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Beleaguered Battery Maker Soon to Get a Jolt

NEW YORK ( TheStreet) -- Investors and fishermen have three favorite stories: the trophy they landed, the beauty that got away and the monster they've been watching in a favorite fishing spot.

For my inaugural article on TheStreet, I'm going to share my perspective on Axion Power International (AXPW - Get Report), a micro-cap battery-technology developer with an ugly price history that obscures a brilliant future.

I'm not a disinterested observer when it comes to Axion. I was the company's board chairman from 2004 to 2007, and I own a substantial block of stock that I bought at four times the current price in the fall of 2006. I'm down 75% on paper, but I've never felt better about my risk-reward profile.

First, some history. Axion was formed in late 2003 to conduct R&D on a hybrid battery that pairs a lead-based positive electrode with a carbon negative electrode assembly. Like most developments in the battery industry, Axion's PbC battery involves trade-offs. Replacing the lead-based negative electrode with a carbon electrode assembly reduces the specific energy of the battery, which makes it a poor choice for storing large amounts of electricity for applications that need long periods of sustained discharge.

On the other hand, the electrode substitution results in a battery that charges as much as 20 times faster than a normal lead-acid battery and doesn't suffer from a phenomenon known as sulfation, the primary cause of lead-acid battery failure. That means Axion's PbC battery can offer up to 10 times the useful service life in applications that cycle frequently. It's not a silver bullet for all the world's energy-storage needs, but it's well-suited for emerging applications in alternative energy, automotive and railroads.

For its first five years, Axion was a low-profile R&D stock with a very illiquid market that traded about 15,000 shares a day. At March 24, 2009, the 38.9 million equivalent common shares outstanding gave Axion a market cap of $35 million, which was about right for a late-stage R&D outfit with no product, no revenue and no visible industry relationships.

Things started to get interesting in April 2009 when Axion announced a worldwide supply agreement with Exide Technologies (XIDE), which promised to take the PbC from the laboratory bench to the factory floor. The company got downright fascinating in August 2009 when the Department of Energy awarded a $34 million ARRA Battery Manufacturing Grant to "Exide Technologies with Axion Power International." The grant was originally seen as wonderful news, but it also created some tension between the companies because Exide had control over the money and Axion believed it deserved a share of the grant because the PbC technology was a core element of the application.

When Axion went looking for additional financing in December 2009, unresolved questions about whether it would share the grant made price negotiations tough, and Axion was forced to accept a deep discount for a $26 million private placement that went off at $0.57 and more than doubled the share count from 38.9 million to 84.6 million.

That offering created a huge supply-and-demand imbalance that's distorted trading for the past 2 1/2 years.

The following graph tracks two key statistics since January 2009. The daily closing price is in blue and the 60-day average trading volume is in red. If you spend some time studying the chart, a classic lesson in stock market supply-and-demand dynamics begins to emerge.

During 2009, the chart behaves exactly as you'd expect, with price spikes for the Exide announcement and the DOE grant, followed by some deterioration because of uncertainty over the sharing of grant proceeds. After the December 2009 private placement, the price stabilized in the $1.15 range, or roughly twice the private placement price.

Things turned ugly in April 2010 when a resale registration statement for the private placement shares went into effect and investors got out for a quick profit. Almost overnight, average daily trading volume tripled, and the price fell sharply. By August 2010, the first wave of selling abated, and the price stabilized through the end of the year. In early 2011, demand started to pull the price up and that set off a second and larger wave of selling that lasted through the end of the year. In early 2012, a modest price recovery combined with a direct public offering of 27.6 million additional shares set off a third and even larger wave of selling.
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