UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-KT





 ̈
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





x
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from October 1, 2010 to December 31, 2010





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)


180 South Street, New Providence, NJ 07974


(Address of principal executive offices)





(908) 542-0888


(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 registeredNone
None





Securities registered under Section 12(g) of the Exchange Act:





Title of each classCommon 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  x    No    ̈ .





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   ̈     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 o
Accelerated filer oNon-accelerated filer  o (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 $24,606,808 based on the average bid and asked price of the Common Stock on June 30, 2010.





The number of shares outstanding of the registrant’s Common Stock, as of April 29, 2011, was 24,009,145.





DOCUMENTS INCORPORATED BY REFERENCE








TABLE OF CONTENTS





PagePART I.Item 1.
Business
3Item 1A
Risk Factors
13Item 2.
Property
18Item 3.
Legal Proceedings
18Item 4.
[Removed & Reserved]
18PART II.Item 5.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
19Item 6.
Selected Financial Data
19Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
25Item 8.
Financial Statements and Supplementary Data
25Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
25Item 9A.
Controls and Procedures
25Item 9B.
Other Information
26PART III.Item 10.
Directors, Executive Officers, and Corporate Governance
27Item 11.
Executive Compensation
30Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
34Item 13.
Certain Relationships and Related Transactions and Director Independence
38Item 14.
Principal Accountant Fees and Services
39PART IV.Item 15.
Exhibits and Financial Statement Schedules
40Signatures
43




2





EXPLANATORY NOTE





On January 18, 2011, the Company’s Board of Directors approved the change of the date of the Company’s fiscal year end from September 30 to December 31. The Company has elected to file its report on Form 10-K for the transition period from October 1, 2010 to December 31, 2010.





PART I





Item 1.  Business





Overview





Axion International Holdings, Inc. (“Axion”), formerly Analytical Surveys, Inc., was formed in 1981 and operated several different businesses until November 2007, when Axion entered into an Agreement and Plan of Merger, among Axion, Axion Acquisition Corp., a Delaware corporation and newly created direct wholly-owned subsidiary of Axion (the “Merger Sub”), and Axion International, Inc., a Delaware corporation which incorporated on August 6, 2006 with operations commencing in November 2007 (“Operating Entity”).  On March 20, 2008 (the “Effective Date”), Axion consummated the merger (the “Merger”) of Merger Sub into Operating Entity, with Operating Entity continuing as the surviving corporation and a wholly-owned subsidiary of Axion.  Each issued and outstanding share of Operating Entity became 47,630 shares of Axion’s common stock (“Common Stock”), or 9,190,630 shares in the aggregate constituting approximately 90.7% of Axion’s issued and outstanding Common Stock as of the Effective Date of the Merger.  The Merger resulted in a change of control, and as such, Axion (“we”, “our” or “Company”) is the surviving entity.





Business





Axion is the exclusive licensee of patented and patent-pending technologies developed for the production of structural plastic products such as railroad crossties, pilings, I-beams, T-Beams, and various size boards including a tongue and groove design that are utilized in multiple engineered design solutions such as rail track, rail and tank bridges (heavy load), pedestrian/park and recreation bridges, marinas, boardwalks and bulk heading to name a few.  This technology is licensed and products are sold in several territories including North and South America, the Caribbean, South Korea, Saudi Arabia, The United Arab Emirates, and Russia; additionally, China is a shared country with our strategic partner, Micron. We believe these technologies, which were developed by scientists at Rutgers University (“Rutgers”), can transform recycled consumer and industrial plastic wastes that would otherwise be discarded into landfills, into superior structural products which are more durable, have a substantially greater useful life and offer more flexible design features than traditional products made from wood, steel and concrete.  Our products also resist rot and damaging insects without the use of chemical treatments and require significantly less maintenance throughout their lifecycles than traditional products.  In addition, we believe our recycled composite products are environmentally friendly, in part because they sequester carbon, reduce the number of trees needing to be harvested and do not contain creosote, a carcinogen used to coat conventional wood crossties.





We are currently marketing our structural products to both the U.S. domestic and international railroad industry, the U.S. military, and industrial engineering and contracting firms. Our initial products consist of: (1) structural composite railroad crossties, (2) structural composite I-beams along with tongue and groove planking and (3) various sizes of boards.





In 2009, we sold our products for use in construction of two bridges commissioned by the military at Fort Bragg, NC to help facilitate troop movements, which were engineered to carry the extreme tonnage requirements for armored military vehicles that would not be possible with currently existing wooden bridges.  We believe these bridges are the first structures of their kind made almost exclusively of recycled thermoplastic materials to support loads in excess of 70 tons.


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Products





Our patented technology allows for the replacement of standard building materials, not with engineered resins, but with our recycled material formulations. This advantage secures not only a less expensive input material but also improved performance.





Benefits include:


·
Initial up-front cost savings based on design improvements


·
Life cycle savings based on lower maintenance and longevity


·
Improved performance


·
Green technology


·
Positive Environmental impact


·
Potential Carbon and Leed Credits as a green material





We are selling cross ties to both freight and transit railroads whose cost-benefit analysis determined the utility of installing recycled structural composite (“RSC”) crossties in high stress, overhead and moisture-laden areas.





The structural composite I-beams (patent pending) and tongue and groove planking (patent pending) are innovative products that we believe have the potential to revolutionize the structural material marketplace. These products were successfully installed for a vehicular bridge over the Mullica River in the New Jersey Pine Barrens in 2003.  The design features that made this installation unique were the use of less material and ease of interoperability of the construction parts.  In addition, an earlier bridge construction was successfully completed at Ft. Leonard Wood, Missouri in 1998.  Based on a 2007 analysis conducted by the U.S. Corps of Army Engineers, we believe that these bridges were then substantially as durable as they were when first installed and required virtually no maintenance. Axion supplied the materials for and participated in the installation of the first two structural composite bridges ever designed for use by military tanks. These bridges, constructed in 2009, hold over 70 tons for track vehicles and over 85 tons for wheeled vehicles. In 2010, we again participated in a ground breaking project, supplying the materials and helping in the design and build of two bridges. These bridges were developed for train use and are specified to hold 130 tons. Both the tank and rail bridge projects were constructed almost entirely from Axion materials including pilings, pile caps, girders, decking, ties (where applicable), rub rails and railings. The Company has recently secured a purchase order for a bill of materials to be used in the construction of a third tank bridge.  We anticipate supplying product for the construction of additional bridges and as a solution for waterfront bulkhead projects. We intend to continue to develop new products that will be utilized in many engineered solutions that will serve to not only expand our market capabilities but also serve as barriers to entry by others. We are currently engaged in two major product line expansion initiatives that will provide structural products (sizes and shapes) that will allow us to compete in the pedestrian/park & recreation bridge market and the marine solutions market.





Sales and Marketing





In 2011, we anticipate entering the next phase of our development.  Over the last three years, we have accomplished a great deal in advancing the development of our technology and products.  Additionally we have completed the deployment of these products (proof of concept) across multiple customers, applications and industries.  In all cases our products have performed above expectations.  Now it is time to begin the process of taking our products to mass markets.   We have commenced our sales efforts of our railroad ties and other recycled structural composite products to railroads and other public- and private-sector buyers (our first sales focus). Since these sales are important to our early success, initial sales are largely being handled by our management team whose members, through their prior activities, have a background in and connections with this industry. In addition, strategic engineering and sales relationships are being established to generate further sales penetration. The Company’s initial objectives are to secure sales orders for composite crossties from railroads and transit line railroads as well as, platforms and boardwalks from both the US Army and civilian contracts.  We believe our initial sales and marketing efforts have been positively received in the marketplace and our initial success with the US Army is an indication of the acceptance of our technology and products in the market.


4





Our strategic focus is on the continued growth of sales and the expansion of our technology within and across markets.  We have kept our management staff extremely lean during our initial years and focused on developing and confirming the performance of our RSC product.





With adequate funding, we anticipate expanding our organization to focus on increasing our sales pipeline.We anticipate we will deploy varied sales strategies and organizational structures based on the unique market segments. We believe our products have broad application across many markets. Each of these markets employs a different supply chain and back office infrastructure to support its business.





We may utilize a joint venture business strategy in certain markets in order to maximize profitability in a timely and efficient manner. For example, we may also explore potential collaborations with companies that will expedite sales efforts into a given sales channel, such as a marine distribution firm, whereby we will contribute our products, research and development and technology and our partner will contribute the sales and marketing knowledge and effort.





The Company will continue to use traditional methods of marketing through major trade magazines, internet, green social networking and trade shows.





The international markets present many options for us.  We are currently exploring business structures, including licensing, franchising or creating joint venture relationships. We intend to always be in control of the licensing of our intellectual property and of the formulation and the manufacturing process we employ. Currently, we are engaged in discussions with government officials and other organizations within Morocco, South America, Russia, China, France, India, Mexico and the Caribbean Islands.   To date, we have successfully shipped products to Morocco, India, Canada, Australia, Mexico and Italy.





Manufacturing





We do not own manufacturing facilities in which to produce our products.  Instead we believe that our outsourcing model to third-party manufacturing operations provides 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 Company’s various patented material formulations lend themselves to various production styles and opportunities. We currently produce through both (i) a continuous extrusion molding and (ii) a flow or intrusion molding process. These differing processes are run at separate facilities and are dictated by the size and complexity of the parts being manufactured. In addition, we have also explored compression and sheet molding processes as we look to develop and promote our technology and expand market acceptance.





Rather than designing and recreating our manufacturing processes when seeking to explore a different production process, we have seized the opportunity provided by the growing level of excess capacity left behind by manufacturing leaving the US. We thereby increase our production flexibility; eliminate the costly need to maintain our own facilities; and allow these underutilized facilities to provide for the creation or maintenance of jobs that would be otherwise lost overseas.





This manufacturing and production model also allows us to take advantage of production facilities located near key customers, reducing freight costs to those customers and making our products more cost effective. Finally, this model allows us to utilize material sources in various regions of the country and help promote recycling collection and broaden our supply base.





All of our products are currently manufactured by third-party manufacturers, currently with facilities in Pennsylvania and Indiana. We have also manufactured products in a facility in Tennessee.  In addition, we have contacted and discussed the production of our products with multiple third-party manufacturers who have the skills and capabilities to manufacture our products according to need and requirements.  Additional production facilities are being analyzed in Florida, Arkansas, Ohio and in Texas to better serve a customer looking to potentially expand its use of our products.


5





Third-party production facilities utilized by us tend to be located on direct industrial rail links or spur to allow for efficient material deliveries to customers and, particularly to rail customers. Flatbed and container trucks are also used to transport product. Facility size is dictated by the number of machines that Axion is utilizing in that plant but is seldom less than 30,000 sq ft. Because of the properties inherent in our products, outside storage is an important consideration and extensively used. With a product that is all but immune to changing weather conditions, there is no reason to waste valuable indoor storage.  Facilities that support the manufacture of large products and are in involved the recycling business, lend well to our requirements.





We provide the necessary raw materials and place one or more of our own employees in the third-party contract facility to serve as production consultants and quality control experts. We require our third-party contract manufacturers to enter into our non-compete, non-disclosure agreement.





We design and retain ownership of certain production equipment such as molds and dies that are provided to the third-party contract manufacturers during production runs.  For the Company’s most basic intrusion/flow molding process, there is approximately a 15-20:1 return on the molds built and placed in a facility. For approximately $500,000 invested in molds, a machine will generate products of between $7.5 and $10 million in annual sales, depending on the product mix. All molds and manifolds are designed as component parts and can be transferred between facilities or used interchangeably in a plug-and-play system as production needs dictate. We also provide and train the third-party contract molders with specific, internally-designed quality control (“QC”) equipment and procedural manual. All molders are required to maintain extensive QC records. Once a process is systemized, the Company may rely on a cost per piece basis, thereby eliminating returns risk and maximizing incentives to the third-party contract manufacturer to meet or exceed production goals.





The Company maintains a small corporate office in New Providence, NJ. The office is convenient to both Newark Airport and New York City and allows reasonably quick access to certain manufacturing facilities.





Materials Supply





The Company’s licensed material patents are for immiscible polymer blends which, when mixed and processed according to proprietary knowledge, yield structural grade properties in the resulting product. The concept is relatively straight forward. Rather than mixing materials with similar properties together to yield a third material (a commonly accepted industry practice), our technology blends two separate materials in a manner that allows them to physically bind together while still retaining their original properties. In effect, a tough, rugged, weather resistant material is mixed with a stiff and rigid material to yield both strength and stiffness properties whose sum of the parts is greater than their individual components. Adding to the uniqueness of the products manufactured is that recycled plastic wastes materials are used to achieve the desired results. Rather than using virgin, engineering grade materials that might be marketed and sold for tens or even hundreds of dollars per pound, the materials used in our recycled structural composites are diverted from landfills or collected as industrial scrap, and sell for less than one dollar per pound. The performance achieved at this price differential makes it virtually impossible for large virgin material suppliers, such as Dow, DuPont, or Shell to compete in our sector as a large scale industrial product.





The raw materials we utilized are widely available, and collected in most communities. Only a portion of the billions of pounds of recyclable-eligible materials generated each year are actually collected, and an even smaller percentage is actually used in recycled products. The 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. Long-term contracts actually benefit us as a buyer as they will allow us to more accurately project our material requirements, seek more competitive pricing from suppliers, and lock in that pricing (within limits) over time. An additional benefit inherent in the recycled material market is that it offers far greater pricing stability than does the virgin material market. The primary costs associated with recycled resins rest with the collection and grinding process. They are not directly tied to fluctuations and increases in oil prices as are virgin materials.





Exclusive License Agreement from Rutgers University





Pursuant to a License Agreement  with Rutgers (the “License Agreement”), we have 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 and patent pending applications owned by Rutgers.  As a result of the License Agreement, we have been granted the right to grant sublicenses. We use these patented technologies in the production of structural plastic products, such as railroad crossties, I-beams, T-beams, various boards including our tongue–in-groove design, that are utilized in the construction of bridges, marinas and marine bulk heading, There is an ongoing flow of new patent applications from Rutgers University that we will have the ability to utilize under our License Agreements, such as the patent pending on a new piling design.




6





We are obligated to pay Rutgers royalties ranging from 1.5% to 3.0%, on various product sales, subject to certain easily attainable minimum payments and to reimburse Rutgers for certain patent defense costs.  We also pay annual membership dues of $20,000 to AIMPP, a department of Rutgers, as well as consulting fees for research and development projects. 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.





Intellectual Property





Our licensed technologies are based on materials/composition of matter, processing and use and design patents. The compositions are used to produce structural products from waste materials. The processing capacity allows the production of efficient shapes from these blends such as I-beams and pilings. Our patents cover multiple material compositions including HDPE (high density polyethylene) a polymer commonly available from post-consumer and post-industrial waste streams, together with either stiffer polymers or polymer composites. Since our most completely tested and accepted product solution is presently railroad crossties, it is important to note that each of these polymer combinations can be used in railroad crosstie manufacturing.  We have a license from Rutgers for a pending patent on a unique processing technology that produces finer microstructures in the blends, and may lead to even tougher and stronger end products. Included in our license are three pending patents covering manufactured shapes. One of the patents covers both I-beams and tongue-in-groove planking. Another patent covers a method to produce even longer I-beams with variable shapes. The third patent covers a newly designed railroad crosstie that obviates the need for the expensive steel tie plate.  We also have licenses from Rutgers for one issued and two pending fire retardant patents. One retardant is designed to be sprayed onto plastic lumber and render it unable to sustain a fire. This technology is designed to coat thermoplastics. The other fire retardant coating was developed for the U.S. Military, specifically to be used to protect other standard materials.





Patents or Patents Pending





Axion’s intellectual property in the form of licenses, patents and technologies, include:





·
Method of deriving polystyrene and polyolefin plastics composite from recycled plastics, U.S. Patent 5,298,214 — (This is a composition of matter patent that covers blends of Polyethylene (PE) and Polystyrene (PS). The properties when blended properly yield a product that is stiffer than PE and tougher than PS.)


·
Composite Building Materials from Recyclable Waste, U.S. Patent 5,789,477;


·
Composite Building Materials from Recyclable Waste, U.S. Patent 5,916,932 — composition of matter patents for a)PS coated fiberglass and High Density Polyethylene (HDPE) blends and b)Polypropylene (PP) coated fiberglass and HDPE blends. PP coated fiberglass is broadly used in auto bumpers.)


·
Structural Plastic I-Beams, Patent Pending — (This is the concept of making I-beam structures along with Tongue & Groove decking from materials listed in #1 to #3.)


·
Structural Material composed of Polymethylmethacrylate (PMMA) with HDPE,  Patent Pending — (This is another composition of matter patent for blends of PMMA, an acrylic, and HDPE, to form another excellent structural material.  Axion observe PMMA trending toward being the cheapest polymer known.)


·
Processing Technology to Increase Toughness, Patent Pending — (This is a processing patent that increases the toughness of #1 to #3 and #5.)


·
Railroad Tie Not Needing a Tie Plate, Patent Pending


·
Damage Resistant Fire Retardant and Intumescent Coatings for the Protection of Substrates from Heat Flux, Patent Pending — (This is a fire retardant developed for plastics.)


·
Emissivity Based Silicone/Glass Fiber Composites for the Protection of Substrates from Heat Flux and Fire, Patent Pending — (This fire retardant is presently being tested by the U. S. Army on its ammo boxes.)


·
Method of Producing Long I-Beams with Capability of Variable Tapers from Structural Polymer Based Materials, Patent Pending — (This is a method patent for the manufacturing of tapered I-beams of varied lengths.)




7




Research and Development/Testing








Market Opportunities





The deteriorating state of the infrastructure in the United States presents an enormous opportunity for us. Conditions affecting standard building materials such as corrosion, crumbling, material rot, the application of toxic chemicals to retard product failure and maintenance and repair concerns such as painting, staining, rust treatments and, of course, replacement and downtime costs are all estimated to be reduced or eliminated by the use of our recycled structural composites (“RSC”).





We are focused on development and commercialization of products utilizing our patented technology.  These products will be tested, and may be certified and used across multiple segments and engineered solutions. The diversity of our technology portfolio again comes into play in supporting our position as a solutions provider to the infrastructure market. We are focused on infrastructure solutions and have identified five major U.S. vertical markets, which total billions of dollars in annual expenditures:





§
Railroads – railroad ties, bridges and switch ties;


§
Bridges – short span, pedestrian, vehicular, DOT/highway


§
Military – bridges,


§
Marine – marinas, bulkheads, docks and boardwalks


§
General industrial – supports for solar power; wind turbine poles; sound barriers; boardwalk super structure, structural components for portable houses




Railroads





§
The major North American railroads purchase between 15-20 million crossties annually. These numbers are based on fifty years of data and have been trending up over the past several years (Railway Tie Association Data).


§
Of the approximate 20 million crossties installed annually, approximately 30% were installed in areas considered most conducive to alternative, non-wooden, crossties. The alternative crosstie market is therefore approximately six million crossties per year, or is approximately a $600 million per year market for the Class I railroads alone.


§
Additional opportunities in the rail market include rail bridges; switch sets (turnouts), rail crossings, and the addition of fire retardant materials as a safety feature.





Bridges





The annual cost to maintain and repair highways and bridges was estimated at approximately $79 billion over the next 20 years (Federal Highway Administration Conditions and Performance Report (2006)). According to the U.S. Federal Highway Administration’s Oversight of Structurally Deficient Bridges study released in September 2007 before the Committee of Transportation and Infrastructure U.S. House of Representatives, “the National Bridge Inventory comprises data on 599,976 bridges, including 116,086 bridges on the National Highway System, as well as bridges maintained and operated by various state and local entities.....almost 80,000 bridges are considered functionally obsolete and nearly 72,500 are structurally deficient.” According to the U.S. DOT/FHA, “the Nation spends at least $5 billion per year for highway bridge design, construction, replacement, and rehabilitation.”





In pursuit of an attractive market opportunity and also as a segue to future DOT contract needs, we have participated in a U.S. Army design and supply program, transferring the knowledge of how to build vehicular bridges to U.S. Army Engineers in Training at Fort Leonard Wood, MO., which has already installed our technology in vehicular bridges.




8





Figure 3.1           Commercially Successful Bridges utilizing Axion’s products and technology


§





§





§




9





Military/Government Contracts





Overall, the U.S. Military historically has allocated substantial sums of money for infrastructure improvement:  Military Budget (2007) - $12.6 billion; R&D - $73.2 billion.


The Department of Defense spends $22.5 billion dollars annually on equipment and infrastructure as an impact of corrosion. For the Army, this number is approximately $5.8 billion annually... The Army estimates that [it] will receive a 34 to 1 return on investment by using this technology. This bridge is less expensive to build than its alternative, it provides greater corrosion resistance, and it’s practically maintenance free.  – ( Dr. Roger Hammerlinck, U.S. Military, September 2009).





This thermoplastic bridge, able to withstand heavy loads with little to no maintenance, expected to last at least 50 years, is no longer the bridge of the future – it’s the bridge for today. It also meets national environmental goals of being completely recyclable. This technology is not only good for DoD, but should be immediately transferred to state departments of transportation for use with short-span bridges wherever possible.  – ( Daniel J. Dunmire, Director of Office of the Secretary of Defense Corrosion Policy and Oversight).





Marine





Our products resist corrosion to harsh water environments and present compelling solutions to common marine applications such as:


·
Public and private boat docks and marinas;


·
Piers and bulk heading along any seaboard, river, or estuary.





“Thirteen Federal agencies spent an average of $3.9 billion annually ... on construction and maintenance of federally authorized projects.” (GAO Report on Marine Transportation (2002)).





General Industrial





The long term opportunities for recyclable structural components to replace standard building materials across a variety of industries is substantial, including bridges, cell towers & wind turbine poles, sound barriers, boardwalk and residential decking super structure The Transportation market segment could also be expanded to include highway guard rails and posts, sign posts, and other products for State and Federal Departments of Transportation. We continue to work with world leading structural and civil engineering firms to further develop applications and set standards for our products.





Competition





We believe our competitors in the various infrastructure verticals are the suppliers of existing historical materials such as wood, steel and concrete. These materials have gained widespread acceptance over time. Our challenge as well as that of other alternative material manufactures and developers, is to break the inertia associated with the familiarity surrounding “standard” products. Our ability to break into these markets and overcome this inertia, is built around the following solutions:





Documenting successful projects and results


·
White papers have and are being published by the U.S. Army Corps of Engineers and various respected engineering firms documenting the performance of our products.


·
Repeat orders are being placed by multiple concerns for both railroad ties and bridges.


·
Key engineering firms are initiating work on establishing standard design criteria for various repeat projects.





Proving safety margins of our products (equal or better than that of historical materials)


·
The U.S. Army Corps of Engineers has supported monitoring of certain bridge projects and has reported that our products “have exceeded expectations.”


·
Civil engineering firms are certifying our products based on establishing design provisions that allow them a greater safety factor in their designs than would be available with standard materials. For example, the Ft. Bragg bridges have been designed to allow a 70 ton tank to be parked and left on the bridge for a 25 year period without causing the bridge to suffer from long term creep or sagging.




10





Documenting cost benefits


·
As confirmed by the U.S. military and various military contractors, our products used to construct bridges are designed to present significant upfront cost savings.


·
Our products represent life cycle cost savings as the very nature of the material prevents corrosion, rusting, moisture absorption, etc., thereby reducing maintenance costs.


·
our products are lighter in weight and often feature quick assembly designs that allow for projects to be built quickly reducing downtime and inconvenience.





Unique Component Benefits


·
We have the ability to engineer and manufacture highly specialized components.


·
We work closely with customers to deliver products that are engineered specifically to meet the challenges of each job or project.





With regard to competition from within the composite or alternative building material markets, we maintain some significant advantages. Our diverse patent portfolio and ongoing think-tank relationship with Rutgers encourages solutions that are tailored to whatever challenges may be presented. The straight forward formulations and detailed quality control focus stressed by our processes and procedures, allows us to produce commercially viable, cost efficient solutions with little if any waste. Further, the ability to perform across varying market segments yields us a significant advantage against other competitors.





Railroads





Prior to Axion launching operations, there have been other companies in the composite railroad tie industry which documented the enthusiasm of the railroad market for composites with one particular company receiving an order for one million railroad ties from a major freight carrier. However, they experienced a number of quality control issues, a high rejection rate in the field, and significant management turnover, but were able to establish the potential volume that the rail industry could generate. Another privately held railroad tie manufacturer based in Florida, remains active in the industry though with limited production capacity. Composite railroad ties make up less than 5% of the replacement railroad ties ordered in the US.





Bridges





No other composite manufacturer has constructed an entire bridge utilizing recycled plastic wastes as we have all but created this market segment through our efforts with the U.S. Army Corps of Engineers and work with various engineering firms. Certain virgin polymer manufacturers exist internationally but seem to focus more on decking materials to the exclusion of pilings, girders, etc. while being far higher priced based on higher material costs.  A U.S. manufacturer of composite girders, concrete, steel, and virgin plastic also exists but does not make other supporting products.








Marine





The largest composite marine supplier is the Seaward division of Trelleborg. This supplier has a system of virgin fiberglass rods which are inserted in a polymer shell to create pilings and related marine products. While a solid performance product, the multi-stage manufacturing process and the use of virgin materials can lead this to be an extremely high priced system.





Sales Growth Drivers





Market demand for products incorporating plastic composites is growing and the number of competitive suppliers of structural building products utilizing recycled plastics is very limited.





We are one of only a few commercial suppliers of high integrity HDPE composite components and products within the primary infrastructure markets it serves.  In almost all market verticals, we compete with only one or two key competitors and hold a leading technological position in each business or market served.  Barriers to entry are high and the likelihood of new entrants is low.  Therefore, we have the potential to assert a leadership position in many of our product lines due to our simplified manufacturing approach and consistent product quality control.




11





The substantial increase in demand for composite crossties within the U.S. has created a potential void in order fulfillment.  Major railroad companies have adopted a preference for composite crossties to replace formerly wooden crossties which cannot stand up to harsh environments as well as composite crossties.  This preference has resulted in prior purchase agreements being reissued by rail companies to purchase composite crossties.  We have now been qualified to supply our composite crossties to these potential purchasers and recently have been awarded a multiyear supply agreement with an industry-leading rail line.





The Company intends to expand its international sales efforts in order to capture a larger proportion of the global crosstie market.  The increase in international sales will be achieved by increasing sales focus on specific foreign countries, such as Mexico and Morocco.  Each of these countries lacks a forestry industry to provide wooden railroad crossties.  Additionally, each has a punishing desert environment which subjects crossties to daily temperature fluctuations that can accelerate the deterioration of traditional wooden rail crossties.  The Company believes it can successfully expand its international market share by tailoring its products to meet regional requirements and by strengthening sales channels.





Benefits: Environmental Impact, Performance and Cost





Utilizing virtually 100% recycled plastics, our structural products have the distinct advantage of being environmentally friendly.  Our products form a nearly perfect Green Circle. We start by diverting plastic from the waste stream; use less energy to manufacture and transport our products than standard building materials; our products enjoy a long life with low maintenance requirements; and, our products are fully sustainable as they can be recycled again at the eventual end of their useful life.  Our products address the increasing worldwide environmental concerns for deforestation coupled with the specific goals for recycling, reducing greenhouse gases and manufacturing products without toxic materials.  We believe that our products in certain installations will last longer than conventional creosote treated wooden ties, offering significant cost savings in maintenance and product replacement, and will have freedom from biological attack (including termites).





Employees





On April 29, 2011, we had six full time employees and continue to utilize consultants on an as-needed basis.




12


Item A.  Risk Factors





In addition to the other information set forth in this Form 10-K the issues and risks described below should be considered carefully in evaluating our outlook and future.  If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed.  In that case, the trading price of our Common Stock could decline and you could lose all or part of your investment.





We have generated limited operating revenues.   If we are unable to commercially develop and sell our structural plastic 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 and sell our structural plastic products.  If we are unable to commercially manufacture and sell our structural plastic products, we will not be able to generate profits and we may be forced to curtail operations.





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 will not be cash flow positive for at least the near future.  We 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.  We cannot assure that adequate additional funding will be available, especially given the current financial turmoil.  If we are unable to continue to obtain needed capital from outside sources, we will be forced to reduce or curtail our operations.





Our ability to execute our business plan depends upon our ability to obtain financing through:





·
bank or other debt financing,


·
equity financing,


·
strategic relationships, and/or


·
other means





At December 31, 2010, we had substantial convertible debt outstanding with maturities over the next eighteen months.





We had approximately $1.2 million in convertible debt at December 31, 2010. Subsequent to December 31, 2010, we amended the maturity dates for several of the debt instruments, resulting in maturities ranging from January 2012 through June 2012. Currently, we do not have the capability to repay these obligations when they become due, and will either need to generate appropriate cash flows from operations, raise additional capital from other sources or negotiate with the debt holder to extend the maturity to allow us to commercialize our business plan and further generate the necessary capital for ultimate repayment. If we are unable to do this, we will be forced to curtail or cease operations.





Our independent auditors have expressed that there is substantial doubt about our ability to continue as a going concern.





Our independent auditors issued an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern on our financial statements for the transition period ended December 31, 2010 and for the fiscal years ended September 30, 2010 and 2009, based on the significant operating losses and a lack of external financing.  Our financial statements do not include any adjustments that resulted from the outcome of this uncertainty.  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.




13




Our products are new and, to date, have limited exposure and acceptance in the marketplace.  If our products do not receive market acceptance, our ability to execute our business plan most likely will be adversely affected.





Although earlier versions of our structural composite railroad crossties, I-beams and bridge decking were sold by Polywood, Inc. several years ago, only a limited amount of our other products, including our fire retardant composite railroad ties, have been sold and are relatively new and untested in the marketplace.  Potential customers may be resistant to trying new untested products, such as ours.  If our products do not receive market acceptance, our ability to commercialize our business plan most likely will be adversely affected.





Our business is highly reliant on third-party manufacturers. If one or more third-party manufacturers that we engage do not meet our manufacturing requirements, our ability to manufacture and subsequently sell our products will be materially impaired.





We plan on relying on third-parties to manufacture our products and have entered into agreements with several third-parties, as well as entering discussions with others, to manufacture our products. Consequently, we are dependent on third-party outsourcing for the manufacture of our products. Our business is dependent upon our retention of manufacturers and the development and deployment by third-parties of their manufacturing abilities. There can be no assurance that we will obtain the requisite manufacturers or, once retained, that these manufacturers will be able to meet our manufacturing needs in a satisfactory and timely manner, or that we can obtain additional manufacturers when and if needed. Although we believe there are a number of potential manufacturers available, if we are unable to retain manufacturers quickly or cost effectively, our ability to manufacture and sell our products will be materially impaired. Our reliance on third-party manufacturers involves a number of additional risks, including the absence of guaranteed capacity and reduced control over the manufacturing process, delivery schedules, production yields and costs, and early termination of, or failure to renew, contractual arrangements. Although we believe that these manufacturers will have an economic incentive to perform such manufacturing for us, the amount and timing of resources to be devoted to these activities is not within our control, and there can be no assurance that manufacturing problems will not occur in the future. A significant price increase, an interruption in supply from one or more of such manufacturers, or the inability to obtain additional manufacturers when and if needed, could have a material adverse effect on our business, results of operations and financial condition.





If we are unable to develop substantial sales and marketing capabilities, we most likely will not be able to generate adequate sales.





Initially, sales and marketing has been conducted by our senior management team, who through their prior activities, have backgrounds and relationships in our industry. In the future, we may utilize a joint venture business strategy in certain markets in order to maximize profitability in a timely and efficient manner. Alternatively, with incremental funding, we may hire 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.





In the quarter ended June 30, 2010, we received our first significant international order 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.


14




Our ability to effect and sustain our business plan and generate profitable operations most likely will be materially adversely affected if we are unable to purchase raw materials of acceptable quality or cost.





We believe that the raw materials that we will need to manufacture our products are available from multiple sources at relatively stable prices, except for recycled plastic, which has cyclical variation in supply, quality and cost. Our inability to secure supplies of raw materials of acceptable quality and costs could have a material adverse effect on our ability to effect and sustain our business plan and generate profitable operations.





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 traditional construction material suppliers and we believe several composite companies, which offer polymer composite products that compete in our market.  Most of our potential competitors have substantially greater financial and marketing resources and capabilities. These companies and others may independently develop technology for the production of structural plastic products similar or superior to our technology, which may result in our products becoming less competitive or obsolete. Competition from other companies, and possibly from universities and research institutions, may increase as advances in technology are made.





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. We and/or Rutgers have obtained and continue to seek patents with respect to newly developed technologies. We also rely on a combination of trade secret, nondisclosure and other contractual arrangements, and copyright laws to protect our proprietary rights. We will 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 will 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, which may limit the development of our business.





If we or our third-party manufacturers were found to be infringing any third-party patents, we or they could be required to pay damages, alter our or their products or processes, obtain licenses or cease certain activities. We cannot be certain that if we or they required licenses for patents held by third-parties that they would be made available on terms acceptable to us or them, if at all.




15





Environmental liabilities and environmental regulations may have an adverse effect on our business.





Previously, we 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. Accordingly, these environmental hazards could expose us to material liabilities for property damage, personal injuries and/or environmental harms, including the costs of investigating and rectifying contaminated properties.





We have outstanding options, warrants and convertible debentures, and we are able to issue “blank check” preferred stock, that could be issued resulting in the dilution of Common Stock ownership.





As of December 31, 2010, we had outstanding options, warrants and convertible debentures that, when exercised and converted, could result in the issuance of up to approximately 10 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. To the extent that outstanding options, warrants and convertible debentures or similar instruments or convertible preferred stock issued in the future are exercised or converted, these shares will represent a dilution to the existing 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 may issue in the future. Any such issuance could be used to discourage an unsolicited acquisition proposal by a third party.





Subsequent to December 31, 2010 and through April 21, 2011, we issued 759,773 shares of our 10% Convertible Preferred Stock which is convertible into 6,078,184 shares of Common Stock.





Future sales of our Common Stock 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.





The price of our Common Stock, as quoted on the Over-the-Counter Bulletin Board, is highly volatile and the purchase or sale of relatively few shares can disproportionately influence the share price.





The trading price and volume of our Common Stock has been and may continue to be subject to significant fluctuations in response to:





·
our ability to  execute our business plan;


·
actual or anticipated quarterly variations in our operating results;


·
the success of our business and operating strategy; and


·
the operations and stock price performance of other comparable companies.





The trading price of our Common Stock may vary without regard to our operating performance. Historically, we have been a thinly traded stock, therefore relatively few shares traded can disproportionately influence share price.





We have limited operating history with regard to our new business and, as a result, there is a limited amount of information about us on which to make an investment decision.





We commenced our current operations in November 2007 and have recognized limited revenues to date. Accordingly, there is very little operating history upon which to judge our current operations or financial results.




16





Our Common Stock is deemed to be a "penny stock" and trading of our shares is subject to special requirements that could impede our stockholders' ability to resell their shares.





Our shares are subject to the Penny Stock Reform Act of 1990 which may potentially decrease your ability to easily transfer our shares. Broker-dealer practices in connection with transactions in "penny stocks" are regulated. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules.





Material weaknesses in our disclosure controls and procedures 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 have concluded that our internal control over financial reporting is not effective as of December 31, 2010. These material weaknesses and our remediation plans are described further in Item 9A, "Controls and Procedures" of this Report. Material 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.





Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements.  Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or reflect the occurrence of unanticipated events.  New factors emerge from time to time, and it is not possible for us to predict which will arise.  In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.




17





Item 2. Properties





We lease approximately 2,100 square feet of office space in New Providence, New Jersey pursuant to a three-year lease agreement for office space which provides for an initial monthly lease payment of $3,356 with customary annual increases.  These premises serve as our corporate headquarters. The initial term of the lease expires on October 31, 2012 and the lease provides one renewal option for an additional three-year term.





Prior to the Merger, we had leased approximately 2,500 square feet of office space in San Antonia, Texas pursuant to a five-year lease agreement which provided for an initial monthly lease of approximately $3,500, with customary annual increases. Effective January 1, 2009, we sublet the space for a monthly sublet fee of $2,000 through the expiration of the underlying lease on December 31, 2011.





Item 3.  Legal Proceedings





In April 2006, Holdings 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 Holdings summary judgment against Tonga for disgorgement of short-swing profits in the amount of $4,965,898.  The defendants are appealing from the order granting Holdings summary judgment.





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.  [Removed & Reserved]




18


PART II.





Item 5.  Market For Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities





As of December 31, 2010, there were approximately 1,271 registered holders of our Common Stock, and there were 23,305,704 shares of our Common Stock outstanding.  Our Common Stock has been traded on the Over-the-Counter 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, since August 4, 2008, the date of the reverse split, our Common Stock was 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.  Our business changed to that of Axion’s on March 20, 2008, the date of the merger.  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 Over-the-Counter 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


LowApril 1, 2011 to April 29, 2011

$
1.38


$
1.12Three months ended March 31, 2011


2.10



0.91Three-months ended December 31, 2010

$
1.10


$
0.80Year Ended September 30, 2010:First quarter

$
3.20


$
2.10Second quarter


3.10



1.55Third quarter


1.80



0.66Fourth quarter


1.29



0.75Year Ended September 30, 2009:First quarter

$
1.50


$
0.75Second quarter


1.20



0.85Third quarter


1.17



0.80Fourth quarter


3.25



0.65





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.





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.




19


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. (“Axion”) was formed in 1981 to provide data conversion and digital mapping services to users of customized geographic information systems.  On March 20, 2008, Axion consummated an Agreement and Plan of Merger (the “Merger”), among Axion, Axion Acquisition Corp. (the “Merger Sub”), a Delaware corporation and direct wholly-owned subsidiary of the Axion, and Axion International, Inc. (“Operating Entity”), a Delaware corporation which incorporated on August 6, 2006 with operations commencing in November 2007.  Pursuant to the Merger, the Merger Sub was merged into Operating Entity, with Operating Entity continuing as the surviving corporation and a wholly-owned subsidiary of Axion.  Each issued and outstanding share of Operating Entity became 47,630 shares of Axion common stock (“Common Stock”), or 9,190,630 shares in the aggregate constituting approximately 90.7% of Axion’s issued and outstanding Common Stock as of the effective date of the Merger.  The Merger resulted in a change of control, and as such, Axion (“we”, “our” or the “Company”) is the surviving entity.





Axion is the exclusive licensee of revolutionary patented technologies developed for the production of structural plastic products such as railroad ties, bridge infrastructure components, marine pilings and bulk heading.  We believe these technologies, which were developed by scientists at Rutgers University (“Rutgers”), can transform recycled consumer and industrial plastics into structural products which are more durable and have a substantially greater useful life than traditional products made from wood, steel and concrete.  In addition, we believe our recycled composite products will result in substantial reduction in greenhouse gases and also offer flexible design features not available in standard wood, steel or concrete products.





The Merger has been accounted for as a reverse merger in the form of a recapitalization with Axion as the successor.  The recapitalization has been given retroactive effect in the accompanying financial statements.  The accompanying consolidated financial statements represent those of Axion for all periods prior to the consummation of the Merger.





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 (“GAAP”) in the US. 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.




20





Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date the financial statements and the reported amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates.





Revenue and Cost 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 when there are no significant future performance obligations.





Our business encompasses the production and sale of structural plastic products (made from recycled plastic waste) and include products such as railroad ties, pilings, I-beams, T-beams, and various size boards including a tongue and groove design that are utilized in multiple engineered design solutions such as rail track, rail and tank bridges (heavy load), pedestrian/ park and recreation bridges, marinas, boardwalks and bulk heading to name a few. Typically, customers are billed based on terms of their purchase order which are generally upon delivery.





In certain situations where we provide services, such as engineering or other consulting in addition to our products, customers are billed based on the terms included in the contracts, which are generally upon delivery of certain products or information, or achievement of certain milestones defined in the contracts.  When billed, such amounts are recorded as accounts receivable.  Revenue earned in excess of billings represents revenue related to services completed but not billed, and billings in excess of revenue earned represent billings in advance of services performed. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and depreciation costs.  Losses on contracts are recognized in the period such losses are determined.  We do not believe warranty obligations on completed contracts are significant.  Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.





Stock-based Compensation. We record stock-based compensation for transactions in which we exchange our equity instruments for services of employees, consultants and others based on the fair value of the equity instruments issued at the date of grant or other 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.





Recent Accounting Pronouncements





See Note 2 of the Consolidated Financial Statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.





Results of Operations





Three-Month Periods Ended December 31, 2010 and 2009





Revenue. We did not recognize any revenue during the three-month period ended December 31, 2010 compared to revenue of approximately $302,500 during the three-month period ended December 31, 2009. Revenue of approximately $252,000 was recognized during the three-month period ended December 31, 2009 related to engineering and production efforts pursuant to an order for the demolition and construction of two bridges on the US Army base at Fort Eustis, in Virginia. The remaining revenue recognized during that period primarily pertains to the sale of railroad ties and other construction activities.




21





In 2011, we anticipate entering the next phase of our development.  Over the past several years, we have focused on advancing the development of our technology and products.  As proof-of-concept, we have completed the deployment of our products across multiple customers, applications and industries. During the three-month period ended December 31, 2010 we began the process of taking our products to mass markets and we have commenced our sales efforts of our railroad ties and other recycled structural composite products to railroads and other public- and private-sector buyers. Our strategic focus is on the continued growth of sales, the expansion of our technology within and across markets, and the expansion of our infrastructure in order to manufacture our products and support our growing sales order pipeline.





Costs of Sales. For the three-month period ended December 31, 2009, our costs of sales were approximately 81% of sales. Because we continue in the early stages of commercial activities, our historical costs of sales may not be indicative of the costs of sales in the future.





Our costs of sales are predominately comprised of the cost of raw materials and the costs and expenses associated with our third-party manufacturing arrangements. During the three-month period ended December 31, 2010, we focused on identifying and evaluating various sources of raw materials as well as locations, processes and methods in which to manufacture our 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.  With proper funding, we will procure additional molds, thereby increasing manufacturing through put.





Research and Development.We continue to work with our scientific team at Rutgers University to enhance our product formulations, develop innovative products and expand the reach of our existing products. Research and development expenses increased to approximately $43,000 for the three-month period ended December 31, 2010 as compared to approximately $27,000 for the corresponding period in 2009.  We anticipate our research and development expenses may fluctuate significantly in the future as projects and products are identified and decisions made to either pursue or not.





Marketing and Sales. We incurred marketing and sales expenses of approximately $71,000 during the three-month period ended December 31, 2010 compared to approximately $105,000 for the corresponding period in 2009. As the focus to date has been on advancing our technology and products, we have not incurred significant expenses in marketing and sales effort.  During the three-month period ended December 31, 2010, we began to increase this effort and anticipate incurring significant market and sales expenses in the near 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 out-licensing our technology to others, will have a significant effect of our marketing and sales expenses.





General and Administrative. During the three-month period ended December 31, 2010 we incurred approximately $1,926,000 in general and administrative expenses which compares to approximately $2,462,000 for the three-month period ended December 31, 2009. For both periods, the expenses primarily represent the costs incurred by our senior management team, administrative support provided to them, and the services of consultants to advise and assist with our strategic and financial plan activities.  During the three-month periods ended December 31, 2010 and 2009, we incurred approximately $1,313,000 and $1,475,000, respectively in stock-based compensation expense in the form of shares or our common stock or warrants, issued to consultants.





We anticipate we will continue to use stock-based compensation when compensating consultants and others, in certain situations. In addition, we anticipate as we continue to grow our business, our general and administrative expenses will increase.





Depreciation and Amortization. Depreciation and amortization of our property, plant and equipment for the three-month periods ended December 31, 2010 and 2009 were comparable at approximately $74,000 versus $64,000, respectively.





Interest Expense and Amortization of Debt Discount.Interest expense related to our convertible debentures and notes was approximately $27,000 and $25,000 for the three-month periods ended December 31, 2010 and 2009, respectively. At the time of issuance, we recorded discounts on these convertible debentures and notes primarily due to the imbedded conversion features and related warrants issued in conjunction with the debt instruments. These discounts are amortized over the term of the underlying convertible debenture or note, and totaled approximately $134,000 and $10,000 for the three-month periods ended December 31, 2010 and 2009, respectively.




22





Income Taxes.We have unused net operating loss carry forwards, which included losses incurred from inception through December 31, 2010. Due to the uncertainty that sufficient future taxable income can be recognized to realize associated deferred tax assets, we have not recorded an income tax benefit from inception through December 31, 2010.





Years Ended September 30, 2010 and 2009





Revenue. For the years ended September 30, 2010 and 2009 we recognized revenue of $1,560,633 and $1,374,961, respectively.  During the year ended September 30, 2010, we fulfilled the orders for two bridges at Ft. Eustis, in Virginia, for which we recognized approximately $988,000 of revenue. In addition, we also recorded sales of railroad ties and assorted other products of approximately $561,000, including $257,000 from one customer, during that same period.  During the year ended September 30, 2009, we recognized approximately $784,000 in revenue associated with two bridges and recorded sales of railroad ties of approximately $591,000.





During the past several years, we have focused on advancing the development of our technology and products, including quality manufacturing processes and methods and product enhancements and we have initiated the deployment of these products in a proof-of-concept manner, across multiple customers, applications and industries. Our focus has recently changed and is now on the commercial sale of our products, including railroad tie products and components for bridges and other structures.





Costs of Sales. Cost of sales amounted to $1,504,095 and $995,218 for the years ended September 30, 2010 and 2009, respectively, resulting in gross margins of $56,538 and $379,743, respectively. The lower gross profit for the year ended September 30, 2010 was a result of being in the early stages of our manufacturing and commercial activities and included, among other factors, inefficient manufacturing processes and methods and costs of additional materials supplied to the bridge projects. Because we are in the early stages of commercial activities, cost of sales may not be indicative of cost of sales in the future, which may vary significantly and are highly dependent on the pricing of products, concurrent production activities, use of subcontractors and timing and mix of the sales and services.





Research and Development. Research and development costs totaled $242,605 and $467,133 for the fiscal years ended September 30, 2010 and 2009, respectively. This decrease reflects the completion of multiple projects with emphasis on product development, prototype molds and other products.  During the fiscal year ended September 30, 2009 we initiated or continued studies with Rutgers University and other third parties to enhance our product formulations, develop new innovative products, and expand the reach of our existing products.





As we encounter new and innovative product solutions for our customers, we anticipate continuing and possibly expanding our research and development efforts.





Marketing and Sales. Marketing and selling expenses decreased to $358,402 for the year ended September 30, 2010 from $497,961 for the year ended September 30, 2009. The decrease was primarily due to more emphasis on fulfilling our projects and contracts and less emphasis and personnel effort on building our sales pipeline.





Subsequent to September 30, 2010, we hired senior staff with substantial experience in the design, building and execution of a commercial strategic plan and anticipate marketing and sales expenses to increase significantly in the future.





General and Administrative. General and administrative costs totaled $5,620,137 and $3,398,509 for the fiscal years ended September 30, 2010 and 2009, respectively. This increase was primarily due to stock-based compensation in the form of shares and warrants issued to consultants. During fiscal year ended September 30, 2010 we recorded approximately $2.3 million in charges related to the issuances of shares of our Common Stock or warrants providing the right to purchase shares of our Common Stock at a predetermined price in the future. We are evaluating the use of shares of our Common Stock and warrants as compensation for consultants and other service providers, and may or may not continue the process in the future.




23





Depreciation and Amortization. Depreciation and amortization totaled $268,006 in the year ended September 30, 2010 compared to $179,547 in the fiscal year ended September 30, 2009.  This increase primarily reflects our increased investments made in our inventory of molds and the related depreciation.





Interest Expense. Interest expense recognized during the fiscal years ended September 30, 2010 and 2009 was approximately $672,000 and $589,000, respectively. The increase in interest expense resulted from increased amortization of discounts recorded on the notes during the fiscal year ended September 30, 2010.





Debt Conversion Expense - During the fiscal year ended September 30, 2009 we incurred approximately $1.0 million of debt conversion expense associated with the conversion and restructuring of several debentures. There were no corresponding conversions or restructurings during the fiscal year ended September 30, 2010.





Income Taxes.We have unused net operating loss carry forwards, which included losses incurred from inception through September 30, 2010. Due to the uncertainty that sufficient future taxable income can be recognized to realize associated deferred tax assets, no income tax benefit from inception through September 30, 2010 has been recorded.





Liquidity, Capital Resources and Plan of Operations





At December 31, 2010 we had approximately $1.1 million in current assets and $1.8 million in current liabilities resulting in a working capital deficit of $0.7 million, which compares to a working capital deficit of $0.6 million at September 30, 2010.





Subsequent to December 31, 2010, we were able to finalize amendments to certain of our convertible debentures, which among other amended terms, extended the maturity dates into 2012. Of $1,182,500 in principal amount of convertible debt at December 31, 2010, $172,500 is due by January 31, 2012, $300,000 is due in February 2012, $300,000 is due in March 2012 and $350,000 is due in May 2012.  The remaining $60,000 convertible note was converted upon maturity in February 2011.





We used approximately $575,000 and $1,270,000 in our operating activities during the three-month periods ended December 30, 2010 and 2009, respectively.  Financing activities, consisting primarily of the sale of shares of our Common Stock, have generated net cash proceeds net of repayments, totaling approximately $474,000 and $396,000 during the three-month periods ended December 30, 2010 and 2009, respectively. Our ability to pay principal and interest on our outstanding debt 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/or our ability to raise capital. The timing and amount of our financing needs will be highly dependent on 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.





We will need to raise additional capital through equity or debt financing over the next twelve months in order to fund our planned operations, including our minimum royalty commitment, and repay, further restructure or refinance our debt obligations. Subsequent to December 31, 2010 and through April 21, 2011, we have raised approximately $7,598,000 through the sale of our 10% Convertible Preferred Stock.





Our current operating plans for the next fiscal year are to enhance and significantly expand or manufacturing capabilities to meet our customer commitments, expand our marketing and sales capabilities to enhance and expand our pipeline of sales orders, and continue to develop innovative solutions for our customers. Although we will have raised additional funds through the issuance of our 10% Convertible Preferred Stock, there can be no assurance that we will achieve our financing needs or if it will be available, or if available, that such financing will be upon terms acceptable to us. Please see the Risk Factor “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” in “Item 1A.  Risk Factors” above.




24





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 Disclosure 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-24 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 in Accounting and Financial Disclosures.


Item 9A. Controls and Procedures





Evaluation of the Company's Disclosure Controls and Procedures





We carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2010.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that due to material weaknesses in our internal control over financial reporting noted below, our disclosure controls and procedures were not effective.





Our disclosure controls and procedures are intended to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as the principal executive and financial officers, respectively, to allow final decisions regarding required disclosures.  In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.





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 conducted an evaluation of the effectiveness of internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, our management concluded that as of December 31, 2010, our internal controls over financial reporting were not effective due to the following material weaknesses:




25





·
Insufficient time for newly engaged personnel to provide for adequate segregation of duties surrounding the approval, processing and recording of transactions, the proper recording of complex transactions, independent review of journal entries and account analyses, an adequate monitoring program and a robust risk assessment function.


·
Missing or non-operating controls and procedures over the recording of stock-based compensation transactions, allocation of production costs, and the preparation of account analyses.


·
Insufficient formal documentation of accounting policies and procedures to ensure continued operating effectiveness.





During the three-month period ended December 31, 2010, management engaged experienced accounting personnel, at both the chief financial officer and the controller positions who will focus in the near term on formalizing policies and procedures surrounding transaction processing and period-end account analyses and providing for additional review and monitoring procedures. Periodically, management will assess the need for additional accounting resources as the business develops.  Effective November 11, 2010, Mr. Donald Fallon was hired as our Chief Financial Officer to replace Mr. Gary Anthony who resigned to pursue other business opportunities.  In addition, the Company engaged an accountant on a part-time basis.





Management will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal control over financial reporting on an ongoing basis and are committed to taking further action and implementing enhancements or improvements, as necessary.




This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company’s registered public accountanting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.


Changes In Internal Control Over Financial Reporting





During the three-month period ended December 31, 2010, management engaged experienced accounting personnel, at both the chief financial officer and the controller positions who will focus in the near term on formalizing policies and procedures surrounding transaction processing and period-end account analyses and providing for additional review and monitoring procedures. Periodically, management will assess the need for additional accounting resources as the business develops





There were no other material changes 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 three-month period ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





Item 9B.  Other Information





None.




26





PART III.





Item 10.  Directors, Executive Officers and Corporate Governance





Directors and Executive Officers





The following table sets forth the names and ages of all of our current directors and executive officers along with their current positions.  All directors hold office until the next annual meeting of stockholders or until their successors have been elected and qualified.





Name

Age

Position with the CompanyMichael Dodd

40

DirectorDonald Fallon

57

Chief Financial Officer and TreasurerAnthony Hatch

51

DirectorPerry Jacobson

51

Chairman, Board of DirectorsPeter Janoff

55

DirectorJames Kerstein

52

Chief Technology Officer and DirectorSteven Silverman

46

President, Chief Executive Officer and Director





The principal occupations of and certain other information about each of our executive officers and directors are as follows:





Michael Dodd. Mr. Dodd, appointed to our board of directors on September 20, 2010, is currently serving as the Chief Executive Officer of 3D Global Solutions Inc. (“3D”).  3D provides professional program management services to governments, corporations and global organizations.  His responsibilities at 3D include providing senior leadership in all aspects of sales, marketing, production, and administration. Prior to joining 3D, Mr. Dodd was a Managing Director of the Federal Technology Group of Audio Visual Innovations, Inc., where he served as an advisor to management and the Board of Directors in matters relating to strategic growth in vertical market opportunities.  Mr. Dodd graduated from Catholic University of America with a B.A. in Political Science in 1994.  He also served in the United States Military from September 1989 through October 2000.





Donald Fallon. Mr. Fallon was appointed Chief Financial Officer and Treasurer effective November 11, 2010. Mr. Fallon has served as a consultant providing chief financial officer services to emerging high tech and non-profit organizations since November 2006.  From December 2003 until October 2006, Mr. Fallon held the positions of Senior Vice President, Chief Financial Officer and co-founder of Ceptor Corporation, an OTCBB-listed development-stage biopharmaceutical company which was engaged in the research and development of therapeutic products with a focus on orphan diseases.  Mr. Fallon has over 30 years of broad senior-level financial and accounting management experience, having served as Chief Financial Officers at both publicly and privately held companies.  Recently, he has provided financial, accounting and operational advisory services primarily to early-stage ventures.  Mr. Fallon has co-founded several biotech companies, and has substantial experience in SEC compliance issues, raising public and venture capital, strategic partnering and planning, and operations.  Mr. Fallon is a certified public accountant, holds a 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 is the founder of ABH Consulting which he started in 1999 to provide independent analytical research and consulting services in the freight and railroad industries to private equity funds, hedge funds and major railroads.  He is a frequent contributor to Progressive Railroading, a leading railroad industry publication, and is the co-sponsor of RailTrends, a railway industry 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, PainWebber and NatWest.  Mr. Hatch received his bachelor of arts, cum laude, from Harvard University in 1982.




27





Perry Jacobson. Mr. Jacobson was appointed to our board of directors on September 20, 2010.  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.





Peter Janoff. Mr. Janoff was appointed to the board of directors effective November 11, 2010. Mr. Janoff is currently serving as a Senior Asset Manager for DRA Advisors, LLC, a registered investment advisor.  He’s held that position since March 2009.  From January 2008 to January 2009, Mr. Janoff held the position of President and Chief Operating Officer of Brascan Property Management Company, S.A., a property management company for Brookfield Asset Management’s retail platform in Brazil.  From August 2005 to December 2007, Mr. Janoff was employed by Pyramid Management Group where he served as General Manager and Senior Asset Manager of Palisades Center, one of the largest and most complex retail entertainment and dining facilities in the United States.  Mr. Janoff earned his Juris Doctor degree from Hofstra Law School in 1981 and his B.A. degree in Economics from the State University of New York in 1978.





James J. Kerstein. Mr. Kerstein was appointed Chief Technology Officer, effective January 18, 2011 and has served as one of our directors since March 30, 2008. Prior to January 18, 2011, Mr. Kerstein had been our Chief Executive Officer since March 30, 2008, the date upon which we acquired Axion International, Inc. pursuant to the Merger.  He had served as the Chief Executive Officer of Axion since 2007.  Prior to that, Mr. Kerstein was the President of Plast-O-Matic Valves Inc., a privately-held manufacturer of high end polymer valves focused on the semiconductor and wastewater industries from December 2004 through May 2007.  From 1996 to 2004, he was the founder, Chief Executive Officer, President and Chairman of Polywood, Inc., a manufacturer of recycled plastic resins utilizing the Rutgers University developed technologies for the production of structural plastic products.  Mr. Kerstein is credited as a co-inventor on multiple patents dealing with formulations and uses of recycled plastics. Mr. Kerstein received a BBA in Accounting from George Washington University and a Master’s degree in Human Resources Management Development from Chapman University.





Steven Silverman. Effective January 18, 2011, Mr. Silverman was appointed Chief Executive Officer. Prior to that, on October 11, 2010, Mr. Silverman assumed the position of President and Chief Operating Officer of Axion International Holdings, Inc., and on November 2, 2010, he was appointed to our board of directors. Mr. Silverman served as Executive Vice President of Archbrook Laguna, LLC (“Archbrook”) from 2006 until he joined the Company and as Vice President of Operations and Business Development of Archbrook from 2000 until 2005.   From 1997 until 2000, he was Archbrook’s Vice President of Sales.  Archbrook is a total solution provider supplying consumer electronics and computer products to retailers through state-of-the-art logistical services.  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.




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.




28





Section 16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Securities Exchange Act of 1934 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 year ended December 31, 2010, we did not receive copies of such reports for the following events we are aware of:





o
Bradley Love – award of option for 150,000 shares on August 26, 2010


o
Michael Dodd – appointment to the board of directors, effective September 20, 2010


o
Michael Dodd – award of stock option pursuant to a plan, effective October 14, 2010


o
Alan Siegel – resignation from the Board of Directors, effective November 2, 2010


o
Miles Slater – resignation from the Board of Directors, effective November 2, 2010


o
Bradley Love – resignation from the Board of Directors, effective November 2, 2010


o
Peter Janoff – appointment to the Board of Directors and award of stock options pursuant to a plan, effective November 11, 2010


o
Donald Fallon – appointment as Chief Financial Officer, effective November 11, 2010


o
Anthony Hatch – appointment to the Board of Directors and award of stock options pursuant to a plan, effective December 6, 2010





Code of Ethics





We adopted a code of ethics which 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 www.axionintl.com .  We intend to disclose on our website any waivers or amendments to our code of ethics within five business days of such action.





Director Nominations





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





Peter Janoff is sole member of the Audit Committee of the Board of Directors. Mr. Janoff is an independent director and a financial expert. Prior to Mr. Janoff’s appointment to the audit committee, Lori Jones was the sole member of the committee and was not deemed an independent director.





The Audit Committee charter was filed as Appendix B to our Proxy on September 28, 2010.





Compensation Committee





The Compensation Committee of the Board of Directors was established at its meeting on  January 18, 2011 and is co-chaired by Michael Dodd and Peter Jacobson.




29





Item 11.  Executive Compensation





The following Summary Compensation Table sets forth, for the years indicated, 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 who received or are entitled to receive compensation in excess of $100,000 during the stated periods.





Summary Compensation Table


Name and









Option


All otherPrincipal Position

Year

Salary


Bonus


Awards


Compensation


TotalJames Kerstein

2010

$
208,000


$
-


$
-


$
10,200
(1)

$
218,200Chief Executive Officer

2009


208,000



-



-



10,200
(1)


218,200Marc Green (2)

2010


73,848



-



-



-



73,848Former President and Treasurer

2009


120,000



-



-



-



120,000Steven Silverman (3)

2010


33,654







243,996







277,650President and Chief Operating Officer





(1) Includes an automobile allowance in the amount of $850.00 per month.


(2) Mr. Green resigned as President and Treasurer in May 2010.


(3) Mr. Silverman was appointed President and Chief Operating Officer on September 23, 2010





Employment Agreements





James Kerstein





January 2008 Agreement





Axion entered into an employment agreement, dated as of January 1, 2008, with Mr. Kerstein that provides for his continued 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 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.




30





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.




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 (“1stMilestone”), (ii) $300,000 upon Axion achieving $15,000,000 in sales during any fiscal year (“2ndMilestone”), and (iii) $375,000 upon Axion achieving $25,000,000 in sales during any fiscal year (“3rdMilestone”).  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 the Company’s 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 the Company achieving the 1stMilestone (iv) an option to purchase an additional 250,000 shares of Common Stock  at $1.75 per share upon the Company achieving the 2ndMilestone, and (v) an option to purchase an additional 250,000 shares of Common Stock at $2.50 per share upon the Company achieving the 3rdMilestone. In the event, following a change in control as defined in his employment agreement, Mr. Silverman’s employment by Axion 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.




31





The agreement also requires Mr. Silverman to enter into the Company’s Confidentiality and Inventions Agreement.




Donald Fallon





Pursuant to the terms of our engagement letter with him, effective November 11, 2010, Mr. Fallon was appointed chief financial officer and is compensated on a part-time hourly basis. In addition, Mr. Fallon was appointed Treasurer, effective January 18, 2011.




32





Compensation of Directors





The following table shows compensation to all directors, who were not also employees or officers of the Company, during the year ended December 31, 2010.





Compensation of Directors





Name

Option Awards


All Other

Compensation


TotalBradley Love (1) (3)

$
152,857


$
-


$
152,857Perry Jacobson (2)


43,860







43,860Michael Dodd (3)


113,660







113,660Perry Jacobson (3)


113,660







113,660Peter Janoff (3)


119,032







119,032Anthony Hatch (3)


118,464







118,464





(1)
Mr. Love was a member of our board of directors from March 2010 until October 2010


(2)
Mr. Jacobson was compensated for recruiting assistance he provided to the Company.


(3)
Each director that is not an officer or employee of the Company received an option to acquire 150,000 shares of Common Stock, pursuant to the 2010 Stock Plan.





Outstanding Equity Awards at December 31, 2010


Option Awards





Name

Number of

Securities

Underlying

Unexercised Options


Option

Exercise Price

Option

Expiration DateJames Kerstein (1)


762,076


$
0.00002

1/1/2013Peter Jacobson (2)


50,000



1.20

10/13/2015Peter Jacobson (3)


150,000



1.20

9/20/2015Michael Dodd (3)


150,000



1.20

9/20/2015Steve Silverman (4)


1,000,000





11/4/2017Peter Janoff (3)


150,000



1.20

11/11/2013Anthony Hatch (3)


150,000



1.20

12/6/2015





(1)
The options are exercisable for a term of five years, of which (i) 190,519 shares vest upon Axion achieving annual revenues of $10 million, (ii) 285,779 shares vest upon Axion achieving annual revenues of $15 million and (iii) 285,778 shares vest upon Axion achieving annual revenues of $25 million.


(2)
Pursuant to the terms of the warrant agreement, such warrants vest immediately upon award.


(3)
Pursuant to the terms of the option agreement, such options vest and become exercisable as to 50,000 shares immediately upon award, as to the second 50,000 shares, one year later and as to the final 50,000 shares two years later. The Option Term, as defined, commences on the date such option vests and becomes exercisable and expires no later than the third anniversary thereof.


(4)
Pursuant to the terms of the option agreement, 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 the Company achieving the 1st Milestone, as defined, (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, as defined, 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, as defined.


33





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 April 29, 2011, 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., 180 South Street, Suite 104, New Providence, New Jersey 07974.





Name and Address of Beneficial

Owner

Amount and

Nature of

Beneficial

Ownership


Percent

of Class

(1)James Kerstein, CTO and Director (2)


2,000,450



6.6
%Perry Jacobson, Chairman of Board (3)


388,575



1.3
%Steven Silverman, CEO and Director (4)


150,000



*Michael Dodd, Director (5)


50,000



*Anthony Hatch, Director (5)


50,000



*Peter Janoff, Director (5)


50,000



*Donald Fallon, CFO and Treasurer


-



-All directors and officers as a group (7 persons) (6)


2,689,025



8.8
%


* Less than 1% of outstanding shares.





(1)
As of April 29, 2011, we had 30,087,329 equivalent shares of common stock outstanding, comprising 24,009,145 shares of Common Stock and 759,773 shares of 10% Convertible Preferred Stock, convertible into 6,078,184 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, executive officer or stockholder, as the case may be.





(2)
Excludes options to purchase 762,076 shares of common stock, which options have not yet vested.





(3)
Includes options and warrants to purchase 100,000 shares of common stock and excludes options to purchase 100,000 shares of common stock which have not vested. Also includes 12,500 shares of 10% Convertible Preferred Stock, convertible into 100,000 shares of common stock.





(4)
Includes options to purchase 150,000 shares of common stock and excludes options to purchase 850,000 shares of common stock which have not vested.





(5)
Includes options to purchase 50,000 shares of common stock and excludes options to purchase 100,000 shares of common stock which have not vested.




(6)
Includes options and warrants to purchase 400,000 shares of common stock and excludes options to purchase 2,012,076 shares of common stock which have not vested.




34





Equity Compensation Plan Information





The following table provides information regarding the status of our existing equity compensation plans at December 31, 2010.





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)Equity compensation plans approved by security holders


1,305,000


$
1.24



5,190,856Equity compensation plans not approved by security holders (1) (2) (3)


2,183,761


$
0.89



-Total


3,488,761


$
1.02



5,190,856





(1)
Pursuant to the terms of an employment agreement with our Chief Executive Officer, granting a right to purchase up to one million shares of Common Stock, of which the option for the purchase of 500,000 shares was awarded under a plan which was not approved by our shareholders. Such option is exercisable for a term of seven years, of which (i) an option to purchase 250,000 shares of Common Stock at $1.75 per share upon the Company achieving the 2nd Milestone, as defined, and (ii) an option to purchase an additional 250,000 shares of Common Stock at $2.50 per share upon the Company achieving the 3rd Milestone, as defined.


(2)
Includes an option pursuant to an employment agreement with our founder and Chief Technology Officer, granting the right to purchase 762,076 shares of Common Stock, at an exercise price of $0.00002 per share, under the terms of a certain performance-based stock option.


(3)
Includes options to purchase 921,685 shares of Common Stock with exercise prices ranging from $0.04 to $1.15, pursuant to individual arrangements.





2003 Stock Option Plan





In September 2003, the Board of Directors adopted the Officer and Employee Recruitment Stock Incentive Plan (the “2003 Plan”). Pursuant to applicable law, the 2003 Plan has been approved by our shareholders.  The 2003 Plan provides for the granting of incentive stock options and non-qualified stock options, as determined by a committee appointed by the Board of Directors.





Number of Shares Subject to the 2003 Plan.   The 2003 Plan authorizes the grant of options relating to an aggregate amount equal to fifteen percent (15%) of the aggregate number of shares of the Company’s outstanding Common Stock.  If any corporate transaction occurs which causes a change in our capitalization (for example, a reorganization, recapitalization, stock split, stock dividend, or the like), the number of shares of stock available and the number of shares of stock subject to outstanding options granted under the 2003 Plan will be adjusted appropriately and equitably to prevent dilution or enlargement of a participant’s rights.





Eligibility for Participation.   Individuals eligible to participate in the 2003 Plan are our employees and employees of our subsidiaries, but not any of our or our subsidiaries’ officers.





Terms of Options.   Options granted to employees may be either incentive stock options (ISOs), which satisfy the requirements of Internal Revenue Code Section 422, or nonstatutory stock options (NSOs), which are not intended to satisfy such requirements.  The exercise price for the grant of an NSO under the 2003 Plan may be any price that is greater than or equal to 85% of the fair market value of the Common Stock on the date the NSO is granted.  The exercise price of an ISO must be at least equal to 100% (110% for 10%-shareholders) of the fair market value of our Common Stock on the date the ISO is granted.  Options expire at the times determined by the committee, as specified in the applicable award agreement. However, no option is exercisable later than the tenth anniversary of the grant date, and any ISO granted to a 10%-shareholder must be exercisable on or before the fifth anniversary of the grant date.




35





Vesting and Acceleration.   Options vest at the times determined by the committee, as specified in the applicable award agreement. A participant’s options become fully vested upon the termination of the participant’s employment as a result of a reduction in force and upon the occurrence of our change in control.  In general, a change in control will be deemed to have occurred upon the acquisition by any person of more than 50% of our outstanding voting securities (or securities subject to conversion into voting securities), the acquisition by any person of the power to elect a majority of our directors, certain mergers and other corporate transactions if the holder’s of our voting securities before the transaction receive less than 50% of the outstanding voting securities of the reorganized, merged or consolidated entity, after the transaction, and our complete liquidation or dissolution, or the sale of all or substantially all of our assets, if approval of our shareholders is required for the transaction.





2010 Stock Option Plan





In September 2010, the Board of Directors adopted the 2010 Stock Plan (the “2010 Plan”). Pursuant to applicable law, the 2010 Plan has been approved by our shareholders.  The 2010 Plan provides for the granting of incentive stock options,  non-qualified stock options, stock grants and stock-based awards, as determined by a committee appointed by the Board of Directors.





Number of Shares Subject to the 2010 Plan.   The 2010 Plan authorizes the grant of options relating to 3,000,000 shares of the Company’s outstanding Common Stock.  If any corporate transaction occurs which causes a change in our capitalization (for example, a reorganization, recapitalization, stock split, stock dividend, or the like), the number of shares of stock available and the number of shares of stock subject to outstanding options granted under the 2010 Plan will be adjusted appropriately and equitably to prevent dilution or enlargement of a participant’s rights.





Eligibility for Participation .  Individuals eligible to participate in the 2010 Plan are our employees , directors and certain of our consultants. Each Option will be set forth in writing in an Option Agreement, duly executed by us and, to the extent required by law or requested by us, by the Participant. The Administrator may provide that Options be granted subject to such terms and conditions, consistent with the terms and conditions specifically required under the Plan, as the Administrator may deem appropriate including, without limitation, subsequent approval by our shareholders of this Plan or any amendments thereto.





Non-Qualified Options .   Each Option Agreement shall state the number of Shares to which it pertains and the option price (per share) of the Shares covered by each Option, which option price shall be determined by the Administrator but shall not be less than the Fair Market Value per share of Common Stock.  The Option Agreement shall also state the date or dates on which it is first exercisable and the date after which it may no longer be exercised, and may provide that the Option rights accrue or become exercisable in installments over a period of months or years, or upon the occurrence of certain conditions or the attainment of stated goals or events. Exercise of any Option may be conditioned upon the Participant’s execution of a Share purchase agreement in form satisfactory to the Administrator providing for certain protections for us and our other shareholders, including requirements that the Participant’s or the Participant’s Survivors’ right to sell or transfer the Shares may be restricted; and the Participant or the Participant’s Survivors may be required to execute letters of investment intent and must also acknowledge that the Shares will bear legends noting any applicable restrictions.  Each Option shall terminate not more than ten years from the date of the grant or at such earlier time as the Option Agreement may provide.





ISOs .   Each Option intended to be an ISO shall be issued only to an Employee and be subject to the terms and conditions outlined below, with such additional restrictions or changes as the Administrator determines are appropriate but not in conflict with Section 422 of the Code and relevant regulations and rulings of the Internal Revenue Service.  The ISO shall meet the minimum standards required of Non-Qualified Options, as described in Paragraph 6(A) of the Stock Plan.  Immediately before the ISO is granted, if the Participant owns, directly or by reason of the applicable attribution rules in Section 424(d) of the Code 10% or less of the total combined voting power of all classes of our stock or an Affiliate, the Option price per share of the Shares covered by each ISO shall not be less than 100% of the Fair Market Value per share of the Shares on the date of the grant of the Option.  However, if the Participant owns, directly or by reason of the applicable attribution rules in Section 424(d) of the Code more than 10% of the total combined voting power of all classes of our stock or an Affiliate, the Option price per share of the Shares covered by each ISO shall not be less than 110% of the Fair Market Value on the date of grant. For Participants who own 10% or less of the total combined voting power of all classes of our stock or an Affiliate, each ISO shall terminate not more than ten years from the date of the grant or at such earlier time as the Option Agreement may provide.  For participants who own more than 10% of the total combined voting power of all classes of our stock or an Affiliate, each ISO shall terminate not more than five years from the date of the grant or at such earlier time as the Option Agreement may provide.  The Option Agreements shall restrict the amount of ISOs which may become exercisable in any calendar year (under the Plan or any other ISO plan of ours or an Affiliate) so that the aggregate Fair Market Value (determined at the time each ISO is granted) of the stock with respect to which ISOs are exercisable for the first time by the Participant in any calendar year does not exceed $100,000.




36





Stock Grants. Each offer of a Stock Grant to a Participant shall state the date prior to which the Stock Grant must be accepted by the Participant, and the principal terms of each Stock Grant shall be set forth in an Agreement, duly executed by us and, to the extent required by law or requested by us, by the Participant. The Agreement shall be in a form approved by the Administrator and shall contain terms and conditions which the Administrator determines to be appropriate and our best interest, subject to the following minimum standards that each Agreement shall state the purchase price (per share), if any, of the Shares covered by each Stock Grant, which purchase price shall be determined by the Administrator but shall not be less than the minimum consideration required by the Colorado Business Corporation Act on the date of the grant of the Stock Grant; each Agreement shall state the number of Shares to which the Stock Grant pertains; and each Agreement shall include the terms of any of our right to restrict or reacquire the Shares subject to the Stock Grant, including the time and events upon which such rights shall accrue and the purchase price therefor, if any.





Stock-Based Awards .   The Board also has the right to grant other Stock-Based Awards based upon our Common Stock having such terms and conditions as the Board may determine, including, without limitation, the grant of Shares based upon certain conditions, the grant of securities convertible into Shares and the grant of stock appreciation rights, phantom stock awards or stock units. The principal terms of each Stock-Based Award shall be set forth in an Agreement, duly executed by us and, to the extent required by law or requested by us, by the Participant. The Agreement shall be in a form approved by the Administrator and shall contain terms and conditions which the Administrator determines to be appropriate and in our best interest.





The following is a brief summary of the U.S. federal income tax consequences of certain transactions under the Stock Plan based on federal income tax laws in effect on September 2, 2010.  This summary applies to the Stock Plan as normally operated and is not intended to provide or supplement tax advice to eligible employees.  The summary contains general statements based on current U.S. federal income tax statutes, regulations and currently available interpretations thereof.  This summary is not intended to be exhaustive and does not describe state, local or foreign tax consequences or the effect, if any, of gift, estate and inheritance taxes.





Grants of options or stock appreciation rights are generally not taxable income to the grantees or deductible for tax purposes by us at the time of the grant.  In the case of non-qualified stock options, a grantee will be deemed to receive ordinary income upon exercise of the stock option, and we will be entitled to a corresponding deduction, in an amount equal to the amount by which the fair market value of the common stock purchased on the date of exercise exceeds the exercise price.  The exercise of an ISO will not be taxable to the grantee or deductible by us, but the amount of any income deemed to be received by a grantee due to premature disposition of common stock acquired upon the exercise of an ISO will be a deductible expense of ours for tax purposes.  In the case of stock appreciation rights, a grantee will be deemed to receive ordinary income upon exercise of the right, and we will be entitled to a corresponding deduction, in an amount equal to the cash or fair market value of shares payable to the grantee. Grantees of restricted stock awards generally will recognize ordinary income in an amount equal to the fair market value of the shares of common stock granted to them at the time that the restrictions on the shares lapse and the shares become transferable.  At that time, we will be entitled to a corresponding deduction equal to the amounts recognized as income by the grantees in the year in which the amounts are included in the grantees’ income. Grantees of stock issued pursuant to other stock awards will generally receive ordinary income, and we will be entitled to a corresponding deduction, in an amount equal to the amount by which the fair market value of the common stock on the date of issuance exceeds the grantee's cash or other payment to us, if any.





Section 162(m) of the Code generally disallows a publicly held corporation’s tax deduction for certain compensation in excess of $1 million per year paid to each of the five most highly compensated executive officers, exclusive of compensation that is “performance-based.”  We have designed the Stock Plan in a manner that is intended to qualify the options and any stock appreciation rights granted under the Stock Plan as performance-based compensation that will not be subject to the deduction limitation of Section 162(m).  Any grant of restricted stock or other stock award could (but is not required to) be designed to avoid any such deduction limitation.




37





The Plan may be amended by our shareholders.  The Plan may also be amended by the Administrator, including, without limitation, to the extent necessary to qualify any or all outstanding Stock Rights granted under the Plan or Stock Rights to be granted under the Plan for favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, and to the extent necessary to qualify the shares issuable upon exercise or acceptance of any outstanding Stock Rights granted, or Stock Rights to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any amendment approved by the Administrator which the Administrator determines is of a scope that requires shareholder approval shall be subject to obtaining such shareholder approval. Any modification or amendment of the Plan shall not, without the consent of a Participant, adversely affect his or her rights under a Stock Right previously granted to him or her. With the consent of the Participant affected, the Administrator may amend outstanding Agreements in a manner which may be adverse to the Participant but which is not inconsistent with the Plan. In the discretion of the Administrator, outstanding Agreements may be amended by the Administrator in a manner which is not adverse to the Participant. In addition, if the stock exchange on which the Shares are traded amends its corporate governance rules so that such rules no longer require shareholder approval of “material amendments” of equity compensation plans, then, from and after the effective date of such an amendment to those rules, no amendment of the Plan which (i) materially increases the number of shares to be issued under the Plan (other than to reflect a reorganization, stock split, merger, spin- off or similar transaction); (ii) materially increases the benefits to Participants, including any material change to: (a) permit a re-pricing (or decrease in exercise price) of outstanding Options, (b) reduce the price at which Shares or Options may be offered, or (c) extend the duration of the Plan; (iii) materially expands the class of Participants eligible to participate in the Plan; or (iv) expands the types of awards provided under the Plan shall become effective unless shareholder approval is obtained.





Item 13.  Certain Relationships and Related Transactions





Harborview Master Fund, L.P.





In July 2009, we issued an interest-free short-term note to Harborview in the amount of $100,000 together with three-year warrants to purchase 100,000 shares of our common stock at an exercise price of $0.90 per share.  The amount of the note was repaid during the fiscal year ended September 30, 2009.





In February 2010, we issued a 10% short-term note in the amount of $300,000 to Harborview Master Fund, LP (“Harborview”), convertible at the rate of $2.00 per share, together with five-year warrants to purchase 100,000 shares of our common stock at an exercise price of $2.50 per share. In addition we entered into a consulting agreement with Harborview for financial consulting services for which we issued 200,000 shares of common stock as compensation. The note was repaid in August 2010.





Bradley C. Love





Mr. Love, who was a member of our board of directors from March 2010 until October 2010, was issued in January 2009, three-year options to purchase 50,000 shares of our common stock at $0.01 per share in consideration for business development and financial consulting services he provided.  Mr. Love subsequently exercised these options.





In 2009, as a consultant to Regal Capital LLC, Mr. Love received compensation from Regal of $62,500 and warrants to purchase an aggregate of 138,281 shares of our common stock at an exercise price of $0.88 per shares.  Some of the warrants expire on December 31, 2013 and the others expire on December 11, 2014 and January 21, 2015.  Also in 2009, as a registered representative with Bedminster Financial Group, Mr. Love received $48,000 in commissions with regard to our private placement.




38




In June 2009, Mr. Love and his spouse loaned us $100,000 pursuant to an interest-free short-term promissory note (the "Note").  As consideration for the Note we issued them a five year warrant to purchase 120,000 shares at $0.88 per share.  In September 2009, they rolled the principal amount of the Note into a $100,000 18-month convertible debenture. Interest under the debenture is 10% per annum (or 12% per annum if paid in stock at a conversion rate of $0.90 per share, at their discretion).  The conversion rate of the debenture is $0.90 per share.  The convertible debenture was issued together with five year warrants to purchase 100,000 shares at an exercise price of $0.90 per share.  Mr. Love also has a security interest in all of the proceeds payable to us arising out the action captioned Analytical Surveys, Inc. v. Tonga Partners, L.P., Cannell Capital LLC and Carlo Cannell, pending in the United States District Court, Southern District of New York, Civil Action No. 06-cv-2692.  As of the date hereof, $3,078 had been paid in interest under the debenture, and the principal amount of the debenture still owing was $100,000.





In September 2009, we entered into a financial consulting agreement with Mr. Love pursuant to which Mr. Love provides consulting services related to assistance with obtaining potential customers for our products in the U.S. and internationally, promoting us and our products to potential investors and identifying potential strategic partners, acquisition opportunities and joint venture partners for the expansion and development of our business and products.  The Agreement was amended in March 2010 to provide for a five year term.  Under the agreement, Mr. Love will receive five year warrants to purchase up to 360,000 shares of our common stock at an exercise price of $0.90 per share, exercisable over the term of the agreement at the rate of 72,000 shares per year.





Pursuant to his appointment to the board of directors, on June 23, 2010, Mr. Love was granted an option to purchase 150,000 shares of common stock at $1.22 per share.  The option expires five years from date of issuance and the option vests as to 50,000 shares immediately, and the remaining 100,000 shares vest in equal parts one year and two years after grant.





Item 14.  Principal Accountant Fees and Services.





RBSM LLP served as our independent registered public accounting firm for the three-month period ended December 31, 2010 and Jewett, Schwartz, Wolfe and Associates served as our independent registered public accounting firm for fiscal years ended September 30, 2010 and 2009.





Audit Fees. For the Transition Period October 1, 2010 through December 31, 2010, RBSM LLP has billed us a total of $15,000 for professional services rendered for the audit of our consolidated financial statements for the period stipulated.





For fiscal years ended September 30, 2010 and 2009, Jewett, Schwartz, Wolfe and Associates billed us a total of $44,500 and $44,500, respectively for professional services rendered for the audit of our annual consolidated financial statements, review of our consolidated financial statements in our Forms 10-Q and services provided in connection with regulatory filings.





Audit-Related Fees. For the three months ended December 31, 2010, RBSM LLP did not perform or bill us for any audit-related services. For fiscal years ended September 30, 2010 and 2009, Jewett, Schwartz, Wolfe and Associates did not perform or bill us for any audit-related services.





Tax Fees. For the three months ended December 31, 2010, RBSM LLP did not perform or bill us for any tax related services. For fiscal year ended September 30, 2010 and 2009, Jewett, Schwartz, Wolfe and Associates billed us a total of $0 and $15,000 for professional services rendered for tax compliance.





All Other Fees. RBSM LLP and Jewett, Schwartz, Wolfe and Associates did not perform or bill us for any services other than those described above for the three months ended December 31, 2010 and fiscal years ended September 30, 2010 and 2009, respectively.





Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors. Consistent with SEC policies regarding auditor independence, the Audit Committee, or the Board of Directors in the absence of the Audit Committee,  has responsibility for appointing, setting compensation for and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm.


39


PART IV.





Item 15.  Exhibits, Financial Statement Schedules





(a)
Financial Statements





Index to Consolidated Financial Statements
F-1Report of Independent Registered Public Accounting Firm – RBSM, LLP
F-2Report of Independent Registered Public Accounting Firm – Jewett, Schwartz, Wolfe and Associates
F-3Consolidated Balance Sheets as of December 31, 2010 and September 30, 2010 and 2009
F-4Consolidated Statements of Operations for the three months ended December 31, 2010 and for the years ended September 30, 2010 and 2009
F-5Consolidated Statements of Stockholders’ (Deficit) Equity as of December 31, 2010
F-6Consolidated Statements of Cash Flows for the three months ended December 31, 2010 and for the years ended September 30, 2010 and 2009
F-7Notes to Consolidated Financial Statements
F-8





(b)
Exhibits


Exhibit

No.

Description of Document2.1

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 Current Report on 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 Current Report on Form 8-K filed on March 26, 2008)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 Current Report on 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 Current Report on Form 8-K, filed on March 25, 2011)4.1

Securities Purchase Agreement dated as of November 24, 2006, among the Company and the Purchasers named therein, (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 30, 2006)4.2

Form of the Company’s Amended and Restated 13% Secured Convertible Debenture due June 30, 2008 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 26, 2008)4.3

Form of Company’s 10% Secured Convertible Debenture due March 11, 2011, with form of Warrant as an exhibit (incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K filed on October 1, 2009)




40





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). (1)10.2

Registration Rights Agreement entered into as of November 24, 2006, among the Company and the Purchasers, (incorporated by reference to Exhibit 4.8 to the Company’s Current Report on Form 8-K dated November 30, 2006).10.3

Amendment and Waiver Agreement entered into as of September 30, 2007, among the Company and the Purchasers of the 13% Secured Convertible Debenture due November 24, 2007 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 3, 2007).10.4

Amendment and Waiver Agreement entered into as of December 31, 2007, among the Company and the Purchasers of the 13% Secured Convertible Debenture due November 24, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 4, 2008).10.5

Employment Agreement, dated as of January 1, 2008, between James Kerstein and Axion International, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 26, 2008). (1)10.6

Letter Agreement, dated December 6, 2007, between Regal Capital, LLC and Axion International, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed March 26, 2008).10.7

Assignment and Amendment Agreement, dated March 20, 2008, among the Assignors named therein, ADH Ventures, LLC and the Company (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 26, 2008).10.8

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) (2)10.9

Securities Purchase Agreement, dated September 25, 2008, by and among, Thor United Corp., Berkshire International Finance, Divash Capital Partners LLC and the Company (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-KSB filed January 13, 2009)10.10

December 2008 Amendment to Employment Agreement between James Kerstein and Axion International, Inc. (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-KSB filed January 13, 2009) (1)10.11

Securities Purchase Agreement, dated as of January 9, 2009, by and between the Company and Insight Partners, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22, 2009).
  10.12

Form of Securities Purchase Agreement, dated as of September 25, 2009, by and between the Company and Purchaser, with Warrant (incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed October 1, 2009)10.13

Delivery Order Authorizations dated October 29,2009 issued by Centennial Contractors Enterprises, Inc. (incorporated by reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K filed November 12, 2009)10.14

Form of Securities Purchase Agreement dated as of November 16, 2009 by and between the Company and Purchaser, with Warrant (incorporated by reference to Exhibit 10.18 to the Company’s Current Report on Form 8-K filed November 20, 2009)




41




10.15

September 2009 Engagement Agreement and Warrant with Bradley C. Love (incorporated by reference to Exhibit 10.21 to the Company’s Amendment No. 1 to Form S-1 dated April 19, 2010)10.16

Employment Agreement, dated September 23, 2010, between Steven Silverman and Axion International Holdings, Inc. (1) (incorporated by reference to  Exhibit 10.18 to the Company’s Annual Report on Form 10-K, filed on January 12, 201110.17

Form of Subscription Agreement for private placement of 10% Convertible Preferred Stock (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on March 25, 2011)22.1

Subsidiaries of the Company *31.1

Section 302 Certification of Chief Executive Officer *31.2

Section 302 Certification of Chief Financial Officer  *32.1

Section 906 Certification of Chief Executive Officer  *32.2

Section 906 Certification of Chief Financial Officer *





* Filed herein


(1) Indicates management contract of compensatory plan or arrangement


(2) Portions have been deleted and filed separately with the Securities and Exchange Commission.  Confidential treatment has been requested with regard to the deleted portions.




42


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:
May 2, 2011
By:
/s/ Steven SilvermanSteven SilvermanChief Executive OfficerDate:
May 2, 2011By:
/s/ Donald FallonDonald FallonChief 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/ Steven Silverman

Chief Executive Officer and Director

May 2, 2011Steven Silverman

(principal executive officer)/s/ Donald Fallon

Chief Financial Officer

May 2, 2011Donald Fallon

(principal financial and accounting officer)/s/ James Kerstein

Chief Technology Officer and Director

May 2, 2011James Kerstein/s/ Michael Dodd

Director

May 2, 2011Michael Dodd/s/ Anthony Hatch

Director

May 2, 2011Anthony Hatch/s/ Perry Jacobson

Director

May 2, 2011Perry Jacobson/s/ Peter Janoff

Director

May 2, 2011Peter Janoff




43





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





Audited Consolidated Financial Statements as of and for the Three Months Ended December 31, 2010 and as of and for the Years Ended September 30, 2010 and 2009





Index to Consolidated Financial Statements


F-1Report of Independent Registered Public Accounting Firm – RBSM, LLP


F-2Report of Independent Registered Public Accounting Firm – Jewett, Schwartz, Wolfe and Associates


F-3Consolidated Balance Sheets


F-4Consolidated Statements of Operations


F-5Consolidated Statements of Stockholders’ (Deficit) Equity


F-6Consolidated Statements of Cash Flows


F-7Notes to Consolidated Financial Statements


F-8




F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of Directors and Stockholders


Axion International Holdings, Inc.


New Providence, NJ





We have audited the accompanying consolidated balance sheet of Axion International Holdings, Inc. (the "Company") as of  December 31, 2010 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the three month period ended December 31, 2010. These 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 audit.





We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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. as of December 31, 2010, and the results of their operations and their cash flows for the three month period ended December 31, 2010, 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 the Note 3 to the accompanying financial statements, the Company has incurred significant operating losses in current year and also in the past. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ RBSM LLP





New York, New York


May 2, 2011


F-2




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the board of directors and stockholders of


Axion International Holdings, Inc.





We have audited the accompanying consolidated balance sheets of Axion International Holdings, Inc. as of September 30, 2010 and 2009, and the related consolidated statements of operations, changes in consolidated stockholders' equity (deficit) and cash flows for the years ended September 30, 2010 and 2009. 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 on our audit.





We conducted our audit in accordance with the 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. An audit includes examining, on a test basis, evidence supporting the amounts in the consolidated financial statement. An audit also includes 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 audit provides a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above presents fairly, in all material respects, the financial position of Axion International Holdings, Inc. as of September 30, 2010 and 2009, 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 referred to above have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3, the Company’s need to seek new sources or methods of financing or revenue to pursue its business strategy, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ Jewett, Schwartz, Wolfe and AssociatesHollywood, FloridaJanuary 11, 2011




F-3




AXION INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED BALANCE SHEETS





December 31,


September 30,


September 30,2010


2010


2009ASSETSCurrent assets:Cash and cash equivalents

$
785,612


$
886,896


$
1,257,516Accounts receivable


22,529



409,292



314,027Inventories


140,594



130,453



76,533Prepaid expenses


149,902



64,727



1,915Total current assets


1,098,637



1,491,368



1,649,991Property and equipment, net


86,654



160,372



306,347Other long-term and intangible assets:License, at acquisition cost,


68,284



68,284



68,284Deposits


10,713



10,713



10,71378,997



78,997



78,997Total assets

$
1,264,288


$
1,730,737


$
2,035,335LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITYCurrent liabilitiesAccounts payable

$
1,045,312


$
1,102,882


$
546,920Accrued liabilities


186,163



277,935



357,172Notes payable


12,985



38,695



14,000Current portion of convertible debentures, net of discount


580,140



657,420



253,795Total current liabilities


1,824,600



2,076,932



1,171,887Convertible debentures, net of discount


303,960



92,894



157,347Total liabilities


2,128,560



2,169,826



1,329,234Commitments and contingencies


-



-



-Stockholders' (deficit) equity:Additional paid-in capital and common stock, no par value; authorized, 100,000,000 shares; 23,305,704,  22,854,037 and 19,243,669 shares issued and outstanding at December 31, 2010,and September 30, 2010 and 2009,  respectively


17,818,336



15,968,740



10,009,677Accumulated deficit


(18,682,608
)


(16,407,829
)


(9,303,576
)Total stockholders' (deficit) equity


(864,272
)


(439,089
)


706,101Total liabilities and stockholders' (deficit) equity

$
1,264,288


$
1,730,737


$
2,035,335





See accompanying notes to consolidated financial statements.


F-4





AXION INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS





Three Months

Ended

December 31,


Year ended

September 30,


Year Ended

September 30,2010


2010


2009Revenue

$
-


$
1,560,633


$
1,374,961Cost of goods sold


-



1,504,095



995,218Gross profit


-



56,538



379,743Operating expenses:Research and development costs


43,066



242,605



467,133Marketing and sales


71,086



358,402



497,961General and administrative expenses


1,925,595



5,620,137



3,398,509Depreciation and amortization


74,194



268,006



179,547Total operating costs and expenses


2,113,941



6,489,150



4,543,150Loss from operations


(2,113,941
)


(6,432,612
)


(4,163,407
)Total other expense :Interest expense, net


27,052



107,276



113,438Amortization of debt discount


133,786



564,365



475,744Debt conversion expense


-



-



1,006,826Total other expense


160,838



671,641



1,596,008Loss before income taxes


(2,274,779
)


(7,104,253
)


(5,759,415
)Provision for income taxes


-



-



-Net loss

$
(2,274,779
)

$
(7,104,253
)

$
(5,759,415
)Weighted average common shares - basic and diluted


23,042,108



20,752,217



15,873,361Basic and diluted net loss per share

$
(0.10
)

$
(0.34
)

$
(0.36
)





See accompanying notes to consolidated financial statements.


F-5


AXION INTERNATIONAL HOLDINGS, INC


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY





Common

Shares


Additional

Paid-in

Capital and

Common

Stock


Accumulated

Deficit


TotalBalance, October 1, 2008


13,978,136


$
3,029,334


$
(3,544,161
)

$
(514,827
)Private placements of common stock


3,115,055



3,205,343



-



3,205,343Shares issued pursuant to conversion of debenture and interest accrued thereon


1,330,621



1,355,327



-



1,355,327Shares issued pursuant to exercise of options


297,857



-



-



-Stock-based compensation


522,000



1,453,404



-



1,453,404Warrants issued in connection with debt instruments






820,238



-



820,238Recognition of beneficial conversion features






146,031



-



146,031Net loss










(5,759,415
)


(5,759,415
)Balance, September 30, 2009


19,243,669



10,009,677



(9,303,576
)


706,101Private placement of common stock


1,761,340



2,664,260



-



2,664,260Shares issued pursuant to conversions of debentures and accrued interest


1,005,330



647,716



-



647,716Shares issued pursuant to exercise of warrants


18,972



-



-



-Stock-based compensation


824,726



2,285,184



-



2,285,184Warrants issued in connection with debt instruments






152,463



-



152,463Recognition of beneficial conversion feature






209,440



-



209,440Net loss






-



(7,104,253
)


(7,104,253
)Balance, September 30, 2010


22,854,037



15,968,740



(16,407,829
)


(439,089
)Private placement of common stock


416,667



500,000







500,000Stock issued for services


35,000



36,750







36,750Stock-based compensation






1,312,846







1,312,846Net loss










(2,274,779
)


(2,274,779
)Balance, December 31, 2010


23,305,704


$
17,818,336


$
(18,682,608
)

$
(864,272
)





See accompanying notes to consolidated financial statements.


F-6





AXION INTERNATIONAL HOLDINGS, INC


CONSOLIDATED STATEMENTS OF CASH FLOWS





Three Months

Ended

December 31,


Year Ended

September 30,


Year Ended

September 30,2010


2010


2009Cash flow from operating activities:Net loss

$
(2,274,779
)

$
(7,104,253
)

$
(5,759,415
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation, and amortization


74,195



268,005



179,547Accretion of interest expense on convertible debentures


133,786



564,364



475,745Debt conversion expense


-



-



1,006,826Issuance of common stock and warrants for financial obligations


1,349,596



2,952,443



1,526,905Changes in operating assets and liabilities:Accounts receivable


386,763



(95,265
)


(314,027
)Inventories


(10,141
)


(53,920
)


33,882Prepaid expenses and other


(85,175
)


(62,812
)


(19,675
)Accounts payable & accrued liabilities


(149,342
)


476,725



314,849Net cash used in operating activities


(575,097
)


(3,054,713
)


(2,555,363
)Cash flows from investing activities:Purchase of equipment and leasehold improvements


(477
)


(122,030
)


(145,289
)Net cash used in investing activities


(477
)


(122,030
)


(145,289
)Cash flows from financing activities:Proceeds from short term notes






63,126



1,124,000Issuance of common stock, net of expenses


500,000



2,371,428



3,205,343Issuance of convertible debenture






710,000



500,000Repayment of notes and convertible debentures


(25,710
)


(338,431
)


(1,010,000
)Net cash provided by financing activities


474,290



2,806,123



3,819,343Net (decrease) increase in cash


(101,284
)


(370,620
)


1,118,691Cash and cash equivalents at beginning of period


886,896



1,257,516



138,825Cash and cash equivalents at end of period

$
785,612


$
886,896


$
1,257,516Supplemental disclosures of cash flow information:Cash paid for interest

$
3,773


$
69,469


$
8,821Common stock issued for consulting services


36,750



1,758,024



562,810Conversion of notes


-



278,236



275,000Warrants issued in connection with debt


-



147,515



820,238





See accompanying notes to consolidated financial statements.




F-7




AXION INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES





Notes to Consolidated Financial Statements





(1)
Summary of Significant Accounting Policies





(a)
Business and Basis of Financial Statement Presentation





Axion International Holdings, Inc. (“Holdings”), formerly Analytical Surveys, Inc., was formed in 1981 to provide data conversion and digital mapping services to users of customized geographic information systems.  In fiscal 2006, Holdings acted upon its belief that it would not be able to sustain the operations of its historical business and focused on completing its long-term contracts that would generate cash, sold certain operations and briefly transitioned its principal business into that of an independent oil and gas enterprise.  In May 2007, Holdings terminated its oil and gas executives and took steps to reduce expenses and commitments in oil and gas investments.





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 (the “Effective Date”), 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.  Each issued and outstanding share of Axion became 47,630 shares of Holdings’ common stock (“Common Stock”), or 9,190,630 shares in the aggregate constituting approximately 90.7% of Holdings’ issued and outstanding Common Stock as of the Effective Date of the Merger.  The Merger resulted in a change of control, and as such, Axion (“we”, “our” or the “Company”) is the surviving entity.





The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.





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





Reverse Merger.  The Merger has been accounted for as a reverse merger in the form of a recapitalization with Axion as the successor.  The recapitalization has been given retroactive effect in the accompanying financial statements. The accompanying consolidated financial statements represent those of Axion for all periods prior to the consummation of the Merger.





On January 18, 2011, the Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. This form 10-KT is a transitional report for the three month period ended December 31, 2010.





(b)
Statement of Cash Flows





For purposes of the statement of cash flows, we consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.




F-8





(c)
Property and Equipment





Equipment and leasehold improvements are recorded at cost and are depreciated and amortized using the straight-line method over estimated useful lives of three to ten years.  Repairs and maintenance are charged directly to operations as incurred.





The Company’s property and equipment consists of the following:





December 31,

2010


September 30,

2010


September 30,

2009Property, equipment, and leasehold improvements, at cost:Equipment

$
13,754


$
13,754


$
9,838Machinery and equipment


520,512



520,035



406,639Purchased software


56,404



56,404



56,404Furniture and fixtures


13,090



13,090



9,322Leasehold improvements


950



950



29,300604,710



604,233



511,503Less accumulated depreciation


(518,056
)


(443,861
)


(205,156
)Net property and leasehold improvements

$
86,654


$
160,372


$
306,347





Depreciation expense included as a charge to income was $74,194, $268,006 and $179,547 for the three months ended December 31, 2010, and for the fiscal years ended September 30, 2010 and 2009 respectively.




(d)
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.  As of December 31, 2010, and September 30, 2010 and 2009 we had not established an allowance for doubtful accounts.





(e)
Inventories





Inventories are priced at the lower of cost or market and consist primarily of production materials and finished goods.  No material adjustment has been made to the cost of finished goods inventories as of December 31, 2010 and September 30, 2010 and 2009.





December 31,

2010


September 30,

2010


September 30,

2009Finished goods

$
104,754


$
108,001


$
46,731Production materials


35,840



22,452



29,802Total inventories

$
140,594


$
130,453


$
76,533





(f)
Revenue and Cost Recognition





Revenue is recognized in accordance with FASB ASC 605 “Revenue Recognition”, 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 when there are no significant future performance obligations.




F-9





In most cases, we receive a purchase order from our customer specifying the products requested and delivery instructions. We recognize revenue upon our delivery of the products specified in the purchase order. Our costs of sales are predominately comprised of the cost of raw materials and the costs and expenses associated with our third-party manufacturing arrangements.  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.





In those certain instances where we may enter into a contract to provide both products and services, customers are billed based on the terms included in the contracts, which are generally upon delivery of products ordered or services provided, or achievement of certain milestones defined in the contracts.  When billed, such amounts are recorded as accounts receivable.  Revenue earned in excess of billings represents revenue related to services completed but not billed, and billings in excess of revenue earned represent billings in advance of services performed. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and depreciation costs.  Losses on contracts are recognized in the period such losses are determined.  We do not believe warranty obligations on completed contracts are significant.  Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.





(g)
Income Taxes





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.





On November 1, 2007, we adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) as codified in ASC 740. 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. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. 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 the 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.





As of December 31, 2010 and September 30, 2010, we did not have any tax issues that required disclosure or recognition under FIN 48.




F-10





(h)
Impairment of Long-Lived Assets Other Than Goodwill





We assess the potential for impairment in the carrying values of our long-term assets whenever events or changes in circumstances indicate such impairment may have occurred.  An impairment charge to current operations is recognized when the estimated undiscounted future net cash flows of the asset are less than its carrying value. Any such impairment is recognized based on the differences in the carrying value and estimated fair value of the impaired asset.





(i)
Stock-Based Compensation





We record stock-based compensation for transactions in which we exchange our equity instruments for services of employees, consultants and others based on the fair value of the equity instruments issued at the date of grant or other 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.





(j)
Earnings (Loss) Per Share





Basic earnings (loss) per share are computed by dividing earnings (loss) available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted earnings (loss) per share includes the effects of the potential dilution of outstanding options, warrants, and convertible debt on our Common Stock as determined using the treasury stock method. For the three months ended December 31, 2010 and the years ended September 30, 2010 and 2009, there were no dilutive effects of such securities because we incurred a net loss in each period.  Potential dilutive common shares issuable under our convertible instruments, and warrant and option agreements amounted to 10,006,520, 8,501,300 and 6,359,699, as of December 31, 2010, September 30, 2010 and 2009, respectively.





(k)
Fair value of Financial Instruments





In January 2008, we adopted the provisions under FASB for Fair Value Measurements, which define fair value for accounting purposes, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements.  Our adoption of these provisions did not have a material impact on our consolidated financial statements.  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 no financial assets and liabilities that are recurring, at fair value at the three months ended December 31, 2010 and the years ended September 20, 2010 and 2009.





(l)
Concentration of Credit Risk





We maintain our cash primarily within one major U.S. domestic bank. The amounts held in this bank exceed the insured limit of $250,000 from time to time and were approximately $739,000 at December 31, 2010.   We have not incurred losses related to these deposits and we regularly monitor all of the banks where we have deposit accounts and the respective balances.




F-11





(m)
Operating Cycle





In accordance with industry practice, we include in current assets and liabilities amounts relating to long-term contracts, which generally have operating cycles extending beyond one year. Other assets and liabilities are classified as current and non-current on the basis of expected realization within or beyond one year.





(n)
Use of Estimates





The preparation of our financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes.  Actual results could differ from those estimates.




(2)
Recent Accounting Pronouncements





In January 2010, the FASB issued Accounting Standards Update No. 2010-06 applicable to FASB ASC 820-10, Improving Disclosures about Fair Value Measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels and the reasons for the transfers and to present information about purchases, sales, issuances and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). This guidance is effective for interim and annual periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation, which will be effective for interim and annual periods beginning after December 15, 2010. As this guidance provides only disclosure requirements, the adoption of this standard will not impact our consolidated results of operations, cash flows or financial positions.





In April 2010, the FASB issued Accounting Standard Update No. 2010-13 “Stock Compensation” (Topic 718). ASU No.2010-13 will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades. This ASU will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted. The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.





The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.





(3)
Going Concern





The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplates continuation of the Company as a going concern.  However, we have negative working capital of $725,963, a stockholders’ deficit of $864,272 and have accumulated losses to date of approximately $18,683,000.  These matters raise substantial doubt about our ability to continue as a going concern.  In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon our ability to meet our financing requirements, raise additional capital, and the success of our future operations.   In addition to the $500,000 raised in the three months ended December 31, 2010, we are seeking additional means of financing to fund our business plan.  There is no assurance that we will be successful in raising sufficient funds to assure the eventual profitability of the Company.  We believe that actions planned and presently being taken to revise our operating and financial requirements provide the opportunity for the Company to continue as a going concern. The financial statements do not include any adjustments that might result from these uncertainties.




F-12





(4)
Intangibles and Exclusive Agreement





In February 2007, we acquired an exclusive, royalty-bearing license in specific but broad global territories to make, have made, use, sell, offer for sale, modify, develop, import, and export products made using patent applications owned by Rutgers University(“Rutgers”).  We are using these patented technologies in the production of structural plastic products such as railroad crossties, bridge infrastructure, utility poles, marine pilings and bulk heading.





We paid approximately $32,000 and issued 714,447 shares of our Common Stock as consideration to Rutgers.  We had estimated the fair market value of the consideration received in exchange for the shares totaled approximately $20,000.  We recorded these amounts, as well as legal expenses we incurred to acquire the license, as an intangible asset.  The license has an indefinite life and is tested for impairment on an annual basis





We are obligated to pay royalties on various product sales to Rutgers, and to reimburse Rutgers for certain patent defense costs.  We did not pay for any patent defense costs to Rutgers, for the three months ended December 31, 2010 or for the years ended September 30, 2010 and 2009. Royalties incurred and payable to Rutgers, for the three months ended December 31, 2010 and for the years ended September 30, 2010 and 2009 totaled $80,000, $60,000 and $23,762, respectively. In addition to consulting fees for research and development performed at Rutgers, we also pay annual membership dues to AIMPP, a department of Rutgers.





(5)
Accrued liabilities





The components of accrued liabilities are:





December 31,

2010


September 30,

2010


September 30,

2009Payable to insurer for legal settlement

$
100,000


$
100,000


$
100,000Refundable oil and gas receipts


-



67,146



129,334Accrued interest


54,852



39,896



76,644Accrued payroll


23,642



70,312



-Other


7,669



581



51,194Total accrued liabilities

$
186,163


$
277,935


$
357,172




(6)
Debt





The components of debt are summarized as follows:




December 31,


September 30,


September 30,Due


2010


2010


20098.75% convertible debenture
December 2010


$
172,500


$
172,500


$
172,5009% convertible debentures








-



278,23610% convertible debentures
February 2011



500,000



500,000



500,00010% convertible debenture
March 2011



100,000



100,000



100,0007% convertible note
May 2012



350,000



350,00010% convertible note
February 2011



60,000



60,000



-Subtotal – principal




1,182,500



1,182,500



1,050,736Debt discount




(298,400
)


(432,186
)


(639,594
)884,100



750,314



411,142Less, current portion




580,140



657,420



253,795$
303,960


$
92,894


$
157,347




F-13





Our 8.75% convertible debenture was issued during the year ended September 30, 2008 pursuant to a debt modification, resulting in debt conversion expense charged during that year. Subsequent to December 31, 2010 the Company extended the maturity date to January 31, 2012 (See Note 15).





Our 9% convertible debentures were issued during the year ended September 30, 2008 pursuant to debt modifications, resulting in debt conversion expense charged during that year.  In March 2010, the debentures were converted, prior to their maturity dates and in accordance with their terms, into an aggregate of 927,453 shares of common stock.  The unamortized debt discount pertaining to these debentures, amounting to $12,488 in the aggregate, was charged to interest expense upon conversion.





In September 2009, pursuant to Securities Purchase Agreements, we received $600,000 and issued to three accredited investors an aggregate of 600,000 units comprised of (i) one dollar of principal amount of our 10% convertible debenture and (ii) three 3-year common stock purchase warrants for five hundred thousand of units, and one three-year common stock purchase warrant for one hundred thousand units, all exercisable at $0.90 per share, for the subscription price of $1.00 per unit. The debentures are due in February and March 2011, may be converted, at the option of the holder into restricted common shares of the Company at the conversion price of $0.90 per share, and earn interest, at the holder’s election, in cash at the rate of 10% or in shares of Common Stock at the rate of 12%.  The debentures are secured on a parri passu basis by a court judgment rendered in favor of the Company in the action entitled Analytical Surveys, Inc. v. Tonga Partners, L.P., Cannell Capital, LLC, and Carlo Cannell, Civil Action No. 06-cv-2692, pending in the U.S. District Court, Southern District of New York.  The total of the calculated fair value of the warrants and the intrinsic value of beneficial conversion features contained in the debentures exceeded the proceeds received.  Accordingly, the Company recorded a discount on the debentures limited to the principal value of the debentures, which is being amortized to interest expense through the maturity dates.  For the three months ended December 31, 2010, we recognized $100,000 in interest expense resulting from the amortization of the discount on the debentures. The unamortized discount on these debentures at December 31, 2010 was approximately $72,000. Subsequent to December 31, 2010 the Company extended the maturity dates to June 30, 2012 (See Note 15).





In February 2010, we issued a 10% short-term note in the amount of $300,000, convertible at the rate of $2.00 per share, together with a five-year warrant to purchase 100,000 shares of Common Stock at an exercise price of $2.50 per share. In addition we entered into a consulting agreement with an affiliate of the purchaser for financial consulting services.  Since the exercise price of the warrant was more than the market price of our Common Stock as reported on the OTC Bulletin Board on the date of issuance, no note proceeds were allocated to the warrant. Since the conversion price of the note was less than the reported market price of our Common Stock as reported on the OTC Bulletin Board on the date of issuance, we allocated $45,000 of the proceeds to the beneficial conversion feature, representing the difference between the fair value of common stock issuable upon conversion at the date of purchase and the amount of proceeds allocated to the note, and recorded this amount as a discount on the note.  The note discount was amortized to interest expense through the maturity date of the note. The note was repaid in August 2010 upon maturity.





In May 2010, we issued a 7% two-year note in the amount of $350,000, convertible at the rate of $1.20 per share, together with 41,667 shares of our common stock and a five-year warrant to purchase 166,667 shares of our common stock at an exercise price of $1.40 per share.  Of the total proceeds received, we allocated $50,000 to the shares of Common Stock. Approximately $148,000 of the note proceeds was attributed to the warrant, based upon the relative fair values of the note, shares of Common Stock and warrant, as determined using the Black-Scholes pricing model, and we also allocated approximately $161,000 of the proceeds to the beneficial conversion feature, representing the difference between the fair value of common stock issuable upon conversion at the date of purchase and the amount of proceeds allocated to the note, and recorded these amounts as an additional discount on the debenture.  The discount is being amortized to interest expense through the scheduled maturity date of the note. For the three months ended December 31, 2010, we recognized approximately $39,000 in interest expense resulting from the amortization of the discount on the debentures. The unamortized discount on this note at December 31, 2010 was approximately $219,000.




F-14





In August 2010, we issued a 10% short-term note in the amount of $60,000, convertible at the rate of $1.05 per share and a five-year warrant to purchase 28,571 shares of our Common Stock at an exercise price of $1.35 per share. Since the exercise price of the warrant was more than the market price of our Common Stock as reported on the OTC Bulletin Board on the date of issuance, no note proceeds were allocated to the warrant. Since the conversion price of the note was less than the reported market price of our Common Stock as reported on the OTC Bulletin Board on the date of issuance, we allocated $3,429 of the proceeds to the beneficial conversion feature, representing the difference between the fair value of common stock issuable upon conversion at the date of purchase and the amount of proceeds allocated to the note, and recorded this amount as a discount on the note.  The note discount is amortized to interest expense through the maturity date of the note. For the three months ended December 31, 2010, we recognized approximately $11,000 in interest expense resulting from the amortization of the discount on the note. The unamortized discount on this note at December 31, 2010 was approximately $8,000.





Each of the debentures or notes above contains features that allows us to redeem the debt instrument prior to their scheduled due dates under certain circumstances.  In certain events of default by us, the holders may generally require the Company to redeem the debt instruments at 120% of their principal amounts or their conversion value.  Based on the life of the notes and the likelihood and effect of substantive exercise of these provisions, we have determined that these features have minimal value.





During the three months ended June 30, 2010, a former holder of a convertible note claimed that additional compensation was payable by the Company in the form of warrants related to a note conversion in 2008.  The Company determined that issuance of additional warrants based on the claim was justified and charged $292,962, representing the fair value of the two-year warrant for the purchase of 287,500 shares of Common Stock based on the Black-Scholes pricing model, to general and administrative expenses during the fiscal year ended September 30, 2010.





(7)
Stockholder’s Equity





We are authorized to issue up to 100,000,000 shares of Common Stock, no par value, and up to 2,500,000 shares of Preferred Stock, no par value. There were 23,305,704 shares of Common Stock issued and outstanding at December 31, 2010.  We have not issued any shares of Preferred Stock through December 31, 2010. We may issue 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.





Pursuant to plans approved by our shareholders, through December 31, 2010 we have granted options to purchase 1,305,000 shares of Common Stock and may grant options for up to an additional 5,190,856 shares of Common Stock. We also may issue up to an additional 921,685 shares of Common Stock pursuant to grants of options which were awarded outside our approved plans and an additional 1,262,076 shares of Common Stock pursuant to options that were awarded pursuant to an individual performance-based arrangement.





From inception through December 31, 2010, we have issued shares of Common Stock to our founders, partners, and investors as follows:





We issued 4,048,529 shares of our Common Stock to founding stockholders without consideration and 714,447 shares of our Common Stock to Rutgers University as partial consideration for issuance of an exclusive license agreement to the Company.  We estimated the fair market value of those shares to be $20,000.





Pursuant to a management consulting agreement, we issued 2,572,007 shares of our Common Stock to the consultant as payment for management consulting services.  The consulting agreement also provides for a monthly fee of $10,000 each during the term of the consulting services and an additional payment of a $230,000 fee, which was paid in the year ended September 30, 2008.  We accounted for the entire fee, other than the $10,000 monthly fee, as a cost of raising capital and reduced the proceeds of the private placement completed in December 2007 accordingly.





In December 2007 and January 2008 we completed a private placement of 1,855,655 shares of Common Stock at $0.548 per share, with gross proceeds totaling $1,019,064.  Approximately 49,535 shares were to repay a $27,164 note payable, with the balance received in cash.





In April, 2008, we issued 37,493 shares of our Common Stock to five former Holdings board members in full settlement of all outstanding past due directors’ compensation.  We also issued 25,000 shares to Holdings’ former Chief Executive Officer in lieu of a cash bonus that she was entitled to receive as a result of the Merger.




F-15





In April 2008, holders of the Debentures elected to convert $100,000 principal into 250,000 shares of Common Stock, and we repaid $200,000 of the outstanding principal. In May 2008, we issued the Series B Debenture in the principal amount of $200,000, with substantially the same terms as the Debentures. We also completed an additional private placement of 536,250 common shares at $0.88 per share during the period from June 2008 to September 2008.





In August 2008, one of the holders of the Debentures elected to convert $282,564 of principal into 706,410 shares of Common Stock. In September 2008 the Debenture holders converted an additional $714,200 into 2,109,834 shares of Common Stock. They also agreed to amend and restructure the debentures to lower the interest rate from 13% to 9% and extend the maturity date to September 30. 2010. In September we issued the New Debenture in the principal amount of $172,500, with a maturity date of September 30, 2010 and a conversion price of $1.50





From December 2008 to September 2009, we sold a total of 2,615,055 shares of common stock for aggregate gross proceeds of $2,301,248.  Options to purchase an aggregate of 169,293 shares at $0.88 per share and warrants to purchase 50,000 shares at $3.13 per share were issued to investors in certain of these transactions.





In September 2009, we sold 500,000 shares of common stock, together with warrants to purchase 50,000 shares of common stock at an exercise price of $3.13, to an investor for gross proceeds of $975,000.  We incurred $70,405 of fees and issued warrants to purchase 50,000 shares of common stock at an exercise price of $3.13 to finders in connection with the transaction.





During the year ended September 30, 2009, we issued a total of 139,865 shares of common stock to settle interest due on notes payable.  In addition, during the year ended September 30, 2009 we issued an aggregate of 522,000 to consultants and advisors and recorded aggregate compensation expense of $646,810 in connection with the issuances.





In October 2009, the Company issued 200,000 shares of its common stock to consultants for services performed in the Company’s strategic planning and financing activities. The shares had a fair value of $600,000 at issuance based on the quoted market price of the Company’s stock on the OTC Bulletin Board and that fair value was recognized in general and administrative expenses in the three months ended December 31, 2009.





In November 2009, the Company sold 200,000 shares of common stock and 20,000 three-year warrants, exercisable at $2.91 per share, for aggregate proceeds of $410,000. As a placement fee, the Company paid $8,200 and issued 20,000 three-year warrants, also at the exercise price of $2.91 per share.





In November 2009, the Company issued 360,000 five-year warrants exercisable at $0.90 per share to a consultant for strategic planning, business development and investor relations services to be performed. The warrants had a fair value of $506.136 at issuance based on the Black-Scholes pricing model, and will be amortized to general and administrative expenses over the five year life of the agreement. The first year amortization of $101,227 was recognized during the fiscal year ended September 30, 2010.





Also in November, the Company issued 74,726 shares of common stock to a consultant for business development, marketing and sales services performed. The shares had a fair value of $198,024 at issuance based on the quoted market price of the Company’s stock on the OTC Bulletin Board, which was charged to general and administrative expenses during the fiscal year ended September 30, 2010. Under the agreement, which expires in 2011, the consultant may be granted options to purchase up to 500,000 additional shares of common stock at an exercise price of $0.01 per share contingent on attaining specified sales targets.





In December 2009, the Company issued 104,554 five-year warrants exercisable at $0.88 per share to a consultant for services performed in the Company’s financing efforts. The warrants had a fair value of $283,788 at the date of grant based on the Black-Scholes pricing model, which was recognized in general and administrative expenses in the fiscal year ended September 30, 2010.





In February 2010, we sold 122,000 shares of common stock and 12,200 five-year warrants, exercisable at $2.50 per share, for aggregate proceeds of $250,100.




F-16





In February 2010, the Company issued 200,000 shares of its common stock to consultants for services performed in the Company’s strategic planning and financing activities. The shares had a fair value of $460,000 at issuance based on the quoted market price of the Company’s stock on the OTC Bulletin Board and that fair value was recognized in general and administrative expenses in the three months ended March 31, 2010.





Also during February 2010, the Company issued 10,000 three-year warrants exercisable at $2.05 per share to a consultant for services performed. The warrants had a fair value of $19,442 at issuance based on the Black-Scholes pricing model, and was charged to general and administrative expenses during the fiscal year ended September 30, 2010.





During February 2010, we executed a purchase agreement and a registration rights agreement with Lincoln Park Capital, LLC (“LPC”), pursuant to which LPC agreed to purchase 100,000 shares of our common stock at $2.05 per share together with warrants to purchase 50,000 shares at an exercise price of $2.91 per share for total consideration of $205,000.  Upon entering into the purchase agreement, we issued to LPC 85,000 shares of our common stock as consideration for entering into the agreement.  Pursuant to the registration rights agreement, we filed a registration statement with the Securities and Exchange Commission (the “SEC”) covering the shares issued to LPC under the purchase agreement. The registration statement became effective and the initial purchase of 100,000 shares and 50,000 warrants was completed in May 2010.  The aggregate value of the 85,000 commitment shares, $178,500, was charged to paid-in capital, and $84,575 of other offering costs was charged to financing expense in general and administrative expenses.  After the effective date, in May 2010, we sold an additional 20,000 shares under the agreement and received proceeds of $30,067.  In July 2010, we and LPC mutually terminated the purchase agreement and related agreements.





During March 2010, the remaining 9% convertible debentures of $278,236 were converted, prior to their maturity dates and in accordance with their terms, into an aggregate of 927,453 shares of common stock.  The unamortized discount pertaining to these debentures of $12,488 was charged to interest expense upon conversion.





During May 2010, the Company issued 300,000 shares of its common stock to a consultant for services performed for the Company. The shares had a fair value of $450,000 at issuance based on the quoted market price of the Company’s stock on the OTC Bulletin Board and that fair value was recognized in general and administrative expenses in the three months ended June 30, 2010.





During May 2010, we sold 41,667 shares of common stock for proceeds of $50,000.





During the period May through September 2010, we received $1,431,209, and issued units consisting of an aggregate of 1,192,673 shares of common stock and five-year warrants to purchase 596,336 shares of common stock at an exercise price of $1.40 per share. Certain of these warrants had a fair value of $94,890 at issuance based on the Black-Scholes pricing model, and such fair value was charged to general and administrative expenses during the fiscal year ended September 30, 2010.





During the three months ended June 30, 2010, a former holder of a convertible note claimed that additional compensation was payable by the Company in the form of warrants related to a note conversion in 2008.  The Company determined that issuance of additional warrants based on the claim was justified and charged $292,962, representing the fair value of the two-year warrant for the purchase of 287,500 shares of Common Stock based on the Black-Scholes pricing model, to general and administrative expenses during the fiscal year ended September 30, 2010.





During July 2010, we issued 50,000 shares of our common stock to a consultant for services performed in regards to the Company’s strategic planning and financing activities. The shares had a fair value of $50,000 at issuance based on the quoted market price of the Company’s stock on the OTC Bulletin Board and that fair value was recognized in general and administrative expenses during the year ended September 30, 2010.





During the fiscal year ended September 30, 2010, we issued 77,877 shares of Common Stock to certain holders of our convertible debentures in exchange for interest accrued in lieu of cash payments of $76,518.




F-17





During the fiscal year ended September 30, 2010, we recognized $142,145 of consulting expenses representing the fair value of certain options, based on the Black-Scholes pricing model, granted in prior fiscal years.





During the fiscal year ended September 30, 2010, the Company issued 18,971 shares of common stock upon cashless exercise of certain warrants.





Pursuant to the terms of a letter agreement executed in October 2010, we issued 35,000 shares of common stock to a consultant to assist us in raising capital. The shares had a fair value of $36,750 at issuance based on the quoted market price of the Company’s stock on the OTC Bulletin Board and that fair value was recognized in general and administrative expenses in the three months ended December 31, 2010





During the three months ended December 31, 2010, we received $500,000, and issued units consisting of an aggregate of 416,667 shares of common stock and five-year warrants to purchase 208,333 shares of common stock at an exercise price of $1.40 per share. A warrant to purchase 33,333 shares of common stock was issued as a finder’s fee in regards to these transactions and had a fair value of $28,321 at issuance based on the Black-Scholes pricing model, and such fair value was charged to general and administrative expenses during the period.





The following table sets forth the number of shares of Common Stock that were issuable upon exercise of outstanding warrants as of December 31, 2010.  Net share settlement is available to warrant holders.





Three Months Ended


Fiscal Year Ended


Fiscal Year EndedDecember31, 2010


September 30, 2010


September 30, 2009Weighted-





Weighted-





Weighted-Average





Average





AverageNumber


Exercise


Number


Exercise


Number


Exerciseof Shares


Price


of Shares


Price


of Shares


PriceOutstanding at beginning of period


5,374,563


$
1.44



3,122,446


$
1.51



426,446


$
4.89Granted during the period


381,666



1.42



2,277,117



1.33



2,696,000



0.98Exercised during the period


-







(25,000
)


0.87







0.01Cancelled during the period


(426,446
)


4.89











-Outstanding at end of the period


5,329,783


$
1.16



5,374,563


$
1.44



3,122,446


$
1.51Exercisable at end of period


5,329,783


$
1.16



5,086,563


$
1.47



3,092,446


$
1.52





(8)
Stock–based compensation





We have two nonqualified stock option plans approved by shareholders with 5,190,856 shares remaining available for grant as of December 31, 2010.  The exercise price of the options are established by the Board of Directors on the date of grant and are generally equal to the market price of the stock on the grant date.  The Board of Directors may determine the vesting period for each new grant. Options issued are exercisable in whole or in part for a period as determined by the Board of Directors of up to ten years from the date of grant.





We 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 the awards during the three months ended December 31, 2010 – (i) no dividend yield, (ii) expected volatility of between 120.4% and 140.7%, (iii) risk-free interest rates of between 0.63% and 1.77%, and (iv) expected lives of between three years and seven years.




F-18





The following table summarizes all of our stock option activity for the three months ended December 31, 2010 and the fiscal years ended September 30, 2010 and 2009:





Three Months Ended


Fiscal Year Ended


Fiscal Year EndedDecember 31, 2010


September 30, 2010


September 30, 2009Weighted-





Weighted-





Weighted-Average





Average





AverageNumber


Exercise


Number


Exercise


Number


Exerciseof Shares


Price


of Shares


Price


of Shares


PriceOutstanding at beginning of period


1,938,761



$ 0.61



2,219,799



$ 0.47



1,218,114



$            -Granted during the period


1,600,000



1.53



150,000



1.22



1,301,685



0.81Exercised during the period


-







-







(300,000
)


0.01Cancelled during the period


(50,000
)


1.13



(431,038
)


0.13



-Outstanding at end of the period


3,488,761



$ 1.02



1,938,761



$ 0.61



2,219,799



$ 0.47Exercisable at end of period


1,326,685



$ 1.01



892,724



$ 0.97



646,057



$ 0.91





We previously issued an option pursuant to an employment agreement with our Chief Technology Officer, granting the right to purchase 762,076 shares of Common Stock, at an exercise price of $0.00002 per share, under the terms of a certain performance-based stock option. The right to exercise the option is based on our achievement of specific sales levels on an annual basis.  To date, we have not met the sales levels stipulated in this option.





During the three months ended December 31, 2010, we issued an option pursuant to an employment agreement with our Chief Executive Officer, granting the right to purchase 1,000,000 shares of Common Stock, under the terms of a certain performance-based stock option. The right to exercise 750,000 of the options is based on our achievement of specific sales levels on an annual basis.  To date, we have not met the sales levels stipulated.





The following table summarizes options outstanding at December 31, 2010:





Weighted

WeightedAverage

Average

AggregateNumber of


Exercise

Remaining

IntrinsicShares


Price

Life

ValueOptions outstanding


3,488,761


$
1.02

4.0 years

$
819,900Options vested and exercisable


1,326,685



1.01

3.3 years


80,702Unvested options expected to vest


2,162,076



1.03

4.5 years


739,198





(9)
Income Taxes


We have not recorded any income tax expense or benefit from inception to December 31, 2010 due to our substantial operating losses and the valuation allowance applied against our deferred tax assets.





Income tax benefit attributable to loss before income taxes differed from the amounts computed by applying the United States of America federal tax rate of 40% to loss before income taxes as a result of the following:




F-19





December 31,


September 30,


September 30,2010


2010


2009Current:Federal

$
-


$
-


$
-State






-



-$
-


$
-


$
-Increase in valuation allowance


(1,400,000
)


(1,500,000
)


(1,000,000
)Benefit of operating loss carry forward


1,400,000



1,500,000



1,00,000Provision (benefit) for income taxes, net

$
-


$
-


$
-






December 31,


September 30,


September 30,2010


2010


2009Statutory federal income tax rate


40.0
%


40.0
%


40.0
%Increase in valuation allowance


(40.0
)%


(40.0
)%


(40.0
)%Effective tax rate


-
%


-
%


-
%





Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes.





At December 31, 2010, the Company has available net operating loss carry forwards of approximately $9,800,000 that expire through 2030.





The net deferred tax assets and liabilities are comprised of the following:





December 31,


September 30,


September 30,2010


2010


2009Deferred tax assetsCurrent

$
-


$
-


$
-Non-current


3,900,000



2,500,000



1,000,0003,900,000



2,500,000



1,000,000Less valuation allowance


(3,900,000
)


(2,500,000
)


(1,100,000
)Net deferred income tax asset

$
-


$
-


$
-





(10)
Commitments and Contingencies





Operating leases





We lease approximately 2,000 square feet of office space in New Providence, New Jersey pursuant to a three-year lease agreement for office space which provides for an initial monthly lease payment of $3,356 with customary annual increases.  These premises serve as our corporate headquarters. The initial term of the lease expires on October 31, 2012 and the lease provides one renewal option for an additional three-year term.  Facility rent expense totaled approximately $14,000, $67,200 and $44,000 for the three months ended December 31, 2010, and the years ended September 30, 2010 and 2009, respectively.





Prior to the Merger, we had leased approximately 2,500 square feet of office space in San Antonia, Texas pursuant to a five-year lease agreement which provided for an initial monthly lease of approximately $3,500, with customary annual increases. Effective January 1, 2009, we sublet the space for a monthly sublet fee of $2,000 through the expiration of the underlying lease on December 31, 2011.  Facility rent expense, net of sublet payments received was approximately $10,000, $22,000 and $26,000 for the three months ended December 31, 2010, and for the years ended September 30, 2010 and 2009, respectively.




F-20





Future minimum rental payments through the remainder of the initial lease terms, net of sublet:





Year ending December 31, 2011

$
66,000Year ending December 31, 2012

$
37,000





Litigation





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 $4,965,898.  The defendants are appealing from the order granting the summary judgment.





We are also subject to various other routine litigation incidental to our business. We do not believe that any of these routine legal proceedings would have a material adverse effect on our financial condition or results of operations.





(11)
Related Party Transactions





Harborview Master Fund, L.P.





Harborview Master Fund, L.P. and affiliates (“Harborview”) beneficially own in excess of 5% of our outstanding stock. In July 2009, we issued an interest-free short-term note to Harborview in the amount of $100,000 together with three-year warrants to purchase 100,000 shares of our common stock at an exercise price of $0.90 per share.  The amount of the note was repaid during the fiscal year ended September 30, 2009.





In February 2010, we issued a 10% short-term note in the amount of $300,000 to Harborview, convertible at the rate of $2.00 per share, together with five-year warrants to purchase 100,000 shares of our common stock at an exercise price of $2.50 per share. In addition we entered into a consulting agreement with Harborview for financial consulting services for which we issued 200,000 shares of common stock as compensation. The note was repaid in August 2010.





Bradley C. Love





Mr. Love, who was a member of our board of directors from March 2010 until October 2010, was issued in January 2009, three-year options to purchase 50,000 shares of our common stock at $0.01 per share in consideration for business development and financial consulting services he provided.  Mr. Love subsequently exercised these options.





In 2009, as a consultant to Regal Capital LLC, Mr. Love received compensation from Regal of $62,500 and warrants to purchase an aggregate of 138,281 shares of our common stock at an exercise price of $0.88 per shares.  Some of the warrants expire on December 31, 2013 and the others expire on December 11, 2014 and January 21, 2015.  Also in 2009, as a registered representative with Bedminster Financial Group, Mr. Love received $48,000 in commissions with regard to our private placement.




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In June 2009, Mr. Love and his spouse loaned us $100,000 pursuant to an interest-free short-term promissory note (the "Note").  As consideration for the Note we issued them a five year warrant to purchase 120,000 shares at $0.88 per share.  In September 2009, they rolled the principal amount of the Note into a $100,000 18-month convertible debenture. Interest under the debenture is 10% per annum (or 12% per annum if paid in stock at a conversion rate of $0.90 per share, at their discretion).  The conversion rate of the debenture is $0.90 per share.  The convertible debenture was issued together with five year warrants to purchase 100,000 shares at an exercise price of $0.90 per share.  Mr. Love also has a security interest in all of the proceeds payable to us arising out the action captioned Analytical Surveys, Inc. v. Tonga Partners, L.P., Cannell Capital LLC and Carlo Cannell, pending in the United States District Court, Southern District of New York, Civil Action No. 06-cv-2692.  As of the date hereof, $3,078 had been paid in interest under the debenture, and the principal amount of the debenture still owing was $100,000.





In September 2009, we entered into a financial consulting agreement with Mr. Love pursuant to which Mr. Love provides consulting services related to assistance with obtaining potential customers for our products in the U.S. and internationally, promoting us and our products to potential investors and identifying potential strategic partners, acquisition opportunities and joint venture partners for the expansion and development of our business and products.  The Agreement was amended in March 2010 to provide for a five year term.  Under the agreement, Mr. Love will receive five year warrants to purchase up to 360,000 shares of our common stock at an exercise price of $0.90 per share, exercisable over the term of the agreement at the rate of 72,000 shares per year.





Pursuant to his appointment to the board of directors, Mr. Love was granted, subsequent to September 30, 2010, an option to purchase 150,000 shares of common stock at $1.22 per share.  The option expires five years from date of issuance and the option vests as to 50,000 shares immediately, and the remaining 100,000 shares vest in equal parts one year and two years after grant.





(12)
Transition Period Comparative Data (Unaudited)





The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which in our opinion, are necessary for a fair presentation of such financial statements.





Consolidated Statements of Operations





Three Months Ended


Three Months EndedDecember 31,

2010


December 31,

2009Revenue

$
-


$
302,541Cost of goods sold


-



246,040Gross profit


-



56,501Operating expenses:Research and development costs


43,066



26,615Marketing and sales


71,086



105,040General and administrative expenses


1,925,595



2,461,600Depreciation and amortization


74,194



64,364Total operating costs and expenses


2,113,941



2,657,619Loss from operations


(2,113,941
)


(2,601,118
)Total other expense :Interest expense, net


27,052



25,214Amortization of debt discount


133,786



9,572Total other expense


160,838



34,786Loss before income taxes


(2,274,779
)


(2,635,904
)Provision for income taxes


-



-Net loss

$
(2,274,779
)

$
(2,635,904
)Weighted average common shares - basic and diluted


23,042,108



19,550,964Basic and diluted net loss per share

$
(0.10
)

$
(0.13
)




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Consolidated Statements of Cash Flows





For the Three

Months Ended

December 31,


For the Three

Months Ended

December 31,2010


2009Cash flow from operating activities:Net loss

$
(2,274,779
)

$
(2,635,904
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation, and amortization


74,195



64,364Accretion of interest expense on convertible debentures


133,786



9,572Issuance of common stock and warrants for financial obligations


1,349,596



1,475,089Changes in operating assets and liabilities:Accounts receivable


386,763



11,206Inventories


(10,141
)


(228,395
)Prepaid expenses and other


(85,175
)


(5,585
)Accounts payable & accrued liabilities


(149,342
)


39,759Net cash used in operating activities


(575,097
)


(1,269,894
)Cash flows from investing activities:Purchase of equipment and leasehold improvements


(477
)


(45,430
)Net cash used in investing activities


(477
)


(45,430
)Cash flows from financing activities:Issuance of common stock, net of expenses


500,000



410,000Repayment of notes and convertible debentures


(25,710
)


(14,000
)Net cash provided by financing activities


474,290



396,000Net (decrease) increase in cash


(101,284
)


(919,324
)Cash at beginning of period


886,896



1,257,516Cash at end of period

$
785,612


$
338,192Supplemental disclosures of cash flow information:Cash paid for interest

$
3,773


$
-Common stock issued for consulting services


36,750



-





(13)
Subsequent Events





(a)
Subsequent to December 31, 2010, we sold $7,597,730 of our 10% Convertible Preferred Stock to accredited investors. Pursuant to this transaction, we issued 759,773 shares of 10% Convertible Preferred Stock  In addition, we paid $735,478 and we’re obligated to issue warrants to purchase 57,560 shares of 10% Convertible Preferred Stock, to certain broker-dealers.




(b)
Subsequent to December 31, 2010, we amended our 8.75% convertible debenture, originally due on December 31, 2010 in the principal amount of $172,500, to extend the maturity date to January 31, 2012. In addition, we agreed:


·
to eliminate our ability to pay interest in shares of our common stock in lieu of cash;


·
to eliminate our ability to optionally redeem the debenture;


·
to amend the terms of our right to force conversion of the debenture when the volume weighted average price for any 30-day trading period exceeds $2.50 from originally $0.80; and


·
that we would be allowed to pay dividends on any financing transaction entered into between the effective date of the amendment and April 30, 2011.


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(c)
Subsequent to December 31, 2010, we amended our 10% convertible debentures, originally due in February and March 2011 in the aggregate principal amount of $600,000, to extend the maturity dates to June 30, 2012.  In addition, we agreed :
 ·
that effective March 1, 2011, the interest rate would increase to 15% if paid in cash and to 18% if paid with shares of common stock, at the rate of one share of common stock for each $0.60 of interest from $0.90 of interest;
 ·
to decrease the Conversion Price to $0.60 from $0.90;
 ·
to amend the terms of our right to force conversion of the debenture when the volume weighted average price for any 30-day trading period exceeds $2.50 from originally $2.00;
 ·
that we would be allowed to pay dividends or distributions on any of our equity securities; and
 ·
that effective for each month after March 2011, we would issue a three-year warrant to purchase shares of our common stock for $0.90 per share, equal to 5% of the outstanding principal on the final day of that month.
  (d)
Subsequent to December 31, 2010, the holder of our 10% convertible note, due February 10, 2011, converted principal plus accrued interest into 60,000 shares of our Common Stock.
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