Note 1 - Summary of Significant Accounting Policies

(a)

Business and Basis of Financial Statement Presentation

Axion International Holdings, Inc. (“Holdings”) was formed in 1981. In November 2007, Holdings entered into an Agreement and Plan of Merger, among Holdings, Axion Acquisition Corp., a Delaware corporation and a newly created direct wholly-owned subsidiary of Holdings (the “Merger Sub”), and Axion International, Inc., a Delaware corporation which incorporated on August 6, 2006 with operations commencing in November 2007 (“Axion”). On March 20, 2008 Holdings consummated the merger (the “Merger”) of Merger Sub into Axion, with Axion continuing as the surviving corporation and a wholly-owned subsidiary of Holdings. Axion Recycled Plastics Incorporated, an Ohio corporation and a wholly-owned subsidiary of Axion, was established to purchase certain tangible and intangible assets of a plastics recycling company during November 2013.

We design and manufacture innovative structural polymer solutions, engineering sustainable products and systems for applications that provide improved long-term value, consistent performance and reduced maintenance costs, offering a viable solution where stress and environmental factors cause degradation and deterioration of traditional products. Our proprietary products are based on patent rights we hold as well as manufacturing processes and formulations we have developed.

We manufacture, market and sell ECOTRAX® rail ties and STRUXURE® building products, with significant focus on construction mats. Our ECOTRAX® and STRUXURE® products are fully derived from post-consumer and post-industrial recycled plastics, such as high-density polyethylene, polystyrene and polypropylene. In patented and proprietary formulations, our products achieve structural strength, are capable of sustaining heavy loads and are resistant to changing shape under constant stress. Our products, manufactured through an extrusion process, are eco-friendly, non-corrosive, impervious to moisture, do not leach chemicals and are resistant to insects and rot. They possess superior lifecycles and generally have greater durability and require less maintenance than competitive traditional products.

For the past seven years, our products have been tested and validated in order to establish their structural strength. Our rail ties, our focus over the past few years, have been subjected to long-term performance testing, in which they have been under constant traffic in various environmental conditions. Short-span bridges have been constructed with our engineered products that have supported tanks and trains. We are in a position to expand upon this foundation we built through years of successful applications. When coupled with enhanced manufacturing capacity and process refinements, these foundational achievements should lead to a significant increase in commercial activity.

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

The accompanying unaudited condensed consolidated financial statements of Holdings have been prepared in accordance with Rule S-X of the Securities and Exchange Commission and with the instructions to Form 10-Q, and accordingly, they do not include all of the information and footnotes which may be required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results from operations for the three and nine months ended September 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2013 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.

(b)

Cash and Cash Equivalents

For purposes of our balance sheet and statement of cash flows, we consider all highly liquid debt instruments, purchased as an investment, with an original maturity of three months or less to be cash equivalents. At September 30, 2014 and December 31, 2013, we maintained all of our cash in demand or interest-bearing accounts at commercial banks.

(c)

Allowance for Doubtful Accounts

We accrue a reserve on a receivable when, based upon the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. At September 30, 2014 we accrued a reserve for uncollectable accounts receivables in the amount of approximately $74,000. We did not provide for an allowance at December 31, 2013.

(d)

Property and Equipment

Property and equipment are recorded at cost and depreciated and amortized using the straight-line method over estimated useful lives of two to twenty years. Costs incurred that extend the useful life of the underlying asset are capitalized and depreciated over the remaining useful life. Repairs and maintenance are charged directly to operations as incurred.

Our property and equipment is comprised of the following:

	September 30,		December 31,
	2014		2013
Equipment	$	17,893	$	18,700
Machinery and equipment		9,881,835		8,803,087
Purchased software		187,996		145,622
Furniture and fixtures		-		14,599
Subtotal – property and equipment, at cost		10,087,724		8,982,008
Less accumulated depreciation		(1,863,754)		(1,082,522)
Net property and leasehold improvements	$	8,223,970	$	7,899,486

Depreciation expense charged to income during the three and nine months ended September 30, 2014 was approximately $268,300 and $781,200, respectively and for the corresponding periods of 2013 was $75,000 and $147,600, respectively.

(e)

Exclusive Agreement

In February 2007, we acquired an exclusive, royalty-bearing license (subject to minimum royalties) in specific but broad global territories to make, have made, use, sell, offer for sale, modify, develop, import, and export products made using patent applications owned by Rutgers University (“Rutgers”). We are using these patented technologies in the production of our composite rail ties and structural building products such as pilings, I-beams, T-beams and boards of various sizes.

Royalties incurred and payable to Rutgers, for the three and nine months ended September 30, 2014 were $50,000 and $150,000, respectively. For the corresponding periods of 2013, the amounts were $50,000 and $150,000, respectively

(f)

Definite Life Intangible Assets

During the year ended December 31, 2013, we acquired a plastic reprocessing business which gave rise to certain definite life intangible assets associated with the acquired customer list and trademark. In accordance with FASB ASC topic, “Goodwill and Other Intangible Assets”, acquired definite life intangibles, are subject to amortization over their useful lives. The method of amortization selected reflects the pattern in which the economic benefits of the specific intangible asset is consumed or otherwise used up. Since that pattern cannot be reliably determined, a straight-line amortization method has been used over the estimated useful life. Intangible assets that are subject to amortization are reviewed for potential impairment at least annually or whenever events or circumstances indicate that carrying amounts may not be recoverable. For the three and nine months ended September 30, 2014 we amortized to operating expenses approximately $19,800 and $59,300, respectively of these intangible assets.

Our financial results for the reprocessed plastics business during the six months ended June 30, 2014 and our decision during the three months ended September 30, 2014 to transition the assets acquired of the reprocessing plastics business to a business extruding our proprietary products, represented a triggering event requiring intangible assets impairment tests. During the three months ended September 30, 2014, we determined that our definite life intangible asset associated with our acquired customer list was impaired and of no further value and accordingly we recorded a charge to other expenses for the remaining unamortized balance of approximately $545,800.

(g)

Indefinite Life Intangible Assets - Goodwill

In accordance with the FASB ASC topic, “Goodwill and Other Intangible Assets”, indefinite life assets, such as goodwill, acquired as a result of our acquisition of the plastic reprocessing business and which are not subject to amortization are tested for impairment annually, or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The fair value is determined by subtracting the fair value of all the identified tangible and intangible assets included in the business acquisition from the fair value of the purchase price.

Our financial results for the reprocessed plastics business during the six months ended June 30, 2014 and our decision during the three months ended September 30, 2014 to transition the reprocessing plastics business to a facility extruding our historical proprietary products, represented a triggering event requiring a goodwill impairment test. During the three months ended September 30, 2014, we tested the goodwill intangible asset associated with the acquisition in November 2013 of the reprocessed plastics business. The goodwill intangible asset was $1.5 million as of both September 30, 2014 and December 31, 2013 and based on our test for impairment done during the three months ended September 30, 2014, we determined there was no impairment.

(h)

Revenue and Related Cost Recognition

In accordance with FASB ASC 605 “Revenue Recognition”, revenue is recognized when persuasive evidence of an agreement with the customer exists, products are shipped or title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed or determinable, collectability is reasonably assured, and there are no significant future performance obligations. In most cases, we receive a purchase order from our customer specifying the products requested and delivery instructions. We recognize revenue upon our delivery or shipment of the products as specified in the purchase order. In other cases where we have a contract which provides for a large number of products and few actual deliveries, the revenues are recorded each month as the products are produced and the risk of ownership passes to the customer upon pre-delivery acceptance. Prior to deliveries, our customer’s products are segregated from our inventory and not available for fulfilling other orders.

Our costs of sales are predominately comprised of the cost of raw materials and the costs and expenses associated with the production of the finished product. Prior to 2013, we utilized third-party manufacturers, where under one arrangement we purchased and supplied the raw materials to the third-party manufacturer and we paid them a per-pound cost to produce the finished product. Under another arrangement, the third-party manufacturer sourced and paid for the raw materials and we purchased the finished product from them at a cost per unit. Beginning in 2013, we initiated production of our finished products within a leased facility utilizing our own employees. Additionally, in late 2013 we acquired the assets of a plastics recycling company and began to reprocess recycled plastics for use in our own finished products and to sell to customers for use in their finished products. During the three months ended September 30, 2014, we began the conversion of that facility from reprocessing plastics to processing of both molded and continuous extruded engineered products. Our costs of sales may vary significantly as a result of the variability in the cost of our raw materials and the efficiency with which we plan and execute our manufacturing processes.

Historically, we have not had significant warranty replacements, but during the year ended December 31, 2013 due to the improper installation of certain of our rail ties, we agreed to replace the rail ties. Although from time to time we replace our engineered products for various reasons, we do not anticipate additional significant situations where we might again replace improperly installed products and therefore do not provide for future warrant expenses.

(i)

Income Taxes

Income tax provision consists of federal and state corporate income taxes resulting from our operations in the United States. The income tax provision differs from the expected tax provisions computed by applying the U.S. Federal statutory rate to loss before income taxes primarily because we have historically maintained a full valuation allowance on our deferred tax assets and to a lesser extent because of the impact of state income taxes. As described in our Form 10-K for the year ended December 31, 2013, we maintain a full valuation allowance in accordance with ASC 740, “Accounting for Income Taxes”, on our net deferred tax assets. Until we achieve and sustain an appropriate level of profitability, we plan to maintain a valuation allowance on our net deferred tax assets.

We are current with the filing of our federal and state income tax returns. Our income tax returns are open to examination by federal and state authorities, based on statute of limitations, which is three years.

(j)

Derivative Instruments

For derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in fair value recognized in earnings each reporting period as a charge or credit to other expenses. We use the Monte Carlo simulation, and other models, as appropriate to value the derivative instruments at inception and subsequent valuation dates and the value is re-assessed at the end of each reporting period, in accordance with FASB ASC Topic 815, “Derivatives and Hedging”. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

(k)

Share-Based Compensation

We record share-based compensation for transactions in which we exchange our equity instruments (shares of common stock, options and warrants) for services of employees, consultants and others based on the fair value of the equity instruments issued on the measurement date. The fair value of common stock awards is based on the observed market value of our stock. We calculate the fair value of options and warrants using the Black-Scholes option pricing model. Expense is recognized, net of expected forfeitures, over the period of performance. When the vesting of an award is subject to performance conditions, no expense is recognized until achievement of the performance condition is deemed to be probable. Awards to consultants are marked to market at each reporting period as they vest, and the resulting value is recognized as an adjustment against our earnings for the period.

(l)

Earnings and Loss Per Share

Basic earnings or loss per share are computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the effects on our weighted average number of common shares outstanding of the potential dilution of (i) outstanding options and warrants, as determined using the treasury stock method and (ii) convertible securities as determined using the as-if converted method. The following table sets forth the computation of basic and diluted earnings per share for the three months ended September 30, 2014:

Numerator for basic earnings per share calculation - income attributable to common shareholders	$	2,567,665
Interest on various convertible promissory notes		361,414
Dividends for 10% convertible preferred stock		152,237
Numerator for diluted earnings per share calculation - income attributable to common shareholders	$	3,081,316

Denominator for basic earnings per share - weighted-average shares outstanding		69,066,096
Incremental shares attributable to:
Options and warrants		194,762
Various convertible promissory notes		50,360,850
10% convertible preferred stock		8,349,975
Denominator for diluted earnings per share		127,971,683

Basic earnings per share	$	0.04

Diluted earnings per share	$	0.02

For the nine months ended September 30, 2014 there was no dilutive effects of such securities as we incurred a net loss for the period.

(m)

Fair Value of Financial Instruments

Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. We have categorized our financial assets and liabilities that are recurring at fair value into a three-level hierarchy in accordance with these provisions.

(n)

Concentration of Credit Risk

We maintain our cash with several major U.S. domestic banks. The amount held in these banks exceeds the insured limit of $250,000 from time to time. The amount which exceeded the insured limit was approximately $2.5 million and $0.3 million at September 30, 2014 and December 31, 2013, respectively. We have not incurred losses related to these deposits.

(o)

New Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and the guidance defines a five step process to achieve this core principle. The ASU is effective for the Company's 2017 fiscal year and may be applied either (i) retrospectively to each prior reporting period presented with an election for certain specified practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application, with additional disclosure requirements. The Company is evaluating the potential impact of this new guidance, but does not currently anticipate that the application of ASU No. 2014-09 will have a significant effect on its financial condition, results of operations or its cash flows. We have not yet determined the method by which we will adopt the standard in 2017.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in an entity's financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. The ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company does not currently anticipate that the application of ASU No. 2014-15 will have an effect on its financial condition, results of operations or its cash flows.

(p)

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.