes are trade secrets, developed over years of testing and refinement. We hold a unique position
in that we employ a patented technology that we have further developed and applied in commercial projects, and we are the only
company in the world with the portfolio of field-proven polymer-based structures and products. Our portfolio provides the foundation
on which we are building commercial activities. Using multiple material technologies and our capabilities in processing, we are
able to create effective application-based polymer solutions for our customers.
For several years, AXION
utilized a contract manufacturing model for the production of its railroad ties and other structural components. This approach
to product manufacturing worked exceptionally well for a number of years and was effective in quickly establishing both northeastern
and eastern midwest production capabilities. As our commercial success grew and production schedules became more predictable in
2012, we concluded that larger scale and directly managed production capability needed to be established in 2013. We also determined
that backward integration into our material supply stream was advantageous for cost positioning and elevated quality performance.
Our collective realizations led to the establishment of a permanent railroad tie production facility in Waco, Texas, and the acquisition
of the recycled plastics processing facility in Zanesville, Ohio, in late 2013.
Through 2013, customer
and market demand for our products continued to grow. In 2014, our growth necessitated the opening of a second product manufacturing
site, which led to an acceleration of our planned conversion of our Zanesville location to a fully integrated production facility
for molded and continuously-extruded products. Our current near-term capacity expansion plans will position the Zanesville operation
at the same production levels of our Waco facility. During early 2015, our goal is to double the manufacturing capacity in both
locations, as we prepare both operations for a significant increase in product output near the end of 2015 to meet market demand.
The fully integrated production
operations at both the Waco and Zanesville facilities are and will be organized similarly and the principal steps are:
| 1. | Receipt, inspection and classification of incoming recycled or reprocessed plastic; |
| 2. | Sorting, shredding, grinding, and pneumatic filtering of plastic flake; |
| 3. | Aqueous separation, mechanical washing and two-stage drying of the plastic flake; |
| 4. | Batching and blending of proprietary formulation of HDPE, GFPP and other components; |
| 5. | Extrusion of the plastic and fiberglass composite into large product specific molds or through
a continuous forming line for mid-range profile boards; and |
| 6. | Post processing of the extruded/molded shapes is dependent on the end product: |
| a. | Rail ties: Inspection, nondestructive testing (x-ray), embossing of grip indentations and potential
pre-plating; |
| b. | Mats: Inspection, machining, assembly and hardware installation; and |
| c. | Structural Components: Inspection, select x-ray analysis, machining, assembly or subassembly, and
kitting or packaging. |
Our manufacturing methods
and techniques are structured for growth and efficient replication in either expanded capacity at the two current locations, in
newly constructed North American facility, or as part of an international venture or partnership. The distinctive manufacturing,
engineering, technical, and quality talent within the organization continually implements improvements to the processes and such
best practices are quickly standardized and deployed within the company. Our manufacturing practices, customized formulations,
and optimized procedures now go well beyond the original art of the technology and these learnings are held as trade secrets by
AXION.
The quality assurance methods
and standards established by AXION also draw a line of distinction with our competitors. A combination of raw material scrutiny,
process controls, nondestructive evaluation, and continual mechanical testing of our products statistically assures that the performance
of all products meet and typically exceed published specifications. Our inline process monitoring, record keeping, and postproduction
analysis capabilities exceed the norms of the industry. Our understanding of the raw material streams and the production process
enable a high level of stability and predictability to the manufacturing process. As with the rest of AXION’s business, the
production operation has been structured with a higher level of sophistication than normally seen in this size or type of a business
in order to assure product performance, engender confidence with our customers, and to establish a solid platform for growth.
RAW MATERIAL SUPPLY
Since we use reclaimed
polymers to create our proprietary products, we have growing needs that we believe will be met through a combination of our internal
processing and external supply. We are expanding our internal processing capacity and external network to achieve a higher performance
and more cost-efficient streams of material supply.
Our supply of raw materials
for reprocessing comes from a wide variety of sources, from large waste management companies and automotive manufacturers to small
regional haulers that collect recycled plastics locally. The supply sources are well established and continue to provide a steady
supply of raw materials, and we foresee no shortage of supply in the raw materials we require.
High-density polyethylene
(HDPE) is our primary raw material. As our internal capacity grows, we continue to purchase HDPE from municipal recycling facilities,
material brokers, and reprocessors to meet our needs. Our goal is to process over 50% of our raw material requirements for recycled
plastics internally depending on market conditions and supply stream opportunities.
Glass-filled polypropylene
or encapsulated fiberglass is our secondary raw material. It is found in a wide range of post-industrial scrap, predominantly related
to the automotive industry. This recycled material is readily available but processing presents a challenge. We are installing
specialized internal processing capabilities to convert reclaimed glass-filled polypropylene material for our internal use and
have begun establishing long-term supply relationships.
Our ability to modify formulations
while maintaining the structural properties of our finished engineered products is a key strategic advantage in managing post-industrial
raw material streams. The post-consumer raw materials we utilize are widely available, and these materials are collected in most
communities. Only a portion of the billions of pounds of recyclable-eligible materials generated each year are actually collected.
An even smaller percentage is actually used in recycled products. The raw materials can be sourced directly through municipal recycling
facilities, major waste haulers, material grinders or recyclers, or brokers depending on the volume required.
Recycled material prices
are listed on a commodity-style basis in industry periodicals or on-line. As mentioned previously, late in 2013 we acquired a plastics
recycling company with the capabilities to purchase directly from collection sites, as well as sort and process the collected materials
into a reprocessed plastics flake or pellet. Our plan is to utilize the experiences and know-how of our reprocessed plastics business
to transfer this capability to sort, wash, and grind raw recycled plastics for use in our production. We have the ability to go
from a scrap form to a fully manufactured and fabricated engineered product that yields a higher per pound sale price for the reprocessed
plastic.
We continue to identify
and develop other unique sources of our raw materials that may provide us with greater supply, more cost-efficient locations from
which to purchase supply, and better pricing.
EMPLOYEES
As of March 23, 2015, we
had 156 full-time employees comprising 135 employees in manufacturing and production, 8 in purchasing,
sourcing and other production-related administrative functions, 5 in sales and marketing and 8 comprising our headquarters staff.
From time to time we may utilize temporary agency employees and consultants on an as-needed basis.
Item A. Risk Factors
As a smaller reporting company, we are not required to provide risk
factors. However, we have chosen to include the following risk factors.
Risks Related to Our Business
Our independent registered public accountants
have expressed that there is substantial doubt about our ability to continue as a going concern.
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, 2014 and 2013, based on our significant operating losses and the requirement
for external financing. Our financial statements do not include any adjustments that would result from the outcome of this
uncertainty. Our inability to continue as a going concern would require a restatement of assets and liabilities on a
liquidation basis, which would differ materially and adversely from the going concern basis on which our consolidated financial
statements have been prepared.
We have generated limited operating revenues. If
we are unable to commercially manufacture higher volumes and sell our recycled plastic engineered products, we will not be able
to generate profits and we may be forced to curtail operations.
As of the date hereof,
we have generated limited revenues. As a result, we have limited operating revenue and we anticipate that, for at least the
near future, we will operate at a loss. Our ultimate success will depend on our ability to commercially manufacture
higher volumes and sell our recycled plastic engineered products. If we are unable to do so, we will not be able to
generate profits and we may be forced to curtail operations.
The demand for ECOTRAX rail ties and
STRUXURE structural building products fluctuates, which could adversely affect our results of operations.
Demand in the end markets
served by our customers is influenced by many factors, including the following:
| |
· |
global and regional economic, political and military events and conditions; |
| |
· |
fluctuations in energy, fuel, oil and natural gas prices and the availability of such fuels; |
| |
· |
changes in residential and commercial construction demands, driven in part by fluctuating interest rates and demographic shifts; |
| |
· |
changes in demand for our products due to technological innovations; |
| |
· |
changes in laws and regulations (or the interpretation
thereof) related to the production of
structural plastic products or the environment; |
| |
· |
prices, availability and other factors relating to our products; |
| |
· |
continued preferences for wood, metal or concrete,
rather than plastic composite engineered products;
|
| |
· |
increases in costs of labor and labor strikes;
and
|
| |
· |
population growth rates. |
We cannot predict or control
the factors that affect demand for our products. Negative developments in the above factors, among others, could cause the demand
for recycled plastic composite engineered products to decline, which could adversely affect our business, financial condition,
results of operations, cash flows and prospects.
If we cannot produce enough of our engineered
products to satisfy customer demand, our ability to execute our business plan will be adversely affected.
Our customers’ needs
will often require the fulfillment of orders within short periods. As a result, a sudden increase in demand from our customers
without a correlative increase of our production capacity or inventory may prevent us from timely satisfying our customers’
demand for our products. Because our customers’ demand will persist regardless of our ability to meet that demand, our inability
to produce enough of our product to satisfy our customers’ needs may lead to the use by those customers of wood, concrete
or metal products, which could adversely affect our business, financial condition, results of operations, cash flows and prospects.
Our business is subject to risks in obtaining
the recycled plastics we use at acceptable prices.
The production of our products
requires substantial amounts of recycled plastic and recycled plastic composite materials. Our business could suffer from the loss
of significant sources of these materials, the payment of higher prices for these materials or the failure to obtain sufficient
additional materials to meet planned increases in production. In addition, the price of recycled plastic and recycled plastic composite
materials sometimes experiences cyclical variation in cost as a commodity. Our ability to obtain adequate supplies of recycled
materials at acceptable cost and quality depends on our success in developing diverse sources of supply that meet our requirements,
maintaining favorable relationships with suppliers and managing the collection of supplies from geographically dispersed locations.
We are dependent on our ability to raise
capital from external funding sources. If we are unable to continue to obtain necessary capital from outside sources,
we will be forced to reduce or curtail operations.
We have not generated any
significant cash flow from operations and we may not be cash flow positive for at least the near future. We also have
limited financial resources. As a result, we may need to obtain additional capital from outside sources to continue
operations and commercialize our business plan. Our ability to execute our business plan depends upon our ability to
obtain financing through:
| |
· |
bank and other debt financing; |
| |
· |
equity financing; |
| |
· |
strategic relationships; and/or |
| |
· |
other means. |
Our engineered products are relatively
new and, to date, have limited exposure and acceptance in the marketplace. If our products do not receive substantial
market acceptance, our ability to execute our business plan will be adversely affected.
Although earlier versions
of our ECOTRAX rail ties and STRUXURE building products, such as I-beams, T-beams, pilings and boards were sold by a predecessor
licensee, our products are still relatively new to the marketplace. As a result, the claims regarding their attributes have not
been fully validated in the marketplace through extended use. Potential customers may be resistant to trying new products
such as ours or, after actual use, may determine that our products do not meet their needs. If our products do not receive
market acceptance, our business, financial condition, results of operations, cash flows and prospects will be adversely affected.
Our business is highly reliant on a relatively
small group of customers. If we lose business from those customers, our sales will be materially impaired.
We are subject to risk
related to customer concentration because of the relative importance of our largest customers and the increased ability of those
customers to influence pricing and other contract terms. Although we continue to strive to broaden and diversify our customer base,
a significant portion of our revenue is derived from a relatively small number of customers. Consequently, a significant loss of
business from, or adverse performance with regard to, any of our major customers may have a material adverse effect on our financial
condition, results of operations and cash flows. Similarly, the renegotiation of major customer supply agreements or individual
purchase orders may also have an adverse effect on our financial results.
If we are unable to develop substantial
sales and marketing capabilities, we most likely will not be able to generate adequate sales.
Sales and marketing have,
to date, been conducted by a limited number of employees including several members of our senior management team. In the
future, we may utilize a joint venture business strategy in certain markets in order to gain sales in a timely and efficient manner.
Alternatively, with incremental funding, we may hire additional sales and marketing staff, additional engineers and supporting
staff and implement a detailed marketing program. However, there can be no assurance that we will be successful in entering
into joint ventures or developing a sales and marketing force or that our sales and marketing efforts will be successful.
If, as our international sales operations
increase, our employees or agents violate the U.S. Foreign Corrupt Practices Act or anti-bribery laws in other jurisdictions, we
may incur substantial fines or penalties, or experience other adverse consequences.
Starting in 2010, we have
received international orders and increased our efforts to arrange international selling activities. We are subject
to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to
foreign governments and their officials and political parties by the United States and other business entities for the purpose
of obtaining or retaining business. As we begin to operate and sell internationally, there is an increasing risk of unauthorized
payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of
various laws including the FCPA, even though these parties are not always subject to our effective control. Our attempts
to implement safeguards may not be effective in preventing employees, consultants, sales agents or distributors from engaging in
conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we
may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
Because our competitors may have greater
financial, marketing and research and development resources, we may not be able to successfully compete in our markets.
We compete with suppliers
of traditional wood and concrete rail ties and building products and several composite product companies that offer products in
the markets in which we sell our engineered products. Many of our competitors and potential competitors have substantially
greater financial and marketing resources and capabilities. These companies and others may independently develop technology for
the production of recycled plastic rail ties and structural building products, similar or superior to our technology, which may
result in our products becoming less competitive or obsolete. Competition from other companies may increase as advances in technology
are made. We cannot guarantee that we will be able to compete successfully against these competitors in the future or that competition
will not have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
We depend upon senior management and
key personnel. Any loss of their services could negatively affect our business. Our failure to retain and attract such personnel
could harm our business, operations and product development efforts.
Our success will depend,
to a significant extent, on the performance of our senior management team, and others who we may hire. To the extent that the services
of any of our key personnel become unavailable, we will be required to retain other qualified persons. We may not be able to find
a suitable replacement for any such person. The loss of the services of key persons could have a material adverse effect on our
business, financial condition and results of operations.
Our products require sophisticated
research and development, quality-assured manufacturing and a significant marketing and sales effort. Our success will depend on
our ability to attract, train and retain qualified personnel for these functions and responsibilities. Competition for personnel
in all these areas is intense and we may not be able to hire sufficient personnel to achieve our goals. If we fail to attract and
retain qualified personnel, our business, operations and product development efforts most likely would suffer.
We may not have adequate protection for
the intellectual property rights on which our business depends.
Our success depends, in
part, on our ability to protect our important intellectual property rights (including those licensed from Rutgers). The steps we
have taken may not be adequate to deter misappropriation or unauthorized use of our proprietary information or to enable us to
detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Rutgers University has obtained
multiple U.S. patents that are licensed to us and continues to seek patents with respect to newly developed technologies related
to our products. We also rely on a combination of trade secret, nondisclosure and other contractual arrangements, and copyright
laws to protect our proprietary rights. We enter into confidentiality agreements with our employees and limit access to and distribution
of our proprietary information, and if it is necessary to disclose proprietary information to third parties for business reasons,
we require that such third parties sign a confidentiality agreement prior to any disclosure. However, these confidentiality agreements
cannot guarantee there will not be disclosure or misappropriation of such proprietary information. In addition, litigation may
be necessary to enforce our intellectual property rights, protect trade secrets, determine the validity and scope of the proprietary
rights of others, or defend against claims of infringement or invalidity. Intellectual property laws provide limited protection.
Moreover, the laws of some foreign countries do not offer the same level of protection for intellectual property as the laws of
the United States. Litigation may result in substantial costs and diversion of resources and the attention of senior management,
which may limit the development of our business.
If we were found to be
infringing any third-party patents, we could be required to pay damages, alter our products or processes, obtain licenses or cease
certain activities. We cannot be certain that if we are required to obtain licenses for patents held by third-parties that they
would be made available on terms acceptable to us or them, if at all.
Environmental liabilities and environmental
regulations may have an adverse effect on our business.
Our current operations,
and those of any potential contract manufacturers, are subject to various federal, state and foreign environmental laws and regulations.
Environmental laws and regulations change regularly and we may become subject to increasingly stringent environmental standards
in the future, particularly with respect to standards related to climate change issues, such as reporting of greenhouse gas emissions.
In addition, we and our potential contract manufacturers are required to comply with environmental laws and the terms and conditions
of multiple environmental permits. Failure to comply with these laws or permits could result in fines and penalties, interruption
of manufacturing operations, or the need to install pollution-control equipment that could be costly.
The company with which
we merged previously held minority and non-operating interests in oil and gas properties. The oil and gas business is
subject to environmental hazards such as spills, leaks or discharges of petroleum products and hazardous substances. Although
no claims have been made to date and we no longer have any such interests, potential environmental liability may not be extinguished
with regard to a holder, such as us, of oil and gas interests during the period in which the interests were held.
Material weaknesses in our internal controls
over financial reporting or our failure to remediate such material weaknesses could result in a material misstatement in our financial
statements not being prevented or detected and could affect investor confidence in the accuracy and completeness of our financial
statements, as well as our common stock price.
We have identified material
weaknesses in our disclosure controls and procedures, including a lack of sufficient internal accounting resources, formal procedures
and segregation of duties necessary to ensure that adequate review of our financial statements and notes thereto is performed,
and lacking the appropriate technical resources to properly evaluate complex debt and equity transactions in accordance with generally
accepted accounting principles, and have concluded that our internal control over financial reporting was not effective as of December
31, 2014. Weaknesses in our disclosure controls and procedures could result in material misstatements in our financial statements
not being prevented or detected. We may experience difficulties or delays in completing remediation or may not be able to successfully
remediate material weaknesses at all. Any material weakness or unsuccessful remediation could affect our ability to file periodic
reports on a timely basis and investor confidence in the accuracy and completeness of our financial statements, which in turn could
harm our business and have an adverse effect on our stock price and our ability to raise additional funds.
We continued the review,
development and implementation of processes, procedures and controls over our financial reporting practices to provide the appropriate
level of segregation of responsibilities and oversight.
Risks Related To An Investment In Our Common Stock
The market price of our common stock
is likely to be highly volatile and the trading volume may fluctuate and cause significant price variation to occur.
We cannot assure you that
the market prices of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could
negatively affect the prices of our shares or result in fluctuations in those prices or in trading volume of our common stock could
include the following, many of which will be beyond our control:
| · | our ability to execute our business plan; |
| · | operating results that fall below expectations; |
| · | loss of any strategic relationship; |
| · | additions or departures of key personnel; |
| · | economic and other external factors; and |
| · | period-to-period fluctuations in our financial
results. |
In addition, the securities
markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance
of particular companies. These market fluctuations may also materially and adversely affect the market price and trading volume
of our common stock.
We have outstanding options, convertible
debt and convertible preferred stock, and we are able to issue “blank check” preferred stock that could be issued,
resulting in the dilution of common stock ownership.
As of March 23, 2015, we
have outstanding options, warrants, convertible debt and convertible preferred stock that, when exercised or converted, could result
in the issuance of up to approximately 67.0 million additional shares of common stock. In addition, our Articles of Incorporation
allow the board of directors to issue up to 2,500,000 shares of preferred stock and to fix the rights, privileges and preferences
of those shares without any further vote or action by the shareholders. The preferred stock could hold dividend priority and a
liquidation preference over shares of our common stock. Thus, the rights of the holders of common stock are and will be subject
to, and may be adversely affected by, the rights of the holders of any preferred stock that we have issued or may issue in the
future. Any such issuance could be used to discourage an unsolicited acquisition proposal by a third party.
Future sales of our common stock, or
the perception in the public markets that these sales may occur, may cause the price of our common stock to decline.
Sales of substantial amounts
of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common
stock to decline. In addition, the sale of our common stock could impair our ability to raise capital through the sale
of additional common or preferred stock.
Future financing will result in dilution
to existing stockholders.
We may require additional
financing in the future. Securities may be issued without the approval or consent of our stockholders. The issuance of our equity
securities in connection with a future financing will result in a decrease of our current stockholders’ percentage ownership.
Anti-takeover provisions in our articles
of incorporation, bylaws and Colorado law could make a third-party acquisition of us difficult.
Our articles of incorporation
and bylaws contain provisions that may make it more difficult for a third party to acquire control of us, including provisions
that determine when and by whom special meetings of our stockholders may be called. In addition, certain provisions of Colorado
law, including provisions that specify that control of shares acquired in excess of certain specified thresholds will not possess
any voting rights unless these voting rights are approved by a majority of a corporation’s disinterested shareholders, could
make it more difficult for a third party to acquire control of us, even if such change in control would be beneficial to our shareholders.
We currently do not intend to pay dividends
on our common stock and consequently the only opportunity to achieve a return on your investment is if the price of our common
stock appreciates.
We currently do not plan
to declare dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend upon our financial
condition, capital requirements, earnings and other factors deemed relevant by our board of directors. Consequently, the only opportunity
to achieve a return on your investment in our common stock will be if the market price of our common stock appreciates.
If equity research analysts do not publish
research or reports about our business, or if they do publish such reports but issue unfavorable commentary or downgrade our common
stock, the price and trading volume of our common stock could decline.
The trading market for
our common stock could be affected by whether and to what extent equity research analysts publish research or reports about us
and our business. We cannot predict at this time whether any research analysts will cover us and our common stock or whether they
will publish research and reports on us. If one or more equity analysts cover us and publish research reports about our common
stock, the price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other
unfavorable commentary or cease publishing reports about us.
If any of the analysts
who elect to cover us downgrade their recommendation with respect to our common stock, our stock price could decline rapidly. If
any of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our common stock
price or trading volume to decline and our common stock to be less liquid.
We are a smaller reporting company and
we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common stock
less attractive to investors.
We are currently a “smaller
reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary
of a parent company that is not a smaller reporting company and have a public float of less than $75 million and annual revenues
of less than $50 million during the most recently completed fiscal year. “Smaller reporting companies” are able to
provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the
Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness
of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including,
among other things, only being required to provide two years of audited financial statements in annual reports and this prospectus.
Decreased disclosures in our SEC filings due to our status as a “smaller reporting company” may make it harder for
investors to analyze our results of operations and financial prospects.
Item 2. Properties
We do not own any real property.
During the year ended December
31, 2013, we entered into an assignment of the original lease for our production facility in Zanesville, OH, effective November
15, 2013 at a monthly lease payment of $25,750. The original term of the lease expires at the end of April 2018, but provides two
additional five-year extensions and includes an annual rent escalation clause based on the greater of the change in a certain Consumer
Price Index or 3%. We record rent expense based on the straight-line amortization of the full 15-year term of the initial lease
plus all extensions. This facility also serves as our corporate headquarters.
During the year ended December
31, 2013, we entered into a month-to-month lease for our production facility in Waco, Texas. Effective September 1, 2013, we signed
a ten year lease for that facility which provides five additional five-year extensions. Monthly rent expense for the first year
of the lease is $21,875. The lease includes an annual rent escalation clause based on the greater of the change in a certain Consumer
Price Index or 3%. We record rent expense based on the straight-line amortization of the full 35-year term of the initial lease
plus all extensions.
Item 3. Legal Proceedings
We may be involved from time to time in various
claims, lawsuits and disputes with third parties or breach of contract actions incidental to the normal course of business operations.
We are not aware of any material pending legal proceedings involving us except as discussed below.
We may also be subject to various other routine
litigation incidental to our business. Management does not believe that any of these routine legal proceedings would have a material
adverse effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
PART II.
Item 5. Market for Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
As of December 31, 2014, there were approximately
1,200 registered holders of our common stock, and there were 70,825,215 shares of our common stock outstanding. Our
common stock has been traded on the OTC Bulletin Board since June 1, 2007. From June 1, 2007 to August 3, 2008, our
common stock was traded under the symbol “ANLT,” and then following the name change of our Company, since August 4,
2008, the date of the reverse split of our Common Stock, our common stock has been traded under the symbol “AXIH.” From
April 3, 2007 until June 11, 2007, our common stock was traded on the OTC Pink Sheets. Prior to April 3, 2007, our common
stock was traded on the NASDAQ Capital Market. The following table sets forth the high and low bid quotations for our common
stock (on a post-reverse split basis) as reported on the OTC Bulletin Board by quarter during each of our last two fiscal years. The
high and low bid quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily
represent actual transactions.
| | |
High | | |
Low | |
| | |
| | |
| |
| Year Ended December 31, 2014: | |
| | | |
| | |
| First quarter | |
$ | 1.07 | | |
$ | 0.70 | |
| Second quarter | |
| 0.80 | | |
| 0.51 | |
| Third quarter | |
| 0.68 | | |
| 0.45 | |
| Fourth quarter | |
| 0.73 | | |
| 0.28 | |
| | |
| | | |
| | |
| Year Ended December 31, 2013: | |
| | | |
| | |
| First quarter | |
$ | 0.75 | | |
$ | 0.36 | |
| Second quarter | |
| 0.73 | | |
| 0.43 | |
| Third quarter | |
| 0.57 | | |
| 0.42 | |
| Fourth quarter | |
| 1.43 | | |
| 0.45 | |
Dividends
Since becoming a public company, we have not
declared or paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We
presently expect that we will retain all future earnings, if any, for use in our operations and the expansion of our business.
In addition, under the Certificate of Designations for the Preferred Stock, as corrected, 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. In addition, the terms of our 8% convertible promissory notes and associated warrants provide the
holders with anti-dilution protection in the event we declare and pay dividends on our common stock in the future.
Equity Compensation Plan Information
See page 50 for a discussion of Axion’s
equity compensation plans.
Recent Sales of Unregistered Securities
We had no sales of unregistered securities
during 2014 that have not previously been disclosed in a Current Report on Form 8-K or Quarterly Reports on Form 10-Q.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any of our equity securities
during 2014.
Item 6. Selected Financial Data
Because we are a smaller reporting company,
we are not required to provide the information called for by this item.
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The discussion of our financial condition
and results of operations set forth below should be read in conjunction with the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K. This Form 10-K contains forward-looking statements that involve risk and uncertainties.
The statements contained in this Form 10-K 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-K, or in the documents incorporated by reference into
this Form 10-K, 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-K are based upon information available to us on the date
of this Form 10-K, 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-K.
Overview
Axion International Holdings, Inc. (“Holdings”)
was formed in 1981 under the name Analytical Surveys, Inc. In November 2007, Holdings entered into an Agreement and Plan
of Merger, among Holdings, Axion Acquisition Corp., a Delaware corporation and a newly created direct wholly-owned subsidiary of
Holdings (the “Merger Sub”), and Axion International, Inc., a Delaware corporation which incorporated on August 6,
2006 with operations commencing in November 2007 (“Axion”). On March 20, 2008 Holdings consummated the merger
of Merger Sub into Axion, with Axion continuing as the surviving corporation and a wholly-owned subsidiary of Holdings. The Merger
has been accounted for as a reverse merger in the form of a recapitalization with Axion as the successor.
Axion Recycled Plastics
Incorporated, an Ohio corporation and a newly created direct wholly-owned subsidiary of Axion (“Axion Recycled Plastics”)
was established to purchase the certain tangible and intangible assets of a plastics recycling company during November 2013. The
amount of revenue and loss from operations of the acquired business included in our consolidated statement of operations for the
year ended December 31, 2013 was approximately $711,400 and $1.0 million, respectively. See note 3 in our notes to consolidated
financial statements. Through June 30, 2014, we operated Axion Recycled Plastics as a separate business segment. In August, 2014,
we announced an acceleration of our business strategy to use the reprocessed plastics Axion Recycled Plastics produces primarily
in our engineered products segment, thereby eliminating Axion Recycled Plastics as a separate business segment. We made this change
because of the additional manufacturing capacity we require to meet the expected demands for our engineered products coupled with
the higher profit margins we can achieve from our engineered products in comparison to our reprocessed plastics.
We design and manufacture
innovative structural polymer solutions, engineering sustainable products and systems for applications that provide improved long-term
value, consistent performance and reduced maintenance costs, offering a viable solution where stress and environmental factors
cause degradation and deterioration of traditional products. Our proprietary products are based on patent rights we hold as well
as manufacturing processes and formulations we have developed.
We manufacture,
market and sell ECOTRAX® rail ties, STRUXURE® building products, with current focus on construction mats and
COMPOSX™ reprocessed ploymers. Our ECOTRAX® and STRUXURE® products are fully derived from post-consumer and
post-industrial recycled plastics, such as high-density polyethylene, polystyrene and polypropylene. In patented and
proprietary formulations, our products achieve structural strength, are capable of sustaining heavy loads and are resistant
to changing shape under constant stress. Our products, manufactured through an extrusion process, are eco-friendly,
non-corrosive, impervious to moisture, do not leach chemicals and are resistant to insects and rot. They possess superior
lifecycles and generally have greater durability and require less maintenance than competitive traditional products.
For the past seven years,
our products have been tested and validated in order to establish their structural strength. Our rail ties, our focus over the
past few years, have been subjected to long-term performance testing, in which they have been under constant traffic in various
environmental conditions. Short-span bridges have been constructed with our engineered products that have supported tanks and trains.
We are in a position to expand upon this foundation we built through years of successful applications. When coupled with enhanced
manufacturing capacity and process refinements, these foundational achievements should lead to a significant increase in commercial
activity.
Critical Accounting Policies
Management’s Discussion and Analysis of
Financial Condition and Results of Operations are based upon our financial statements, which have been prepared in accordance with
generally accepted accounting principles (or GAAP) in the U.S. The preparation of financial statements in conformity with GAAP
requires management to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Our critical accounting policies are those that affect our financial statements materially and
involve difficult, subjective or complex judgments by management.
An accounting policy is deemed to be critical
if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate
is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements.
Use of Estimates
The preparation of our financial statements
in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including fair values of
acquired tangible and intangible assets in a business combination, valuation allowances for receivables and deferred income tax
assets, derivative liabilities, stock-based compensation as well as the reported amounts of expenses during the reporting period.
The statements are evaluated on an ongoing basis and estimates are based on historical experience, current conditions and various
other assumptions believed to be reasonable under the circumstances. Actual results can differ from those estimates, and it is
possible that the differences could be material.
Impairment of Intangible Assets
In accordance with FASB ASC topic, “Goodwill
and Other Intangible Assets”, acquired definite life intangibles, are subject to amortization over their useful lives. The
method of amortization selected reflects the pattern in which the economic benefits of the specific intangible asset is consumed
or otherwise used up. Since that pattern cannot be reliably determined, a straight-line amortization method has been used over
the estimated useful life. Intangible assets that are subject to amortization are reviewed for potential impairment at least annually
or whenever events or circumstances indicate that carrying amounts may not be recoverable.
In accordance with the FASB ASC topic, “Goodwill
and Other Intangible Assets”, indefinite life assets, such as goodwill, acquired as a result of our acquisition of the plastic
reprocessing business and which are not subject to amortization are tested for impairment annually, or more frequently if events
and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount
exceeds the asset’s fair value. The fair value is determined by subtracting the fair value of all the identified tangible
and intangible assets included in the business acquisition from the fair value of the purchase price.
Revenue and Related Costs Recognition
In accordance with FASB ASC 605 “Revenue
Recognition”, revenue is recognized when persuasive evidence of an agreement with the customer exists, products are shipped
or title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed or determinable,
collectability is reasonably assured, and there are no significant future performance obligations. In most cases, we receive a
purchase order from our customer specifying the products requested and delivery instructions. We recognize revenue upon our delivery
or shipment of the products as specified in the purchase order. In other cases where we have a contract which provides for a large
number of products and few actual deliveries, the revenues are recorded each month as the products are produced and the risk of
ownership passes to the customer upon pre-delivery acceptance. Prior to deliveries, our customer’s products are segregated
from our inventory and not available for fulfilling other orders.
Our costs of sales are predominately comprised
of the cost of raw materials and the costs and expenses associated with the production of the finished product. Prior to 2013,
we utilized third-party manufacturers, where under one arrangement we purchased and supplied the raw materials to the third-party
manufacturer and we paid them a per-pound cost to produce the finished product. Under another arrangement, the third-party manufacturer
sourced and paid for the raw materials and we purchased the finished product from them at a cost per unit. Beginning in 2013, we
initiated production of our finished products within a leased facility utilizing our own employees. Additionally, in late 2013
we acquired the assets of a plastics recycling company and began to reprocess recycled plastics for use in our own finished products
and to sell to customers for use in their finished products. During the three months ended September 30, 2014, we began the
conversion of that facility from reprocessing plastics to processing of both molded and continuous extruded engineered products.
Our costs of sales may vary significantly as a result of the variability in the cost of our raw materials and the efficiency with
which we plan and execute our manufacturing processes.
Historically, we have not had significant warranty
replacements, but during the year ended December 31, 2013 due to our customer’s improper installation of certain of our rail
ties, we agreed to replace the rail ties. Although from time to time we replace our engineered products for customer relationship
reasons, we do not anticipate additional significant situations where we might again replace improperly installed products and
therefore do not provide for future warrant expenses.
Share-based Compensation
We recognize share-based compensation for transactions
in which we exchange our equity instruments (shares of common stock, options and warrants) for services of directors, employees,
consultants and others based on the fair value of the equity instruments issued on the measurement date. The fair value
of common stock awards is based on the observed market value of our stock. We calculate the fair value of options and
warrants using the Black-Scholes option pricing model. The Black-Scholes model requires the input of subjective assumptions
including volatility, expected term, risk-free interest rate and dividend yield. We use a measure of volatility based on the historical
volatility of our common stock over a similar period to the expected life of the award. The expected term of an award is based
on the vesting period. We base the risk-free rate on the rate of U.S. Treasury obligations with maturities similar to the
expected term used in the model. Historically, we have not, and do not anticipate paying in the foreseeable future, dividends on
our common stock, and accordingly use an expected dividend yield of zero.
Derivative Instruments
For derivative instruments that are accounted
for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date,
with changes in fair value recognized in earnings each reporting period. We use various simulation models, including Black-Scholes
and Monte Carlo, to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative
instruments, including whether such instruments should be recorded as a liability or as equity, is re-assessed at the end of each
reporting period, in accordance with FASB ASC Topic 815, “Derivatives and Hedging”. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of the derivative
instrument could be required within twelve months of the balance sheet date.
Results of Operations - Comparison of Years Ended December 31,
2014 and 2013
The following discussion should be read in
conjunction with the information set forth in the consolidated financial statements and the related notes thereto appearing elsewhere
in this Form 10-K.
Revenues
We derive our revenues through the sale of
our products to the domestic and international rail industries, the North American oil and gas and energy infrastructure markets
and to industrial engineering and contracting firms. Our current engineered products consist of:
| · | Composite rail ties marketed under the brand name ECOTRAX®; |
| · | Heavy equipment construction mats, temporary road mats, I-beams, T-beams,
pilings along with tongue-and-groove planking and various sizes of boards, all marketed under the brand name STRUXURE®; and |
| · | COMPOSX™ our reprocessed polymer product line |
Our strategic focus is to (i) expand manufacturing
capacity to meet current demand for our ECOTRAX® rail ties and STRUXURE® construction mats; (ii) further penetrate chosen
end-use markets in the railroad, transportation, and oil and natural gas industries; (iii) identify new applications for our proprietary
technologies based on market research and geographic segmentation; (iv) spread our exposure to risk and liability through product
stratification; and (v) expand awareness of and leveraging success in our key product categories.
During November 2013, we acquired a plastics
recycling business to bridge our transition to the manufacture of our higher margin product offerings through our ECOTRAX and STRUXURE
product lines, by providing additional revenue opportunities through the sale of reprocessed plastics, our COMPOSX product line.
In addition, this acquisition provided us the capability to procure potentially less expensive and more consistent sources of raw
materials for our engineered products, and the equipment and other facility infrastructure required to transition the reprocessing
plastics manufacturing facility to one for the production of our engineered products. For the nine months ended September 30, 2014,
we reported revenue from our two segments – the sale of our ECOTRAX and STRUXURE products and the sale of COMPOSX reprocessed
plastics. Subsequent to September 30, 2014, we do not consider the reprocessed plastic sales as a separate reporting segment as
the acquired infrastructure and equipment capacity to reprocess and sell recycled plastics has been converted to the production
of our engineered products. Any future revenue recognized from the sale of reprocessed plastics will be minimal.
We recently introduced our STRUXURE® construction
mats, which are extremely strong, durable and highly resistant to degradation in service. These mats are used at field construction
sites, infrastructure expansion projects and in the oil and gas exploration industry to support heavy equipment and to transport
vehicles on unpaved, wet or soft surfaces. Our unique construction mats are experiencing a strong growth in demand, enabling our
next phase of production and product line expansion.
As we continue to commercialize our construction
mats, we will focus on expanding field installations, as well as the production and fabrication abilities for our mats. In a recent
10-month trial comparing traditional wood mats and our mats, 100% of the STRUXURE® Heavy Construction Mats were intact and
ready for shipment to the next jobsite while 80% of the wood mats had to be discarded and landfilled. This trial illustrates how
our construction mats are superior to traditional mats and can be rapidly deployed to new construction sites, installed over
all types of ground conditions and supports various construction vehicles. Our construction mats do not absorb fluids, are easier
to transport and minimize damage to site access, protecting existing roads. They are ideal in wet or other demanding environments
and are resistant to abrasion and tread-wear, giving them a life cycle over five times longer than traditional wood mats.
Our products for the building and construction
markets, sold under our STRUXURE® line, have been generating exciting opportunities for us. Based on the success of our construction
mats in field performance testing, we have received a high level of interest from potential customers and distributors for this
application. Our new addition to the STRUXURE® construction mat product line, temporary road mats, offer significant additional
sales opportunities for us with potential uses at construction sites, access roads, electrical transmission projects, pipe installations
and oil and gas drilling sites. Our line of STRUXURE® construction mats has distinct advantages over wood mats in terms of
longevity, fluid absorption, economic value, disposal costs, recyclability, durability, ability to be reconditioned, job site safety
on difficult terrains and lower logistics cost expense.
Our product development strategy is straightforward:
develop valuable solutions for customers, test their value proposition across various criteria, and then commercialize the product
with well-coordinated sales, marketing and production efforts. Following the successful introduction of STRUXURE® construction
mats and the solidification of expanding ECOTRAX® rail tie opportunities, we are experiencing the need for faster transformation
of our production facilities to increase capacity. We have also diversified our technologies beyond the patented technologies developed
with Rutgers University and we are utilizing other structural polymer technologies in the development of construction mat lines
and other product extensions into infrastructure and transportation applications
For the years ended December 31, 2014 and 2013,
we recognized revenue of $14.4 million and $6.6 million, respectively, of which $8.8 million and $5.9 million for the years ended
December 31, 2014 and 2013, respectively was attributable to our engineered products with the remainders of $5.6 million
and $0.7 million, respectively attributable to our reprocessed plastics. For the years ended December 31, 2014 and
2013, 24% and 52%, respectively of our engineered product sales were to one Class 1 railroad customer pursuant to a three-year
supply agreement which was completed during the three months ended June 30, 2014. Through the completion of this supply agreement,
we have recognized $10.3 million of revenue, representing approximately 104,500 rail ties.
Costs of Sales and Operating Expenses
Costs of Sales – Production. Our
costs of sales are primarily comprised of the cost of raw materials and the costs associated with our manufacturing and production
efforts. The price of the raw materials depends principally on the stage and source of the supply. Historically, we
purchase the raw materials in various stages, from recycled plastic containers purchased in bulk, which require further processing
before use, to ready-for-production material. Typically, the more processed raw material is more expensive, on a per-pound basis,
than less processed material, but the less expensive and less processed material requires additional costs to prepare it for production.
Likewise, raw materials purchased through third-party brokers or other intermediaries are more expensive than materials purchased
directly from the source or collection point.
Our strategy to reduce our raw material costs
includes broadening our raw materials sources and purchasing other low-cost, unprocessed materials, such as other scrap materials
containing specific raw materials from unique sources and recycled materials from municipal and other recycling collection sources.
Due to the limited amount of time and personnel we can devote to raw materials sourcing, we acquire our raw materials primarily
from intermediaries, and purchase production-stage material, which results in the acquisition of raw materials at higher prices.
Dealing in the recycled plastics market, whether through intermediaries or our own bulk purchases, we will continue to encounter
increasing and decreasing prices typically seen in a commodities market. But since the cost of our raw materials is the single
largest determinant of our costs of sales in our engineered products segment, we continue (i) to expand our internal recycled plastics
processing capabilities (ii) to seek out sources of cheaper raw materials, while ensuring those materials meet or exceed our quality
standards and (iii) to expand our research and development effort of different raw materials which may provide a cost and/or performance
advantage over existing materials. We are continuing to take steps to reduce our production costs and expenses, while increasing
capacity, as necessary.
Central to our initial business model, we did
not own or operate the manufacturing facilities for the production of our engineered products as we believed that our outsourced
contract manufacturing model located at facilities in Pennsylvania and Texas, provided us the business flexibility to maximize
utilization of manufacturing capacity available in the market, respond to the geographic diversity of our customers and minimize
our capital requirements. The production facilities were on direct industrial rail links or spurs, to allow for efficient
product deliveries to customers and particularly to rail customers. Flatbed and container trucks are also used to transport our
products. Because of the weather-resistant properties inherent in our products, we used outdoor storage extensively. These initial
facilities supported the manufacture of large products and were involved in the recycling business and therefore met our requirements.
Under those contract manufacturing arrangements, we designed and retained ownership of certain production equipment such as molds,
manifolds or dies that were provided to our contract manufacturers during production runs. All such production equipment
is designed as component parts and can be transferred between facilities or used interchangeably in a plug-and-play system as production
needs dictate.
In late 2012, our Texas contract manufacturer
made a business decision to vacate the facility and cease producing our engineered products for us. In order to maintain production,
in early 2013 we hired a production and quality workforce to continue to operate the facility and subsequently we purchased the
production equipment and entered into a lease arrangement for the facility. At our Pennsylvania facility, we continued the third-party
contract manufacturing model into the second half of 2013, when we decided to terminate this manufacturing relationship and consolidate
all of our production at our facility in Texas. By the end of 2013, all of our engineered products production was at our leased
facility in Waco, Texas.
In November 2013, we acquired the business
assets and operations of a plastic recycling company in Ohio, which provided us the capability to procure potentially less expensive
and more consistent sources of raw materials for our engineered products, and the equipment and other facility infrastructure required
to eventually transition this reprocessing plastics manufacturing facility to supplement production of our engineered products.
During the three months ended September 30, 2014, we converted our extrusion equipment previously used in this plastics reprocessing
business to the production of our ECOTRAX® rail ties and STRUXURE® mats and building products. This facility continues
to process industrial and post-consumer recycled plastics for both internal use and external sales.
Our technology can be scaled to meet our manufacturing
requirements and we believe our facilities in Ohio and Texas can easily be augmented to support the current demand trajectory.
We are creating process improvements with a focus on high quality production and we continue to push advancements in our technologies
to create an even more compelling value proposition for our customers. We now have the capabilities of molded and continuous extrusion,
fabrication, structural design and internal materials processing.
For the years ended December 31, 2014 and 2013,
our costs of sales – production were $17.0 million and $6.5 million, respectively. For the years ended December 31, 2014
and 2013, costs of sales – production for our engineered products was $9.0 million and $5.4 million, respectively
with remaining $8.0 million and $1.1 million, respectively attributable to the reprocessed plastics.
Costs of Sales - Excess Capacity & Inventory
Adjustments. Our production facility in Texas includes space for additional production lines and ancillary equipment and related
services. Production costs are aggregated during the period and applied to the inventory produced during that period based on a
standard cost per pound based on an assumption that the facility is operating at or near capacity. Any production costs incurred
in excess of this standard is charged to costs of sales – excess capacity in the period incurred. In addition, as we transitioned
the Ohio facility from primarily reprocessing plastics to primarily producing our engineered products, labor and other operating
expenses incurred during that transition period could not be applied to inventory and instead were charged to costs of sales –
excess capacity.
During the years ended December 31, 2014 and
2013, we charged to costs of sales approximately $1.2 million and $0.8 million, respectively, relating to the excess costs and
expenses incurred to provide production capacity at our Texas facility for our engineered products in excess of the volume of production
realized. During the year ended December 31, 2014, we charged to costs of sales approximately $1.0 million relating to excess costs
and expenses of the Ohio facility, primarily a result of the costs of transitioning the facility. We did not have any such charges
for the Ohio facility during the year ended December 31, 2013.
From time to time, we determined that certain
inventory is carried at more than realizable value, and accordingly, we adjusted the carrying value of that inventory during the
period it is determined, which results in a charge to costs of sales –inventory adjustment. For the year ended December 31,
2014 we charged costs of sales approximately $0.4 million and $0.3 million, for inventory at our Texas and Ohio facilities, respectively.
We did not have similar issues in the prior year.
Gross Margin (Loss). Because we are
in the early stages of commercial activities, gross margin (loss) may vary significantly and are highly dependent on the our ability
to price our products properly, price of raw materials, production capacity versus utilization and timing and mix of the sales
and services. Our gross margin (loss) was impacted by our all these factors at both of our facilities, specifically our ability
to reprocessed plastics at a cost less than our price to sell the resins at our Ohio facility, the excess capacity within our Texas
production facility, the fixed pricing impact of our completed three-year supply agreement within our engineered products segment
and still being in the early stages of our manufacturing and commercial activities. In addition, it included, inefficient manufacturing
processes and methods and additional costs and expenses incurred to fulfill certain orders. Due to the nature of the reprocessed
plastics segment requiring higher volume of production than we were able to achieve during the period post-acquisition through
until we initiated the transition of that facility to produce our engineered products, substantial negative margins were recognized.
Total costs of sales amounted to $19.9 million
and $7.3 million for the years ended December 31, 2014 and 2013, respectively, resulting in gross margin (loss) of ($5.5) million and ($0.7) million, respectively and are a result of the impacts discussed previously.
Product Development and Quality Management
Product development and quality management
expenses are incurred as we perform oversight of our own and previously, our contract manufacturing relationships and ongoing evaluations
of materials and processes for existing engineered products, as well as the development of new products and processes. Such expenses
typically include costs associated with the design and required testing procedures associated with our engineer product lines –
ECOTRAX and STRUXURE.
Product development and quality management
expenses were approximately $329,300 and $1.6 million for the years ended December 31, 2014 and 2013, respectively. This decrease
is due to a more concentrated focus and effort to our manufacturing processes resulting in more costs being charged into production
rather than product development. We continue to focus on enhancing our product formulations, developing new innovative products,
and expanding the reach of our existing engineered products as time and resources allow which may result in higher product development
and quality management expenses in the future.
Marketing and Sales
Expenses related to marketing and sales consist
primarily of compensation for our sales and marketing personnel, sales commissions and incentives, advertising, trade shows and
related travel and the effect of the minimum royalty required under our licensing agreements for certain engineered products. We
have increased 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.
Marketing and sales expenses were approximately
$1.3 million for the year ended December 31, 2014 compared to $0.9 million for the year ended December 31, 2013. The variation
between periods was primarily due to the timing of the efforts within primarily our engineered products segment in the development
and implementation of sales and customer development strategy and the continuation of our branding strategy and marketing efforts
and all of which is primarily associated with personnel costs.
We expect that in the future, marketing and
sales expenses will increase in absolute dollars.
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 approximately
$23.3 million and $4.2 million for the years ended December 31, 2014 and 2013, respectively. The significant increase from year
to year was due to the difference in the fair value of the common stock issued to affiliated shareholders in exchange
for warrants tendered pursuant to a tender offer we initiated during the three months ended June 30, 2014. This difference of $19.1
million was charged to general and administrative expenses during the year ended December 31, 2014.
During the years ended December 31, 2014
and 2013, we recorded $0.9 million and $0.7 million respectively, in share based compensation charges related to the
fair value of the issuances of shares of our common stock, options or warrants providing the right to purchase shares of
our common stock at a predetermined price, in the future. Historically, we issued shares of common stock or options to
purchase our common stock, in lieu of cash payments in connection with a licensing agreement, commitment fees for
financing transactions, compensation for our directors, officers and employees, as well as to several consultants.
Impairment of Definite Life Intangible Assets
During the year ended December 31, 2013, we acquired
a plastic reprocessing business which gave rise to certain definite life intangible assets associated with the acquired customer
list and trademark. Intangible assets that are subject to amortization are reviewed for potential impairment at least annually
or whenever events or circumstances indicate that carrying amounts may not be recoverable.
Based on our financial results for the reprocessed plastics
business during the first half of the year ended December 31, 2014 we decided to transition the assets acquired of the reprocessing
plastics business to that of the extrusion of our proprietary engineered products. This action represented a triggering event requiring
intangible assets impairment tests. During the year ended December 31, 2014, we determined that our definite life intangible
asset associated with our acquired customer list was impaired and of no further value and accordingly we recorded a charge to operating
expenses for the remaining unamortized balance of approximately $545,800.
Depreciation and Amortization
For the years ended December 31, 2014 and 2013,
we recorded depreciation expense for manufacturing and production equipment as a charge to production and depreciation for non-production
equipment as a charge to general and administration expenses. As we continue to increase our production capacity, we anticipate
acquiring additional production equipment and would anticipate an increase in depreciation and amortization expenses.
Depreciation and amortization totaled approximately
$1.1 million and $319,200, including approximately $1.0 million and $256,900 charged to production in the years ended December
31, 2014 and 2013, respectively with the remaining depreciation and amortization being charged to operating expenses. As the investment
in molds and other production equipment increased during the year ended December 31, 2014, depreciation expense increased.
Other Expenses
Interest Expense. Interest expense primarily
consists of the contractual interest rate we pay on our debt instruments. Interest expense recognized during the years ended December
31, 2014 and 2013, was approximately $1.8 million and $0.8 million, respectively, and represented the contractual interest rates
payable on our debt obligations. During both periods we increased our debt to continue to fund operations and acquire fixed assets.
During the years ended December 31, 2014 and
2013, we sold $8.5 million and $8.0 million of our debt securities, respectively and received proceeds of $4.0 million from a bank
term loan during the year ended December 31, 2014. To finance the acquisition of the reprocessing business and related equipment
during the year ended December 31, 2013, we executed a bank loan for $4.5 million. Interest expense is related to interest on these
various debt obligations.
Amortization of Debt Discounts. Amortization
of debt discounts consists of the periodic amortization of the debt discounts associated with our various obligations.
During the years ended December 31, 2014 and
2013, we recognized $2.9 million and $0.7 million, respectively, for the amortization of various debt discounts. At the time of
issuance, we recorded discounts on our debt securities primarily due to the fair value of the imbedded conversion features, the
fair value of any related warrants issued in conjunction with the securities and any costs incurred in issuing the security. These
discounts are amortized over the term of the underlying convertible security, to expense. Any unamortized discount remaining when
the security is repaid or converted is written off to expense in that period. For the years ended December 31, 2014 and 2013, the
amortization of debt discounts primarily related to the discounts associated with our 8% convertible promissory notes.
At December 31, 2014, the unamortized discounts
for our convertible securities were approximately $4.4 million, primarily associated with our 8% convertible promissory notes.
This unamortized discount is amortized to expense over the five year lives of the underlying convertible securities.
Fair Value of Common Shares Issued in Excess
of Fair Value of Warrants Tendered. During June 2014, we extended an offer to exchange all of our outstanding warrants for
shares of our common stock. We issued common stock with a fair value of $2.3 million to non-affiliated warrant holders in exchange
for their warrants with a face value of $1.4 million, with the difference of $0.9 million charged to this expense.
Change in Fair Value of
Derivative Liabilities. Through December 31, 2014, we have issued and sold $19.6 million of our various
convertible debt securities, which gives the holders the right to convert the outstanding debt into shares of our common
stock. We recorded the fair value of the conversion options on the dates of issuance as a derivative liability and recognized
that amount as a discount to our convertible debt securities. We account for this derivative liability pursuant to ASC 815,
and accordingly, we recognized a gain of $14.9 million and a charge of $10.9 million for the years ended December 31, 2014
and 2013, respectively as a change in fair value of this derivative liability which was recognized in our statements of
operations. The fair value of this derivative liability at December 31, 2014 was estimated to be $2.0 million.
In addition, in conjunction with the sale and
issuance of certain of these convertible debt securities, we issued warrants to purchase our common stock for which we calculated
the fair value of the warrants on the dates of issuance and recorded a derivative liability and recognized the amount as a discount
of our convertible debt securities. During the year ended December 31, 2014, pursuant to the Tender Offer (as defined and more
fully described in Note 9 to the consolidated financial statements included in this Form 10-K) to exchange all outstanding warrants
for shares of common stock, these warrants were tendered and therefore there was no derivative liability at June 30, 2014. Since
this derivative liability did not qualify as a fair value or cash flow hedge under ASC 815, accordingly, for the years ended December
31, 2014 and 2013, we recognized a gain of $5.2 million and a charge of $4.2 million, respectively as a change in fair value of
this derivative liability in our statement of operations.
We issued warrants to the placement agents
for the sale of our 10% convertible preferred stock, to purchase 58,352 shares of 10% convertible preferred stock at $10 per share.
Since at issuance, the number of shares of common stock which these warrants would be exercisable into was not determinable, we
recorded the fair value of the warrants at issuance, as a liability on our balance sheet and we re-value this warrant liability
at each reporting date, with changes in fair value recognized in earnings each reporting period. During the years ended December
31, 2014 and 2013, we recorded the change in fair value of this derivative liability in our statement of operations as a gain of
approximately $243,500 and a charge of approximately $214,500. The fair value of this derivative liability at December 31, 2014
was estimated to be approximately $52,700.
Income Taxes
We have unused net operating loss carry forwards,
which included losses incurred from inception through December 31, 2014. Due to the uncertainty that sufficient future taxable
income will be recognized to realize associated deferred tax assets, no income tax benefit from inception through December 31,
2014 has been recorded.
Liquidity and Capital Resources – Comparison of Years Ended
December 31, 2014 and 2013
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, 2014 and 2013, based on our significant operating losses and our reliance on and potential
lack of external financing. Our financial statements do not include any adjustments that resulted from the outcome of
this uncertainty.
At December 31, 2014 we had $7.6 million in
current assets and $10.6 million in current liabilities resulting in a working capital deficit of $3.0 million. This compares to
a working capital deficit of $14.0 million as of December 31, 2013. Recorded as a current liability, our derivative liabilities
associated with our convertible debt securities at December 31, 2014 and 2013 was $2.5 million and $17.2 million, respectively.
Since the satisfaction of these balances have not and will not require the use of working capital, without this current liability
included in the working capital calculation, our working capital at December 31, 2014 and 2013 would be a deficit of $1.0 million
and working capital of $3.2 million.
We used $11.0 million and $7.2 million in our
operating activities during the years ended December 31, 2014 and 2013, respectively. In anticipation of certain orders, we
increased inventory $2.0 million at December 31, 2014, as compared to December 31, 2013.
Our net loss for the year ended December 31,
2014 of $16.3 million included the significant impact of several non-cash credits and charges including the effect of the change
in fair value of the derivative liabilities associated with our convertible debt securities of a credit in our statement of operations
for $20.1 million which was offset by a charge to general and administrative expenses of $19.1 million and a charge to other expenses
of $0.9 million associated with our warrant tender offer.
As we continued to increase
production capacity, we purchased $1.8 million of equipment during each of the years ended December 31, 2014 and 2013. We
anticipate purchasing additional property and equipment during the next twelve months as we continue to expand our
manufacturing capacity. An extrusion line for our engineered products manufacturing business, typically costs upwards of $1.5
million, including installation and auxiliary parts and equipment. In addition, during the year ended December 31, 2013, we
incurred a cash outflow of $6.0 million related to the acquisition of a recycling business which included $1.5 million of
existing working capital and the proceeds of $4.5 million in bank term loans.
During years ended December
31, 2014 and 2013, we issued and sold to certain investors an aggregate principal amount of $5.6 million and $6.0 million, respectively
of our 8% convertible promissory notes. We may prepay the notes, in whole or in part, upon 60 calendar-days prior written notice
to the holders thereof. Interest accrues on the notes at a 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.
During the year ended December
31, 2014, we issued and sold to certain investors an aggregate of $1.0 million of our 12% convertible promissory notes. We may
prepay the notes, in whole or in part, upon consent of the holders thereof. Interest accrues on the notes at a rate of 12% per
annum, and is payable monthly.
During the year ended December
31, 2014, we issued and sold to certain investors an aggregate of $1.95 million of our 12% secured notes. We may prepay the notes,
in whole or in part, upon 5 calendar-days prior written notice to the holders thereof. Interest accrues on the notes at a rate
of 12% per annum, and is payable at maturity.
During the year ended December 31, 2014, we
borrowed $4.0 million from a commercial bank pursuant to the terms of a promissory note and loan agreement. Interest accrues on
the outstanding principal at a fixed interest rate of 5% per annum and is payable monthly. All outstanding principal and accrued
but unpaid interest is due at maturity. The note may be prepaid in full or in part at any time without premium or penalty. The
bank was induced to enter into the note with the guarantee of Melvin Lenkin, Samuel Rose and Allen Kronstadt, collectively the
“Investors”, (see Note 15 regarding related party transactions). Under terms of the note, we repaid $100,000 of principal
during the year ended December 31, 2014.
During the year ended December 31, 2014, we
repaid principal under the terms of a loan from a governmental organization in the amount of approximately $105,600.
We entered into a revolving
credit agreement and borrowed $2.0 million during the year ended December 31, 2013, which remains outstanding at December 31, 2014.
These funds were used to support our working capital needs.
Pursuant to our April 2006
action against a shareholder for disgorgement of short-swing profits pursuant to Section 16 of the Securities Exchange Act of 1934,
as amended, during the year ended December 31, 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.
At December 31, 2014, we
had $6.8 million of our 10% convertible preferred stock outstanding of which $6.1 million may not be redeemed by the holder until
after December 31, 2016, pursuant to an agreement entered into between the Company and the preferred stock holders. Due to our
current financial condition, Colorado law will not allow us to redeem the balance. Pursuant to the terms of the 10% convertible
preferred stock, to date we have elected to pay our quarterly dividends in shares of our common stock, rather than in cash. Whether
or not we make the same election for future quarters will have an impact on our cash balances.
Our ability to pay principal and interest on
our various debt securities and bank loans which total $32.3 million at December 31, 2014, 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 December 31, 2014, we had a working capital
deficit of $3.0 million, cumulative face value of redeemable preferred stock and various debt instruments of $39.1 million, a stockholders’
deficit of $22.8 million and have accumulated losses to date of $75.6 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 various convertible promissory notes and other debt instruments 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.
Disclosure About Off-Balance Sheet Arrangements
We do not have any transactions, agreements
or other contractual arrangements that constitute off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
Because we are a smaller reporting company, we are not required
to provide the information called for by this item.
Item 8. Financial Statements and Supplementary
Data
The information required by this item is included in pages F-1 through
F-25 attached hereto and incorporated by reference. The index to the consolidated financial statements can be found on page F-1.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
N/A
Item 9A . Controls and Procedures
Evaluation of the Company's Disclosure Controls and Procedures
The Company maintains “disclosure control
and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management, including our principal executive officer and principal
financial office, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing
and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter
how well conceived and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily
are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our principal executive
officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2014 and concluded that our disclosure controls and procedures were ineffective as of December 31,
2014 due to the material weaknesses that exist in our internal control over financial reporting, more fully described below.
Management’s Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation and fair presentation of financial statements for external purposes, in accordance with
generally accepted accounting principles. The effectiveness of any system of internal control over financial reporting
is subject to inherent limitations and therefore, may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness of future periods are subject to the risk that the controls may become inadequate due to change in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our principal executive
officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting
using the criteria set forth by the committee of Sponsoring Organization of the Treadway Commission (COSO) in Internal Control-Integrated
Framework (1992).
A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis.
Based on our evaluation, our principal
executive officer and principal financial officer concluded that, as a result of the material weaknesses described below, as of
December 31, 2014, we did not maintain effective internal control over financial reporting, based on criteria issued by COSO. The
material weakness, which relates to internal control over financial reporting, that was identified was:
| |
(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. |
| |
(ii) |
Due to our small size, we do not have a proper segregation of duties in certain areas of our
financial reporting and other accounting processes and procedures. This control deficiency results in a reasonable
possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a
timely basis. |
We are committed to continually
improving our financial organization, and from time to time we 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 additional internal personnel until such time as our operations are profitable
on a cash basis or until our operations are large enough to justify the hiring of additional accounting personnel. As necessary,
we may engage consultants in the future in order to ensure proper accounting for our consolidated financial statements.
This annual report does not include an attestation
report of our registered public accounting firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission
that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes In Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting
(as defined in Rules 13a-13(f) and 15d-15(f) under the Exchange Act) that occurred during our fourth fiscal quarter of the fiscal
year ended December 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information
PART III.
Item 10. Directors, Executive Officers and Corporate
Governance
The following table sets forth the names and ages, as of March 23,
2015, of all of our current directors and executive officers along with their current positions. All directors hold
office until the next annual meeting of shareholders or until their successors have been elected and qualified.
| Name |
|
Age |
|
Position |
| Thomas Bowersox |
|
68 |
|
Secretary and Director |
| Claude Brown |
|
53 |
|
President, Chief Executive Officer and Director |
| Donald Fallon |
|
60 |
|
Chief Financial Officer and Treasurer |
| Anthony Hatch |
|
55 |
|
Director |
| Allen Hershkowitz |
|
59 |
|
Director |
| Perry Jacobson |
|
55 |
|
Chairman, Board of Directors |
| Allen Kronstadt |
|
62 |
|
Director |
| Samuel Rose |
|
78 |
|
Director |
| Steven Silverman |
|
50 |
|
Vice-chairman, Board of Directors |
The principal occupations of and certain other information about each
of our executive officers and directors are as follows:
Thomas Bowersox, CPA. Mr. Bowersox was appointed to our board
of directors effective September 11, 2012, pursuant to the Note Purchase Agreement dated August 24, 2012, among the Company, Samuel
Rose, MLTM Lending, LLC, Allen Kronstadt, and certain other investors. Mr. Bowersox is also a member of our audit committee and
effective March 14, 2014 was appointed Corporate Secretary by our board of directors. Since 1997, Tom Bowersox has been a Principal
with Shreve Bowersox, P.C. in Bethesda, Maryland, which provides quality, personalized financial and management services tailored
to the sophisticated needs of high wealth individuals and growing entrepreneurial businesses. He has also served as chief financial
officer of Lerner Companies and Washington Real Estate Investment Trust. Mr. Bowersox serves as director of privately-held
Carl M. Freeman Companies since 2012. Mr. Bowersox received his B.S. in Accounting from the University of Kentucky.
Claude Brown, Jr. Mr. Brown was appointed Chief Executive
Officer, President and a director on August 4, 2014. On February 26, 2014, Mr. Brown was appointed Chief Operating and Technology
Officer. From 2010 to 2013, Mr. Brown served as President of Eōvations, LLC, a new business venture focused on the development,
production and launch of an innovative structural polymer technology which he spun-out of Dow Chemical. From 2007 to 2010 Mr. Brown
worked at Dow Chemical as Director of Research and Development for both Dow Solar Solutions and Dow Building Solutions where he
established technology and operations strategy for various building products and led their development and commercialization. In
2003, Mr. Brown joined Alcoa’s Home Exteriors as Vice President of Technology with responsibilities for materials research,
process refinement, product development, regulatory services, production engineering and commercialization management. Prior to
that, Mr. Brown served as both Vice President of Research and Development and Director of Engineering during his fourteen-year
career with CertainTeed Corporation. Mr. Brown began his career in TRW’s Executive Development program which led to key assignments
in automotive engine production, product development and eventually the Head of Quality for Norton Company’s Advanced Ceramics
division. Mr. Brown earned his B.S. and M.S. degrees in Ceramic Engineering from the Ohio State University in 1983 and 1985, respectively.
Donald Fallon. Mr. Fallon was appointed Chief Financial
Officer and Treasurer in November 2010. Mr. Fallon has served as a Chief Financial Officer of several publicly traded companies
throughout his career, including CepTor Corporation (formerly OTCBB:CEPO) (biopharmaceuticals) and Life Medical Sciences Inc. (formerly
NASDAQ:CHAI) (biomaterials). He has also served in various senior financial management capacities for other public companies, including
Guilford Pharmaceuticals Inc. (formerly NASDAQ:GLFD) (pharmaceuticals), PharmaKinetics Laboratories, Inc. (formerly NASDAQ: PKLB)
(bio-analytical contract services) and Ryland Group Inc. (NYSE:RYL) (homebuilding). Mr. Fallon has worked with many private early-stage
companies as an employee and consultant providing financial, accounting and operational advisory services. Mr. Fallon holds an
MBA in Finance from Loyola University Maryland, and received a BS in Accounting from University of Baltimore and is a member of
the American Institute of Certified Public Accountants and various other professional organizations.
Anthony Hatch. Effective December 6, 2010, Mr. Hatch
was appointed to our board of directors. Mr. Hatch founded ABH Consulting in 1999 which focuses on the freight transportation segment,
particularly surface and intermodal transportation. Along with “Progressive Railroading” magazine, a leading
railroad industry publication, he co-sponsors and leads “RailTrends”, a comprehensive railways conference held each
fall in New York City. Mr. Hatch has been a senior transportation analyst on Wall Street for over twenty years, having
worked at Salomon Brothers, Argus Research, PaineWebber and NatWest Markets (USA). Mr. Hatch received his A.B., cum
laude, from Harvard University in 1982.
Allen Hershkowitz. Dr. Hershkowitz was appointed to
our board of directors on May 25, 2011 and serves on our audit committee. In September 2014, Dr. Hershkowitz was elected President
of the Green Sports Alliance, an international coalition of hundreds of sports teams, leagues and venues committed to protecting
the conditions that make life on Earth possible. He is also Distinguished Professor in Sustainability Management in the MBA Program
of the Presidio Graduate School. Previously, Dr. Hershkowitz served as a Senior Scientist at the Natural Resources Defense Council
for 26 years, between 1988 and 2014, helping to grow NRDC into one of the most influential and largest environmental organizations
in the world. Dr. Hershkowitz has received awards and recognition from the U.S. EPA, the American Institute of Architects, Scenic
Hudson, and the Natural Resources Defense Council. Dr. Hershkowitz received his Ph.D. in political economics, specializing in energy
resources economics, from the City University of New York Graduate School in 1986. He earned a M. Phil. in political economics
in 1982, a B.A. (cum laude) from the City College of New York in 1978 and a Certificat D’assiduite from the University of
Grenoble in 1975.
Perry Jacobson. Mr. Jacobson was appointed to our board
of directors on September 20, 2010 and is chairman of our board of directors and is a member of our compensation committee. He
is currently serving as a Managing Director at Brookstone Partners (“Brookstone”). In his role at Brookstone,
Mr. Jacobson is responsible for managing B.P. Mezzanine Capital, LLC, a captive mezzanine fund which primarily invests alongside
Brookstone’s equity capital as well as working with the firm's limited partners. Prior to joining Brookstone,
Mr. Jacobson was a specialist on the New York Stock Exchange from 1982 to 2004. He started his career with CMJ Partners
and continued with Wagner, Stott and Mercator after their merger. Mr. Jacobson became a member of the managing committee
at each firm where he was involved in both day-to-day and policy decisions. Mr. Jacobson was also a NYSE Floor Governor
and a member of the NYSE Market Performance Committee which sets rules and procedures for NYSE trading. Mr. Jacobson
graduated from Boston University with a B.S. in Business Administration in 1981.
Allen Kronstadt. Mr. Kronstadt was appointed to our board
of directors effective September 11, 2012, pursuant to the Note Purchase Agreement dated August 24, 2012, among the Company, Samuel
Rose, MLTM Lending, LLC, Allen Kronstadt, and certain other investors. Mr. Kronstadt is also a member of our compensation committee.
Mr. Kronstadt is the founder and president of A. R. Kronstadt Realty Investors, Inc., a firm specializing in the development and
asset management of retail, industrial and indoor sports facilities. Initially, he worked as a commercial leasing agent, moving
into investment sales followed by establishing his own property-management company in 1978. Mr. Kronstadt joined with Sy Zuckerman
in 1986 to form Zuckerman Kronstadt Inc., which became one of the largest, full-service, property-management and brokerage firms
in the Washington, DC area. In 1996, Zuckerman Kronstadt Inc. was sold to a national real estate company, allowing Mr. Kronstadt
to turn his attention to real estate development and asset management. Raised in Washington, D.C., Mr. Kronstadt attended Babson
College and the University of Denver.
Samuel Rose. Mr. Rose was appointed to our board of directors
on August 4, 2014 pursuant to the Note Purchase Agreement dated August 24, 2012, among the Company, MLTM Lending, LLC, Allen Kronstadt,
and certain other investors. He has spent the last thirty years working for the company he founded in 1980, Greenebaum & Rose
Associates, which has been instrumental in developing and managing over five million square feet of office space in the Washington,
DC area including areas around Union Station. Mr. Rose began his career in real estate development in 1960, where he worked with
Rouse Company in its Maryland and San Francisco offices. Mr. Rose actively participates in the National Capital Area Chapter of
the American Planning Association and is a strong supporter of higher education, which is evidenced by the numerous scholarship
programs he and his wife have established. Mr. Rose is an emeritus board member at Dickinson College and the Smithsonian American
Art Museum. Mr. Rose earned his undergraduate degree from Dickinson College in 1958 and his Juris Doctor from the University of
Baltimore in 1961.
Steven Silverman. Effective January 18, 2011, Mr. Silverman
was appointed Chief Executive Officer, a position he held until August 4, 2014 when he relinquished his position and was named
Vice-Chairman of the board. Prior to becoming chief executive officer of the Company, Mr. Silverman served as our President and
Chief Operating Officer and has been on our board of directors since November, 2010. Mr. Silverman previously served as Executive
Vice President of Archbrook Laguna, LLC (or Archbrook), a total solutions provider supplying consumer electronics and computer
products to retailers through state-of-the-art logistical services from 2006 until he joined our company. He held a series
of roles at Archbrook, serving as Vice President of Operations and Business Development of Archbrook from 2000 until 2005, and
before that as Vice President of Sales from 1997 until 2000. As Executive Vice President, Mr. Silverman was responsible
for developing and implementing strategic corporate policy as well as the day-to-day operational management of Archbrook. As
Vice President of Operations and Business Development, Mr. Silverman assumed a diverse range of strategic and operational functions,
with a focus on business development. Mr. Silverman received a B.S. in Business Administration from Widener University in 1986.
Family Relationships
There are no family relationships among our executive officers and
directors.
Legal Proceedings
During the past ten years, none of our executive
officers, directors, promoters or control persons has been involved in a legal proceeding material to an evaluation of the ability
or integrity of such person.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our
directors and executive officers, and any persons who own more than 10 percent of a registered class of our equity securities,
to file reports of ownership and changes of ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission. Officers,
directors, and greater than 10% shareholders are required to furnish us with copies of all such forms that they file.
To our knowledge, based solely on review of
the copies of such reports furnished to us during the period, all such filing requirements were met, except:
| |
• |
Samuel Rose, Allen Kronstadt and MLTM Lending,
LLC failed to file on a timely basis Form 4’s with respect to certain shares of common stock received as payment-in-kind
interest and dividends issued to such persons during the year ended December 31, 2014. |
Code of Ethics
We adopted a code of ethics that our senior
financial officers, executive officers, and general and project managers are expected to adhere to and promote throughout the organization. Our
code of ethics may be found on our website at http://www.axih.com . We intend to disclose on our website any waivers
or amendments to our code of ethics within five business days of such action.
Background and Qualifications of Directors
When considering whether directors and nominees
have the experience, qualifications, attributes and skills, taken as a whole, to enable the board of directors to satisfy its oversight
responsibilities effectively in light of the our business and structure, the board focuses primarily on each person’s background
and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above. We
believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business. As
more specifically described in the biographies set forth above, our directors possess relevant knowledge and experience, industry-specific
and otherwise, in the manufacturing, recycled plastics, transportation, finance and business fields generally, which we believe
enhances the board’s ability to oversee, evaluate and direct our overall corporate strategy. The board annually reviews
the composition and size of the board so that the board consists of members with the proper expertise, qualifications, attributes,
skills, and personal and professional backgrounds needed by the board, consistent with applicable regulatory requirements.
Committees
Nominating Committee
We do not maintain a nominating committee of
the board. Nominations for election or appointment to the board are made by the full board. Because of our
small size, we do not believe that a nominating committee would significantly improve our nomination process. We do
not have in place procedures by which security holders may recommend nominees to the board of directors and have not received any
recommendations for nominee for the board of directors from any security holders.
Audit Committee
Our board of directors established an Audit
Committee in accordance with Section 3(a)(58)(A) of the Exchange Act. Upon his appointment to the board of directors, Mr. Bowersox
was appointed chairman of the Audit Committee and Dr. Hershkowitz is the other member of such committee. The board has determined
that Mr. Bowersox, a certified public accountant, qualifies as an “audit committee financial expert” as defined in
Item 407(d)(s)(ii) of Regulation S-K, and also satisfies the Independence standards for an audit committee member under the NASDAQ
rules (although our securities are not listed on the NASDAQ stock market but are quoted on the OTC Bulletin Board). The board has
determined that Dr. Hershkowitz also satisfies the independence standards set forth in the NASDAQ rules.
Compensation Committee
The Compensation Committee of the board of directors
was established at its meeting on January 18, 2011. Mr. Kronstadt, upon his appointment to the board of directors,
joined Mr. Jacobson as the members of the Compensation Committee.
Item 11. Executive Compensation
The following Summary Compensation Table sets
forth, for the fiscal years ended December 31, 2014 and 2013, all cash compensation, paid, distributed or accrued for services,
including salary and bonus amounts, rendered in all capacities by our Chief Executive Officer and all other executive officers
whose total compensation for such periods equaled or exceeded $100,000 during the stated periods.
Summary Compensation Table
| Name and | |
| | |
| | |
| | |
Option | | |
All Other | | |
| |
| Principal Position | |
Year | | |
Salary | | |
Bonus | | |
Awards | | |
Compensation | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Claude Brown (1) | |
| 2014 | | |
$ | 183,200 | | |
$ | - | | |
$ | 43,913 | (2) | |
$ | - | | |
$ | 227,113 | |
| President and Chief Executive | |
| 2013 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| | |
| Officer | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Donald Fallon | |
| 2014 | | |
| 175,000 | | |
| - | | |
| - | | |
| - | | |
| 175,000 | |
| Chief Financial Officer | |
| 2013 | | |
| 175,000 | | |
| - | | |
| - | | |
| - | | |
| 175,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Steven Silverman (3) | |
| 2014 | | |
| 122,500 | | |
| - | | |
| - | | |
| - | | |
| 122,500 | |
| President and Chief | |
| 2013 | | |
| 210,000 | | |
| - | | |
| - | | |
| 20,000 | (4) | |
| 230,000 | |
| Executive Officer | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| James Kerstein | |
| 2014 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Chief Technology Officer (5) | |
| 2013 | | |
| 185,000 | | |
| - | | |
| - | | |
| - | | |
| 185,000 | |
| (1) |
Mr. Brown was appointed Chief Operating and Technology Officer on February 26, 2014 and as President and Chief Executive Officer on August 4, 2014. |
| (2) |
This is the fair value of an option as calculated using the Black-Scholes Option Pricing Model, to purchase 75,000 shares of common stock at $0.84 per share, exercisable for five years after date of award. |
| (3) |
On August 4, 2014, Mr. Silverman relinquished his position as President and Chief Executive Officer and was named Vice-Chairman of the board. |
| (4) |
Mr. Silverman was provided $20,000 for relocation assistance to Ohio. |
| (5) |
On February 25, 2014, Mr. Kerstein resigned as Secretary, Chief Technology Officer and Director. |
Employment Agreements
Claude Brown
August 2014 Agreement. Upon his
appointment as Chief Executive Officer, pursuant to an employment letter, Mr. Brown’s base salary was adjusted to $225,000
per year. All other terms of his January 2014 Agreement remained the same.
January 2014 Agreement. Axion
entered into an employment agreement, effective February 25, 2014, with Mr. Brown that provides for his employment with the Company
as Chief Operating and Technology Officer, with an annual base salary of $195,000. Mr. Brown is also entitled to receive benefits
consistent with what is provided to other senior executives including participation in any bonus program established by the compensation
committee of the board of directors.
In addition, Mr. Brown was awarded an option
to purchase up to 75,000 shares of common stock of Axion at an exercise price of $0.84 per share. The option is immediately exercisable
for a term of five years.
In the event, following a change in control
as defined in his employment agreement, Mr. Brown’s employment is terminated by the Company for any reason other than (i)
for cause, as defined in his employment agreement, (ii) due to death, or (iii) due to a permanent disability, as defined in his
employment agreement, Mr. Brown shall be entitled to receive severance of his than base salary, payable in a lump sum amount.
The agreement also requires Mr. Brown to enter
into Axion’s standard confidentiality and inventions agreement.
Donald Fallon
June 2011 Agreement. Axion entered
into an employment agreement, dated as of June 7, 2011, with Mr. Fallon that provides for his employment with Axion as Chief Financial
Officer and Treasurer. Under the terms of the employment agreement, Mr. Fallon receives annual base compensation in the amount
of $175,000. Mr. Fallon is also entitled to receive benefits consistent with what is provided to other senior executives.
In addition, Mr. Fallon was awarded an option
to purchase up to 500,000 shares of common stock of Axion. Such option is exercisable for a term of five years from June 8, 2011,
of which (i) an option to purchase up to 125,000 of common stock at $1.30 per share is immediately exercisable, (ii) an option
to purchase an additional 130,000 shares of common stock at $1.30 per share is exercisable on June 8, 2012, (iii) an
option to purchase an additional 125,000 shares of common stock at $1.75 per share is exercisable upon our achieving $20 million
in sales during any fiscal year, and (iv) an option to purchase an additional 125,000 shares of common stock at $2.00
per share upon the Company achieving $50 million in sales during any fiscal year.
In the event, following a change in control
as defined in his employment agreement, Mr. Fallon’s employment is terminated by the Company for any reason other than (i)
for cause, as defined in his employment agreement, (ii) due to death, or (iii) due to a permanent disability, as defined in his
employment agreement, Mr. Fallon shall be entitled to receive severance in the amount of $175,000, payable in a lump sum amount,
plus, if such termination occurs prior to June 8, 2012, his option to purchase an additional 125,000 shares of common stock at
$1.30 per share will be exercisable on such date.
The agreement also requires Mr. Fallon to enter
into Axion’s standard confidentiality and inventions agreement.
Steven Silverman
September 2010 Agreement. Axion
entered into an employment agreement, dated September 23, 2010, with Mr. Silverman that provides for his employment with Axion
as President and Chief Operating Officer. Under the terms of the employment agreement, Mr. Silverman receives annual base
compensation in the amount of $175,000, which will be increased to the following amounts upon reaching the following revenue milestones:
(i) $250,000 upon Axion achieving $10,000,000 in sales during any fiscal year (1st Milestone”), (ii) $300,000 upon Axion
achieving $15,000,000 in sales during any fiscal year (2nd Milestone”), and (iii) $375,000 upon Axion achieving $25,000,000
in sales during any fiscal year (3rd Milestone”). Mr. Silverman is also entitled to receive benefits (including
health insurance) provided to other senior executives.
In addition, Mr. Silverman was awarded an option
pursuant to our 2010 Stock Plan, to purchase up to 1,000,000 shares of common stock of Axion. Such option is exercisable for a
term of seven years, of which (i) an option to purchase up to 150,000 of common stock at $1.05 per share is immediately exercisable,
(ii) an option to purchase an additional 100,000 shares of common stock at $1.25 per share is exercisable on October
11, 2011, (iii) an option to purchase an additional 250,000 shares of common stock at $1.50 per share is exercisable upon our achieving
the 1st Milestone, (iv) an option to purchase an additional 250,000 shares of common stock at $1.75 per share upon the
Company achieving the 2nd Milestone, and (v) an option to purchase an additional 250,000 shares of common stock at $2.50 per share
upon the Company achieving the 3rd Milestone.
In the event, following a change in control
as defined in his employment agreement, Mr. Silverman’s employment is terminated by the Company for any reason other than
(i) for cause, as defined in his employment agreement, (ii) due to death, or (iii) due to a permanent disability, as defined in
his employment agreement, Mr. Silverman shall be entitled to receive severance in the amount of $300,000, payable in a lump sum
amount, plus, if such termination occurs prior to October 11, 2011, his option to purchase an additional 100,000 shares of common
stock at $1.25 per share will be exercisable on such date
The agreement also requires Mr. Silverman to enter into Axion’s
standard confidentiality and inventions agreement.
May 2011 Amendment. Pursuant to
a letter agreement dated May 10, 2011, the terms and conditions contained in the offer letter dated September 23, 2010 were amended
as follows:
| |
· |
Effective March 1, 2011, Mr. Silverman’s base salary was increased to $210,000; |
| |
· |
Mr. Silverman’s base salary will be further increased to $300,000 and $375,000 upon the Company’s achievement of $15 million and $25 million in sales during any fiscal year, respectively; |
| |
· |
Mr. Silverman was awarded an option to purchase 150,000 shares of our common stock at $1.20 per share, which is exercisable through May 10, 2018; |
| |
· |
In addition, Mr. Silverman was awarded an option to purchase 150,000 and 100,000 shares of our common stock at $1.75 and $2.00 per share upon the Company’s achievement of $20 million and $50 million in sales during any fiscal year, respectively, and will expire on May 10, 2018; and |
| |
· |
Upon the attainment of certain designated management objectives as established by the board of directors, Mr. Silverman will be entitled to purchase an additional 200,000 shares of our common stock until May 10, 2018, at an exercise price equal to the market price of the our common stock on the date the objectives have been met. |
James Kerstein
January 2008 Agreement. Axion
entered into an employment agreement, dated as of January 1, 2008, with Mr. Kerstein that provided for his employment with Axion
as Chief Executive Officer through January 1, 2013. Under the terms of the employment agreement, Mr. Kerstein receives annual
base compensation in the amount of $208,000, which will be increased to the following amounts upon reaching the following revenue
milestones: (i) $388,000 upon Axion achieving annual revenues of $10,000,000, (ii) $488,000 upon Axion achieving annual revenues
of $15,000,000, and (iii) $508,000 upon Axion achieving annual revenues of $25,000,000. Mr. Kerstein is also entitled
to receive benefits (including health insurance) provided to other senior executives and automobile allowance of $850 per month.
In addition, Mr. Kerstein was previously awarded
options to purchase 16 shares of common stock of Axion at an exercise price of $1.00 per share. As a result of the Merger
and the reverse stock split, such options were automatically converted into the right to purchase 762,076 shares of common stock
of the Company, at an exercise price of $0.00002 per share. The options are exercisable for a term of five years, of
which (i) 190,519 shares vest upon Axion achieving annual revenues of $10,000,0000, (ii) 285,779 shares vest upon Axion achieving
annual revenues of $15,000,000 and (iii) 285,778 shares vest upon Axion achieving annual revenues of $25,000,000; provided, all
of the options vest in the event of (i) a change of control, as defined in his employment agreement, (ii) termination of Mr. Kerstein’s
employment by Axion without cause, as defined in his employment agreement, or (iii) termination of Mr. Kerstein’s employment
by Mr. Kerstein for good reason, as defined in the employment agreement.
If Mr. Kerstein is terminated without cause,
as defined in his employment agreement, or by Mr. Kerstein for good reason, as defined in his employment agreement, he will receive
(i) the remainder of his salary, (ii) benefits provided to other senior executives and (iii) automobile allowance of $850 per month,
each through the normal expiration date of his employment term. If Mr. Kerstein is terminated due to his permanent disability,
he will receive for a period of six months (i) his base salary, (ii) benefits provided to other senior executives and (iii) automobile
allowance of $850 per month. In addition, if Mr. Kerstein is terminated due to his death, he will receive base salary
for a period of six months.
The agreement also contains covenants governing
confidentiality, non-competition and non-solicitation upon the termination of his employment. The non-compete continues for a period
of 12 months following termination of Mr. Kerstein’s employment.
December 2008 Amendment. Mr. Kerstein’s
agreement was amended in December 2008 solely for the purpose of making it more compliant with provisions of Section 409A of the
Internal Revenue Code that took effect on December 31, 2008.
May 2011 Amendment. Pursuant to
a letter agreement dated May 10, 2011, the terms and conditions of the Mr. Kerstein’s Employment Agreement were amended as
follows:
| |
· |
Effective March 1, 2011, Mr. Kerstein’s base salary was adjusted to $185,000; |
| |
· |
Mr. Kerstein’s base salary will be increased to $220,000 and $250,000 upon the Company’s achievement of $15 million and $25 million in sales during any fiscal year, respectively; |
| |
· |
Mr. Kerstein was awarded an option to purchase 100,000 shares of our common stock at $1.20 per share, which is exercisable for through May 10, 2018; |
| |
· |
In addition, options to purchase 285,779 and 285,779 shares of our common stock currently held by Mr. Kerstein were revised to vest upon the Company’s achievement of $15 million and $20 million, respectively, in sales during any fiscal year; and |
| |
· |
Mr. Kerstein agreed to enter into a lock-up agreement through May 10, 2012 with respect to 1,850,450 shares of our common stock he currently owns. When the closing price of our common stock reaches $4.00 per share, 20% of the shares will be released from the lock-up, and an additional thirty percent will be release upon the closing price reaching $10.00 per share. The lock-up shall be terminated if the closing price of our stock reaches $20.00 per share. |
On February 25, 2014, Mr. Kerstein resigned as Secretary, Chief
Technology Officer.
Compensation of Directors
The following table
shows compensation to all of our directors, who were not also employees or officers, during the year ended December 31, 2014:
| Name | |
Option Awards
($) | | |
All Other
Compensation | | |
Total | |
| Thomas Bowersox | |
$ | 29,275 | (1) | |
$ | 48,000 | (2) | |
$ | 77,275 | |
| Allen Kronstadt | |
| 29,275 | (1) | |
| - | | |
| 29,275 | |
| (1) |
Mr. Bowersox and Mr. Kronstadt were compensated for previous service on our board for 2013, with an option to acquire 50,000 shares of common stock each, issued pursuant to the 2010 Stock Plan. |
| (2) |
Mr. Bowersox was compensated for certain assistance provided to
our CEO. |
The following table
shows compensation to all of our directors, who were not also employees or officers, during the year ended December 31, 2013:
| Name | |
Option Awards
($) | | |
All Other
Compensation | | |
Total | |
| Thomas Bowersox | |
$ | 10,233 | (1) | |
$ | 69,200 | (2) | |
$ | 128,549 | |
| | |
| 49,116 | (3) | |
| | | |
| | |
| Anthony Hatch | |
| 49,116 | (3) | |
| | | |
| 49,116 | |
| Allen Hershkowitz | |
| 49,116 | (3) | |
| | | |
| 49,116 | |
| Perry Jacobson | |
| 61,395 | (4) | |
| | | |
| 135,069 | |
| | |
| 73,674 | (5) | |
| | | |
| | |
| Allen Kronstadt | |
| 49,116 | (3) | |
| - | | |
| 49,116 | |
| (1) |
Mr. Bowersox was compensated for serving as our audit committee chairman for 2013, with an option to acquire 25,000 shares of common stock, pursuant to the 2010 Stock Plan. |
| (2) |
Mr. Bowersox was compensated for certain assistance provided to
our CEO. |
| (3) |
Pursuant to the board compensation program, Mr. Hatch, Dr. Hershkowitz and Mr. Kronstadt were each provided an option to acquire 120,000 shares of common stock, pursuant to the 2010 Stock Plan. |
| (4) |
Mr. Jacobson was compensated for additional services provided to our company as the Chairman of the Board of Directors with an option to purchase 150,000 shares of common stock, pursuant to the 2010 Stock Plan. |
| (5) |
Pursuant to the board compensation program, Mr. Jacobson, as Chairman of the Board of Directors, was provided an option to acquire 180,000 shares of common stock, pursuant to the 2010 Stock Plan. |
| | |
| |
Outstanding Equity
Awards at Fiscal Year End - Option Awards |
| Name | |
| |
Number of
Securities
Underlying
Unexercised
Options
Exercisable | | |
Number of
Securities
Underlying
Unexercised
Options
Not exercisable | | |
Number of
Securities
Underlying
Unexercised
Options
Unearned | | |
Option
Exercise
Price | | |
Option
Expiration
Date |
| | |
| |
| | |
| | |
| | |
| | |
|
| Claude Brown | |
(1) | |
| 75,000 | | |
| - | | |
| - | | |
$ | 0.84 | | |
March 3, 2019 |
| | |
| |
| | | |
| | | |
| | | |
| | | |
|
| Donald Fallon | |
(2) | |
| 250,000 | | |
| - | | |
| 250,000 | | |
| | | |
June 8, 2016 |
| | |
| |
| | | |
| | | |
| | | |
| | | |
|
| Steven Silverman | |
(3) | |
| 500,000 | | |
| - | | |
| - | | |
| | | |
October 11, 2017 |
| | |
(4) | |
| 300,000 | | |
| - | | |
| - | | |
| | | |
May 10, 2018 |
| (1) |
Such option is exercisable for a term of five years and are exercisable immediately. |
| |
|
| (2) |
Pursuant to the terms of an option agreement, dated June 8, 2011, such options are exercisable for a term of five years, of which (i) an option to purchase 125,000 shares of common stock at an exercise price of $1.30 per share was immediately exercisable, (ii) an option to purchase an additional 125,000 shares of common stock at an exercise price of $1.30 was exercisable on June 8, 2012, (iii) an option to purchase an additional 125,000 shares of common stock at an exercise price of $1.75 per share when we achieve $20 million in annual sales, and (iv) an option to purchase an additional 125,000 shares of common stock at an exercise price of $2.00 per share when we achieve $50 million in annual sales. |
| |
|
| (3) |
Such option is exercisable for a term of seven years, of which
(i) an option to purchase up to 150,000 of common stock at $1.05 per share was immediately exercisable, (ii) an option to purchase
an additional 100,000 shares of common stock at $1.25 per share was exercisable on October 11, 2011, 2nd (iii) an option
to purchase an additional 250,000 shares of common stock at $1.50 per share was exercisable upon our achieving the 1st Milestone
(as defined in Mr. Silverman’s employment agreement). |
| |
|
| (4) |
Pursuant to the terms of an option agreement, dated May 10, 2011,
such options are exercisable for a term of seven years, of which options to purchase 150,000 shares of common stock at $1.20 per
share, 50,000 shares of common stock at $0.73 per share, 50,000 shares of common stock at $0.60 per share and 50,000 shares of
common stock at $0.31 per share are exercisable. |
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the number
of shares of our common stock beneficially owned as of March 23, 2015, by each of our directors, each of our executive officers,
all of our executive officers and directors as a group, and by any person or “group,” as that term is used in Section
13(d)(3) of the Exchange Act, known to us to own beneficially more than 5% of the outstanding shares of our common stock. Except
as otherwise set forth below, the address of each of the persons listed below is c/o Axion International Holdings, Inc., 4005 All
American Way, Zanesville, Ohio 43701.
| Name and Address of Beneficial Owner | |
Amount and
Nature of
Beneficial
Ownership | | |
Percent of Class
(a) | |
| Directors and executive officers | |
| | | |
| | |
| Samuel G. Rose and Julie Walters (1) | |
| 32,904,103 | | |
| 36.4 | % |
| Allen Kronstadt, Director (2) | |
| 30,156,573 | | |
| 33.8 | % |
| Perry Jacobson, Chairman of Board (3) | |
| 975,973 | | |
| 1.3 | % |
| Steven Silverman, Vice-Chairman of Board (4) | |
| 800,000 | | |
| 1.1 | % |
| Donald Fallon, Chief Financial Officer and Treasurer (5) | |
| 250,000 | | |
| * | |
| Allen Hershkowitz, Director (6) | |
| 140,000 | | |
| * | |
| Thomas Bowersox, Secretary and Director (8) | |
| 120,000 | | |
| * | |
| Anthony Hatch, Director (7) | |
| 90,000 | | |
| * | |
| Claude Brown, President, Chief Executive Officer and Director (9) | |
| 75,000 | | |
| * | |
| | |
| | | |
| | |
| All directors and officers as a group (9 persons) (10) | |
| 65,511,649 | | |
| 59.8 | % |
| | |
| | | |
| | |
| Other persons: | |
| | | |
| | |
| MLTM Lending, LLC (12) | |
| 27,804,963 | | |
| 31.5 | % |
| Ml Dynasty Trust (13) | |
| 23,594,359 | | |
| 27.9 | % |
| | |
| | | |
| | |
| All other persons (2 persons) (16) | |
| 27,804,963 | | |
| 31.5 | % |
* Less than 1% of outstanding shares.
| (a) |
As of March 23, 2015, we had 81,685,119 equivalent shares of common stock outstanding, comprising 72,249,613 shares of common stock and 682,998 shares of 10% convertible preferred stock, convertible into 9,435,506 shares of common stock. Unless otherwise indicated in these footnotes, each stockholder has sole voting and investment power with respect to the shares beneficially owned. All share amounts reflect beneficial ownership determined pursuant to Rule 13d-3 under the Exchange Act. All information with respect to beneficial ownership has been furnished by the respective director or executive officer, as the case may be. |
| (1) | Includes 1,745,701 shares of common stock held with shared voting and dispositive power, 12,899,492 shares of common stock
held by Mr. Rose with sole voting and dispositive powers (of which 145,000 are held in the name of RPM Greenebaum & Rose 401(k)
Plan, dated December 1, 1992 for the benefit of Mr. Rose), 16,830,339 shares of common stock issuable upon conversion of our convertible
debt held with sole voting and dispositive powers by Mr. Rose, and 100,000 shares of 10% convertible preferred stock held with
shared voting and dispositive powers convertible into 1,428,571 shares of common stock. The address of the beneficial owners is
5301 Wisconsin Avenue, NW, Suite 510, Washington, DC 20015. |
| (2) |
Includes 13,011,335 shares of common stock held in the name of Mr. Kronstadt, 7,300 shares of common stock held by the Danielle Nicole Kronstadt Irrevocable Trust, dated February 26,2001, 22,885 shares of common stock held by the Michael Benjamin Kronstadt Irrevocable Trust, dated February 26, 2001, 13,000 shares of common stock held by the Jamie Fay Kronstadt Irrevocable Trust, dated February 26, 2001, 181,618 shares of common stock held by the Bethesda Foundation, Inc., 16,830,435 shares of common stock issuable upon conversion of our convertible debt held by Mr. Kronstadt. Includes options to purchase 90,000 shares of common stock and excludes options to purchase 80,000 shares of common stock which have not yet vested. The address of the beneficial owners is 11820 Parklawn Drive, Suite 404, Rockville, MD 20852. |
| (3) |
Includes options and warrants to purchase 510,000 shares of common stock and excludes options to purchase 120,000 shares of common stock which have not yet vested. Also includes 12,500 shares of 10% convertible preferred stock, convertible into 178,571 shares of common stock. |
| (4) |
Includes options to purchase 800,000 shares of common stock. |
| (5) |
Includes options to purchase 250,000 shares of common stock and excludes options to purchase 250,000 shares of common stock which have not yet vested. |
| (6) | Includes options to purchase 140,000 shares of common stock and excludes options to purchase 80,000 shares of common stock
which have not yet vested. |
| (7) | Includes options to purchase 115,000 shares of common stock and excludes options to purchase 80,000 shares of common stock
which have not vested. |
| (8) |
Includes options to purchase 90,000 shares of common stock and excludes options to purchase 80,000 shares of common stock which have not yet vested. |
| (9) |
Includes options to purchase 75,000 shares of common stock. |
| (10) |
Includes options and warrants to purchase 2,070,000 shares of common stock and excludes options to purchase 440,000 and 250,000 shares of common stock which have not vested and have not yet been earned, respectively. |
| (11) |
MLTM Lending, LLC and the ML Dynasty Trust beneficially own in excess of 5% of our outstanding stock. Pursuant to the Schedule 13D filings made by MLTM Lending, LLC and the ML Dynasty Trust, the ML Dynasty Trust shares with MLTM the power to vote or direct the vote of, and to dispose or direct the disposition of, greater than 5% of our outstanding stock. Includes 403,416 shares of common stock held with sole voting and dispositive powers, 11,373,247 shares of common stock held with shared voting and dispositive powers, 12,221,112 shares of common stock issuable upon conversion of our convertible debt held with shared voting and dispositive powers, and 3,807,188 shares of common stock issuable upon conversion of our convertible debt held with sole voting and dispositive powers. The address of the beneficial owners is 4922A St. Elmo Ave., Bethesda, MD 20814. |
| (12) |
Includes 11,373,247 issued and outstanding shares and 12,221,112 shares issuable upon conversion of outstanding convertible debt, as to which only shared voting and disposition power exists for all such shares with MLTM Lending, LLC. |
| (13) |
Includes 11,776,663 issued and outstanding shares of common stock and 16,028,300 shares of common stock issuable upon conversion of our convertible debt. |
Equity Compensation Plan Information
The following table provides information regarding the status of
our existing equity compensation plans at December 31, 2014.
| Plan Category | |
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights | | |
Weighted-average
exercise price of
outstanding option,
warrants and rights | | |
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the second column) (1) | |
| | |
| | | |
| | | |
| | |
| Equity compensation plans approved by security holders (1) | |
| 4,128,128 | | |
$ | 1.04 | | |
| 3,915,000 | |
| (1) |
Includes 2,000,000 shares of common stock approved by the Board of Directors for award under the 2010 Stock Plan which has not been approved by shareholders. Our 2003 Stock Plan expired during the year ended December 31, 2013. |
Item 13. Certain Relationships and Related Transactions,
and Director Independence
Policies for Approval of Related Person Transactions
Pursuant to our policies, any proposed related-party
transaction must be approved or ratified by a majority of the disinterested directors on the board of directors or a designated
committee thereof consisting solely of disinterested directors. In approving any related-party transaction, the board of directors
or the committee must determine that the transaction is on terms no less favorable to us in the aggregate than those generally
available to an unaffiliated third party under similar circumstances. Certain transactions with related persons, though not classified
as related-party transaction by our policy and thus not subject to its review and approval requirements, may still need to be disclosed
if required by the applicable securities laws, rules and regulations.
Samuel G. Rose and Julie Walters
Pursuant to the terms of the Purchase
Agreement associated with our 8% convertible promissory notes, Samuel G. Rose was appointed to our board of directors on August
4, 2014, and Mr. Rose and Julie Walters beneficially own in excess of 5% of our outstanding stock.
10% Convertible Redeemable Preferred Stock.
During the year ended December 31, 2011, we sold to Mr. Rose and Ms. Walters 100,000 shares of our Preferred Stock for $1.0 million.
The Preferred Stock may be converted into shares of our common stock at any time by Mr. Rose and Ms. Walters at a conversion price
effective January 1, 2015 of $0.70 per share, as adjusted. Mr. Rose and Ms. Walters are entitled to receive dividends at the rate
of 10% per annum payable quarterly, at our option, in cash, or in additional shares of common stock, and have the right to vote
the Preferred Stock with our common stockholders on any matter.
Since certain revenue targets for the twelve
months ended December 31, 2011 were not achieved, Mr. Rose and Ms. Walters received a warrant to purchase 500,000 shares of our
common stock. During June 2014, we extended an offer to exchange for shares of our common stock any and all of our outstanding
warrants from the holders thereof (the “Tender Offer”). Each warrant holder was provided with the terms of the Tender
Offer regarding their outstanding warrants. For every $10 of value attributed to the warrant, we offered to exchange 14.17707 shares
of our common stock. The value of the warrants was derived from third parties using Monte Carlo simulation models and the Black-Scholes
Option Pricing Model. Pursuant to this Tender Offer, Mr. Rose and Ms. Walters received approximately 259,300 shares of common stock
in exchange for the warrants to purchase 500,000 shares of common stock.
Through December 31, 2014, Mr. Rose and Ms.
Walters received an aggregate of approximately 635,400 shares of common stock as dividend payments on the Preferred Stock held
by them.
8% Convertible Promissory Notes (2012).
Effective April 25, 2012, we entered into a Memorandum of Understanding (the “MOU”) with Mr. Rose and several other
investors. Pursuant to the MOU, we issued to Mr. Rose a demand promissory note (the “Demand Note”) in the principal
amount of $1,666,667. Interest accrued on the unpaid principal balance of the Demand Note at a rate of 8.0% per annum.
On August 24, 2012, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with Mr. Rose, MLTM Lending,
LLC, Allen Kronstadt and certain other investors (the “Note Purchase Agreement Investors”), pursuant to which, as of
December 31, 2014, we have issued and sold to Mr. Rose an aggregate principal amount of $5,209,260 of our 8.0% convertible promissory
notes (the “8% Notes - 2012”) which are initially convertible into shares of our common stock, at a conversion price
equal to $0.40 per share of common stock, subject to adjustment as provided on the terms of the 8% Notes - 2012, and associated
warrants (the “8% Note Warrants”) to purchase, in the aggregate, 13,023,151 shares of common stock, subject to adjustment
as provided on the terms of the 8% Note Warrants. At the initial closing under the Purchase Agreement, in consideration for the
issuance of the 8% Notes - 2012 and the 8% Note Warrants issued at such closing, Mr. Rose converted the aggregate principal amount
outstanding, together with all accrued and unpaid interest, under the Demand Note and paid us in cash for the balance. Through
December 31, 2014, Mr. Rose have received an aggregate of 1,265,849 shares of common stock as interest payments under the 8% Notes
- 2012 held by them.
In connection with the entry into the Purchase
Agreement, we granted to the Note Purchase Agreement Investors: (i) certain demand and piggyback registration rights with respect
to the registration of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder,
and (ii) a security interest and lien in all of our assets and rights to secure our obligations under the 8% Notes – 2012.
The 8% Notes - 2012, including all outstanding
principal and accrued and unpaid interest, are due and payable on the earlier of five years from date of issuance or upon the occurrence
of an Event of Default (as defined in the 8% Notes - 2012). We may prepay the 8% Notes - 2012, in whole or in part, upon 60 calendar
days prior written notice to the holders thereof. Interest accrues on the 8% Notes - 2012 at a rate of 8.0% per annum, payable
during the first three years that the 8% Notes - 2012 are outstanding in shares of common stock, valued at the weighted average
price of a share of common stock for the twenty consecutive trading days prior to the interest payment date, pursuant to the terms
of the 8% Notes - 2012. During the fourth and fifth years that the 8% Notes - 2012 are outstanding, interest that accrues under
the 8% Notes - 2012 shall be payable in cash.
Pursuant to our Tender Offer, Mr. Rose received
10.9 million shares of common stock in exchange for their 8% Note Warrants to purchase 13.0 million shares of common stock.
Revolving Credit and Letter of Credit Support
Agreement. During the year ended December 31, 2013, we entered into a Revolving Credit and Letter of Credit Support Agreement
(the “Revolving Loan Agreement”) pursuant to which Mr. Rose along with MLTM Lending LLC (the “Lenders”)
had agreed to lend us up to $1.0 million each on a revolving basis. Each revolving loan made under the Revolving Loan Agreement
bears interest at 12% per annum, of which 4% is payable by us in cash on the first business day of each month, and 8% is payable
by us in shares of common stock on the first business day of each calendar quarter, valued at a price equal to the average of the
Weighted Average Price (as such term is defined in the Revolving Loan Agreement) of a share of common stock for 20 consecutive
trading days prior to the interest payment date. The maturity date of the Revolving Loan Agreement is December 31, 2015 (the “Maturity
Date”). As of December 31, 2014, Mr. Rose had provided $1.0 million pursuant to the Revolving Loan Agreement.
Under the terms of the Revolving Loan Agreement,
we may prepay the revolving loans at any time, in whole or in part, together with all accrued and unpaid interest, without premium
or penalty. The Lenders may accelerate all amounts due under the Revolving Loan Agreement, together with accrued and unpaid interest,
upon the occurrence of an Event of Default, as defined in the Revolving Loan Agreement.
As consideration for the revolving loans extended
under the Revolving Loan Agreement, we agreed to issue to each Lender 100,000 shares of common stock, upon signing of the Revolving
Loan Agreement and again prior to December 31, 2014 and 2015. Through December 31, 2014, Mr. Rose has received a total of 200,000
shares of common stock.
In connection with the entry into the Revolving
Loan Agreement, pursuant to the terms thereof, we entered into a Security Agreement pursuant to which we granted a security interest
and lien in all of our accounts receivable and inventory to secure the Lenders’ obligations under the Revolving Loan Agreement.
Through December 31, 2014, we paid approximately
$42,700 in interest and we issued to Mr. Rose approximately 142,100 shares of common stock as payment of interest.
8% Convertible Promissory Notes (2014).
During the months of June and August 2014 pursuant to the terms of our 8% convertible promissory notes (the “8% Notes - 2014”),
we issued and sold to Mr. Rose, an aggregate principal amount of $666,666 of our 8% Notes - 2014 which are initially convertible
into 2.5 million shares of our common stock, subject to adjustment as provided on the terms of the 8% Notes - 2014, (i) at any
time prescribed by the Investors or (ii) upon any date prior to the maturity date of June 11, 2019, on which the Company’s
common shares are listed on a U.S. based stock exchange.
Through December 31, 2014, we paid Mr. Rose
approximately $28,100 of interest on the 8% Notes – 2014.
12% Convertible Promissory Notes. During
the three months ended September 30, 2014 pursuant to the terms of our 12% convertible promissory notes (the “12% Notes”),
we issued and sold to Mr. Rose, an aggregate principal amount of $333,333 of our 12% Notes which are initially convertible into
shares of our common stock, subject to adjustment as provided on the terms of the 12% Notes, at any time prescribed by the Investors
at a conversion price equal to 85% of the weighted average price of a share of common stock for the ten consecutive trading days
prior to the conversion date. The 12% Notes mature on June 30, 2015.
Through December 31, 2014, we paid Mr. Rose
approximately $9,400 of interest on the 12% Notes.
12% Secured Notes. During the
three months ended December 31, 2014 pursuant to the terms of our 12% secured notes (the “12% Secured Notes”), we
issued and sold to Mr. Rose, an aggregate principal amount of $650,000 of our 12% Secured Notes. The 12% Secured Notes mature
on June 30, 2015 and are secured by a pledge of the common shares of Axion International, Inc. and Axion Recycled
Plastics Incorporated, owned by us.
Through December 31, 2014, we paid Mr. Rose
approximately $4,600 of interest on the 12% Secured Notes.
Related Transactions Summary – Samuel
G. Rose and Julie Walters
| | |
| | |
Common Stock | |
| | |
| | |
Equivalent, | |
| | |
Principal | | |
If Converted | |
| | |
| | |
| |
| 10% convertible preferred stock | |
$ | 1,000,000 | | |
| 1,428,571 | |
| 8% convertible notes (2012) | |
| 5,209,260 | | |
| 13,023,151 | |
| 12% revolving | |
| 1,000,000 | | |
| - | (i) |
| 8% convertible notes (2014) | |
| 666,666 | | |
| 2,500,000 | |
| 12% convertible promissory notes | |
| 333,333 | | |
| 980,391 | (ii) |
| 12% secured notes | |
| 650,000 | | |
| - | (i) |
| TOTAL | |
$ | 8,859,259 | | |
| 17,932,113 | |
(i) not convertible into shares of common stock.
(ii) assumed 10-day volume weighted average price was $0.40.
MLTM Lending, LLC and the ML Dynasty
Trust
MLTM Lending, LLC and the ML Dynasty Trust
beneficially own in excess of 5% of our outstanding stock. Pursuant to the Schedule 13D filings made by MLTM Lending, LLC and the
ML Dynasty Trust, the ML Dynasty Trust shares with MLTM the power to vote or direct the vote of, and to dispose or direct the disposition
of, greater than 5% of our outstanding stock. Thomas Bowersox, a member of our board of directors, is a trustee of the ML
Dynasty Trust.
8% Convertible Promissory Notes (2012).
Pursuant to the MOU, we issued to MLTM Lending, LLC a Demand Note (the “MLTM Demand Note”) in the principal amount
of $1,426,667. Interest accrued on the unpaid principal balance of the MLTM Demand Note at a rate of 8.0% per annum. Pursuant to
the Purchase Agreement, as of December 31, 2014, we have issued and sold to MLTM Lending, LLC an aggregate principal amount of
$4,888,444 of our 8% Notes - 2012 and associated 8% Note Warrants to purchase, in the aggregate, 12,221,112 shares of common stock,
subject to adjustment as provided on the terms of the 8% Note Warrants. In consideration for the issuance of the 8% Notes - 2012
and the 8% Note Warrants, MLTM Lending, LLC converted the aggregate principal amount outstanding, together with all accrued and
unpaid interest, under the MLTM Demand Note and paid us in cash for the balance. Through December 31, 2014, MLTM Lending, LLC has
received an aggregate of 1,169,138 shares of common stock as interest payments under the 8% Notes that it holds.
Pursuant to our Tender Offer, MLTM Lending, LLC received 10.2 million
shares of common stock in exchange for their 8% Note Warrants to purchase 12.2 million shares of common stock.
The terms of the 8% Notes – 2012, the
8% Note Warrants and the Tender Offer are described above.
Revolving Credit and Letter of Credit Support
Agreement. During the year ended December 31, 2013, we entered into a Revolving Credit and Letter of Credit Support Agreement
(the “Revolving Loan Agreement”) pursuant to which MLTM Lending LLC and Mr. Rose (the “Lenders”) have agreed
to lend us up to $1.0 million each on a revolving basis. In addition, the Revolving Loan Agreement provides that MLTM Lending,
LLC will provide letter of credit support to us of up to $500,000 (the “LC Sublimit”). Each revolving loan made under
the Revolving Loan Agreement bears interest at 12% per annum, of which 4% is payable by us in cash on the first business day of
each month, and 8% is payable by us in shares of common stock on the first business day of each calendar quarter, valued at a price
equal to the average of the Weighted Average Price (as such term is defined in the Revolving Loan Agreement) of a share of common
stock for 20 consecutive trading days prior to the interest payment date. The maturity date of the Revolving Loan Agreement is
December 31, 2015 (the “Maturity Date”). As of December 31, 2014, MLTM Lending, LLC had provided $1.0 million pursuant
to the Revolving Loan Agreement and supported $400,000 of outstanding letters of credit.
Under the terms of the Revolving Loan Agreement,
we may prepay the revolving loans at any time, in whole or in part, together with all accrued and unpaid interest, without premium
or penalty. The Lenders may accelerate all amounts due under the Revolving Loan Agreement, together with accrued and unpaid interest,
upon the occurrence of an Event of Default, as defined in the Revolving Loan Agreement.
As consideration for the revolving loans extended
under the Revolving Loan Agreement, we agreed to issue to each Lender 100,000 shares of common stock, upon signing of the Revolving
Loan Agreement and again prior to December 31, 2014 and 2015. Through December 31, 2014, MLTM Lending, LLC has received a total
of 200,000 shares of common stock. As consideration for MLTM Lending, LLC providing letter of credit support, we are required to
pay a letter of credit commission fee on the date of the Revolving Loan Agreement, and on each one year anniversary of the date
of the Revolving Loan Agreement prior to the Maturity Date, in the amount equal to (i) 2% of the LC Sublimit in cash and (ii) shares
of common stock, with an aggregate value of 4% of the LC Sublimit, with each such share of common stock valued at a price equal
to the average of the Weighted Average Price of a share of Common Stock for the 20 consecutive trading days prior to the date of
payment.
In connection with the entry into the
Revolving Loan Agreement, pursuant to the terms thereof, we entered into a Security Agreement pursuant to which we granted a
security interest and lien in all of our accounts receivable and inventory to secure the Lenders’ obligations under the
Revolving Loan Agreement.
Through December 31, 2014, we paid MLTM Lending,
LLC approximately $62,800 in interest and commitment fees, issued approximately 261,000 shares of common stock in various commitment
fees, and approximately 142,500 shares of common stock as payment of interest.
8% Convertible Promissory Notes (2014).
During the months of June and August 2014 pursuant to the terms of our 8% convertible promissory notes (the “8% Notes - 2014”),
we issued and sold to MLTM Lending, LLC, an aggregate principal amount of $666,667 of our 8% Notes - 2014 which are initially convertible
into 2.5 million shares of our common stock, subject to adjustment as provided on the terms of the 8% Notes - 2014, (i) at any
time prescribed by the Investors or (ii) upon any date prior to the maturity date of June 11, 2019, on which the Company’s
common shares are listed on a U.S. based stock exchange.
Through December 31, 2014, we paid MLTM Lending,
LLC approximately $28,100 of interest on the 8% Notes – 2014.
12% Convertible Promissory Notes. During
the three months ended September30, 2014 pursuant to the terms of our 12% convertible promissory notes (the “12% Notes”),
we issued and sold to MLTM Lending, LLC, an aggregate principal amount of $333,334 of our 12% Notes which are initially convertible
into shares of our common stock, subject to adjustment as provided on the terms of the 12% Notes, at any time prescribed by the
Investors at a conversion price equal to 85% of the weighted average price of a share of common stock for the ten consecutive trading
days prior to the conversion date. The 12% Notes mature on June 30, 2015.
Through December 31, 2014, we paid MLTM Lending,
LLC approximately $10,100 of interest on the 12% Notes.
12% Secured Notes. During the three months ended December
31, 2014 pursuant to the terms of our 12% secured notes (the “12% Secured Notes”), we issued and sold to MLTM Lending,
LLC, an aggregate principal amount of $650,000 of our 12% Secured Notes. The 12% Secured Notes mature on June 30, 2015 and are
secured by a pledge of the common shares of Axion International, Inc. and Axion Recycled Plastics Incorporated, owned by us.
Through December 31, 2014, we paid MLTM Lending,
LLC approximately $4,500 of interest on the 12% Secured Notes.
Related Transactions Summary - MLTM Lending,
LLC and the ML Dynasty Trust
| | |
| | |
Common
Stock | |
| | |
| | |
Equivalent, | |
| | |
Principal | | |
If Converted | |
| | |
| | |
| |
| 8% convertible notes (2012) | |
$ | 4,888,444 | | |
| 12,221,112 | |
| 12% revolving | |
| 1,000,000 | | |
| - | (i) |
| 8% convertible notes (2014) | |
| 666,667 | | |
| 2,500,000 | |
| 12% convertible promissory notes | |
| 333,334 | | |
| 980,394 | (ii) |
| 12% secured notes | |
| 650,000 | | |
| - | (i) |
| TOTAL | |
$ | 7,538,445 | | |
| 15,701,506 | |
(i) not convertible into shares of common stock.
(ii) assumed 10-day volume weighted average price was $0.40.
Allen Kronstadt
Allen Kronstadt owns in excess of 5% of
our outstanding common stock, and was appointed to our board of directors on September 11, 2012 pursuant to the terms of
the Purchase Agreement associated with our 8% convertible promissory notes.
8% Convertible Promissory Notes (2012).
Pursuant to the MOU, we issued to Mr. Kronstadt a demand promissory note (the “Kronstadt Demand Note”) in the principal
amount of $1,666,667. Interest accrued on the unpaid principal balance of the Kronstadt Demand Note at a rate of 8.0%
per annum. Pursuant to the Purchase Agreement, as of December 31, 2014, we have issued and sold to Mr. Kronstadt an aggregate principal
amount of $5,209,297 of our 8% Notes - 2012 and 8% Note Warrants to purchase, in the aggregate, 13,023,243 shares of common stock,
subject to adjustment as provided on the terms of the 8% Note Warrants. At the initial closing under the Purchase Agreement, in
consideration for the issuance of the 8% Notes - 2012 and the 8% Note Warrants at such closing, Mr. Kronstadt converted the aggregate
principal amount outstanding, together with all accrued and unpaid interest, under the Kronstadt Demand Note and paid us in cash
for the balance. Through December 31, 2014, Mr. Kronstadt has received an aggregate of 1,245,032 shares of common stock as interest
payments under the 8% Notes - 2012 that he holds.
Pursuant to our Tender Offer, Mr. Kronstadt
received 10.9 million shares of common stock in exchange for their 8% Note Warrants to purchase 13.0 million shares of common stock.
The terms of the 8% Notes – 2012, the
8% Note Warrants and the Tender Offer are described above.
8% Convertible Promissory Notes (2014).
During the months of June and August 2014 pursuant to the terms of our 8% convertible promissory notes (the “8% Notes - 2014”),
we issued and sold to Mr. Kronstadt, an aggregate principal amount of $666,667 of our 8% Notes - 2014 which are initially convertible
into 2.5 million shares of our common stock, subject to adjustment as provided on the terms of the 8% Notes - 2014, (i) at any
time prescribed by the Investors or (ii) upon any date prior to the maturity date of June 11, 2019, on which the Company’s
common shares are listed on a U.S. based stock exchange.
Through December 31, 2014, we paid Mr. Kronstadt
approximately $27,900 of interest on the 8% Notes – 2014.
12% Convertible Promissory Notes. During
the three months ended September 30, 2014 pursuant to the terms of our 12% convertible promissory notes (the “12% Notes”),
we issued and sold to Mr. Kronstadt, an aggregate principal amount of $333,333 of our 12% Notes which are initially convertible
into shares of our common stock, subject to adjustment as provided on the terms of the 12% Notes, at any time prescribed by the
Investors at a conversion price equal to 85% of the weighted average price of a share of common stock for the ten consecutive trading
days prior to the conversion date. The 12% Notes mature on June 30, 2015.
Through December 31, 2014, we paid Mr. Kronstadt
approximately $9,300 of interest on the 12% Notes.
12% Secured Notes. During the
three months ended December 31, 2014 pursuant to the terms of our 12% secured notes (the “12% Secured Notes”), we
issued and sold to Mr. Kronstadt, an aggregate principal amount of $650,000 of our 12% Secured Notes. The 12% Secured Notes
mature on June 30, 2015 and are secured by a pledge of the common shares of Axion International, Inc. and Axion Recycled
Plastics Incorporated, owned by us.
Through December 31, 2014, we paid Mr. Kronstadt
approximately $3,200 of interest on the 12% Secured Notes.
Related Transactions Summary – Allen
Kronstadt
| | |
| | |
Common Stock | |
| | |
| | |
Equivalent, | |
| | |
Principal | | |
If Converted | |
| | |
| | |
| |
| 8% convertible notes (2012) | |
$ | 5,209,297 | | |
| 13,023,243 | |
| 8% convertible notes (2014) | |
| 666,667 | | |
| 2,500,000 | |
| 12% convertible promissory notes | |
| 333,333 | | |
| 980,391 | (ii) |
| 12% secured notes | |
| 650,000 | | |
| - | (i) |
| TOTAL | |
$ | 6,859,297 | | |
| 16,503,634 | |
(i) not convertible into shares of common stock.
(ii) assumed 10-day volume weighted average price was $0.40.
Perry Jacobson
Perry Jacobson was appointed to our board of directors on September
20, 2010.
10% Convertible Redeemable Preferred Stock.
During the year ended December 31, 2011, we sold to Mr. Jacobson 12,500 shares of our Preferred Stock for $125,000. The Preferred
Stock may be converted into shares of our common stock at any time by Mr. Jacobson at a conversion price effective January 1, 2015
of $0.70 per share, as adjusted. Mr. Jacobson is entitled to receive dividends at the rate of 10% per annum payable quarterly,
at our option, in cash, or in additional shares of common stock, and has the right to vote the Preferred Stock with our common
stockholders on any matter.
Since certain revenue targets for the twelve
months ended December 31, 2011 were not achieved, Mr. Jacobson received a warrant to purchase 62,500 shares of our common stock.
During the three months ended June 30, 2014, pursuant to our Tender Offer to all warrant holders to exchange the fair value of
any warrants then outstanding, for shares of our common stock, Mr. Jacobson received approximately 32,400 shares of common stock
in exchange for the warrants to purchase 62,500 shares of common stock.
Through December 31, 2014, Mr. Jacobson received
an aggregate of approximately 79,400 shares of common stock as dividend payments on the Preferred Stock held by them.
Related Transactions Summary – Perry
Jacobson
| | |
| | |
Common Stock | |
| | |
| | |
Equivalent, | |
| | |
Principal | | |
If Converted | |
| | |
| | | |
| | |
| 10% convertible preferred stock | |
$ | 125,000 | | |
| 178,571 | |
Director Independence
In accordance with the disclosure requirements
of the SEC, and since the OTC Bulletin Board does not have its own rules for director independence, we have adopted the NASDAQ
listing standards for independence. Although we are not presently listed on any national securities exchange, each of our directors,
other than Mr. Brown is independent in accordance with the definition set forth in the NASDAQ rules. Each current member of the
Audit Committee and Compensation Committee is an independent director under the NASDAQ standards. The board considered the information
included in transactions with related parties as outlined above along with other information the board considered relevant, when
considering the independence of each director.
Item 14. Principal Accountant Fees and Services.
BDO USA LLP served as our independent registered public accounting
firm for the years ended December 31, 2014 and 2013.
Audit Fees. During the years ended December 31, 2014
and 2013, BDO USA LLP billed us a total of approximately $182,000 and $134,000, respectively, for professional services rendered
for (i) the audit of our consolidated financial statements in our Forms 10-K, (ii) review of our quarterly filings on Form 10-Q
and (iii) services provided in connection with regulatory filings.
Audit-Related Fees. For years ended December 31, 2014
and 2013, BDO USA LLP did not perform or bill us for any audit-related services.
Tax Fees. For years ended December 31, 2014 and 2013,
BDO USA LLP billed us a total of approximately $23,300 and $26,200, respectively for professional services rendered in regards
to tax compliance.
All Other Fees. During the years ended December 31,
2014 and 2013, BDO USA LLP did not perform or bill us for any services other than those described above.
PART IV.
Item 15. Exhibits, Financial Statement Schedules
| |
· |
Consolidated Balance Sheets as of December 31, 2014 and 2013 |
| |
· |
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013 |
| |
· |
Consolidated Statement of Stockholders’ Deficit as of December 31, 2014 |
| |
· |
Consolidated Statements of Cash Flow for years ended December 31, 2014 and 2013 |
EXHIBIT INDEX
Exhibit
No. |
|
Description of Document |
| |
|
|
| 2.1 |
|
Agreement and Plan of Merger by and among Analytical Surveys, Inc., Axion Acquisition Corp, and Axion International, Inc. dated as of November 20, 2007 (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K dated November 21, 2007) |
| |
|
|
| 2.2 |
|
Certificate of Merger of the Merger Sub and Axion, dated March 20, 2008 (incorporated by reference to Exhibit 2.2 to the Company’s Form 8-K filed on March 26, 2008) |
| |
|
|
| 2.3 |
|
Asset Purchase Agreement dated as of
November 15, 2013, among Axion Recycled Plastics Incorporated, Y City Recycling, LLC, and Brian Coll and Renee Coll (incorporated
by reference to Exhibit 10.1 to the Company’s Form 8-K filed on November
21, 2013). |
| |
|
|
| 3.1 |
|
Articles of Incorporation, as amended (incorporated by reference to the Company’s Registration Statement on Form S-18 (Registration No. 2-93108-D)) |
| |
|
|
| 3.2 |
|
By-Laws (incorporated by reference to the Company’s Registration Statement on Form S-18 (Registration No. 2-93108-D)) |
| |
|
|
| 3.3 |
|
Amendment to By-laws (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended September 30, 1998) |
| |
|
|
| 3.4 |
|
Articles of Amendment, filed July 21, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on August 6, 2008) |
| |
|
|
| 3.5 |
|
Certificate of Designation of 10% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed on March 25, 2011) |
| |
|
|
| 3.6 |
|
Certification of Correction of Preferred Stock Designation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed on April 21, 2011) |
| |
|
|
| 3.7 |
|
Articles of Amendment to the Articles
of Incorporation of Axion International Holdings, Inc., filed with the Secretary of State of Colorado on November 20, 2013
(incorporated by reference to Exhibit 3.1 to the Company’s Form
8-K filed on November 21, 2013) |
| 4.2 |
|
Form of Warrant issued to debt holders, investors, consultants and others (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011) |
| |
|
|
| 4.3 |
|
Form of Warrant issued to placement agents of 10% Convertible Preferred Stock (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 |
| |
|
|
| 4.4 |
|
Form of 8% Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on August 27, 2012) |
| |
|
|
| 4.5 |
|
Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on August 27, 2012) |
| |
|
|
| 4.6 |
|
Form of 8% convertible note issued as
part of $2,000,000 convertible note financing on June 11, 2014 and June 13, 2014 (incorporated by reference to Exhibit 4.1 to
the Company’s Form 8-K filed on June 17, 2014) |
| |
|
|
| 4.7 |
|
Form of 12% convertible promissory
note issued as part of $1,000,000 note financing dated August 22, 2014 * |
| |
|
|
| 4.8 |
|
Form of 12% secured note issued as
part of $9,000,000 note financing on November 25, 2014 * |
| |
|
|
| 10.1 |
|
Analytical Surveys, Inc. Year 2003 Stock Option Plan and Form of Agreement (incorporated by reference to the Company’s Proxy Statement dated July 21, 2003) |
| |
|
|
| 10.3 |
|
License Agreement, dated February 1, 2007, by and between Rutgers, the State University of New Jersey, and Axion International, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB filed May 15, 2008) |
| |
|
|
| 10.4 |
|
Employment Agreement, dated September 23, 2010, between Steven Silverman and Axion International Holdings, Inc. (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K, filed on January 12, 2011 |
| |
|
|
| 10.5 |
|
Form of Subscription Agreement for private placement of 10% Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on March 25, 2011) |
| |
|
|
| 10.8 |
|
Employment Agreement, dated June 7, 2011, between the Company and Donald Fallon (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on June 13, 2011) |
| |
|
|
| 10.9 |
|
2010 Stock Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement, filed on September 28, 2010) |
| |
|
|
| 10.10 |
|
Note Purchase Agreement, dated August 24, 2012, among the Company and the Investors named therein (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on August 27, 2012) |
| |
|
|
| 10.11 |
|
Security Agreement, dated August 24, 2012, among the Company, Axion International, Inc. and certain 8% Convertible Promissory Note Holders (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on August 27, 2012) |
| |
|
|
| 10.12 |
|
Registration Rights Agreement, dated August 24, 2012, among the Company and certain 8% Convertible Promissory Note Holders (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on August 27, 2012) |
| |
|
|
| 10.13 |
|
Promissory Note dated as of November
15, 2013, Loan No. 2312374 in the principal amount of $3,500,000, issued by Axion Recycled Plastics Incorporated in favor
of The Community Bank (incorporated by reference to Exhibit 4.1
to the Company’s Form 8-K filed on November 21, 2013). |
| 10.14 |
|
Promissory Note dated as
of November 15, 2013, Loan No. 2312398 in the principal amount of $1,000,000, issued by Axion Recycled Plastics Incorporated
in favor of The Community Bank (incorporated by reference to Exhibit 4.2
to the Company’s Form 8-K filed on November 21, 2013). |
| |
|
|
| 10.15 |
|
Revolving Credit Note dated as of November 15, 2013, issued by Axion International Holdings, Inc., Axion International, Inc., and Axion Recycling Plastics Incorporated in favor of MLTM Lending, LLC or its assigns (incorporated by reference to Exhibit 4.3 to the Company’s Form 8-K filed on November 21, 2013). |
| |
|
|
| 10.16 |
|
Revolving Credit Note dated as of November
15, 2013, issued by Axion International Holdings, Inc., Axion International, Inc., and Axion Recycling Plastics Incorporated
in favor of Samuel G. Rose or his assigns (incorporated by reference to Exhibit 4.4
to the Company’s Form 8-K filed on November 21, 2013). |
| |
|
|
| 10.17 |
|
Commercial Loan Agreement, Loan No.
2312374 in the principal amount of $3,500,000, dated as of November 15, 2013, between Axion Recycled Plastics Incorporated
and The Community Bank (incorporated by reference to Exhibit 10.2 to the Company’s
Form 8-K filed on November 21, 2013). |
| |
|
|
| 10.18 |
|
Security Agreement, Loan No. 2312374
in the principal amount of $3,500,000, dated as of November 15, 2013, between Axion International, Inc. and The Community
Bank (incorporated by reference to Exhibit 10.3 to the Company’s Form
8-K filed on November 21, 2013). |
| |
|
|
| 10.19 |
|
Security Agreement, Loan No. 2312374
in the principal amount of $3,500,000, dated as of November 15, 2013, between Axion Recycled Plastics Incorporated and The
Community Bank (incorporated by reference to Exhibit 10.4 to the Company’s Form
8-K filed on November 21, 2013). |
| |
|
|
| 10.20 |
|
Guaranty, Loan No. 2312374 in the principal
amount of $3,500,000, dated as of November 15, 2013, issued by Axion International Holdings, Inc. in favor of The Community
Bank (incorporated by reference to Exhibit 10.5 to the Company’s Form
8-K filed on November 21, 2013). |
| |
|
|
| 10.21 |
|
Guaranty, Loan No. 2312374 in the principal
amount of $3,500,000, dated as of November 15, 2013, issued by Axion International, Inc. in favor of The Community Bank (incorporated
by reference to Exhibit 10.6 to the Company’s Form 8-K filed
on November 21, 2013). |
| |
|
|
| 10.22 |
|
Commercial Loan Agreement, Loan No.
2312398 in the principal amount of $1,000,000, dated as of November 15, 2013, between Axion Recycled Plastics Incorporated
and The Community Bank (incorporated by reference to Exhibit 10.7 to the Company’s Form
8-K filed on November 21, 2013). |
| |
|
|
| 10.23 |
|
Security Agreement, Loan No. 2312398
in the principal amount of $1,000,000, dated as of November 15, 2013, between Axion International Inc. and The Community Bank
(incorporated by reference to Exhibit 10.8 to the Company’s Form 8-K
filed on November 21, 2013). |
| |
|
|
| 10.24 |
|
Security Agreement, Loan No. 2312398
in the principal amount of $1,000,000, dated as of November 15, 2013, between Axion Recycled Plastics Incorporated and The
Community Bank (incorporated by reference to Exhibit 10.9 to the Company’s Form
8-K filed on November 21, 2013). |
| |
|
|
| 10.25 |
|
Guaranty, Loan No. 2312398 in the principal
amount of $1,000,000, dated as of November 15, 2013, issued by Axion International Holdings, Inc. in favor of The Community
Bank (incorporated by reference to Exhibit 10.10 to the Company’s Form
8-K filed on November 21, 2013). |
| |
|
|
| 10.26 |
|
Guaranty, Loan No. 2312398 in the principal
amount of $1,000,000, dated as of November 15, 2013, issued by Axion International, Inc. in favor of The Community Bank (incorporated
by reference to Exhibit 10.11 to the Company’s Form 8-K filed
on November 21, 2013). |
| |
|
|
| 10.27 |
|
Revolving Credit and Letter of Credit
Support Agreement dated as of November 15, 2013, among Axion International Holdings, Inc., Axion International, Inc., Axion
Recycling Plastics Incorporated, MLTM Lending, LLC and Samuel G. Rose (incorporated by reference to Exhibit
10.12 to the Company’s Form 8-K filed on November 21, 2013). |
| 10.28 |
|
Security Agreement dated
as of November 15, 2013, among Axion International Holdings, Inc., Axion International, Inc., Axion Recycling Plastics Incorporated,
MLTM Lending, LLC and Samuel G. Rose (incorporated by reference to Exhibit 10.13
of the Company’s Form 8-K filed on November 21, 2013). |
| |
|
|
| 10.29 |
|
First Amendment to Axion International
Holdings, Inc. 2010 Stock Plan effective as of November 20, 2013 (incorporated by reference to Exhibit 10.14 to the Company’s Form
8-K filed on November 21, 2013) |
| |
|
|
| 10.30 |
|
Lease Agreement dated September,
2013 between Axion International, Inc. and Coll Financial Holdings, LLC for Company facility located at Waco, Texas (incorporated
by reference to Exhibit 10.30 of the Company’s Form 10-K filed on
April 10, 2014). |
| |
|
|
| 10.31 |
|
Lease Agreement dated May 1, 2013 between
Y City Recycling, LLC and Coll OH RE Holdings, LLC for Company facility located in Zanesville, Ohio (incorporated by reference
to Exhibit 10.31 of the Company’s Form 10-K filed on April 10,
2014). |
| |
|
|
| 10.32 |
|
Lease Assignment and Extension Agreement
dated October 10, 2013 between Y City Recycling, LLC, Coll OH RE Holdings, LLC and Axion International, Inc. regarding
lease for Zanesville, Ohio facility (incorporated by reference to Exhibit 10.32
of the Company’s Form 10-K filed on April 10, 2014).
|
| |
|
|
| 10.33 |
|
Employment Agreement, dated January 23, 2014, between the Company and Claude Brown, Jr.* |
| |
|
|
| 10.34 |
|
Appointment Letter, dated August 8, 2014, between the Company and Claude Brown, Jr.* |
| |
|
|
| 10.35 |
|
Commercial loan agreement in the principal amount of $4,000,000, dated September 18, 2014,
between Axion International Holdings, Inc. and Eagle Bank * |
| |
|
|
| 10.36 |
|
Promissory note dated as of September 18, 2014 in the principal amount of $4,000,000, issued
by Axion International Holdings, Inc. in favor of Eagle Bank * |
| |
|
|
| 21.1 |
|
Subsidiaries of the Company* |
| |
|
|
| 23.1 |
|
BDO USA, LLP consent. |
| |
|
|
| 31.1 |
|
Section 302 Certification of Chief Executive Officer * |
| |
|
|
| 31.2 |
|
Section 302 Certification of Chief Financial Officer * |
| |
|
|
| 32.1 |
|
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer * |
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| Date: |
March 31, 2015 |
By: |
/s/ Claude Brown |
| |
|
Claude Brown |
| |
|
President and Chief Executive Officer |
| |
|
|
| Date: |
March 31, 2015 |
|
| |
|
By: |
/s/ Donald Fallon |
| |
|
Donald Fallon |
| |
|
Chief Financial Officer |
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE |
|
TITLE |
|
|
| /s/ Claude Brown |
|
Chief Executive Officer and Director |
|
March 31, 2015 |
| Claude Brown |
|
(principal executive officer) |
|
|
| |
|
|
|
|
| /s/ Donald Fallon |
|
Chief Financial Officer |
|
March 31, 2015 |
| Donald Fallon |
|
(principal financial and accounting officer) |
|
|
| |
|
|
|
|
| /s/ Thomas Bowersox |
|
Secretary and Director |
|
March 31, 2015 |
| Thomas Bowersox |
|
|
|
|
| |
|
|
|
|
| /s/ Anthony Hatch |
|
Director |
|
March 31, 2015 |
| Anthony Hatch |
|
|
|
|
| |
|
|
|
|
| /s/ Allen Hershkowitz |
|
Director |
|
March 31, 2015 |
| Allen Hershkowitz |
|
|
|
|
| |
|
|
|
|
| /s/ Perry Jacobson |
|
Director |
|
March 31, 2015 |
| Perry Jacobson |
|
|
|
|
| |
|
|
|
|
| /s/ Allen Kronstadt |
|
Director |
|
March 31, 2015 |
| Allen Kronstadt |
|
|
|
|
| |
|
|
|
|
| /s/ Samuel Rose |
|
Director |
|
March 31, 2015 |
| Samuel Rose |
|
|
|
|
| |
|
|
|
|
| /s/ Steven Silverman |
|
Director |
|
March 31, 2015 |
| Steven Silverman |
|
|
|
|
AXION INTERNATIONAL HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting
Firm
Board of Directors and Stockholders
Axion International Holdings, Inc.
Zanesville, OH
We have audited the accompanying consolidated balance sheets of
Axion International Holdings, Inc. (the "Company") as of December 31, 2014 and 2013 and the related consolidated
statements of operations, stockholders’ deficit, and cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements
based upon our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Axion International Holdings, Inc. at December 31, 2014
and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company
has suffered recurring losses from operations and has working capital and net capital deficiencies that raise substantial doubt
about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note
2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ BDO USA, LLP |
|
| BDO USA, LLP |
|
New York, New York
March 31, 2015
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
| | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | |
| ASSETS | |
| | | |
| | |
| Current assets: | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 221,437 | | |
$ | 883,936 | |
| Accounts receivable, net of allowance for doubtful accounts | |
| 1,109,524 | | |
| 888,214 | |
| Inventories | |
| 5,980,457 | | |
| 3,955,515 | |
| Prepaid expenses | |
| 294,053 | | |
| 280,140 | |
| Total current assets | |
| 7,605,471 | | |
| 6,007,805 | |
| Property and equipment, net | |
| 8,678,932 | | |
| 7,899,486 | |
| Goodwill | |
| 1,492,132 | | |
| 1,492,132 | |
| Other intangible assets | |
| - | | |
| 610,000 | |
| Total assets | |
$ | 17,776,535 | | |
$ | 16,009,423 | |
| | |
| | | |
| | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
| Current liabilities: | |
| | | |
| | |
| Accounts payable | |
$ | 2,417,803 | | |
$ | 1,879,760 | |
| Accrued liabilities | |
| 1,161,120 | | |
| 713,394 | |
| Derivative liabilities | |
| 2,053,000 | | |
| 17,190,000 | |
| 12%convertible promissory notes, net of discounts | |
| 965,838 | | |
| - | |
| 12% revolving credit agreement, net of discounts | |
| 1,907,957 | | |
| - | |
| 12% secured notes | |
| 1,950,000 | | |
| - | |
| Current portion of long term debt | |
| 187,943 | | |
| 185,347 | |
| Total current liabilities | |
| 10,643,661 | | |
| 19,968,501 | |
| 8% convertible promissory notes, net of discounts | |
| 14,393,746 | | |
| 11,030,913 | |
| 12% revolving credit agreement, net of discounts | |
| - | | |
| 1,873,716 | |
| 4.25% bank term loan | |
| 4,300,000 | | |
| 4,400,000 | |
| 5% bank promissory loan | |
| 4,000,000 | | |
| - | |
| Other debt | |
| 191,900 | | |
| 300,127 | |
| Dividends payable on 10% convertible preferred stock | |
| 143,024 | | |
| 183,346 | |
| Fair value of 10% convertible preferred stock warrants | |
| 52,720 | | |
| 296,194 | |
| Total liabilities | |
| 33,725,051 | | |
| 38,052,797 | |
| | |
| | | |
| | |
10% convertible preferred stock, no par value, net; authorized 880,000 shares; 682,998 and 694,623 shares
issued and outstanding at December 31, 2014 and 2013, respectively | |
| 6,829,980 | | |
| 6,724,844 | |
| Total temporary equity | |
| 6,829,980 | | |
| 6,724,844 | |
| | |
| | | |
| | |
| Commitments and contingencies | |
| | | |
| | |
| | |
| | | |
| | |
| Stockholders’ deficit: | |
| | | |
| | |
Common stock, no par value; authorized 250,000,000 shares; 70,825,215 and 31,168,905 shares issued and
outstanding at December 31, 2014 and 2013, respectively | |
| 52,780,363 | | |
| 30,500,445 | |
| Accumulated deficit | |
| (75,558,859 | ) | |
| (59,268,663 | ) |
| Total stockholders’ deficit | |
| (22,778,496 | ) | |
| (28,768,218 | ) |
| Total liabilities and stockholders’ deficit | |
$ | 17,776,535 | | |
$ | 16,009,423 | |
(See accompanying notes to consolidated financial
statements.)
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND
2013
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Revenue | |
$ | 14,378,352 | | |
$ | 6,627,765 | |
| Costs of sales: | |
| | | |
| | |
| Production | |
| 16,972,593 | | |
| 6,471,049 | |
| Excess capacity & inventory adjustments | |
| 2,948,533 | | |
| 816,111 | |
| Gross margin (loss) | |
| (5,542,774 | ) | |
| (659,395 | ) |
| | |
| | | |
| | |
| Operating expenses: | |
| | | |
| | |
| Product development and quality management | |
| 329,285 | | |
| 1,556,203 | |
| Marketing and sales | |
| 1,285,738 | | |
| 927,061 | |
| General and administrative | |
| 23,300,836 | | |
| 4,232,200 | |
| Impairment of definite-life intangible assets | |
| 545,750 | | |
| - | |
| Total operating expenses | |
| 25,461,609 | | |
| 6,715,464 | |
| | |
| | | |
| | |
| Loss from operations | |
| (31,004,383 | ) | |
| (7,374,859 | ) |
| | |
| | | |
| | |
| Other (income) expenses: | |
| | | |
| | |
| Interest expense | |
| 1,839,535 | | |
| 808,117 | |
| Amortization of debt discounts | |
| 2,878,834 | | |
| 685,761 | |
| Fair value of common stock issued in excess of fair value of warrants exchanged | |
| 883,422 | | |
| - | |
| Change in fair value of derivative liabilities | |
| (20,315,978 | ) | |
| 15,320,865 | |
| Total other (income) expenses | |
| (14,714,187 | ) | |
| 16,814,743 | |
| | |
| | | |
| | |
| Net loss | |
| (16,290,196 | ) | |
| (24,189,602 | ) |
| | |
| | | |
| | |
| Accretion of preferred dividends and beneficial conversion feature | |
| (860,639 | ) | |
| (1,633,147 | ) |
| Net loss attributable to common shareholders | |
$ | (17,150,835 | ) | |
$ | (25,822,749 | ) |
| | |
| | | |
| | |
| Weighted average common shares - basic and diluted | |
| 52,483,796 | | |
| 29,945,608 | |
| | |
| | | |
| | |
| Basic and diluted net loss per share | |
$ | (0.33 | ) | |
$ | (0.86 | ) |
(See accompanying notes to consolidated financial
statements.)
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2014 AND
2013
| | |
Common
Shares | | |
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 | |
| 114,000 | | |
| 114,000 | | |
| | | |
| 114,000 | |
| Shares issued for interest payments | |
| 977,582 | | |
| 541,515 | | |
| | | |
| 541,515 | |
| Shares issued for dividend payments | |
| 956,850 | | |
| 533,569 | | |
| | | |
| 533,569 | |
| Share-based compensation | |
| 300,300 | | |
| 745,746 | | |
| | | |
| 745,746 | |
| Recovery of shareholder short swing profits | |
| | | |
| 3,095,308 | | |
| | | |
| 3,095,308 | |
| Dividend on 10% convertible preferred stock | |
| | | |
| (716,915 | ) | |
| | | |
| (716,915 | ) |
| Amortization of beneficial conversion feature on 10% convertible preferred stock | |
| | | |
| (916,232 | ) | |
| | | |
| (916,232 | ) |
| Net loss | |
| | | |
| | | |
| (24,189,602 | ) | |
| (24,189,602 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Balance, December 31, 2013 | |
| 31,168,905 | | |
| 30,500,445 | | |
| (59,268,663 | ) | |
| (28,768,218 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Shares issued upon conversion of 10% convertible
preferred stock | |
| 116,250 | | |
| 116,250 | | |
| | | |
| 116,250 | |
| Shares issued for interest payments | |
| 2,454,146 | | |
| 1,532,252 | | |
| | | |
| 1,532,252 | |
| Shares issued for dividend payments | |
| 1,003,340 | | |
| 679,575 | | |
| | | |
| 679,575 | |
| Share-based compensation | |
| 619,619 | | |
| 854,680 | | |
| | | |
| 854,680 | |
| Dividend on 10% convertible preferred stock | |
| | | |
| (639,253 | ) | |
| | | |
| (639,253 | ) |
| Amortization of beneficial conversion feature on 10% convertible preferred stock | |
| | | |
| (221,386 | ) | |
| | | |
| (221,386 | ) |
| Fair value of warrants tendered and cancelled | |
| | | |
| (4,866,269 | ) | |
| | | |
| (4,866,269 | ) |
| Fair value of common stock issued in exchange for warrants tendered and cancelled | |
| 35,462,955 | | |
| 24,824,069 | | |
| | | |
| 24,824,069 | |
| Net loss | |
| | | |
| | | |
| (16,290,196 | ) | |
| (16,290,196 | ) |
| Balance, December 31, 2014 | |
| 70,825,215 | | |
$ | 52,780,363 | | |
$ | (75,558,859 | ) | |
$ | (22,778,496 | ) |
(See accompanying notes to consolidated financial
statements.)
AXION INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND
2013
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Cash flows from operating activities: | |
| | | |
| | |
| Net loss | |
$ | (16,290,196 | ) | |
$ | (24,189,602 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
| Depreciation and amortization | |
| 1,056,659 | | |
| 319,207 | |
| Amortization of convertible debt discounts | |
| 2,878,834 | | |
| 685,761 | |
| Amortization of identifiable intangible assets | |
| 64,250 | | |
| - | |
| Change in fair value of 10% convertible preferred stock warrants | |
| (243,474 | ) | |
| 214,478 | |
| Change in fair value of derivative liabilities | |
| (20,072,504 | ) | |
| 15,106,387 | |
| Change in allowance for doubtful accounts | |
| 10,790 | | |
| (131,996 | ) |
| Share-based compensation | |
| 854,680 | | |
| 745,746 | |
| Interest expense paid in shares of common stock | |
| 1,532,252 | | |
| 541,515 | |
| Fair value of common stock issued in excess of fair value of warrants tendered | |
| 19,957,800 | | |
| - | |
| Impairment of intangible assets | |
| 545,750 | | |
| - | |
| | |
| | | |
| | |
| Changes in operating assets and liabilities, net of acquisition: | |
| | | |
| | |
| Accounts receivable | |
| (232,100 | ) | |
| (438,349 | ) |
| Inventories | |
| (2,024,942 | ) | |
| (629,562 | ) |
| Prepaid expenses | |
| (13,913 | ) | |
| (46,517 | ) |
| Accounts payable | |
| 538,043 | | |
| 511,701 | |
| Accrued liabilities | |
| 447,726 | | |
| 118,278 | |
| Net cash used in operating activities | |
$ | (10,990,345 | ) | |
$ | (7,192,953 | ) |
| | |
| | | |
| | |
| Cash flows from investing activities: | |
| | | |
| | |
| Purchase of property and equipment | |
$ | (1,836,105 | ) | |
$ | (1,813,478 | ) |
| Acquisition, net of cash | |
| - | | |
| (6,001,847 | ) |
| Net cash used in investing activities | |
$ | (1,836,105 | ) | |
$ | (7,815,325 | ) |
| | |
| | | |
| | |
| Cash flows from financing activities: | |
| | | |
| | |
| Proceeds from issuance of 8% convertible promissory notes, net | |
| 5,527,950 | | |
| 5,950,001 | |
| Proceeds from issuance of 12% revolving credit facility | |
| - | | |
| 2,000,000 | |
| Proceeds from issuance of 12% convertible promissory notes | |
| 1,000,000 | | |
| - | |
| Proceeds from 4.25% bank term loans | |
| - | | |
| 4,500,000 | |
| Proceeds from 5% bank term loan | |
| 4,000,000 | | |
| - | |
| Proceeds from issuance of 12% secured notes | |
| 1,950,000 | | |
| - | |
| Recovery of shareholder short swing profits | |
| - | | |
| 3,095,308 | |
| Repayments on long term debt obligations | |
| (313,999 | ) | |
| - | |
| Net cash provided by financing activities | |
$ | 12,163,951 | | |
$ | 15,545,309 | |
| | |
| | | |
| | |
| Net increase (decrease) in cash and cash equivalents | |
| (662,499 | ) | |
| 537,031 | |
| Cash and cash equivalents at beginning of period | |
| 883,936 | | |
| 346,905 | |
| Cash and cash equivalents at end of period | |
$ | 221,437 | | |
$ | 883,936 | |
| | |
| | | |
| | |
| Supplemental disclosures of cash flow information: | |
| | | |
| | |
| Cash transactions: | |
| | | |
| | |
| Cash paid for interest | |
$ | 496,989 | | |
$ | 17,839 | |
| Non-cash investing and financing activities: | |
| | | |
| | |
| Shares issued pursuant to conversion of preferred stock and debt | |
| 116,250 | | |
| 114,000 | |
| Shares issued in payment of dividends on 10% convertible preferred stock | |
| 679,575 | | |
| 533,569 | |
| Dividends on 10% convertible preferred stock | |
| 639,253 | | |
| 716,915 | |
| Amortization of conversion feature of 10% convertible preferred stock | |
| 221,386 | | |
| 916,232 | |
| Fair value of common stock issued as revolving credit fees | |
| 108,368 | | |
| 148,682 | |
| Fair value of common stock issued in exchange for warrants tendered and cancelled | |
| 24,824,069 | | |
| - | |
(See accompanying notes to consolidated financial
statements.)
AXION INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting
Policies
| |
(a) |
Business and Basis of Financial Statement Presentation |
Axion International Holdings, Inc. (“Holdings”)
was formed in 1981. In November 2007, Holdings entered into an Agreement and Plan of Merger, among Holdings, Axion Acquisition
Corp., a Delaware corporation and a newly created direct wholly-owned subsidiary of Holdings (the “Merger Sub”), and
Axion International, Inc., a Delaware corporation which incorporated on August 6, 2006 with operations commencing in November 2007
(“Axion”). On March 20, 2008 Holdings consummated the merger (the “Merger”) of Merger Sub into Axion,
with Axion continuing as the surviving corporation and a wholly-owned subsidiary of Holdings. Axion Recycled Plastics Incorporated,
an Ohio corporation and a wholly-owned subsidiary of Axion, was established to purchase certain tangible and intangible assets
of a plastics recycling company during November 2013.
The Company was founded in 2007 to exploit
a proprietary technology that enabled the conversion of recycled plastics into a benchmark structural plastic material yielding
components which demonstrated significant strength, durability and application versatility. We manufacture, market and sell ECOTRAX®
rail ties and STRUXURE® building products, with significant focus on construction mats. Our ECOTRAX® and STRUXURE®
products are fully derived from post-consumer and post-industrial recycled plastics, such as high-density polyethylene, polystyrene
and polypropylene.
Our consolidated financial statements include
the accounts of our wholly-owned subsidiaries and all intercompany balances and transactions have been eliminated in consolidation.
| |
(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 December 31, 2014 and 2013, 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. Our allowance for doubtful accounts at December 31, 2014 was approximately $10,800. We did
not accrue a reserve for any receivables at December 31, 2013.
| |
(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, at December 31, 2014 and 2013:
| | |
2014 | | |
2013 | |
| Office furniture and equipment | |
$ | 110,173 | | |
$ | 33,299 | |
| Machinery and equipment | |
| 10,560,393 | | |
| 8,803,087 | |
| Purchased software | |
| 147,547 | | |
| 145,622 | |
| Subtotal – property and equipment, at cost | |
| 10,818,113 | | |
| 8,982,008 | |
| Less accumulated depreciation | |
| (2,139,181 | ) | |
| (1,082,522 | ) |
| Net property and equipment | |
$ | 8,678,932 | | |
$ | 7,899,486 | |
Depreciation expense charged
to production and operations during the years ended December 31, 2014 and 2013 was approximately $1.1 million and $319,200, respectively.
Our financial results for the reprocessed
plastics business during the six months ended June 30, 2014 and our decision during the three months ended September 30, 2014
to transition the assets acquired of the reprocessing plastics business to a business extruding our proprietary products,
represented a triggering event requiring an impairment test of tangible and intangible assets acquired. Based on our test, we
determined there was no impairment of property and equipment.
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 boards of various sizes.
We are obligated to pay royalties on various
product sales to Rutgers, and to reimburse Rutgers for certain patent defense costs. Royalties incurred and payable to Rutgers,
for the years ended December 31, 2014 and 2013 were $200,000 for each year and represent the minimum royalties due under the license.
| |
(f) |
Definite Life Intangible Assets |
During the year ended December 31, 2013, we
acquired a plastic reprocessing business which gave rise to certain definite life intangible assets associated with the acquired
customer list and trademark. In accordance with FASB ASC topic, “Goodwill and Other Intangible Assets”, acquired definite
life intangibles, are subject to amortization over their useful lives. The method of amortization selected reflects the pattern
in which the economic benefits of the specific intangible asset is consumed or otherwise used up. Since that pattern cannot be
reliably determined, a straight-line amortization method has been used over the estimated useful life. Intangible assets that are
subject to amortization are reviewed for potential impairment at least annually or whenever events or circumstances indicate that
carrying amounts may not be recoverable. For the year ended December 31, 2014, we amortized to operating expenses approximately
$64,300 of these intangible assets. There was no corresponding amortization for the year ended December 31, 2013.
Our financial results for the reprocessed plastics
business during the six months ended June 30, 2014 and our decision during the three months ended September 30, 2014 to transition
the assets acquired of the reprocessing plastics business to our business of extruding our proprietary products, represented a
triggering event requiring intangible assets impairment tests. During the three months ended September 30, 2014, we determined
that our definite life intangible asset associated with our acquired customer list was impaired and of no further value and accordingly
we recorded a charge to other expenses for the remaining unamortized balance of approximately $545,800. See note 3.
| |
(g) |
Indefinite Life Intangible Assets – Goodwill |
In accordance with the FASB ASC topic, “Goodwill
and Other Intangible Assets”, indefinite life assets, such as goodwill, acquired as a result of our acquisition of the plastic
reprocessing business and which are not subject to amortization are tested for impairment annually, or more frequently if events
and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount
exceeds the asset’s fair value.
Our financial results for the
reprocessed plastics business during the six months ended June 30, 2014 and our decision during the three months ended
September 30, 2014 to transition the facility and equipment used for our reprocessing plastics business to a facility
extruding our historical proprietary engineered products, represented a triggering event requiring a goodwill impairment
test. During the three months ended September 30, 2014, we tested the goodwill intangible asset associated with the
acquisition in November 2013 of the reprocessed plastics business. The goodwill intangible asset was $1.5 million as of both
September 30, 2014 and December 31, 2013 and based on our test for impairment done during the three months ended September
30, 2014, we determined there was no impairment at December 31, 2014. See note 3.
| |
(h) |
Revenue and Cost Recognition |
In accordance with FASB ASC 605 “Revenue
Recognition”, revenue is recognized when persuasive evidence of an agreement with the customer exists, products are shipped
or title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed or determinable,
collectability is reasonably assured, and there are no significant future performance obligations. In most cases, we receive a
purchase order from our customer specifying the products requested and delivery instructions. We recognize revenue upon our delivery
or shipment of the products as specified in the purchase order. In other cases where we have a contract which provides for a large
number of products and few actual deliveries, the revenues are recorded each month as the products are produced and the risk of
ownership passes to the customer upon pre-delivery acceptance. Prior to deliveries, our customer’s products are segregated
from our inventory and not available for fulfilling other orders.
Our costs of sales are predominately comprised
of the cost of raw materials and the costs and expenses associated with the production of the finished product. Prior to 2013,
we utilized third-party manufacturers, where under one arrangement we purchased and supplied the raw materials to the third-party
manufacturer and we paid them a per-pound cost to produce the finished product. Under another arrangement, the third-party manufacturer
sourced and paid for the raw materials and we purchased the finished product from them at a cost per unit. Beginning in 2013, we
initiated production of our finished products within a leased facility utilizing our own employees. Additionally, in late 2013
we acquired the assets of a plastics recycling company and began to reprocess recycled plastics for use in our own finished products
and to sell to customers for use in their finished products. Our costs of sales may vary significantly as a result of the
variability in the cost of our raw materials and the efficiency with which we plan and execute our manufacturing processes.
Historically, we have not had significant warranty
replacements, but from time to time as a customer relationship effort, we agree to replace and install improperly installed replacement
rail ties. As we view these situations on a case by case basis, and because our products have in the past and we anticipate will
in the future, met all specifications for that product, we therefore do not provide for future warranty expenses.
We use the asset and liability method of accounting
of income taxes pursuant to the provisions of FASB ASC 740 “Income Taxes”, which establishes deferred tax assets and
liabilities to be recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
FASB ASC 740 clarifies the accounting for uncertainty
in income taxes recognized and prescribes a recognition threshold and measurement attributes for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. FASB ASC 740 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. FASB ASC 740 requires a company
to recognize the financial statement effect of a tax position when it is “more-likely-than-not” (defined as a substantiated
likelihood of more than 50%), based on the technical merits of the position, that the position will be sustained upon examination.
A tax position that meets the more-likely-than-not” recognition threshold is measured to determine the amount of benefit
to be recognized in the financial statements based upon the largest amount of benefit that is greater than 50% likely of being
realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Our inability to
determine that a tax position meets the more-likely-than-not” recognition threshold does not mean that the Internal Revenue
Service (“IRS”) or any other taxing authority will disagree with the position that we have taken.
If a tax position does not meet the “more-likely-than-not”
recognition threshold, despite our belief that our filing position is supportable, the benefit of that tax position is not recognized
in the statements of operations and we are required to accrue potential interest and penalties until the uncertainty is resolved.
Potential interest and penalties are recognized as a component of the provision for income taxes which is consistent with our
historical accounting policy. Differences between amounts taken in a tax return and amounts recognized in the financial statements
are considered unrecognized tax benefits. We believe that we have a reasonable basis for each of our filing positions and intend
to defend those positions if challenged by the IRS or another taxing jurisdiction. If the IRS or other taxing authorities do not
disagree with our position, and after the statute of limitations expires, we will recognize the unrecognized tax benefit in the
period that the uncertainty of the tax position is eliminated.
We believe that there are no uncertain tax
positions that fail to meet the more likely than not recognition threshold to be sustained upon examination. As such, a tabular
presentation of those tax benefits taken that do not qualify for recognition is not presented.
We are current with our filing of our federal
and state income tax returns. Our income tax returns are open to examination by federal and state authorities, based on statute
of limitations, which is three years.
| |
(j) |
Derivative Instruments |
For derivative instruments that are accounted
for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date,
with changes in fair value recognized in earnings each reporting period as a charge or credit to other expenses. We use the Monte
Carlo simulation, and other models, as appropriate to value the derivative instruments at inception and subsequent valuation dates
and the value is re-assessed at the end of each reporting period, in accordance with FASB ASC Topic 815, “Derivatives and
Hedging”. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether
or not the net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
| |
(k) |
Share-Based Compensation |
We record share-based compensation for transactions
in which we exchange our equity instruments (shares of common stock, options and warrants) for services of employees, consultants
and others based on the fair value of the equity instruments issued 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.
Basic loss per share is 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 years ended December 31, 2014
and 2013, there were no dilutive effects of such securities because we incurred a net loss in each period. As of
December 31, 2014, we have approximately 70.2 million potential common shares issuable under our convertible instruments,
warrant and stock option agreements.
| |
(m) |
Fair Value of Financial Instruments |
Fair value is defined as an exit price, which
is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between
market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities
generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively
quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing
observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely
traded or not quoted have less price observability and are generally measured at fair value using valuation models that require
more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is
dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. We have categorized
our financial assets and liabilities that are recurring at fair value into a three-level hierarchy in accordance with these provisions.
| |
(n) |
Concentration of Credit Risk |
We maintain our cash with several major U.S.
domestic banks. The amount held in the banks exceeds the insured limit of $250,000 from time to time. We have not incurred losses
related to these deposits.
At December
31, 2014, two of our customers had unpaid accounts due us representing 35% and 28% of our accounts receivable balance at December
31, 2014. At December 31, 2013, four of our customers had unpaid accounts due us representing 27%, 19%, 12% and 12% of our accounts
receivable balance at December 31, 2013.
| |
(o) |
New Accounting Pronouncements |
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts
with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services, and the guidance defines a five step process to achieve this core principle. The ASU is
effective for the Company's 2017 fiscal year and may be applied either (i) retrospectively to each prior reporting period presented
with an election for certain specified practical expedients, or (ii) retrospectively with the cumulative effect of initially applying
the ASU recognized at the date of initial application, with additional disclosure requirements. The Company is evaluating the potential
impact of this new guidance, but does not currently anticipate that the application of ASU No. 2014-09 will have a significant
effect on its financial condition, results of operations or its cash flows. We have not yet determined the method by which we will
adopt the standard in 2017.
In August 2014, the FASB issued ASU No.
2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an
Entity's Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose
going-concern uncertainties in an entity's financial statements. The new standard requires management to perform interim and
annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements
are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's
ability to continue as a going concern. The ASU is effective for annual periods ending after December 15, 2016, and interim
periods thereafter, with early adoption permitted. The Company does not currently anticipate that the application of ASU No.
2014-15 will have an effect on the presentation of our financial condition, results of operations or its cash flows.
The preparation of our financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.
Note 2 - Going Concern
The accompanying financial statements have
been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplates our
continuation as a going concern. At December 31, 2014, we have a working capital deficit of $3.0 million, a stockholders’
deficit of $22.8 million and have accumulated losses to date of $75.6 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 – Business Acquisition
On November 15, 2013, our subsidiary, Axion Recycled Plastics
Incorporated (“Axion Recycling”) an Ohio corporation, and wholly-owned subsidiary of Axion International, Inc., a
Delaware corporation and our wholly-owned subsidiary, entered into an Asset Purchase Agreement (the “Purchase
Agreement”), among Y City Recycling, LLC (“Y City”), and Brian Coll and Renee Coll (collectively, the
“Sellers”). Pursuant to the terms of the Purchase Agreement, Axion Recycling acquired certain tangible and
intangible assets from the Sellers relating to the operation of Y City’s recycled plastics facility located in
Zanesville, Ohio (the “Facility”). Simultaneous with the Purchase Agreement transaction, and pursuant to a bill
of sale executed by the The Community Bank, an Ohio banking corporation (the “Bank”), as grantor, in favor of
Axion Recycled, as grantee, Axion Recycling acquired from the Bank certain equipment, inventory and supplies related to the
operation of the Y City business located at the Facility. The combined consideration paid by Axion Recycling for these assets
was $6.0 million that included a cash payment of $1.1 million, proceeds from two term loans made by the Bank to Axion
Recycling in the aggregate principal amounts of $4.5 million pursuant to promissory notes which bear interest at 4.25% per
annum and mature on November 15, 2018 and the assumption of a promissory note with a principal balance of
approximately $385,500 owed by Y City as of the acquisition date.
Y City recycled post-consumer and post-industrial plastics in multiple
forms. As a complete plastics recycling operation, Y City sorted, ground, washed, blended and pelletized plastics for future use,
offering economic benefits to its customers while keeping waste out of landfills. By acquiring these assets, leasing the Facility
and hiring the former employees and managers of Y City, we believe we can grow the recycling capabilities at the Facility, expand
those capabilities to our Waco, Texas facility and more importantly we have eliminated several steps in our raw material supply
chain, thereby adding stability to our raw material costs and enhancing our quality control over those raw materials.
The expenses incurred in executing these transactions of approximately
$64,200 are fully reflected in our operating expenses for the year ended December 31, 2013.
The following table summarizes the assets acquired and liabilities
assumed at the acquisition date:
| Trade and other receivables | |
$ | 125,854 | |
| Inventories | |
| 237,000 | |
| Property and equipment | |
| 4,400,000 | |
| Goodwill | |
| 1,492,132 | |
| Other intangibles | |
| 610,000 | |
| Total assets acquired | |
| 6,864,986 | |
| Bank overdraft | |
| (413,574 | ) |
| Accounts payable | |
| (477,665 | ) |
| 3% promissory note | |
| (385,474 | ) |
| Net assets acquired | |
$ | 5,588,273 | |
The goodwill of approximately $1,492,100 arising from the acquisition
results primarily from the expected benefits of processing plastics for use in our finished product production processes. Goodwill
equates to the residual intangible asset that generates earnings in excess of a normal return on all tangible and other intangible
assets. Under this residual method, the fair value of goodwill is calculated by subtracting the fair value of all the identified
tangible and intangible assets from the fair value of the consideration paid. Since it is an asset acquisition, goodwill is taxable.
Other intangible assets consist primarily of existing customer
relationships and vendor sources of $590,000 and the trade name of $20,000, and have been assigned 10-year and one-year useful
lives, respectively based on the operating history and relationships Y City had with its existing customer base. The acquired
customer relationships were valued using an income approach, with significant assumptions used in the valuation including the
customer attrition rate assumed and the expected level of future sales. During year ended December 31, 2014, we transitioned our
focus of this business from reprocessing plastics to our traditional business of extrusion molded engineered products, we terminated
all customer relationships acquired in the reprocessing plastics business acquisition, and this resulted in an impairment of the
customer relationship intangible asset which resulted in a write off of the remaining unamortized balance.
Note 4 – Reportable Business Segments
For the nine months ended September 30, 2014, we reported our business
in two operating segments in addition to corporate expenses of selling, general and administrative functions. See note 3 for a
discussion of the business acquired giving rise to segment reporting. These operating segments were:
| |
· |
Our reprocessed plastics segment typically purchased various plastic
wastes and through its efforts, reprocessed that plastic waste into flakes or pellets which became raw material for other manufacturers,
our customers. In certain situations we applied our processes to our customers’ inventory of plastic waste, and returned
it to them including a charge for our tolling effort.
|
| |
· |
Our engineered products segment takes certain recycled plastics and plastic composites, and through a proprietary extrusion process, manufactures rail ties, construction mats, boards, I-beams, etc. through two product lines. Our ECOTRAX product line primarily serves the rail industry by selling all lengths of rail ties. Our STRUXURE product line sells products supporting other infrastructure requirements, with a current focus on heavy- and light-equipment construction mats. |
Our segment reporting was
consistent with the then current manner of how our Chief Operating Decision Maker (“CODM”) and our board of directors
viewed our business.
In order to position our strategic focus to allow our CODM and
management to make business decisions, during the nine months ended September 30, 2014, we reported two segments – our reprocessed
plastics segment and our engineered products segment. Decisions regarding allocation of resources and investment of capital were
made based on the reportable segments contribution to the financial success of the consolidated enterprise.
Based on our financial results for the reprocessed plastics business
during the six months ended June 30, 2014, we decided during the three months ended September 30, 2014 to transition the assets
acquired of the reprocessing plastics business to our business of extruding our proprietary products. Beginning October 1, 2014,
after we had ceased operating our reprocessed plastics segment, we no longer have two reportable business segments as of September
30, 2014.
Note 5 - Inventories
Inventories are priced at the lower of cost
or market and consist primarily of raw materials, parts for assembling our finished products and finished products.
Our inventories at December 31, 2014 and
2013, consisted of:
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Finished products | |
$ | 5,202,608 | | |
$ | 2,930,753 | |
| Production materials | |
| 777,849 | | |
| 1,024,762 | |
| Total inventories | |
$ | 5,980,457 | | |
$ | 3,955,515 | |
From time to time we engage third-party contract
manufacturers and fabricators to produce our finished products, therefore certain finished inventories at December 31, 2014 and
2013 may be located at the third-party locations. We carry insurance for loss on this inventory.
Note 6 - Accrued Liabilities
The components of accrued liabilities at December 31, 2014 and 2013
are:
| | |
2014 | | |
2013 | |
| Interest | |
$ | 398,157 | | |
$ | 248,763 | |
| Rent | |
| 335,096 | | |
| 78,797 | |
| Royalties | |
| 132,593 | | |
| 235,772 | |
| Payroll | |
| 127,635 | | |
| 119,937 | |
| Real estate taxes and insurance | |
| 92,549 | | |
| - | |
| Board of director fees | |
| 31,000 | | |
| - | |
| Miscellaneous | |
| 44,090 | | |
| 30,125 | |
| Total accrued liabilities | |
$ | 1,161,120 | | |
$ | 713,394 | |
Note 7 - Derivative Liabilities
8% Convertible Promissory Notes – Conversion Option
and Warrants
Prior to, and through April 8, 2014, we issued
8% convertible promissory notes (the “8% Notes”). See Note 8 for further discussion. The 8% Notes met the definition
of a hybrid instrument, as defined in the ASC Topic 815 “Derivatives and Hedging” (“ASC 815”). The hybrid
instrument was composed of a debt instrument, as the host contract, and an option to convert the debt outstanding under the terms
of the 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
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 fair value of the conversion option derivative liability on
the various dates of issuance and on December 31, 2014 aggregated approximately $6,332,400 and $1,984,000, respectively.
The change in fair value during the years ended December 31, 2014 and 2013 of a decrease of approximately $14,803,100 and
an increase of approximately $10,870,400, respectively was recorded as a change in fair value of derivative liability in
the statement of operations. The fair value of the warrants derivative liability on the various dates of issuance
aggregated approximately $1,168,700. During the year ended December 31, 2014, we offered all warrant holders the right to
exchange their warrants for their fair value, as calculated using the Black-Scholes option pricing model, for shares of
common stock. All warrants associated with the 8% Notes were exchanged for shares of common stock resulting in no derivative
liability for the warrants at December 31, 2014. The change in fair value during the years ended December 31, 2014 and 2013
of a decrease of approximately $5,181,400 and an increase of approximately $4,235,900, respectively was recorded as a change
in fair value of derivative liability in the statement of operations. The fair value of common stock issued in exchange for
warrants tendered exceeded the fair value of the warrant liability which resulted in (i) compensation expense of $19.1
million for all warrant holders considered affiliates which was recorded as a component of general and administrative
expenses and (ii) approximately $883,400 of other expense for warrant holders not considered affiliates classified as fair
value of common stock issued in excess of fair value of warrants tendered for the year ended December 31, 2014.
12% Convertible Promissory Notes – Conversion Option
During the year ended December 31, 2014, we
issued 12% convertible promissory notes (the “12% Notes”). See Note 8 for further discussion. The 12% Notes met the
definition of a hybrid instrument, as defined in the ASC Topic 815 “Derivatives and Hedging” (“ASC 815”).
The hybrid instrument was composed of a debt instrument, as the host contract, and an option to convert the debt outstanding under
the terms of the 12% Notes, into shares of our common stock. The conversion option is a derivative liability. The conversion option
derives its value based on the underlying fair value of the shares of our common stock which is not clearly and closely related
to the underlying host debt instrument since the economic characteristics and risk associated with the conversion option derivative
are based on the common stock fair value. Accordingly, changes in the fair value of the conversion option liabilities are immediately
recognized in earnings and classified as a change in fair value in the statement of operations.
We determined the fair value of the conversion
option derivative liability on the date of issuance and recorded the fair value of $157,000 as a discount to the debt and a derivative
liability. The aggregate fair value of the conversion option on December 31, 2014 was $69,000. The $88,000 decrease in the
fair value of this derivative liability during the year ended December 31, 2014 was recorded as a change in derivative liability
in the statement of operations.
The estimated fair values of the derivative
liabilities associated with the 8% Notes and the 12% Notes, for the conversion options and warrants issued through and as of December
31, 2014 were computed by a third party using Monte Carlo simulations based on the following ranges for each assumption:
| |
|
At Issuances |
|
|
December 31,
2014 |
|
| |
|
|
|
|
|
|
| Volatility |
|
|
40.0% to 45.0 |
% |
|
|
35.0 |
% |
| Risk-free interest rate |
|
|
0.11% to 0.3 |
% |
|
|
0.4% to 0.14 |
% |
| Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
| Expected life |
|
|
1.1 to 1.6 years |
|
|
|
0.25 to 0.65 years |
|
Placement Agent Warrants
We issued warrants to the placement agents
for the sale of our 10% convertible preferred stock, to purchase 58,352 shares of 10% convertible preferred stock at $10 per share.
Since the underlying 10% convertible preferred stock is redeemable by the holder after three years from the date of purchase, we
recorded the fair value of the warrants at issuance, as a liability on our balance sheet and we re-measure this warrant liability
at each reporting date, with changes in fair value recognized in earnings each reporting period. We estimated the fair value at
December 31, 2014 of this derivative liability by using the Black-Scholes option pricing model with the following assumptions -
(i) no dividend yield, (ii) an expected volatility of 85%, (iii) a risk-free interest rate 0.47%, and (iv) an expected life of
approximately one and one-half years. The fair value of the warrant liability at December 31, 2014 and 2013 was approximately $52,700
and $296,200, respectively and we recognized the change in fair value of the warrant liability during the years ended December
31, 2014 and 2013 of a credit in our statement of operations of approximately $243,500 and a charge in our statement of operations
of approximately $214,500, respectively.
Accounting for Fair Value Measurements
We are required to disclose the fair value
measurements required by Accounting for Fair Value Measurements. The derivative liability recorded at fair value in the balance
sheet as of December 31, 2014 and 2013 is categorized based upon the level of judgment associated with the inputs used to measure
its fair value. Hierarchical levels, defined by Accounting for Fair Value Measurements are directly related to the amount of subjectivity
associated with the inputs to fair valuation of the liability is as follows:
| Level 1 - |
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; |
| |
|
| Level 2 - |
Inputs other than Level 1 inputs that are either directly or indirectly observable; and |
| |
|
| Level 3 - |
Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own assumptions. |
The following tables summarize the financial
liability measured at fair value on a recurring basis as of December 31, 2014 and 2013, segregated by the level of the valuation
inputs within the fair value hierarchy utilized to measure fair value:
| | |
As of December 31, 2014 | |
| | |
| | |
| | |
| | |
Derivative | |
| | |
| | |
| | |
| | |
Liabilities at | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair Value | |
| | |
| | |
| | |
| | |
| |
| 8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
| Conversion option | |
$ | - | | |
$ | - | | |
$ | 1,984,000 | | |
$ | 1,984,000 | |
| 12% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
| Conversion option | |
| - | | |
| - | | |
| 69,000 | | |
| 69,000 | |
| Derivative liabilities - Current | |
| - | | |
| - | | |
| 2,053,000 | | |
| 2,053,000 | |
| Placement agent warrants - Non-current | |
| - | | |
| - | | |
| 52,720 | | |
| 52,720 | |
| Derivative liabilities - Total | |
$ | - | | |
$ | - | | |
$ | 2,105,720 | | |
$ | 2,105,720 | |
| | |
As of December 31, 2013 | |
| | |
| | |
| | |
| | |
Derivative | |
| | |
| | |
| | |
| | |
Liabilities at | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair Value | |
| | |
| | |
| | |
| | |
| |
| 8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
| Conversion option | |
$ | - | | |
$ | - | | |
$ | 12,400,000 | | |
$ | 12,400,000 | |
| Warrants | |
| - | | |
| - | | |
| 4,790,000 | | |
| 4,790,000 | |
| Derivative liabilities - Current | |
| - | | |
| - | | |
| 17,190,000 | | |
| 17,190,000 | |
| Placement agent warrants - Non-current | |
| - | | |
| - | | |
| 296,194 | | |
| 296,194 | |
| Derivative liabilities - Total | |
$ | - | | |
$ | - | | |
$ | 17,486,194 | | |
$ | 17,486,194 | |
The following tables are a
reconciliation of the derivative liability for which Level 3 inputs were used in determining fair value during the years
ended December 31, 2014 and 2013:
| | |
For the Year Ended December 31, 2014 | |
| | |
Balance - | | |
Fair Value
of | | |
| | |
Balance - | |
| | |
January 1, | | |
Derivative | | |
Change in | | |
December 31, | |
| | |
2014 | | |
Liability | | |
Fair Value | | |
2014 | |
| | |
| | |
| | |
| | |
| |
| 8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
| Conversion option | |
$ | 12,400,000 | | |
$ | 4,387,139 | | |
$ | (14,803,139 | ) | |
$ | 1,984,000 | |
| Warrants | |
| 4,790,000 | | |
| 391,365 | | |
| (5,181,365 | ) | |
| - | |
| 12% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
| Conversion option | |
| - | | |
| 157,000 | | |
| (88,000 | ) | |
| 69,000 | |
| Derivative liabilities - Current | |
| 17,190,000 | | |
| 4,935,504 | | |
| (20,072,504 | ) | |
| 2,053,000 | |
| Placement agent warrants - Non-current | |
| 296,194 | | |
| - | | |
| (243,474 | ) | |
| 52,720 | |
| Derivative liabilities - Total | |
$ | 17,486,194 | | |
$ | 4,935,504 | | |
$ | (20,315,978 | ) | |
$ | 2,105,720 | |
| | |
For the Year Ended December 31, 2013 | |
| | |
Balance - | | |
Fair Value
of | | |
| | |
Balance - | |
| | |
January 1, | | |
Derivative | | |
Change in | | |
December 31, | |
| | |
2013 | | |
Liability | | |
Fair Value | | |
2013 | |
| | |
| | |
| | |
| | |
| |
| 8% Convertible promissory notes: | |
| | | |
| | | |
| | | |
| | |
| Conversion option | |
$ | 610,000 | | |
$ | 919,554 | | |
$ | 10,870,446 | | |
$ | 12,400,000 | |
| Warrants | |
| 220,000 | | |
| 334,059 | | |
| 4,235,941 | | |
| 4,790,000 | |
| Derivative liabilities - Current | |
| 830,000 | | |
| 1,253,613 | | |
| 15,106,387 | | |
| 17,190,000 | |
| Placement agent warrants - Non-current | |
| 81,716 | | |
| - | | |
| 214,478 | | |
| 296,194 | |
| Derivative liabilities - Total | |
$ | 911,716 | | |
$ | 1,253,613 | | |
$ | 15,320,865 | | |
$ | 17,486,194 | |
Note 8- Debt
The components of our debt at December 31, 2014 and 2013, are summarized
as follows:
| | |
Due | |
2014 | | |
2013 | |
| 8% convertible promissory notes (2012) | |
Beginning in August 2017 | |
$ | 16,628,188 | | |
$ | 13,078,188 | |
| 12% revolving credit facility | |
December 31, 2015 | |
| 2,000,000 | | |
| 2,000,000 | |
| 3% promissory note | |
February 1, 2018 | |
| 279,843 | | |
| 385,474 | |
| 4.25% bank term loans | |
November 15, 2018 | |
| 4,400,000 | | |
| 4,500,000 | |
| 8% convertible promissory notes (2014) | |
June 11, 2019 | |
| 2,000,000 | | |
| - | |
| 12% convertible promissory notes | |
June 30, 2015 | |
| 1,000,000 | | |
| - | |
| 5% bank term loan | |
September 18, 2017 | |
| 4,000,000 | | |
| - | |
| 12% secured notes | |
June 30, 2015 | |
| 1,950,000 | | |
| - | |
| Subtotal | |
| |
| 32,258,031 | | |
| 19,963,662 | |
| Less debt discount | |
| |
| (4,360,647 | ) | |
| (2,173,559 | ) |
| Subtotal – net of debt discount | |
| |
| 27,897,384 | | |
| 17,790,103 | |
| Less current portion | |
| |
| (5,011,738 | ) | |
| (185,347 | ) |
| Total – long term debt | |
| |
$ | 22,885,646 | | |
$ | 17,604,756 | |
8% Convertible Promissory Notes (2012)
Through December 31, 2014, pursuant to the terms of our 8% convertible
promissory notes (the “2012 Notes”), we issued and sold to Melvin Lenkin, Samuel Rose and Allen Kronstadt collectively
the “Investors”, (see Note 15 regarding related party transactions) and several unaffiliated investors (i) an aggregate
principal amount of $15,628,188 of 2012 Notes convertible into shares of our common stock at $0.40 per share and an aggregate principal
amount of $1,000,000 of 2012 Notes, convertible into shares of our common stock at a conversion price equal to $0.74 per share,
respectively subject to adjustment as provided on the terms of the 2012 Notes, and (ii) associated warrants to purchase, in the
aggregate, 37.8 million shares of common stock, subject to adjustment as provided on the terms of the warrants. During the three
months ended June 30, 2014, we offered all warrant holders the right to exchange their warrants for their fair value, as calculated
using the Black-Scholes option pricing model, for shares of common stock. All warrants associated with the 2012 Notes were exchanged
for shares of common stock.
The 2012 Notes, including all outstanding principal and accrued
and unpaid interest, are due and payable on the earlier of five years from date of issuance or upon the occurrence of an Event
of Default (as defined in the 2012 Notes). We may prepay the 2012 Notes, in whole or in part, upon 60 calendar-days prior written
notice to the holders thereof. Interest accrues on the 2012 Notes at a rate of 8.0% per annum, payable during the first three years
that the 2012 Notes are outstanding in shares of common stock, valued at the weighted average price of a share of common stock
for the twenty consecutive trading days prior to the interest payment date, pursuant to the terms of the 2012 Notes. During the
fourth and fifth years that the 2012 Notes are outstanding, interest that accrues under the 2012 Notes shall be payable in cash.
In connection with the sale of our 2012 Notes, we entered into a
Note Purchase Agreement, (i) we granted to the Investors certain demand and piggyback registration rights with respect to the registration
of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder, and (ii) we granted
a security interest and lien in all of our assets and rights ti the Investors to secure our obligations under the 2012 Notes.
Interest expense for the years ended December
31, 2014 and 2013 was approximately $1.3 million and $777,400, respectively. Accrued interest at December 31, 2014 of approximately
$271,500 was paid with 678,825 shares of common stock, in lieu of cash, and issued subsequent to December 31, 2014.
The issuance costs of approximately $146,700, plus the fair
values at issuances of the conversion option derivative liability and the warrants derivative liability were recorded as a
discount to the 2012 Notes. This debt discount is amortized to other expenses in our statement of operations over the initial
term of the 2012 Notes. During the years ended December 31, 2014, and 2013 we amortized $1.7 million and approximately
$663,400, respectively of the discount to other expenses in our statement of operations. At December 31, 2014, the
unamortized discount was approximately $2.5 million. See Note 7 for further discussion of these derivative liabilities.
12% Revolving Credit Agreement
During the year ended December 31, 2013, we entered into a Revolving
Credit and Letter of Credit Support Agreement (the “Revolving Loan Agreement”) with MLTM Lending, LLC, a Maryland limited
liability company (“MLTM”), and Samuel G. Rose (“Rose” and together with MLTM, the “Lenders”),
pursuant to which the Lenders have agreed to lend us up to $2,000,000 on a revolving basis. In addition, the Revolving Loan Agreement
provides that MLTM will provide letter of credit support to us of up to $500,000 (the “LC Sublimit”). Each revolving
loan made under the Revolving Loan Agreement bears interest at 12% per annum, of which 4% is payable by us in cash on the first
business day of each month, and 8% is payable by us in shares of our common stock on the first business day of each calendar quarter,
valued at a price equal to the average of the Weighted Average Price (as such term is defined in the Revolving Loan Agreement)
of a share of our common stock for 20 consecutive trading days prior to the interest payment date. Under the terms of the Revolving
Loan Agreement, we may prepay the revolving loans at any time, in whole or in part, together with all accrued and unpaid interest,
without premium or penalty. The Lenders may accelerate all amounts due under the Revolving Loan Agreement, together with accrued
and unpaid interest, upon the occurrence of an Event of Default, as defined in the Revolving Loan Agreement. The maturity date
of the Revolving Loan Agreement is December 31, 2015 (the “Maturity Date”). During the year ended December 31, 2013,
we borrowed $2,000,000 less fees, under the Revolving Loan Agreement which remained outstanding through December 31, 2014.
As consideration for the revolving loans extended under the
Revolving Loan Agreement, with respect to the year ending December 31, 2013, and prior to each of December 31, 2014 and 2015,
we are required to issue to the Lenders an aggregate of 200,000 shares of our common stock during each such calendar year, up
to a total of 600,000 shares of our common stock. The fair value of this common stock on the date of issue is recorded as a
discount to the revolving loan debt and is amortized to other expenses in our statement of operations over the annual period.
Pursuant to the terms of the Revolving Loan Agreement, through December 31, 2014 we have issued 400,000 shares of common
stock. As consideration for MLTM providing letter of credit support, we are required to pay a letter of credit commission fee
on the date of the Revolving Loan Agreement, and on each one year anniversary of the date of the Revolving Loan Agreement
prior to the Maturity Date, in the amount equal to (i) 2% of the LC Sublimit in cash and (ii) shares of our common stock,
with an aggregate value of 4% of the LC Sublimit, with each such share of our common stock valued at a price equal to the
average of the Weighted Average Price of a share of our common stock for the 20 consecutive trading days prior to the date of
payment. The issuance of the shares of common stock results in additional interest expense.
In connection with the entry into the Revolving Loan Agreement,
pursuant to the terms thereof, we and the Lenders entered into a Security Agreement pursuant to which the Borrowers were granted
a security interest and lien in all of our accounts receivable and inventory to secure the Borrowers’ obligations under the
Revolving Loan Agreement.
Interest expense for the years ended December 31, 2014 and 2013
was approximately $229,900 and $12,900. Of the $229,900 of interest expense for the year ended December 31, 2014, approximately
$81,100 was paid in cash or is to be paid in cash and the balance of approximately $148,800 was or will be paid in shares of common
stock.
The issuance costs of approximately $7,800, plus the fair values
of the shares of our common stock issued annually as consideration for the revolving loans and the letter of credit support, are
recorded as a discount to the revolving loans. This debt discount is amortized to other expenses in our statement of operations
over the annual period ending November 30. During the years ended December 31, 2014 and 2013, we amortized approximately $142,600
and $22,400, respectively of the discount to other expenses in our statement of operations.
3% Promissory Note
On November 15, 2013, our subsidiary, Axion Recycled Plastics Incorporated
(“Axion Recycling”), entered into an Asset Purchase Agreement (the “Purchase Agreement”), among Y City
Recycling, LLC (“Y City”), and Brian Coll and Renee Coll (collectively, the “Sellers”). See note 3. Pursuant
to the terms of the Purchase Agreement, Axion Recycling acquired certain assets from the Sellers relating to the operation of Y
City’s recycled plastics facility located in Zanesville, Ohio (the “Facility”), see Note 4 for further discussion.
As a component of the consideration paid by Axion Recycling for these asset was the assumption of a 3% promissory note (the “Promissory
Note”) with a remaining principal balance of approximately $385,500 as of December 31, 2013. The principal and interest at
3% per annum, is payable in eighty-four monthly installments with the last installment due on February 1, 2018.
The payment of the Promissory Note and all interest thereon is secured
by a first interest in certain equipment owned by Axion Recycling. We may prepay the Promissory Note at any time, in whole or in
part, together with all accrued and unpaid interest, without premium or penalty.
Interest expense for the years ended December 31, 2014 and 2013
of approximately $9,800 and $1,900, respectively was paid in cash.
4.25% Bank Term Loans
During the year ended December 31, 2013, we purchased certain tangible
and intangible assets including property and equipment of Y City Recycling LLC, a plastics recycling company (see Note 3), which
were funded, in part, by term loans (the “Bank Term Loans”) made by The Community Bank in the aggregate principal amounts
of $1,000,000 and $3,500,000. Each of the Bank Term Loans bears interest at 4.25% per annum and matures on November 15, 2018. With
respect to principal payments under the Bank Loans, $100,000 is due on each of November 15, 2014 and 2015, $250,000 is due on each
of November 15, 2016 and 2017, and the balance of the principal amounts outstanding under the Bank Term Loans is due on November
15, 2018. The Bank Term Loans may be prepaid in full or in part at any time without premium or penalty. The Community Bank may
accelerate all amounts due under the Bank Term Loans, together with accrued and unpaid interest, upon the occurrence of an Event
of Default, as defined in the documents. We were in compliance with the term of the Bank Term Loans at December 31, 2014.
The Bank Term Loans are secured by a security interested in all
of the equipment we purchased pursuant to this transaction and in certain of our equipment located at our Waco, Texas facility.
Interest expense for the years ended December 31, 2014 and 2013
of approximately $192,500 and $15,900, respectively was paid in cash.
8% Convertible Promissory Notes (2014)
During the year ended December 31, 2014 pursuant to the terms of
our 8% convertible promissory notes (the “2014 Notes”), we issued and sold to MLTM Lending, LLC, Samuel Rose and Allen
Kronstadt collectively the “Investors”, (see Note 14 regarding related party transactions) an aggregate principal amount
of $2,000,000 of our 2014 Notes which are initially convertible into 7.5 million shares of our common stock, subject to adjustment
as provided on the terms of the 2014 Notes, (i) at any time prescribed by the Investors or (ii) upon any date prior to June 11,
2019 (the “Maturity Date”) which the Company’s common shares are listed on a U.S. based stock exchange.
The fair value of the conversion option derivative
liability at issuance, was recorded as a discount to the 2014 Notes. This debt discount is amortized to other expenses in our
statement of operations over the term of the 2014 Notes. During the year ended December 31, 2014, we amortized approximately
$0.9 million of the discount to other expenses in our statement of operations. At December 31, 2014, the unamortized discount
was approximately $1.8 million. See Note 7 for further discussion of this derivative liability.
The 2014 Notes, including all outstanding principal and accrued
and unpaid interest, are due and payable on the Maturity Date or upon the occurrence of an Event of Default (as defined in the
2014 Notes). We may prepay the 2014 Notes, in whole or in part, upon notice to the holders thereof. Interest accrues on the 2014
Notes at a rate of 8.0% per annum, payable quarterly starting with September 30, 2014. For the quarter ended December 31, 2014
and for each subsequent quarter that the 2014 Notes are outstanding, the Investors shall have the right to have the interest paid
in shares of common stock, valued at the weighted average price of a share of common stock for the twenty consecutive trading days
ending with the end of the quarter, pursuant to the terms of the 2014 Notes.
Interest expense for the year ended December 31, 2014 was approximately
$84,100 and was paid in cash prior to or subsequent to December 31, 2014.
12% Convertible Promissory Notes
During the year ended December 31, 2014 pursuant to the terms of
our 12% convertible promissory notes (the “12% Notes”), we issued and sold to MLTM Lending, LLC, Samuel Rose and Allen
Kronstadt collectively the “Investors”, (see Note 14 regarding related party transactions) an aggregate principal amount
of $1,000,000 of our 12% Notes. Upon sixty days’ notice, the principal due under the 12% Notes is convertible into shares
of our common stock based on a Conversion Price which is 85% of the weighted average volume price per day of our common stock for
the ten consecutive trading days preceding the day upon which the notice of conversion is received by us, pursuant to the 12% Notes.
The 12% Notes, including all outstanding principal and accrued and
unpaid interest, are due and payable on June 30, 2015 or upon the occurrence of an Event of Default (as defined in the 12% Notes).
We may prepay the 12% Notes, in whole or in part, upon notice to the holders thereof. Interest accrues on the 12% Notes at a rate
of 12% per annum, payable monthly starting with September 30, 2014.
Interest expense for the year ended December
31, 2014 was approximately $43,200 and was paid in cash prior to or subsequent to December 31, 2014.
5% Bank Promissory Note
During the year ended December 31, 2014, we borrowed $4.0 million
from a commercial bank (the “Bank”) pursuant to the terms of a promissory note and loan agreement (the “5% Bank
Note”). Interest accrues on the outstanding principal at a fixed interest rate of 5% per annum and is payable monthly. All
outstanding principal and accrued but unpaid interest is due on September 18, 2017. The 5% Bank Note may be prepaid in full or
in part at any time without premium or penalty. The Bank may accelerate all amounts due under the Bank Term Loans, together with
accrued and unpaid interest, upon the occurrence of an Event of Default, as defined in the documents. We were in compliance with
the terms of the 5% Bank Note at December 31, 2014.
The Bank was induced to enter into the 5% Bank Note with the guarantee
of Melvin Lenkin, Samuel Rose and Allen Kronstadt, collectively the “Investors”, (see Note 14 regarding related party
transactions). In a separate agreement between the Bank and the Investors, the Investors agreed, among other terms, to guarantee
to the Bank the full and punctual payment of all obligations which we have with the Bank in connection with the 5% Bank Note.
Interest expense for the year ended December 31, 2014 of approximately
$57,200 was paid in cash prior to or subsequent to December 31, 2014.
12% Secured Notes
During the year ended December 31, 2014 pursuant to the terms of
our 12% secured notes (the “12% Secured Notes”), we issued and sold to MLTM Lending, LLC, Samuel Rose and Allen Kronstadt
collectively the “Investors”, (see Note 14 regarding related party transactions) an aggregate principal amount of $1,950,000
of our 12% Secured Notes. Pursuant to the terms of the Pledge Agreement entered into contemporaneous with the 12% Secured Notes,
we provided a security interest in favor of the Investors in all of our rights, title and interest in the pledged shares of common
stock of certain wholly-owned subsidiaries of the Company.
The 12% Secured Notes, including all outstanding principal and accrued
and unpaid interest, are due and payable on June 30, 2015 or upon the occurrence of an Event of Default (as defined in the 12%
Secured Notes). We may prepay the 12% Secured Notes, in whole or in part, upon notice to the holders thereof. Interest accrues
on the 12% Secured Notes at a rate of 12% per annum.
Interest expense for the year ended December
31, 2014 was approximately $18,500 and will be paid in cash on March 31, 2015, at maturity.
Note 9 - 10% Convertible Redeemable Preferred
Stock
The components of our Preferred Stock, classified
as temporary equity in our balance sheet at December 31, 2014 and 2013, are summarized as follows:
| | |
2014 | | |
2013 | |
| 10% convertible preferred stock - face value | |
$ | 6,829,980 | | |
$ | 6,946,230 | |
| Unamortized discount | |
| - | | |
| (221,386 | ) |
| 10% convertible preferred stock, net of discount | |
$ | 6,829,980 | | |
$ | 6,724,844 | |
During the year ended December 31, 2011, we
designated 880,000 shares of preferred stock as 10% convertible redeemable preferred stock (the “Preferred Stock”).
The Preferred Stock has a stated value (the “Stated Value”) of $10.00 per share. The Preferred Stock and any dividends
thereon may be converted into shares of our common stock at any time by the holder at a conversion rate, as adjusted (the “Conversion
Rate”). The holders of the Preferred Stock are entitled to receive dividends at the rate of ten percent per annum payable
quarterly. Dividends shall not be declared, paid or set aside for any series or other class of stock ranking junior to the Preferred
Stock, until all dividends have been paid in full on the Preferred Stock. The dividends on the Preferred Stock are payable, at
our option, in cash, if permissible, or in additional shares of common stock. The Preferred Stock is not subject to any anti-dilution
provisions other than for stock splits and stock dividends or other similar transactions. The holders of the Preferred Stock shall
have the right to vote with our stockholders in any matter. The number of votes that may be cast by a holder of our Preferred Stock
shall equal the Stated Value of the Preferred Stock purchased divided by the Conversion Rate.
The Preferred Stock is redeemable for cash
by the holder any time after the three-year anniversary from the initial purchase. The Preferred Stock were purchased during March
and April 2011, therefore holders of the Preferred Stock have the right to redeem their Preferred Stock any time after March 2014.
Since we were precluded by Colorado law from redeeming any Preferred Stock upon the attainment of the redemption date, during the
year ended December 31, 2014, in exchange for extending the redemption date to after December 31, 2016, we’ve offered to
reduce the conversion price to $0.80 for any conversion in 2014, to $0.70 for any conversions in 2015 and to $0.60 for any conversions
in 2016 (the “Revised Conversion Terms”). We also offered to extend the expiration date of the Preferred Stock Warrants
an additional two years. In exchange, the Preferred Stock Holders agreed to automatically convert their Preferred Stock on the
date our common shares are listed on a U.S. based stock exchange (the “Up-listing Date”). In addition, any Preferred
Stock Warrants remaining outstanding at the Up-listing Date, will be cancelled and the holder issued a number of shares of common
stock equivalent to the fair value of those warrants. Holders of 607,998 shares of the outstanding Preferred Stock accepted this
offer. During the three months ended September 30, 2014, we received the consent of a majority of both our common stock holders
voting with the as-converted preferred stock holders and the preferred stock holders only, to automatically convert the Preferred
Stock still outstanding at the Up-listing Date. Also, the Preferred Stock may be converted by us, provided that the variable weighted
average price of our common stock has closed at $4.00 per share or greater, for sixty consecutive trading days and during such
sixty-day period, the shares of common stock issuable upon conversion of the Preferred Stock have either been registered for resale
or are issuable without restriction pursuant to Rule 144 of the Securities Act of 1933, as amended.
The Preferred Stock when issued was a hybrid
instrument comprised of a (i) a preferred stock, (ii) an option to convert the preferred stock into shares of our common stock
(the “Conversion Option”) and (iii) a warrant to purchase shares of our common stock to be issued if a certain revenue
milestone (the “Revenue Milestone”) was not achieved (the “Make Good Warrant”), as an embedded derivative
liability. The Conversion Option derives its value based on the underlying fair value of the shares of our common stock as does
the Preferred Stock, and therefore is clearly and closely related to the underlying preferred stock. Since, at issuance the number
of shares of common stock which the Make Good Warrant would be exercisable into, was not determinable, and since the fair value
of the Make Good Warrants was deemed improbable, we did not record a derivative liability. See Note 7 for further discussion on
these derivative liabilities.
Since our Revenue Milestone for the twelve
months ended December 31, 2011 was not achieved (i) the Conversion Rate was reduced to $1.00, and (ii) each holder received a Make
Good Warrant to purchase a number of shares of our common stock equal to fifty percent of the number of shares of common stock
issuable upon conversion of the Preferred Stock at the Conversion Rate. The Make Good Warrants expire December 31, 2015, have
an initial exercise price of $1.00 per share and provide for cashless exercise at any time the underlying shares of common stock
have not been registered for resale under the Securities Act of 1933 or are issuable without restriction pursuant to Rule 144 of
the Securities Act. During the three months ended June 30, 2014, we offered all warrant holders the right to exchange their warrants
for their fair value, as calculated using the Black-Scholes option pricing model, for shares of common stock. Warrant holders holding
approximately 84% of these outstanding warrants elected the exchange offer.
During the year ended December 31, 2011, we
sold 759,773 shares of Preferred Stock at a price per share of $10, for gross proceeds of $7,597,730. We paid commissions, legal
fees and other expenses of issuance of $828,340, which has been recorded as a discount and deducted from the face value of the
Preferred Stock. At issuance of the Preferred Stock, we attributed a conversion option to the Preferred Stock based upon the difference
between the Conversion Rate at the time of issuance and the closing price of our common stock on the date of issuance, which was
recorded as a discount and deducted from the face value of the Preferred Stock. Pursuant to the Make Good adjustment of the Conversion
Rate to $1.00, at December 31, 2011 the conversion option was recalculated as if the $1.00 Conversion Rate was in affect at issuance
which amounted to $2.1 million, and the amortization of the related discount was adjusted for the year ended December 31, 2011.
These discounts were amortized over three years consistent with the initial redemption terms, as a charge to additional paid-in
capital, due to our deficit in retained earnings. For the three months ended March 31, 2014, we amortized approximately $221,400
of these discounts to additional paid-in capital. At March 31, 2014, the Preferred Stock discount was fully amortized.
During the years ended December 31, 2014 and
2013, we issued 116,250 and 114,000 shares of our common stock, respectively upon conversion of 11,625 and 11,400 shares of our
Preferred Stock, respectively.
The Preferred Stock outstanding at December
31, 2014, is convertible into 9.4 million shares of our common stock pursuant to the Revised Conversion Terms or the original terms.
Historically, since the Preferred Stock could
ultimately be redeemed at the option of the holder, the carrying value of the shares, net of unamortized discount and accumulated
dividends, has been classified as temporary equity.
Our dividend payable on December 31, 2014 of
approximately $143,000 was paid, in lieu of cash, with 357,561 shares of common stock issued subsequent to December 30, 2014.
Placement Agent Warrants
We issued warrants to the placement agents
for the sale of our Preferred Stock, to purchase 58,352 shares of 10% convertible preferred stock at $10 per share. Since at issuance,
the number of shares of common stock which these warrants would be exercisable into was not determinable, we recorded the fair
value of the warrants at issuance, as a liability on our balance sheet and we re-value this warrant liability at each reporting
date, with changes in fair value recognized in earnings each reporting period. See Note 8 for further discussion of derivative
liabilities.
Note 10 - Stockholders’ Equity
On November 19, 2013 at our Annual Meeting
of Shareholders, our shareholders approved an amendment to our existing Articles of Incorporation to increase the number of authorized
shares of our common stock from 100,000,000 to 250,000,000 shares. The amendment became effective upon the filing of the Articles
of Amendment to the Articles of Incorporation with the Secretary of State of the State of Colorado on November 20, 2013. Therefore,
we are authorized to issue up to 250,000,000 shares of our common stock, no par value, and up to 2,500,000 shares of our preferred
stock, no par value. There were 70,825,215 and 31,168,905 shares of common stock issued and outstanding at December 31, 2014 and
2013, respectively. During the year ended December 31, 2011, we designated 880,000 shares of preferred stock as 10% convertible
preferred stock and had issued and outstanding 682,998 and 694,623 shares of 10% convertible preferred stock at December 31, 2014
and 2013, 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 Year Ended
December 31, 2014
During January 2014, we issued 181,531 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 $183,346.
During January 2014, we issued 235,853 shares
of common stock as payment of our interest on our 8% convertible notes, in lieu of cash, with a fair value on the date of issue
of $235,853.
During January 2014, we issued 107,461
shares of common stock upon cashless exercise of 341,793 previously awarded stock options and warrants with intrinsic value
of $257,219.
During January 2014, we issued 220,147 shares
of common stock as payment of various commitment fees pursuant to our 12% revolving credit agreement, in lieu of cash, with a fair
value on the date of issue of $140,894.
During January 2014, we issued 8,522 shares
of common stock as payment of our interest on our 12% revolving credit agreement, in lieu of cash, with a fair value on the date
of issue of $8,522.
During April 2014, we issued 215,942 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 $159,797.
During April 2014, we issued 359,300 shares
of common stock as payment of our interest on our 8% convertible notes, in lieu of cash, with a fair value on the date of issue
of $265,882.
During April 2014, we issued 50,424 shares
of common stock as payment of our interest on our 12% revolving credit agreement, in lieu of cash, with a fair value on the date
of issue of $37,314.
During April 2014, we issued 196,079 shares
of common stock to a consultant pursuant to terms of an agreement, with a fair value on the date of issue of $100,000.
During June and July 2014, we issued 35,462,955
shares of common stock with a fair value on the date of issue of $24,824,069, in exchange for previously outstanding warrants which
were cancelled pursuant to a tender offer, with a fair value of $4,866,269.
During July 2014, we issued 274,918 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 $184,195.
During July 2014, we issued 507,483 shares
of common stock as payment of our interest on our 8% convertible notes, in lieu of cash, with a fair value on the date of issue
of $340,014.
During July 2014, we issued 61,280 shares of
common stock as payment of our interest on our 12% revolving credit agreement, in lieu of cash, with a fair value on the date of
issue of $41,058.
During August and September 2014, we issued
116,250 shares of common stock upon conversion of 11,625 shares of our 10% convertible preferred stock, with a value of $116,250.
During October 2014, we issued 330,949 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 $152,237.
During October 2014, we issued 687,614 shares
of common stock as payment of our interest on our 8% convertible notes, in lieu of cash, with a fair value on the date of issue
of $316,302.
During October 2014, we issued 82,706 shares of
common stock as payment of our interest on our 12% revolving credit agreement, in lieu of cash, with a fair value on the date of
issue of $38,045.
During October and November 2014, we issued
an aggregate of 316,079 shares of common stock to consultants pursuant to terms of an agreement, with a fair value on the date
of issue of $149,084.
During November 2014, we issued 240,817 shares
of common stock as payment of various annual commitment fees pursuant to our 12% revolving credit agreement, in lieu of cash, with
a fair value on the date of issue of $108,368.
Common Stock Issuances for the Year Ended
December 31, 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 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 notes, in lieu of cash, with a fair value on the date of issue
of $188,210.
During October 2013, we issued 347,039 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 $176,990.
During October 2013, we issued 355,903 shares
of common stock as payment of our interest on our 8% convertible notes, in lieu of cash, with a fair value on the date of issue
of $181,510.
During December 2013, we issued 75,000 shares
of common stock to a consultant. The shares of common stock had a fair value on the date of issuance of $76,500, which was charged
to general and administrative expenses in our statement of operations upon issuance.
During December 2013, we issued a total of
75,000 shares of common stock upon conversion of 7,500 shares of our 10% convertible preferred stock, with a value of $75,000.
During December 2013, we issued 300
shares of common stock upon a cashless exercise of a previously awarded stock option of 2,500 shares with an intrinsic value
of $2,200.
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.
Note 11 - Share-based Compensation
Options
At our Annual Meeting of Shareholders during
the year ended December 31, 2013, our shareholders approved an amendment to our 2010 Stock Plan to increase the number of shares
of common stock reserved thereunder by 2,000,000 shares. In addition, during the year ended December 31, 2014 the board approved
an additional 2,000,000 shares to be available for award under the 2010 Stock Plan, subject to shareholder approval, which brought
the total available for award under the 2010 Stock Plan to 7,000,000 shares. The exercise price of an option is established by
the Board of Directors on the date of grant and is generally equal to the market price of the stock on the grant date. The
Board of Directors may determine the vesting period for each new grant. Options issued are exercisable in whole or in part for
a period as determined by the Board of Directors of up to ten years from the date of grant.
During the year ended December 31, 2013, our
2003 Stock Plan expired and no further awards are allowed under that plan.
We estimated the fair value of each option
award at the grant date by using the Black-Scholes option pricing model with the following range of assumptions for awards made
during the years ended December 31, 2014 and 2013:
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
| Expected volatility, in years |
|
|
90 |
% |
|
|
90 |
% |
| Risk-free interest rates |
|
|
1.5 |
% |
|
|
1.4% to 2.8 |
% |
| Expected lives, in years |
|
|
5 |
|
|
|
5 to 10 |
|
During the year ended December 31, 2014, we
awarded options to purchase 175,000 shares of our common stock at a weighted average exercise price of $0.84 to an officer and
two of our directors. The right to exercise these options is on the date of award. We estimated the fair value of these options
to be approximately $102,500 which was charged to expense in our statement of operations during the period. We use the Black-Scholes
option pricing model to estimate the fair values, with the following range of assumptions: (i) no dividend yield, (ii) expected
volatility of 90%, (iii) risk-free interest rates of 1.5%, and (iv) expected lives of five years.
In addition to the options which vested on
the date of award, we amortize certain options over vesting periods which included certain periods during the year ended December
31, 2014 and consequently we charged to operating expenses approximately $433,400 during the year ended December 31, 2014, respectively.
During the year ended December 31, 2013, we
awarded options to purchase 3,085,000 shares of our common stock at a weighted average exercise price of $0.54 per share to employees,
directors and consultants. The right to exercise these options is either on the date of award or based on (i) service time and
(ii) in certain instances the optionee’s achievement of specific objectives. We estimate the fair value on the date
of grant for the service time-vested options awarded during the year and amortized that fair value over the service time requirement.
For those option awards that vest on the optionee’s achievement of certain objectives, until it is probable that the optionee
will achieve the specific objective, the award is not earned and the fair value of the option is not estimated nor charged to operating
expenses. We use the Black-Scholes option pricing model to estimate fair value of each option awarded. During the year ended December
31, 2013, an aggregate of approximately $529,500 was recognized in operating expenses in relation to these options.
The following table summarizes our stock option
activity for the periods presented:
| | |
| | |
Weighted- | |
| | |
Number | | |
Average | |
| | |
of Shares | | |
Exercise | |
| | |
Issuable | | |
Price | |
| Balance, January 1, 2013 | |
| 5,710,125 | | |
$ | 1.10 | |
| Granted | |
| 3,085,000 | | |
| 0.54 | |
| Exercised | |
| (2,500 | ) | |
| 0.88 | |
| Cancelled | |
| (1,290,204 | ) | |
| 0.36 | |
| Balance, December 31, 2013 | |
| 7,502,421 | | |
$ | 1.00 | |
| Granted | |
| 175,000 | | |
| 0.84 | |
| Exercised | |
| (186,225 | ) | |
| 0.88 | |
| Cancelled | |
| (3,363,068 | ) | |
| 0.96 | |
| Balance, December 31, 2014 | |
| 4,128,128 | | |
$ | 1.04 | |
During the years
ended December 31, 2014 and 2013, we issued 23,693 and 300 shares of common stock, respectively pursuant to a cashless
exercise of stock option to acquire 186,225 and 2,500 shares of common stock, respectively. The intrinsic value of these
shares of common stock were approximately $163,900 and $2,200, respectively.
The following table summarizes options outstanding
at December 31, 2014:
| | |
| | |
Weighted- | | |
Weighted- | | |
| |
| | |
Number | | |
Average | | |
Average | | |
Aggregate | |
| | |
of Shares | | |
Exercise | | |
Remaining | | |
Intrinsic | |
| | |
Issuable | | |
Price | | |
Term (Years) | | |
Value | |
| Exercisable | |
| 3,438,128 | | |
$ | 1.03 | | |
| 2.5 | | |
$ | 3,000 | |
| Not vested | |
| 690,000 | | |
| 1.06 | | |
| 3.4 | | |
| - | |
| Balance, December 31, 2014: | |
| 4,128,128 | | |
$ | 1.04 | | |
| 2.7 | | |
$ | 3,000 | |
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 periods presented:
| | |
| | |
Weighted- | |
| | |
Number | | |
Average | |
| | |
of Shares | | |
Exercise | |
| | |
Issuable | | |
Price | |
| Balance, January 1, 2013 | |
| 27,353,151 | | |
$ | 0.79 | |
| Granted | |
| 14,875,004 | | |
| 0.60 | |
| Cancelled | |
| (632,500 | ) | |
| 1.56 | |
| Balance, December 31, 2013 | |
| 41,595,655 | | |
$ | 0.69 | |
| Granted | |
| 7,435,901 | | |
| 0.67 | |
| Cancelled pursuant to Tender Offer | |
| (46,276,774 | ) | |
| 0.67 | |
| Exercised | |
| (155,568 | ) | |
| 0.60 | |
| Cancelled | |
| (1,433,068 | ) | |
| 0.87 | |
| Balance, December 31, 2014 | |
| 1,166,146 | | |
$ | 1.13 | |
During the year
ended December 31, 2014, we issued 83,768 shares of common stock pursuant to a cashless exercise of warrants to acquire
155,568 shares of common stock with an intrinsic value of approximately $93,300.
During the year ended December 31, 2014, we
issued warrants to purchase 7,275,901 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 approximately
$391,400 which was recorded as a credit to derivative liabilities and a charge to debt discount associated with our 8% convertible
promissory notes. See Notes 7 and 8 for further discussion of these warrants. The estimated fair value of the warrants was computed
by a third party using Monte Carlo simulation models. The following ranges of assumptions were used for the simulation models:
(i) no dividend yield, (ii) expected volatility of 45%, (iii) risk-free interest rate of 0.2%, and (iv) an expected life of approximately
one and one-half years.
During the year ended December 31, 2014, we
issued a warrant to purchase 160,000 shares of our common stock at an exercise price of $1.20 in payment of amounts due a consultant.
We estimated the fair value of this warrant to be approximately $84,700, which was charged to expense in our statement of operations
during the period. We used the Black-Scholes option pricing model to estimate the fair value, with the following range of assumptions:
(i) no dividend yield, (ii) expected volatility of 90%, (iii) risk-free interest rate of 0.8%, and (iv) an expected life of approximately
three years.
In addition, the fair value of a previously
issued warrant to a consultant which was 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. During the year ended December 31, 2014, we
decreased the fair value by approximately $14,900 and recorded a charge in our statement of operations. We used the
Black-Scholes option pricing model to estimate the fair value, with the following range of assumptions: (i) no dividend yield,
(ii) expected volatility of 90%, (iii) risk-free interest rate of approximately 0.8%, and (iv) an expected life of less than one
year.
Tender Offer to Exchange Warrants for
Shares of Common Stock
During June 2014, we extended an offer to exchange
for shares of our common stock any and all of our outstanding warrants from the holders thereof (the “Tender Offer”).
Each warrant holder was provided with the terms of the Tender Offer regarding their outstanding warrants. For every $10 of value
attributed to the warrant, we offered to exchange 14.17707 shares of our common stock. The value of the warrants was derived from
third parties using Monte Carlo simulation models and the Black-Scholes Option Pricing Model. The Tender Offer expired at 11:59P.M.
on June 16, 2014.
Of the warrants to purchase 47.7 million shares
of our common stock subject to the Tender Offer, warrants to purchase 46.3 million shares of our common stock were tendered with
fair value of $4.9 million and exchanged for 35.5 million shares with a fair value on date of issuance of $24.8 million. The warrants
were cancelled upon tender.
During the year ended December 31, 2013, pursuant
to our 8% convertible promissory notes, we issued warrants to purchase 14,875,004 shares of our common stock at an initial exercise
price of $0.60 per share. These warrants had fair values on their dates of issuances of approximately $334,100 which was recorded
as a credit to derivative liabilities and a charge to debt discount associated with our 8% convertible promissory notes. See Notes
7 and 8 for further discussion of these warrants. The estimated fair value of the warrants was computed by a third party using
Monte Carlo simulation models.
Note 12 - Income Taxes
Due to our substantial operating losses and
the valuation allowance applied against our deferred tax assets, we have not recorded any income tax expense or benefit.
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
| Current: |
|
|
|
|
|
|
|
|
| Federal |
|
$ |
- |
|
|
$ |
- |
|
| State |
|
|
- |
|
|
|
- |
|
| |
|
|
- |
|
|
|
- |
|
| Deferred: |
|
|
|
|
|
|
|
|
| Federal |
|
|
- |
|
|
|
- |
|
| State |
|
|
- |
|
|
|
- |
|
| |
|
|
- |
|
|
|
- |
|
| Provision for income tax, net |
|
$ |
- |
|
|
$ |
- |
|
Income taxes related to our loss from operations differ from the
amount computed using the federal statutory income tax rate as follows for the years ended December 31, 2014 and 2013:
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Tax benefit computed at the federal statutory rate | |
$ | (5,701,569 | ) | |
$ | (8,466,361 | ) |
| State income tax (benefit), net of federal income tax effect | |
| (814,510 | ) | |
| (1,209,480 | ) |
| Nondeductible permanent differences | |
| (143,271 | ) | |
| 6,042,555 | |
| Change in valuation allowance | |
| 6,659,350 | | |
| 3,633,286 | |
| Provision for income taxes | |
$ | - | | |
$ | - | |
Deferred income taxes result from temporary
differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. At December 31, 2014
and 2013, we had available net operating loss carry forwards of $37.9 million and $25.7 million, respectively that expire through
2034.
During 2014 the Company has experienced a significant
change in capital structure. As a result of the increase in shares outstanding, the Company believes that a greater than 50%
change in ownership as defined in section 382 of the IRC has occurred and therefore the Company’s ability to
utilize it’s net operating losses may be limited. The Company believes that a Sec. 382 study will confirm a change has
occurred and therefore the ability of the Company to use its net operating losses will be limited on an annual basis based on
the value of the Company at the time of the ownership change. Such limitation will have the effect of limiting on an annual
basis the amount of net operating losses the Company can utilize as an offset to future taxable income.
Nondeductible permanent differences at December
31, 2014 and 2013 result from the recognition of the changes in fair value of derivative liabilities, warrants exchanged for common
stock, and impairment charge for intangible assets for financial reporting purposes, but will not be a deduction or income for
tax purposes.
As of December 31, 2014 and 2013, our deferred
tax assets (liabilities) are as follows:
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Deferred Tax Assets: | |
| | | |
| | |
| Non-cash interest expense | |
$ | 2,828,837 | | |
$ | 1,677,305 | |
| Share-based compensation | |
| 4,061,677 | | |
| 3,833,855 | |
| Impairment of intangible assets | |
| 218,300 | | |
| - | |
| Other | |
| 254,740 | | |
| 254,740 | |
| Net operating loss carry forward | |
| 15,159,830 | | |
| 10,098,134 | |
| Less: Valuation allowance | |
| (22,220,990 | ) | |
| (15,561,640 | ) |
| | |
| 302,394 | | |
| 302,394 | |
| Deferred Tax Liabilities: | |
| | | |
| | |
| Property and equipment | |
| (302,394 | ) | |
| (302,394 | ) |
| | |
| | | |
| | |
| Net deferred asset (liability) | |
$ | - | | |
$ | - | |
We file income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. We are current with our filing of our federal and state tax returns. Our income tax returns are open
to examination by federal and state authorities, based on statute of limitations, which is three years. We do not have any amount
recorded for any unrecognized tax benefits as of December 31, 2014 and 2013, nor did we record any amount for the implementation
of ASC 740. Our policy is to record estimated interest and penalty related to underpayment of income taxes or unrecognized tax
benefits as a component of our income tax provision. During the years ended December 31, 2014 and 2013, we did not recognize any
interest or penalties in our statement of operations and there are no accruals for interest or penalties at December 31, 2014 or
2013.
Note 13 - Business Concentration
During the years ended December 31, 2014 and 2013, we sold
our products to 95 and 58 different customers, respectively. Sales of our ECOTRAX rail ties to one customer
represented approximately 15% and 46%, respectively of our total revenue for which there were no unpaid invoices at
December 31, 2014 or 2013.
During the year ended December 31, 2014, two vendors
each provided over 10% of our purchases of raw materials and other product and services. During the year ended December
31, 2013, the top five vendors approximated 59%, of our purchases or raw materials and other products and services.
Note 14 - Commitments and Contingencies
Operating leases
During the year ended December 31, 2013, we
entered into an assignment of the original lease for our Zanesville, OH facility, effective November 15, 2013 at a monthly lease
payment of $25,750. The original term of the lease expires at the end of April 2018, but provides two additional five-year extensions
and includes an annual rent escalation clause based on the greater of the change in a certain Consumer Price Index or 3%. We record
rent expense based on the straight-line amortization of the full 15-year term of the initial lease plus all extensions. Our rent
expense, for the years ended December 30, 2014 and 2013 was approximately $383,100 and $38,600, respectively and our deferred rent
at December 31, 2014 was approximately $77,000. This facility also serves as our corporate headquarters.
Effective September 1, 2013, we signed a ten
year lease for our production facility in Waco, Texas which provides five additional five-year extensions. Monthly rent expense
for the first year of the lease is $21,875. The lease includes an annual rent escalation clause based on the greater of the change
in a certain Consumer Price Index or 3%. We record rent expense based on the straight-line amortization of the full 35-year term
of the initial lease plus all extensions. Our rent expense for the years ended December 31, 2014 and 2013 was approximately $453,500
and $265,700 (including the month-to-month arrangement prior to the signed lease), respectively and our deferred rent at December
31, 2014 was approximately $257,900.
We leased office space in New Providence, New
Jersey which previously served as our corporate headquarters, pursuant to a one-year extension of our prior three-year lease agreement
for monthly lease payments of approximately $3,800. The lease expired on October 31, 2014. Facility rent expense totaled approximately
$38,400 for the year ended December 31, 2014, 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 University (Rutgers”). We are using these
patented technologies in the production of our composite rail ties and structural building products. The term of the License Agreement
runs until the expiration of the last-to-expire issued patent within the Rutgers’ technologies licensed under the License
Agreement, unless terminated earlier.
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 years ended December 31, 2014 and 2013,
we accrued royalties payable to Rutgers on product sales of approximately $125,400 and $93,400, respectively. In addition, for
the years ended December 31, 2014 and 2013, since we did not meet the minimum royalty due pursuant to the license, we accrued approximately
$74,600 and $106,600, respectively which was charged to operating expenses in our statement of operations.
Previously, we paid a royalty for the use of certain production
practices for our rail tie products. For the years ended December 31, 2014 and 2013, we paid approximately $46,800 and $83,000,
respectively under this arrangement.
Litigation
From time to time we may be subject to various
routine legal matters incidental to our business, but we do not believe that they would have a material adverse effect on our financial
condition or results of operations.
Note 15 - Related Party Transactions
Samuel G. Rose and Julie Walters
Pursuant to the terms of the Purchase
Agreement associated with out 8% convertible promissory notes (see note 8), Samuel G. Rose was appointed to our board
of directors on August 4, 2014, and Mr. Rose and Julie Walters own in excess of 5% of our outstanding common stock.
10% Convertible Redeemable Preferred Stock.
During the year ended December 31, 2011, we sold to Mr. Rose and Ms. Walters 100,000 shares of our Preferred Stock for $1.0 million.
The Preferred Stock may be converted into shares of our common stock at any time by Mr. Rose and Ms. Walters at a conversion price
effective January 1, 2015 of $0.70 per share, as adjusted. Mr. Rose and Ms. Walters are entitled to receive dividends at the rate
of 10% per annum payable quarterly, at our option, in cash, or in additional shares of common stock, and have the right to vote
the Preferred Stock with our common stockholders on any matter.
Since certain revenue targets for the twelve
months ended December 31, 2011 were not achieved, Mr. Rose and Ms. Walters received a warrant to purchase 500,000 shares of our
common stock. During June 2014, we extended an offer to exchange for shares of our common stock any and all of our outstanding
warrants from the holders thereof (the “Tender Offer”). Each warrant holder was provided with the terms of the Tender
Offer regarding their outstanding warrants. For every $10 of value attributed to the warrant, we offered to exchange 14.17707 shares
of our common stock. The value of the warrants was derived from third parties using Monte Carlo simulation models and the Black-Scholes
Option Pricing Model. Pursuant to this Tender Offer, Mr. Rose and Ms. Walters received approximately 259,300 shares of common stock
in exchange for the warrants to purchase 500,000 shares of common stock.
Through December 31, 2014, Mr. Rose and Ms.
Walters received an aggregate of approximately 635,400 shares of common stock as dividend payments on the Preferred Stock held
by them.
8% Convertible Promissory Notes
(2012). Effective April 25, 2012, we entered into a Memorandum of Understanding (the “MOU”) with Mr. Rose and
several other investors. Pursuant to the MOU, we issued to Mr. Rose a demand promissory note (the “Demand Note”)
in the principal amount of $1,666,667. Interest accrued on the unpaid principal balance of the Demand Note at a
rate of 8.0% per annum. On August 24, 2012, we entered into a Note Purchase Agreement (the “Purchase Agreement”)
with Mr. Rose, MLTM Lending, LLC, Allen Kronstadt and certain other investors (the “Note Purchase Agreement
Investors”), pursuant to which, as of December 31, 2014, we have issued and sold to Mr. Rose an aggregate principal
amount of $5,209,260 of our 8.0% convertible promissory notes (the “8% Notes - 2012”) which are initially
convertible into shares of our common stock, at a conversion price equal to $0.40 per share of common stock, subject to
adjustment as provided on the terms of the 8% Notes - 2012, and associated warrants (the “8% Note Warrants”) to
purchase, in the aggregate, 13,023,151 shares of common stock, subject to adjustment as provided on the terms of the 8% Note
Warrants. At the initial closing under the Purchase Agreement, in consideration for the issuance of the 8% Notes - 2012 and
the 8% Note Warrants issued at such closing, Mr. Rose converted the aggregate principal amount outstanding, together with all
accrued and unpaid interest, under the Demand Note and paid us in cash for the balance. Through December 31, 2014, Mr. Rose
has received an aggregate of 1,265,849 shares of common stock as interest payments under the 8% Notes - 2012 held by
them.
In connection with the entry into the Purchase
Agreement, we granted to the Note Purchase Agreement Investors: (i) certain demand and piggyback registration rights with respect
to the registration of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder,
and (ii) a security interest and lien in all of our assets and rights to secure our obligations under the 8% Notes – 2012.
The 8% Notes - 2012, including all outstanding
principal and accrued and unpaid interest, are due and payable on the earlier of five years from date of issuance or upon the occurrence
of an Event of Default (as defined in the 8% Notes - 2012). We may prepay the 8% Notes - 2012, in whole or in part, upon 60 calendar
days prior written notice to the holders thereof. Interest accrues on the 8% Notes - 2012 at a rate of 8.0% per annum, payable
during the first three years that the 8% Notes - 2012 are outstanding in shares of common stock, valued at the weighted average
price of a share of common stock for the twenty consecutive trading days prior to the interest payment date, pursuant to the terms
of the 8% Notes - 2012. During the fourth and fifth years that the 8% Notes - 2012 are outstanding, interest that accrues under
the 8% Notes - 2012 shall be payable in cash.
Pursuant to our Tender
Offer, Mr. Rose received 10.9 million shares of common stock in exchange for their 8% Note Warrants to purchase 13.0 million shares
of common stock.
Revolving Credit and Letter of Credit Support
Agreement. During the year ended December 31, 2013, we entered into a Revolving Credit and Letter of Credit Support Agreement
(the “Revolving Loan Agreement”) pursuant to which Mr. Rose along with MLTM Lending LLC (the “Lenders”)
had agreed to lend us up to $1.0 million each on a revolving basis. Each revolving loan made under the Revolving Loan Agreement
bears interest at 12% per annum, of which 4% is payable by us in cash on the first business day of each month, and 8% is payable
by us in shares of common stock on the first business day of each calendar quarter, valued at a price equal to the average of the
Weighted Average Price (as such term is defined in the Revolving Loan Agreement) of a share of common stock for 20 consecutive
trading days prior to the interest payment date. The maturity date of the Revolving Loan Agreement is December 31, 2015 (the “Maturity
Date”). As of December 31, 2014, Mr. Rose had provided $1.0 million pursuant to the Revolving Loan Agreement.
Under the terms of the Revolving Loan Agreement,
we may prepay the revolving loans at any time, in whole or in part, together with all accrued and unpaid interest, without premium
or penalty. The Lenders may accelerate all amounts due under the Revolving Loan Agreement, together with accrued and unpaid interest,
upon the occurrence of an Event of Default, as defined in the Revolving Loan Agreement.
As consideration for the revolving loans extended
under the Revolving Loan Agreement, we agreed to issue to each Lender 100,000 shares of common stock, upon signing of the Revolving
Loan Agreement and again prior to December 31, 2014 and 2015. Through December 31, 2014, Mr. Rose has received a total of 200,000
shares of common stock.
In connection with the entry into the Revolving
Loan Agreement, pursuant to the terms thereof, we entered into a Security Agreement pursuant to which we granted a security interest
and lien in all of our accounts receivable and inventory to secure the Lenders’ obligations under the Revolving Loan Agreement.
Through December 31, 2014, we paid approximately
$42,700 in interest and we issued to Mr. Rose approximately 142,100 shares of common stock as payment of interest.
8% Convertible Promissory Notes (2014).
During the months of June and August 2014 pursuant to the terms of our 8% convertible promissory notes (the “8% Notes - 2014”),
we issued and sold to Mr. Rose, an aggregate principal amount of $666,666 of our 8% Notes - 2014 which are initially convertible
into 2.5 million shares of our common stock, subject to adjustment as provided on the terms of the 8% Notes - 2014, (i) at any
time prescribed by the Investors or (ii) upon any date prior to the maturity date of June 11, 2019, on which the Company’s
common shares are listed on a U.S. based stock exchange.
Through December 31, 2014, we paid Mr. Rose
approximately $28,100 of interest on the 8% Notes – 2014.
12% Convertible Promissory Notes. During
the three months ended September 30, 2014 pursuant to the terms of our 12% convertible promissory notes (the “12% Notes”),
we issued and sold to Mr. Rose, an aggregate principal amount of $333,333 of our 12% Notes which are initially convertible into
shares of our common stock, subject to adjustment as provided on the terms of the 12% Notes, at any time prescribed by the Investors
at a conversion price equal to 85% of the weighted average price of a share of common stock for the ten consecutive trading days
prior to the conversion date. The 12% Notes mature on June 30, 2015.
Through December 31, 2014, we paid Mr. Rose
approximately $9,400 of interest on the 12% Notes.
12% Secured Notes. During the three
months ended December 31, 2014 pursuant to the terms of our 12% secured notes (the “12% Secured Notes”), we issued
and sold to Mr. Rose, an aggregate principal amount of $650,000 of our 12% Secured Notes. The 12% Secured Notes mature on June 30, 2015 and are secured by a pledge of the common shares of Axion International, Inc. and Axion Recycled Plastics Incorporated,
owned by us.
Through December 31, 2014, we paid Mr. Rose
approximately $4,600 of interest on the 12% Secured Notes.
A summary of the transactions entered into
with Mr. Rose and Ms. Walter is as follows:
| | |
| | |
Common
Stock | |
| | |
| | |
Equivalent, | |
| | |
Principal | | |
If
Converted | |
| | |
| | |
| |
| 10% convertible preferred stock | |
$ | 1,000,000 | | |
| 1,428,571 | |
| 8% convertible notes (2012) | |
| 5,209,260 | | |
| 13,023,151 | |
| 12% revolving | |
| 1,000,000 | | |
| - | (i) |
| 8% convertible notes (2014) | |
| 666,666 | | |
| 2,500,000 | |
| 12% convertible promissory notes | |
| 333,333 | | |
| 980,391 | (ii) |
| 12% secured notes | |
| 650,000 | | |
| - | (i) |
| | |
| | | |
| | |
| TOTAL | |
$ | 8,859,259 | | |
| 17,932,113 | |
(i) not convertible into shares of common stock.
(ii) assumed 10-day volume weighted average price was $0.40.
MLTM Lending, LLC and the ML Dynasty
Trust
MLTM Lending, LLC and the ML Dynasty
Trust own in excess of 5% of our outstanding common stock. Pursuant to the Schedule 13D filings made by MLTM Lending, LLC and
the ML Dynasty Trust, the ML Dynasty Trust shares with MLTM the power to vote or direct the vote of, and to dispose or direct
the disposition of, greater than 5% of our outstanding stock. Thomas Bowersox, a member of our board of directors, is a
trustee of the ML Dynasty Trust.
8% Convertible Promissory Notes (2012).
Pursuant to the MOU, we issued to MLTM Lending, LLC a Demand Note (the “MLTM Demand Note”) in the principal amount
of $1,426,667. Interest accrued on the unpaid principal balance of the MLTM Demand Note at a rate of 8.0% per annum. Pursuant to
the Purchase Agreement, as of December 31, 2014, we have issued and sold to MLTM Lending, LLC an aggregate principal amount of
$4,888,444 of our 8% Notes - 2012 and associated 8% Note Warrants to purchase, in the aggregate, 12,221,112 shares of common stock,
subject to adjustment as provided on the terms of the 8% Note Warrants. In consideration for the issuance of the 8% Notes - 2012
and the 8% Note Warrants, MLTM Lending, LLC converted the aggregate principal amount outstanding, together with all accrued and
unpaid interest, under the MLTM Demand Note and paid us in cash for the balance. Through December 31, 2014, MLTM Lending, LLC has
received an aggregate of 1,169,138 shares of common stock as interest payments under the 8% Notes that it holds.
Pursuant to our Tender Offer, MLTM Lending,
LLC received 10.2 million shares of common stock in exchange for their 8% Note Warrants to purchase 12.2 million shares of common
stock.
The terms of the 8% Notes – 2012, the
8% Note Warrants and the Tender Offer are described above.
Revolving Credit and Letter of Credit Support
Agreement. During the year ended December 31, 2013, we entered into a Revolving Credit and Letter of Credit Support Agreement
(the “Revolving Loan Agreement”) pursuant to which MLTM Lending LLC and Mr. Rose (the “Lenders”) have agreed
to lend us up to $1.0 million each on a revolving basis. In addition, the Revolving Loan Agreement provides that MLTM Lending,
LLC will provide letter of credit support to us of up to $500,000 (the “LC Sublimit”). Each revolving loan made under
the Revolving Loan Agreement bears interest at 12% per annum, of which 4% is payable by us in cash on the first business day of
each month, and 8% is payable by us in shares of common stock on the first business day of each calendar quarter, valued at a price
equal to the average of the Weighted Average Price (as such term is defined in the Revolving Loan Agreement) of a share of common
stock for 20 consecutive trading days prior to the interest payment date. The maturity date of the Revolving Loan Agreement is
December 31, 2015 (the “Maturity Date”). As of December 31, 2014, MLTM Lending, LLC had provided $1.0 million pursuant
to the Revolving Loan Agreement and supported $400,000 of outstanding letters of credit.
Under the terms of the Revolving Loan Agreement,
we may prepay the revolving loans at any time, in whole or in part, together with all accrued and unpaid interest, without premium
or penalty. The Lenders may accelerate all amounts due under the Revolving Loan Agreement, together with accrued and unpaid interest,
upon the occurrence of an Event of Default, as defined in the Revolving Loan Agreement.
As consideration for the revolving loans extended
under the Revolving Loan Agreement, we agreed to issue to each Lender 100,000 shares of common stock, upon signing of the Revolving
Loan Agreement and again prior to December 31, 2014 and 2015. Through December 31, 2014, MLTM Lending, LLC has received a total
of 200,000 shares of common stock. As consideration for MLTM Lending, LLC providing letter of credit support, we are required to
pay a letter of credit commission fee on the date of the Revolving Loan Agreement, and on each one year anniversary of the date
of the Revolving Loan Agreement prior to the Maturity Date, in the amount equal to (i) 2% of the LC Sublimit in cash and (ii) shares
of common stock, with an aggregate value of 4% of the LC Sublimit, with each such share of common stock valued at a price equal
to the average of the Weighted Average Price of a share of Common Stock for the 20 consecutive trading days prior to the date of
payment.
In connection with the entry into the
Revolving Loan Agreement, pursuant to the terms thereof, we entered into a Security Agreement pursuant to which we granted a
security interest and lien in all of our accounts receivable and inventory to secure the Lenders’ obligations under the
Revolving Loan Agreement.
Through December 31, 2014, we paid MLTM Lending,
LLC approximately $62,800 in interest and commitment fees, issued approximately 261,000 shares of common stock in various commitment
fees, and approximately 142,500 shares of common stock as payment of interest.
8% Convertible Promissory Notes (2014).
During the months of June and August 2014 pursuant to the terms of our 8% convertible promissory notes (the “8% Notes - 2014”),
we issued and sold to MLTM Lending, LLC, an aggregate principal amount of $666,667 of our 8% Notes - 2014 which are initially convertible
into 2.5 million shares of our common stock, subject to adjustment as provided on the terms of the 8% Notes - 2014, (i) at any
time prescribed by the Investors or (ii) upon any date prior to the maturity date of June 11, 2019, on which the Company’s
common shares are listed on a U.S. based stock exchange.
Through December 31, 2014, we paid MLTM Lending,
LLC approximately $28,100 of interest on the 8% Notes – 2014.
12% Convertible Promissory Notes. During
the three months ended September30, 2014 pursuant to the terms of our 12% convertible promissory notes (the “12% Notes”),
we issued and sold to MLTM Lending, LLC, an aggregate principal amount of $333,334 of our 12% Notes which are initially convertible
into shares of our common stock, subject to adjustment as provided on the terms of the 12% Notes, at any time prescribed by the
Investors at a conversion price equal to 85% of the weighted average price of a share of common stock for the ten consecutive trading
days prior to the conversion date. The 12% Notes mature on June 30, 2015.
Through December 31, 2014, we paid MLTM Lending,
LLC approximately $10,100 of interest on the 12% Notes.
12% Secured Notes. During the three
months ended December 31, 2014 pursuant to the terms of our 12% secured notes (the “12% Secured Notes”), we issued
and sold to MLTM Lending, LLC, an aggregate principal amount of $650,000 of our 12% Secured Notes. The 12% Secured Notes mature
on June 30, 2015 and are secured by a pledge of the common shares of Axion International, Inc. and Axion Recycled Plastics Incorporated,
owned by us.
Through December 31, 2014, we paid MLTM Lending,
LLC approximately $4,500 of interest on the 12% Secured Notes.
A summary of the transactions entered
into with MLTM Lending, LLC is as follows:
| | |
| | |
Common
Stock | |
| | |
| | |
Equivalent, | |
| | |
Principal | | |
If
Converted | |
| | |
| | |
| |
| 8% convertible notes (2012) | |
$ | 4,888,444 | | |
| 12,221,112 | |
| 12% revolving | |
| 1,000,000 | | |
| - | (i) |
| 8% convertible notes (2014) | |
| 666,667 | | |
| 2,500,000 | |
| 12% convertible promissory notes | |
| 333,334 | | |
| 980,394 | (ii) |
| 12% secured notes | |
| 650,000 | | |
| - | (i) |
| | |
| | | |
| | |
| TOTAL | |
$ | 7,538,445 | | |
| 15,701,506 | |
(i) not convertible into shares of common stock.
(ii) assumed 10-day volume weighted average price was $0.40.
Allen Kronstadt
Allen Kronstadt owns in excess of 5% of
our outstanding common stock, and was appointed to our board of directors on September 11, 2012 pursuant to the terms of
the Purchase Agreement associated with out 8% convertible promissory notes (see note 8).
8% Convertible Promissory Notes (2012).
Pursuant to the MOU, we issued to Mr. Kronstadt a demand promissory note (the “Kronstadt Demand Note”) in the principal
amount of $1,666,667. Interest accrued on the unpaid principal balance of the Kronstadt Demand Note at a rate of 8.0%
per annum. Pursuant to the Purchase Agreement, as of December 31, 2014, we have issued and sold to Mr. Kronstadt an aggregate principal
amount of $5,209,297 of our 8% Notes - 2012 and 8% Note Warrants to purchase, in the aggregate, 13,023,243 shares of common stock,
subject to adjustment as provided on the terms of the 8% Note Warrants. At the initial closing under the Purchase Agreement, in
consideration for the issuance of the 8% Notes - 2012 and the 8% Note Warrants at such closing, Mr. Kronstadt converted the aggregate
principal amount outstanding, together with all accrued and unpaid interest, under the Kronstadt Demand Note and paid us in cash
for the balance. Through December 31, 2014, Mr. Kronstadt has received an aggregate of 1,245,032 shares of common stock as interest
payments under the 8% Notes - 2012 that he holds.
Pursuant to our Tender Offer, Mr. Kronstadt
received 10.9 million shares of common stock in exchange for their 8% Note Warrants to purchase 13.0 million shares of common stock.
The terms of the 8% Notes – 2012, the
8% Note Warrants and the Tender Offer are described above.
8% Convertible Promissory Notes (2014).
During the months of June and August 2014 pursuant to the terms of our 8% convertible promissory notes (the “8% Notes - 2014”),
we issued and sold to Mr. Kronstadt, an aggregate principal amount of $666,667 of our 8% Notes - 2014 which are initially convertible
into 2.5 million shares of our common stock, subject to adjustment as provided on the terms of the 8% Notes - 2014, (i) at any
time prescribed by the Investors or (ii) upon any date prior to the maturity date of June 11, 2019, on which the Company’s
common shares are listed on a U.S. based stock exchange.
Through December 31, 2014, we paid Mr. Kronstadt
approximately $27,900 of interest on the 8% Notes – 2014.
12% Convertible Promissory Notes. During
the three months ended September 30, 2014 pursuant to the terms of our 12% convertible promissory notes (the “12% Notes”),
we issued and sold to Mr. Kronstadt, an aggregate principal amount of $333,333 of our 12% Notes which are initially convertible
into shares of our common stock, subject to adjustment as provided on the terms of the 12% Notes, at any time prescribed by the
Investors at a conversion price equal to 85% of the weighted average price of a share of common stock for the ten consecutive trading
days prior to the conversion date. The 12% Notes mature on June 30, 2015.
Through December 31, 2014, we paid Mr. Kronstadt
approximately $9,300 of interest on the 12% Notes.
12% Secured Notes. During the three
months ended December 31, 2014 pursuant to the terms of our 12% secured notes (the “12% Secured Notes”), we issued
and sold to Mr. Kronstadt, an aggregate principal amount of $650,000 of our 12% Secured Notes. The 12% Secured Notes mature on
June 30, 2015 and are secured by a pledge of the common shares of Axion International, Inc. and Axion Recycled Plastics Incorporated,
owned by us.
Through December 31, 2014, we paid Mr. Kronstadt
approximately $3,200 of interest on the 12% Secured Notes.
A summary of the transactions entered into
with Mr. Kronstadt is as follows:
| | |
| | |
Common Stock | |
| | |
| | |
Equivalent, | |
| | |
Principal | | |
If Converted | |
| | |
| | |
| |
| 8% convertible notes (2012) | |
$ | 5,209,297 | | |
| 13,023,243 | |
| 8% convertible notes (2014) | |
| 666,667 | | |
| 2,500,000 | |
| 12% convertible promissory notes | |
| 333,333 | | |
| 980,391 | (ii) |
| 12% secured notes | |
| 650,000 | | |
| - | (i) |
| TOTAL | |
$ | 6,859,297 | | |
| 16,503,634 | |
(i) not convertible into shares of common stock.
(ii) assumed 10-day volume weighted average price was $0.40.
Perry Jacobson
Perry Jacobson was appointed to our board of directors on September
20, 2010.
10% Convertible Redeemable Preferred Stock.
During the year ended December 31, 2011, we sold to Mr. Jacobson 12,500 shares of our Preferred Stock for $125,000. The Preferred
Stock may be converted into shares of our common stock at any time by Mr. Jacobson at a conversion price effective January 1, 2015
of $0.70 per share, as adjusted. Mr. Jacobson is entitled to receive dividends at the rate of 10% per annum payable quarterly,
at our option, in cash, or in additional shares of common stock, and has the right to vote the Preferred Stock with our common
stockholders on any matter.
Since certain revenue targets for the twelve
months ended December 31, 2011 were not achieved, Mr. Jacobson received a warrant to purchase 62,500 shares of our common stock.
During the three months ended June 30, 2014, pursuant to our Tender Offer to all warrant holders to exchange the fair value of
any warrants then outstanding, for shares of our common stock, Mr. Jacobson received approximately 32,400 shares of common stock
in exchange for the warrants to purchase 62,500 shares of common stock.
Through December 31, 2014, Mr. Jacobson received
an aggregate of approximately 79,400 shares of common stock as dividend payments on the Preferred Stock held by them.
Note 16 - Subsequent Event
12% Secured Notes
Subsequent to the year ended December 31, 2014 pursuant to the terms
of our 12% secured notes (the “12% Secured Notes”), we issued and sold to MLTM Lending, LLC, Samuel Rose and Allen
Kronstadt collectively the “Investors”, (see Note 8 for additional description) an aggregate principal amount of $4.4
million of our 12% Secured Notes. Pursuant to the terms of the Pledge Agreement entered into contemporaneous with the 12% Secured
Notes, we provided a security interest in favor of the Investors in all of our rights, title and interest in the pledged shares
of common stock of certain wholly-owned subsidiaries of the Company.
The 12% Secured Notes, including all outstanding principal and accrued
and unpaid interest, are due and payable on June 30, 2015 or upon the occurrence of an Event of Default (as defined in the 12%
Secured Notes). We may prepay the 12% Secured Notes, in whole or in part, upon notice to the holders thereof. Interest accrues
on the 12% Secured Notes at a rate of 12% per annum, payable on maturity.
