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), 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.

For the 12-month periods ended July 31, 2009, 2010, 2011 and 2012, total reported trading volumes were 4.1 million shares, 13.9 million shares, 58.2 million shares and 81.5 million shares, respectively. With today's 200-day average trading volume sitting at 357,500 shares, Axion's stock isn't so sleepy anymore.

Now that you have a feel for what happened to the stock price, let me tell you what's been going on with Axion's business and the PbC technology.

-- In June 2010, Axion announced that the PbC had been selected for an electric locomotive development program with Norfolk Southern ( NSC). While a development partnership with a first-tier transportation company would be enough to send most micro-caps soaring, the news barely registered on the price chart.

-- In September 2010, I witnessed one of the most extraordinary events in my career when BMW took the podium with Axion at the European Lead Battery Conference for a joint presentation where BMW publicly embraced the PbC technology before Axion was ready to deliver its first commercial PbC product. The underlying message to the global battery industry was "this is the kind of performance we need for our new generation of vehicles with stop-start idle elimination." Once again, news of a development relationship, this time with a global automaker, barely registered on the price chart.

-- In March 2011, Axion announced it had entered into a toll-manufacturing agreement with a leading battery manufacturer that was going to buy batteries made by Axion and re-brand them for sale under the buyer's label. While the expected first year revenue of $3.5 million to $8 million wasn't huge, it was a modest beginning that helped the stock price for a couple weeks before the second wave of selling began in earnest.

-- In Axion's year-end conference call for 2010, investors were told that a major U.S. automaker had joined Axion as a partner in a DOE grant application. While the requested grant wasn't awarded, a particularly diligent stockholder filed an FOIA request for the grant application, and we ultimately learned that Axion's domestic OEM partner was General Motors ( GM). This time, news of a development relationship with a first-tier automaker didn't even register on the price chart.

-- In the fall of 2011, Axion announced that its PowerCube for commercial energy storage had been tied into the PJM grid as the first behind the meter battery based frequency regulation resource in the country. Once again, news of a revolutionary advance in the state of grid-connected energy storage systems didn't register on the price chart.

-- On Feb. 1, 2012, Axion said it had completed a $9.4 million direct public offering that was priced at $0.35, a discount from the Jan. 30 closing price of $0.62 but a significant premium from the December 2011 low of $0.27.

-- In Axion's year-end conference call for 2011, investors were told the toll-manufacturing contract that generated $6.4 million of revenue in 2011 was extended for another year.

-- In April 2012, Axion said the laboratory phase of its development project with Norfolk Southern had been successfully completed; NS had ordered $475,000 of batteries for its first prototype switching locomotive and NS planned to order another million dollars of batteries for a prototype long-haul locomotive later this year.

-- In its second-quarter conference call Aug. 16, Axion said it had successfully completed a three-year testing program with BMW and was looking forward to fleet testing within six months. It also told stockholders that accelerated testing with a "top 5" automaker from Asia was likely to progress to fleet testing within a year. The only two automakers that fit the description are Hyundai and Toyota ( TM).

For 2 1/2 years, Axion has been a "broken stock" that suffered from a disastrous supply-and-demand imbalance. Its current market cap of $34 million is a 3% discount to the $35 million market value it carried in the spring of 2009 when it had no product, no revenue and no visible industry relationships.

While the stock has been a dog in terms of market performance, Axion's business relationships and the PbC technology have developed at an extraordinary pace. I've been a securities lawyer for over 30 years and I've spent my entire career advising companies on corporate finance and business development matters. I've never seen a micro-cap that could speak publicly about advanced business relationships with a half-dozen giants in their respective industries.

Since a big chunk of my personal fortune is tied up in Axion, I'm pretty obsessive about tracking the available information on who's been selling and who's been buying. The good news is that most of the pre-2010 legacy holders who wanted to sell have already done so. The better news is the lion's share of the buying over the past 2 1/2 years has come from retail investors who've followed my blog on other financial Web sites. When the last of the shares in the hands of legacy holders and other willing sellers are absorbed, I expect to see a sharp reversal in Axion's "broken stock" syndrome.

Over the years I've witnessed a couple of spectacular trend reversals with other clients that had modest supply-and-demand imbalances. My first rodeo was with WRT Energy in the early 1990s and the second was with Boots & Coots International Well Control in the late '90s.

Over the next few months I expect to learn whether my experience with the behavior of perch translates to the behavior of marlins.
John Petersen, a lawyer and CPA, has specialized in advising companies on corporate finance and business development for more than 30 years. He writes the deathless prose and dire warnings investors read in offering documents and SEC reports. While Petersen has served as a board member or executive officer for a handful of public companies, the bulk of his work is behind the scenes where precision and a passion for detail are essential. Petersen�s investing style is that of �elephant hunter,� and nothing grabs his attention like a �multi-bagger� in the rough. His investing time horizon is two to four years. On the long side, Petersen looks for blood in the streets and stock prices that have been beaten down to unconscionably low levels. On the short side, he seeks out high-profile companies that trade at unsustainable levels while hype-intoxicated executives make the same tactical mistakes he�s suffered through with clients. Petersen�s sector focus is batteries and efficient transportation because he has almost a decade of experience in the industry, including a three-year stint as board chairman of an R&D-stage battery-technology developer. He�s convinced these sectors are emerging investment mega-trends.

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