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Executives

Joe Allen – IR

Tom Granville – CEO

Chuck Trego – CFO

Analysts

Paul DeMarchi

Dan Skolnik

Charles Mackall – Avenir Corporation

Michael Karpoff

Susan Bond

Hubert Young – Private Investor

Bill Hogan

Donald McCathy

Michael Holt

Martin Smith

William Blanchard

Axion Power International, Inc. (OTCQB:AXPW) Q3 2012 Earnings Call November 15, 2012 11:00 AM ET

Operator

Good morning and welcome to the Axion Power third quarter 2012 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Joe Allen. Please go ahead.

Joe Allen

Thanks Laura. Good morning everyone, and thank you for joining us today. The purpose of this conference call is to supplement the information provided in Axion Power’s press release announcing the company’s financial results for the third quarter and nine months ended September 30th, of this year which was disseminated this morning at 7:30 AM Eastern Time. If you did not receive a copy of the press release, it is posted on Axion Power’s website at axionpower.com and in the client section of our website at www.allencaron.com.

It’s also posted on Yahoo Finance and on most of the finance sites. You can also call our office in New York at 212-691-8087 and we’ll email it to you right away.

Speaking on today’s call are Chairman and Chief Executive Officer, Thomas Granville; Chief Financial Officer, Charles Trego and Chief Operating Officer Philip Baker.

Before we begin I’d like to remind you that some of the statements made during this call including those about Axion’s projected future financial results, economic and market trends and the company’s competitive position may contain forward-looking statements. These forward-looking statements and all other statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. Any forward-looking statements made on this call today, speak as of today and Axion Power does not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.

Please refer to today’s press release, the company’s annual report on Form 10-K for the year ended December 31, 2011 and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results. As a reminder, today call is also available as a webcast which can be accessed from Axion Power’s website and clicking on the investor tab. A replay of the webcast will be available shortly after this call and will continue for 90 days.

I would now like to turn this over to Tom Granville. Good morning Tom.

Tom Granville

Good morning Joe and good morning ladies and gentlemen. Welcome to this morning’s Axion Power third quarter earnings call. As Joe indicated, I am joined here this morning by Chuck Trego, our Chief Financial Officer and by Phil Baker our Chief Operating Officer.

Second half of 2012 is shaping up to be one of the most exciting in the company’s history. Initiatives that were explored in years past are coming back to the forefront as we look at best exploit the unique properties of our PbC Battery. But more about that after Chuck reports on the third quarter and year-to-date financials. Chuck?

Chuck Trego

Thank you Tom and good morning to all those who are with us on the call this morning. Yesterday, November 14, we filed our third quarter 10-Q with the SEC and we encourage everyone to read it as it discloses relevant investor information about Axion Power International. Just a quick aside on that. Our 10-Q that was filed last night was accepted and posted by the SEC a little bit later than usual. We were informed the SEC had some backup in their filing processes, probably we surmised increased XBRO (ph) filing requirements and the after effects of some of their operational issues from Sandy.

Today we released our operating results for our third quarter and nine months ending September 30, 2012. My comments will be on our operating results for the third quarter and nine months ended September 30, 2012 compared to 2011, our cash flow for the nine months ended September 30, 2012 and our liquidity situation as of September 30, 2012.

For the nine months ended September 30, 2012 revenue was $6.7 million with a net loss of $6.4 million or $0.06 loss per share, compared to revenue for the nine months of 2011 of $5.2 million with a net loss of $5.7 million or $0.07 loss per share. For the third quarter ended September 30, 2012 revenue was $2.2 million with a net loss of $2.1 million or $0.02 loss per share, compared to revenue for the third quarter of the previous year of $2.1 million with a loss of $2.0 million or $0.02 loss per share. We want to emphasize that revenue for all periods was largely attributable to the sale of specialty lead-acid batteries to a major lead-acid battery company that sells the batteries under its own brand.

A comment about cash flow. For the first nine months of 2012, compared to the same period of 2011, excluding cash inflow of approximately 8.6 million in net proceeds from the sale of or common stock in the first quarter of 2012, our net cash flow for 2012 was negative $6.4 million compared to a negative $9.4 million in 2011, a reduction in nine months year-over-year net cash burn of $3 million or 32%. This significant reduction in net cash burn is in alignment with our plans for 2012 to improve our liquidity while continuing to focus on those activities critical to initial commercialization of our PbC technology.

Our liquidity situation. At September 30, 2012, Axion Power had $4.2 million in cash and cash equivalents compared to $2 million at the end of the prior year December 31st, 2011. Total current assets at September 30, 2012 were $8 million versus total current liabilities of $1.2 million with no significant debt. Or primary source of liquidity has historically been cash generated from issuances of our equity or debt securities. From inception through September 30, 2012, we have generated insignificant revenue from operations. We believe that the currently available funds at September 30, 2012 which includes the net proceeds of the aforementioned 8.6 million from our February registered direct common stock offering as well as internally generated funds for product sales will provide sufficient financial resources for our current development stage operations, working capital and capital expenditures through the first quarter of 2013.

Subsequent sources of our outside capital will be required to fund the company’s working capital, capital expenditures and corporate operations beyond March, 31, 2013. No assurances can be given that the company will be successful in arranging for the capital needed to continue the execution of our business plan including the development and commercialization of new products or if successful on what terms.

Keeping with the roadmap established early in 2012, the company will need to source additional capital for both working capital and operational requirements during 2013 in order to continue to develop the PbC products that customers are buying and that potential customers are testing. Capital will also be required to transition manufacturing of complex power storage systems to a major US contract manufacturer. That manufacturer will be fully capable of ramping up tube and hub manufacturing to meet future demand take full advantage of economies of scale and further align with the company’s long term strategy.

Management with the advice and consent of our board of directors has taken actions to identify capital sources that are in alignment with our business objectives and long term strategy. Capital contributed from these sources will allow us to commercialize our products beyond March 31, 2013.

And now I will turn the meeting back over to Tom.

Tom Granville

Thanks Chuck and thanks for spearheading our 2012 initiative to reduce spending on a cash flow basis. The $3 million net reduction you achieved in spite of the significant added marketing expense we undertook when we strengthened our marketing department including adding Vani Dantam as Senior Vice President Sales and Marketing is truly a job well done. We represented this reduction as part of our go forward roadmap back in January of this year and you led the team in making it happen. Axion shareholders thank you.

As Chuck mentioned, there were some glitches in our filing this year so we will have some events subsequent to report on this morning. But first in the third quarter work continued with Norfolk Southern partially as an extension of the $400,000 purchase order they issued to us on April 26, of this year. The initial purchase order was Phase I of a $475,000 total purchase order for batteries to be used in retrofitting the NS-999, all electric locomotive. On October 25th and in event subsequent to the end of the third quarter, Norfolk Southern issued us a second purchase order in the amount of $88,850 which covered the remaining $75,000 balance from the $475,000 main purchase order.

The remainder of the purchase order $13,850 was for purchase of additional PbC batteries for Norfolk Southern’s own use. This issuance is in keeping with their commitment to reduce emissions and reduce reliance on fossil fuels. They plan to do this by developing greener alternatives such as the 999.

On November 6, Norfolk Southern issued their fifth annual sustainability report and I would like to read you a couple of brief excerpts from that report. They can be found on page 16 of that sustainability report and I quote “leading the charge with the NS-999 to developing greener alternatives. Five years ago Norfolk Southern began development of a battery powered locomotive to save on fuel costs, lower emissions and reduced reliance on foreign oil sources. Two years into the effort in the fall of 2009, we unveiled NS-999 a prototype electric switcher locomotive. Since then, we have worked with industry partners Axion Power International, TVM Control Systems and with scientists at Penn State University to address technical challenges posed by the locomotive’s battery and battery management system.

In 2013, we plan to reintroduce an upgraded NS-999 with new advanced lead-acid carbon batteries that's us, and an overhauled battery management system that addresses technical issues we encountered with the prototype. We believe this rebuilt “next generation” model will provide a foundation for the development of economically viable battery-powered locomotives to help reduce emissions and reliance on fossil fuel”.

Quoting Gerhard Thelen here, “The whole difficulty has been how to manage these long battery strings while the batteries charge and discharge with very high current, and we absolutely are plowing new ground with this,” said Gerhard Thelen, Vice President Of Operations Planning And Support. “We think we can make this work, giving us fuel savings as well as pollution-free source emissions.”

Well this is us; this is in the PbC with inherent string equalization. So how does that relate specifically to Axion, the report in accompanying quotes from their Vice President of Operations confirms their commitment not only to the NS-999 rebuild for which we have a purchase order but for future rebuilds? Requiting now from the report “this rebuilt 999 “next generation” model will provide the foundation for the development of economically viable battery-powered locomotives.” The report also confirms that the problem and quoting again “has been managing long battery strings while these batteries charge and discharge with very high current”. As we know the PbC self regulates module to module, and large string applications, such as the Norfolk Southern’s 54 battery strings which will be used on the NS-999 and on future over the road locomotives. We are pleased with the way our batteries have been responding, to customer and third party testing and we are naturally very pleased with Norfolk Southern’s public comments regarding their commitments to battery powered locomotives now and in the future.

In the early summer, we embarked on a series of meetings and conference calls with utilities and groups representing utilities. Our acceptance in this arena was in part sparked by the product credibility generated from the commissioning of our on-site power cube last December.

In the third quarter, we began to ramp up our demand response participation with our strategic partners PJM and Viridity. Late in the quarter, we began to receive invitations to present our value propositions and PJM Network resolves to other utilities. One specific invitation we accepted from the south east utility conference where we presented on September 18. This conference was attended by representatives from 22 different utilities, our various interactions have generated request for proposal which are currently in mature development.

In August, we executed an exclusive global distribution agreement that we have spoken about before with Rosewater. As previously discussed, Rosewater has proven expertise in the distribution and marketing of electronic systems to the consumer retail markets in the United States and access to a network of installers or such electronic systems which we feel maybe beneficial to the distribution of our hub product. This agreement was for three years subject to the attainment of agreed upon annual sales objectives.

We presented at the CDS (ph) show and after the CDS show we began a process of qualifying our residential energy storage hub to compliant standards under UL 1741. We engaged a test facility and expect to be certified in early December of this year. On a parallel path we performed in-house testing and as a result of this successful testing, we began to market this product offshore where US certification standards are not required. Upon completion of this third party testing, all of our units, on and off shore will be manufactured to US standards including UL 1741 and will contain labeling, verifying that compliance.

PbC base batteries and systems are being primarily marketed to two of customers, transportation and those that require on and off grid power storage systems. We continue to work with BMW and other automobile and truck companies based in the US, Europe and Asia with the goal of implementing PbC based start-stop systems in production models, of passenger automobiles. Severely we are in various stages of work and discussions that vary from early to very advanced with a number of small and large start-up, to prominent well established heavy truck OEMs here in the United States. The objective is to outfit 18 wheelers with battery powered Axion systems that will boost uphill performance as well as increased miles per gallon.

On November 7, we shipped PbC batteries to an OEM for their use in a class 8 truck rebuild program utilizing their proprietary hybrid drive train. We first engaged this potential rebuild program in 2009 but several obstacles prevented the OEM from moving forward. The program is now well under way and we reengaged early this summer. Our batteries, 52 in all are scheduled to go into a rebuilt vehicle in the next several days. I hope the press is here. And that vehicle is scheduled to be on the road hauling freight by the end of November. We will see real world application results by the end of 2012. Our batteries will be utilized in the boost uphill performance program that will provide extra power when needed and more importantly, provide better miles per gallon in overall freight handling.

This application is in addition to our truck OEM initiative designed to satisfy 'anti-idling' legislation with the use of our PbC battery. We feel that the unique properties of our PbC battery, high charge acceptance, fast recharge rate, long cycle life and string equalization will allow the OEM'S segregated battery system and segregated battery system to function more efficiently when the truck is at rest but still needs to run its ancillary load for example their heater, radio, electronics, air conditioning, and to do this without idling the engine and creating emissions.

We resurrected this truck program after Vani Dantam, Senior Vice President Sales and Marketing came on board at Axion. We began an initiative back in 2009 that was aimed at providing a viable option to new at that time, anti-idling legislation. Vani has had a couple of decades of experience with heavy duty truck OEMs. We presented an award winning paper at SAE on October 2, and that paper brought us heightened interest from large well established heavy duty truck OEMs. We have shared data and MDAs and are moving forward with them.

Well that's sum of what's been going on here at Axion in the second half of 2012. And now I'll open the floor to questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is from Paul DeMarchi (ph) of Dakota (ph) Incorporated.

Paul DeMarchi

You didn’t mention anything about the grants from the government. Are they contingent with anything to do with Norfolk Southern or is that something entirely separate?

Tom Granville

That's an entirely separate program. There is so much good news though we didn’t want to take the entire morning with all of that. But that's a grand program that's an automotive application. Two battery design system, we began work on that in the middle of the third quarter this past summer are moving forward with that Phase I program. It’s really to prove the validity of the two battery system, it’s a Phase I of a potential three phased grant program and we’re very happy with the results we've achieved to date on that.

Operator

(Operator Instructions). And our next question is from Dan Skolnik. Go ahead please.

Dan Skolnik

Last year you spoke of a large 300% jump in revenue. I want to see kind of what you are feeling about that call, where things are, what the timeline is and if that's still applicable?

Tom Granville

I don't think that's applicable, I got a little ahead of myself there. Things are slower than what we expected. We certainly have those kinds of things in the works, but it hasn’t come to fruition as quickly as we would have hoped. If anything since that comment was made last year which I bit my tongue and wished I could have retracted after I read the transcript and I think I actually mentioned that at the end and in fact I know I mentioned it at the annual meeting, we have actually more opportunities now than when I first spoke of that last year.

Dan Skolnik

So if you just tell me a little bit in the release you talked about how the Norfolk Southern and BMW timelines weren't going to be as quick as some other things coming out, especially for BMW, do you have a sense of the timeline or what's holding up delays or are there delays that's going to (inaudible).

Tom Granville

It’s an automotive company, as I have mentioned thousand times in the past and they are just slow. They are very slow. They are extremely slow. They are ridiculously slow, all of the above. Which is why the other opportunities that we have, I mean here is a truck opportunity where we've got batteries out, batteries are going into a truck, it’s not a demonstration as such, it’s an actual truck that's going to be on the road hauling freight and it’s going to be doing it within a month. I mean that's the kind of opportunities that we enjoy having and that we blend in with the longer term opportunities like BMW and like Norfolk Southern and the slow movers of the world, the railroads and the automotive companies. It’s also one of the reasons we’re as excited as we are about the residential units and the off-shore units that we've been looking at and advanced RFPs on because they are shorter term projects, very much shorter term projects.

The only thing that’s held up, the residential units to date was the variability in terms of UL 1741 approval for our units. The units had to be tested to that standard to make them easier to sell into households. Technically speaking, I think, I’ve mentioned this in a past call, the approval isn't required but without it, building and specters, we are told anyway would take much longer to approve the system and grant a permit. Once that attesting to the UL 1741 standard is stamped on the unit, they can move at a much faster fashion and approve something in a day or couple of days as opposed to weeks. Again, this is what we’re being told by the installer, when we deal with them on a daily basis.

Operator

The next question is from Charles Mackall of Avenir Corporation.

Charles Mackall – Avenir Corporation

My understanding is that BMW has an eight party testing batteries and I just wondered, are you getting any feedback on that and then that was about testing as opposed to sort of be completed by early first quarter ’13. Is that right?

Tom Granville

The initial program when we hope to do is get that completed so that we still could take advantage and they could take advantage hopefully of some fleet testing in the winter season. That was the target. The testing has been ongoing. We can’t get into a lot of the details about it. Like anything there have been some starts and stops but we’re still positive about it.

Charles Mackall – Avenir Corporation

Can you give us any feel for your efforts in developing some additional financing?

Tom Granville

In January of 2012, when we spoke to those that were involved in the financing, we made a conscious decision to do it in tranches and take it all at one time. And so when that financing was done at the beginning of 2012 it was with the idea that a second financing would take place early in 2013. Unless we were totally unsuccessful with some of the projects that we were working on and didn’t need working capital to make those things happen.

As you cans see, as you can tell from our comments today, that's not the case. We have moved forward and I didn’t even talk about contract manufacturing which has been extended well into 2013. Incidentally as a side here, we received a perfect grade from our customer for delivery on time, on returns, there hasn’t been one warranty item on the batteries that we've made that have been returned to us and so those things all require capital and we knew that. We projected being successful obviously and that's been the case and so we will need that capital. We've been talking to the people about it and again, I don't want to get into too much stuff there, but it will be an event after the first of the year.

Operator

And our next question is from Michael Karpoff (ph) of (inaudible) Investment Partners.

Michael Karpoff

I have a couple of questions. The first is, are you able to at this early stage in development to project any timeline to become cash flow neutral or perhaps even a little bit in the back, do you have any way of projecting that at this point?

Chuck Trego

It’s a lot of guess work as you can well imagine. We've said that it was our goal to get there before the end of 2013, not for the year but for the period. That's still our goal as some of these projects get pushed out a little further, of course it becomes a little more difficult to project that that's going to happen, but that's still our goal and still our projects lead us in, in that direction and my CEO right now is ready to strangle me because he doesn't like to promise numbers and talk about that sort of thing but it’s our goal and we’re working hard to achieve it.

Michael Karpoff

Okay, so that's pretty much where I expected it truly is no way in this early stage to project cash flow neutrality. And that's fine. And my second question is, the stock’s been languishing for a number of reasons I guess, the fact that the street knows that you’re going to have to raise additional revenue, you’ve announced that quite some time and the fact that some of these programs are rolling out more slowly than you expected. Do you have any way of knowing what might be the first catalyst to come to fruition that moves its stocks?

Chuck Trego

Well if I knew that I’d be on Wall Street I think. We have a number of initiatives that are out there. We talked about some of them, maybe even most of them this morning and any one of those can really get us rolling here. I don't know about moving the stock, we’re about running the business and making the business successful and getting to cash flow positive. So I try not to dwell too much on what moves the stock and certainly we don't try to influence that.

Operator

And our next question is from Susan Bond (ph) of (inaudible).

Susan Bond

You mentioned that your goal to become the lead supplier of carbon electrode assembly is based on fulfilling your plant’s production capacity. Where is the production capacity right now and when do you think you’ll be able to fulfill that goal?

Tom Granville

We are not to the point where we’re selling carbon electrodes right now. We’re still in the phase of going to the end user and proving the application of the product. So we’re making the entire battery and that's where our focus is right now. As we prove those applications and as that market grows largely, then we will transition into a phase of providing carbon electrodes to others.

Let me just add to that, it’s not our intent to be a large battery manufacturer and to try to compete with the giant battery companies of the world that have offices in 80 countries and plants all over the world. That's not where we want to go. What we do want to do and what we do feel is necessary is to take the product, to prove the application with the end users such as the truck application, the BMW application, the cube applications with utilities the residential application, all those things. And then as I said, talked to and we are working with other large lead asset batteries, talked to companies, talked to them about and we have already done some of that about purchasing our electrodes to make their batteries better.

Operator

And our next question is from Hubert Young, a private Investor. Mr. Young, your line is open.

Hubert Young – Private Investor

My first question is a follow up on the last question that relates to production. So the intent is to license the lead-carbon electrodes to other manufacturers or to produce the lead-carbon electrodes for use in larger applications.

Tom Granville

The licensing potential is down the road. The roadmap is make the batteries, prove the application, prove it with end users in various markets, max out the capacity of the plant or have a close roadmap to maxing that out. Then provide make and provide the negative electrodes to other lead acid battery companies and wildly successful as we hope to be, eventually that will lead to the licensing agreements.

Hubert Young – Private Investor

And my second question is in regards to the residential hubs. You mentioned that you’ve already begun marketing overseas. Would you be ready to ship hubs to potential customers if they ordered them?

Tom Granville

That's the intent. We certainly don't want to make those, we’re capable of making them and have made them and have them here at Newcastle but we’re talking to a number of contract manufacturers to take that burden off of the plant here and just focus on making the batteries. We are after all a battery company.

Operator

And the next question is from Bill Hogan.

Bill Hogan

I am curious if you feel Axion faces an uphill battle in marketing and school battery, dual voltage system to OEM automobile companies when the alternative would be a drop in lithium ion battery for the ancillary load coupled with an ultra-capacitor.

Tom Granville

No our advantage and we've spoken of this a number of times in the past, our advantage is that we are a safe product, we’re less expensive than a lithium ion product. There are vehicles now utilize two batteries, the Prius and those kinds of vehicles actually have two batteries, a lead acid battery, starting battery and a lithium or nickel metal hydride battery. So the idea of the two battery system is not foreign at all and has been embraced by some OEMs that seen that as a future.

Again, the reasons being, the charge acceptance, the very high charge acceptance, the things that they need to make the stop-start technology work. Now when you get to a plugin or an all-electric vehicle, we are not the answer right now. That a lithium or a nickel metal hydride solution, a very expensive one at that. But that's a very small part of the market, we've spoken a number of times in the past about research reports that talk about market size and the stop-start the simple stop-start with or without regenerative breaking is easily 95% of the market through 2017. In 2020, the projections from a number of sources including pipe research is that electric vehicles and plugins and all electric TVs will make up about 6.3% to be exact of the market. Those numbers actually since the report’s been written in talking to the OEMs, they feel those numbers are a little high.

Operator

And the next question is from Donald McCathy. Go ahead please.

Donald McCathy

The question that I had was about the timing of the NS-999 testing. I think you had stated that its planned to begin in early 2013, but I guess the question is, how long do we expect that run forward, do we have any indication from Norfolk Southern about that and then, what would come next? I mean, obviously the goal is not just have one of these operation but to have many of them. So can you tell me a little bit more about that?

Tom Granville

Yes, we can’t speak for Norfolk Southern, and in fact we've been chastised a little bit for speaking for them in the past. But I know it’s their goal to have that NS-999 on the road, not just being tested. We’re beyond testing for the NS-999 and the testing that we’re doing is for over the road vehicle. Norfolk Southern has other subcontractors that may not be in perfect alignment with what their original schedules would have been. We have the PL, we’re finished with any work that we need to do. We’re ready to ship. We have a lot of batteries, a large percentage of batteries already in the form and can crank those things out the door pretty quickly when given notice to shift by Norfolk Southern. So the reason I wanted to read some of that report is to give you a feel, not put words in their mouth but just quote what they have said, give our shareholders a feel for what their thinking is and what their plans are going forward.

Donald McCathy

And that's fair. Speaking of that sustainability report from Norfolk Southern, I noticed that they indicated they have 2000 locomotives that have idle stop-start built into them now and maybe this is another dead end question, but I just wanted to check and see if or what conversations you may have had with some of about using the PbC for their idle stop-start in their locomotives.

Tom Granville

Yes, that's the idea. They are looking at utilizing this across the board for rebuilds, for yard slugs, for all electric, for hybrid electric, for the over the road units. In some applications it’s not the best use of the product, for example a flat areas in Iowa or in the middle of the country or the very steep climbs in the Rockies. While the topography that we’re best suited for is a rolling topography where we have a chance to recharge the batteries with regenerative breaking and that's why they’ve been looking at the particular lines that they've been looking at to utilize the product on those lines, not just the crust and corner that runs from New Jersey down through Memphis and all the way down to New Orleans. That's perfect topography for a product like ours.

Operator

The next question is a follow up from Michael Karpoff of (inaudible).

Michael Karpoff

If my memory serves me correctly, in a previous conference call, you indicated that the testing time of the batteries from other automobile OEMs would probably be lessened by the hope for success of BMW. With BMW slowing down their timeframe either on purpose or inadvertently, you expect this to do much to slow down the testing timeframes of any other OEMs that they have an interest in the batteries?

Tom Granville

That's their decision obviously but what I was referring to and what they talked about was accepting the data that we produced and that had been verified by BMW and starting at second base if you will rather than at home plate. Regardless of where BMW got to, they would still need to get from second base back to home plate because their individual requirements are different than what a BMW or General Motors or another OEM might be. So they still need to do that testing, but what I talked about is getting the batteries into a vehicle quickly as opposed to going through all of the bench testing that we did with BMW and with others. They felt that they could accept that bench testing data and start from that point.

Michael Karpoff

And do you have any batteries in any other OEMs vehicles or are they still in bench test mode or maybe perhaps not even that far?

Tom Granville

A little of each. We do have batteries in other OEM vehicles and I can’t get into [Multiple Speakers].

Operator

And the next question is from Jeff (inaudible). Please go ahead.

Unidentified Analyst

I am sorry I've a lot of the conference call, my first question is I wanted to just talk about, if you would comment a little bit more on BMW and I am sorry if I heard you wrong, but did I hear you say that the BMW has slowed up their testing or did I hear you say that the testing is a little bit on the stop-start schedule right now with the third party testing?

Tom Granville

Yes, you may have heard part of the answer to that question but like anything else, we've had starts and stops, no play on words there for the stop-start market or the stop-start application. But we have experienced some of that but already testing with them. They have finished their testing, as I have mentioned before, we finished our testing and now its validation testing by third parties.

Operator

And the next question is from Michael Holt.

Michael Holt

Two quick questions. First off, last quarter you mentioned the $400,000 purchase order by Norfolk Southern, and then a follow up in this call about the additional 88,000 for the remaining balance. Has the $400,000, that purchase order has that actually been delivered? Shouldn’t that show through in the revenues. And then second question, as I see a large increase in your work in progress, in the inventory, any comments on that or is that just seasonality?

Tom Granville

That's a two or three part question there. The $400,000 was part of the first phase purchase order from BMW, it was $475,000 purchase order. So they gave us a new purchase order that made up a balance of that 75 plus an additional order for $13,000 for more PbC batteries. We have not shipped any of those batteries for any of the purchase orders. We have however as I was mentioning a few minutes ago, made some of that product and have that product aimed up ready to shift. We've made carbon electrodes for other of those batteries. So there is a lot of inventory product that is waiting for shipment to Norfolk Southern.

Michael Holt

Okay, so the $488,000 replaced the $400,000 and I would expect to see that $488,000 be in the receivables fine then?

Tom Granville

Not yet. It hasn’t been shipped yet. What you’ll see in the receivables line is the $13,850 because those batteries will be shipped to them.

Operator

And the next question is from Martin Smith.

Martin Smith

You had mentioned in the notes there that the PJM’s rating system you had a 92 out of a 100 score. One would presume that that would be good but if you could give a little bit of insight that would be great.

Tom Granville

It’s actually closer to 93 and what this is part of the new pay for (ph) performance regulations that were first (inaudible) a year ago and they gave the utilities a year this year 2012 to implement them. And what it means is you scored on a number of factors and a couple of those factors are the speed with which you can respond to their signal and we can respond to their signal in milliseconds. In the past the window was in minutes, we’re responding in milliseconds so you get a scored amount for that. The second of the multiple issues that they raid on is for the performance. Did you really you bid in for 400 KVA or 300 KVA or 500 KVA, were you able to provide and were you provide it in a timely fashion and if you are, you get a certain number of points for that.

So what was the rate that was being paid, the base rate that's being paid is one, let`s call it 1.0, if you’re rated and you can only be rated as high as 100, if you’re rated 92 for example or 93, then you are paid 1.92 or 1.93, so, instead of being paid $1 where the system gets paid a $1.92 or $1.93. If you fall below a 45 rating roughly, 45 rating, then you have to go through the whole cycle again and get recertified as a demand response asset. But we’re averaging, I think its 92.6 or 92.65, something like that for the month of October.

Martin Smith

Do we have any insight into how others do?

Tom Granville

We’re trying to find that out as a matter of fact. No, we haven't been able to do great detective work there yet. It’s a new program and they are a lot of people participating in it, more and more are participating every day, but this pay for performance was something that we were looking forward to if you look back on some of our previous calls and some of our press releases, we spoke about that, that was coming and that was going to be very helpful to us and one of the reasons that it was going to be very helpful to us is because of the unique capabilities of the battery and responding as quickly as it can.

Operator

And our next question is from William Blanchard.

William Blanchard

Could you offer any color on the flooded battery contract including maybe how often it gets renewed and power production changes, any predictions of become whatever we’re in. I guess my biggest concern is that it would go away and I have seen companies kill when something like that happens and I am sure it’s unlikely but like to hear it from you.

Tom Granville

Sure, what we've actually looked at how we’re going to handle that in the future and continually do look at that, but we've been renewed I guess nine months out on that and we typically stay six to nine months out on projected purchase orders from them. It’s amazing year-to-year, not necessarily month to month but almost quarter to quarter, how accurate they are with their predictions of the number of batteries that they will need. Bear in mind that these are special batteries for things like tractors and heavy duty construction equipment and they know the market pretty well, they've been doing it for a long time, predecessor company here, Newcastle battery company made those batteries for a long time and it was one of the reasons that the customer came to us to continue making that product for them. So we’re comfortable with it at least for the near future. Two years, out I can’t really predict where that will be two years out, but certainly for the next several quarters, we’re locked in.

William Blanchard

Want to heckle out a question about the grading 92 or 93 score, I think that be a great thing to expand upon in some way either on your website or in a letter to shareholders because I am in a shareholder group and there is a lot of confusion about what exactly that meant, so like to encourage that's a comment. And my question is, do you anticipate being involved with other RTOs (ph) besides PJM and any near term frame. Is that something you are focused on?

Tom Granville

Actually we've had conversations and we’ll continue to have conversations depending on the area that we’re working in. PJM is primarily an east coast company. So when we get out of the country for example, or over to the west coast, we will be dealing with other RTOs at that point.

William Blanchard

And are you depending on Viridity for a lot of that or even Rosewater or is that more of your own marketing step that's involved?

Tom Granville

It depends on the application. In some instances, in Canada for example, Rosewater has a lot of strength and a lot of reach, in other areas Viridity has some reach and in some areas it’s just us and there are companies and utilities that we've dealt with in the past that we’re reengaging as you can tell from some of the notes and the press release and even what I said here this morning. I guess it maybe wasn’t in the press release because it didn’t make it to the subsequent event column. But we were invited to present to 22 utilities back there in September and we've had a lot follow up that overall presentation.

William Blanchard

And would we expect to see any revenues actually reported from the power that you are using with PJM or are they too insignificant?

Tom Granville

It’s insignificant at this point. Bear in mind that we are still using that as a test bed for a lot of the things that we’re doing in the large strength testing and some other things that we’re doing. We are ramping it up somewhat whenever we can. We’re limited as to some of the times that Viridity and PJM have an actual signal during the wee hours of the night for example, they don't accept bids and so they is no opportunity to do this on a 24 day basis, if we wanted to, which we don't, but if we wanted to, that opportunity doesn’t exist at this point. But they are expanding their hours as more demand response resources come online.

William Blanchard

And my last question has to do with the residential hub, I've heard the mentions of offshoring and are we now thinking that they might be first installed offshore and the reason I ask is, with relationship they ramp up, I understand that reservoirs is planned as to be very careful about the first few units, be really focused on customer acceptance and happiness if you will. Do we think that this plan may actually start offshore instead of long shore?

Tom Granville

I think it will be both. We certainly were cognizant and have the opportunity offshore when those orders will come in and when shipments will be made as supposed to just having orders come in, one can’t ever completely tell about. It’s so, now that we have a firm UL 1741 certification date, it’s going to be a lot easier to market that product, lot easier for Rosewater to market that product in North America. Having that hanging out there, when is it going to be ready, makes it very difficult to market a product without having a firm mandate and we had end dates that were all over the pet place, believe, it was went to literally quarters and quarters out, but now we've arrived at a better test facility that can get us there more quickly and we’re very appreciative of that.

William Blanchard

Okay, I am certainly appreciative of it as well. I am also really a shareholder and that was just a disaster for them for how long they took to get that certification for their inverters and so I am really concerned and I guess I am a really dubious when I heard you used the word firm end date on this but I take it you are really convinced they are going to come through for you.

Tom Granville

Well they’ve stuck their neck out there, that's for sure.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Granville for any closing remarks.

Tom Granville

Thank you. So I think you all can see why we’re so excited here at Axion. Our strategy of approaching more than one market has been questioned by some in the past. But as competitors such as AV123 (inaudible) International Battery, all of which initially concentered on one market. As they all fall by the wayside, we feel comfortable with a broad-based market we have targeted. The undeniable cost efficiency of PbC batteries compared to lithium ion batteries is becoming better understood by potential end-users many of whom have formally assumed that lithium ion would be the adopted battery of choice in spite of its very high cost and its significant safety problems.

We have designed practical, affordable battery systems for real world users such as the stop-start system that every automobile manufacturer in the world is trying to perfect. Axion products do not require a special alterations in the national or international power infrastructure, just the opportunity in fact. Our transportation systems including the over the road locomotives, are all capable of charging themselves while in use by taking advantage of regenerative breaking. Simply put, our technology is not constrained by dependence on others. For example, needing to wait for someone to build charging stations and our hubs work with real world solar and wind while at the same time, they offer the option of accepting grid power or accepting emergency power from diesel generators.

It’s an exciting time at Axion, it’s a time of great opportunity and we plan to take advantage of those opportunities. Thanks for sharing in our news. Thanks for being on the call. We’ll see you next time.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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