Letter to Shareholders

NEW CASTLE, Pa., Oct. 3, 2012 /PRNewswire/ -- Dear Shareholder, 

In September, Axion Power International, Inc. (OTCQB: AXPW) attended the annual CEDIA Expo in Indianapolis.  CEDIA stands for Custom Electronic Design and Installation Association, and it is the premier trade group for high-end entertainment and electronic systems – home theaters, home entertainment systems, energy efficiency systems, and what's called "whole-house integration."

(Logo: http://photos.prnewswire.com/prnh/20100119/AXIONLOGO)

The experience was an eye-opener, and we wanted to share some of what happened there with you, our shareholders.  We wish all of you could have been there to experience firsthand the welcome and acceptance that was accorded to our Residential Energy Hub (REH) that we are marketing through the Rosewater Energy Group ("Rosewater").

Some of you are familiar with Rosewater from our news releases, and some of you heard a brief presentation by Joe Piccirilli, the CEO of Rosewater, on our second quarter conference call held on August 16.  A few of you heard a presentation by Joe Piccirilli at our 2012 Annual Meeting here in New Castle on June 21.  Joe Piccirilli and his team have a track record of successful business ventures.  Joe in particular has been very successful in channel execution in the high-end U.S. residential market for more than 2 decades, and he has maintained a significant network of distributors, dealers, representatives and friends in that market.  Just to be clear, we categorize the "high-end" residential market segment as homes beginning at 10,000~ square feet, and ranging significantly larger in size from that point. These homes typically include a sophisticated home entertainment system and a fully automated whole house control system, which is usually technologically cutting-edge. For these systems to fully function to the design specifications, and provide the highest quality audio video and management performance, a consistent pure 60-cycle sine wave and a constant 120 volts are essential. Our Residential Energy Hub provides this critical clean power and perfect sine wave for power received from any renewable source - such as solar or wind; from the grid; or from a generator.

At CEDIA we were able to see some of the technological marvels that are available to home owners – and you can read about them by going to the site: www.CEDIA.net.   Rosewater sent out some links to media coverage from the Expo, and we requested that they include our shareholders in that dissemination.  If anyone wishes to see that media summary, please send a request to me or to Rudy Barrio ([email protected]) and we will email it to you.  We cannot duplicate the media stories for copyright reasons, but we can send you the links so that you can visit the sites and read them online at your convenience.

The basic point about this targeted market for these high-end homes is that the installers and the homeowners are currently at the mercy of an extremely variable electrical signal when accepting power from the grid.  Most of us watch television from time to time, and there are times, with cable or with dish reception, when pictures freeze; or audio and video get out of synch; or parts of the picture get odd-looking as pixels don't behave the way they should.  Some of that may be a problem with the basic signal we are getting, but most of it is due to the variable quality of the electrical power we receive when we plug the television, or the cable box, into the wall.  This is not a physics lesson, but suffice it to say that most appliances are built with a tolerance for variation.  That variation can, however, cause distortions – and the more sensitive the electronic device, the more serious those distortions become.  A lot of us use power strips with surge protectors to keep our appliances from getting 'fried' in a power surge in, say, an electrical storm.  But if you were spending upwards of half a million dollars on your home entertainment system, your system components would not perform up to design standards if they were just plugged into power strips. The REH solves that problem.

In addition, if you have a large home on a sizeable piece of property, or a large home at the top of a tall building, you may have environmental concerns that lead you to want to generate some of your electrical current from solar panels or wind turbines.  You may want to be independent of the utility grid to the extent possible, and you certainly would want to be able to keep at least part of your power intact in a utility crisis - such as a brownout or a blackout.  So you may have a back-up generator, which of course takes some time to come on line. To bridge that power gap, one would have to consider implementing a bank of fully charged batteries to supply energy immediately after a utility power interruption.

The Residential Energy Hub we have designed working with Rosewater and their channel partners represents a missing link in the quest for pure energy, and residential self-sufficiency.  It "conditions" energy to provide a pure electrical signal for entertainment, home security, whole-home integration and other purposes.  It includes a variety of electronics that enable a homeowner to employ power from different inputs, including both DC (as in solar and wind) and AC (as in electrical grid) inputs.  Finally, it stores energy for use when energy is not available from outside sources, and it discharges on demand and recharges very quickly.  It can do all of these things because the system incorporates our proprietary PbC® batteries which are key to the system architecture. With the REH system, if there were a sudden blackout, the user would see full electrical power unless the home were programmed to cut off nonessential circuits to save energy in a crisis.

Based on the positive response the Residential Energy Hub received at the CEDIA show, along with the REH market assessment Rosewater conducted, we believe there is a large potential market for our Residential Energy Hub. We hope to be able to start shipping Residential Energy Hubs for installation, in end-user locations, in the near future. The only hurdle we have to clear to begin selling and shipping in the U.S. is UL approval (www.ul.com), and we have been working on that, with others, for some time.

In answer to anticipated questions about manufacturing capability, let me say that we can supply the short-term needs of Rosewater and its customers. And as for going forward, we have had very encouraging talks with one of the largest outsource supply manufacturers in the world. We made the first REH unit ourselves and have the in-house know-how, space and ability to continue on that path in the near term. We have a continuing dialog with smaller manufacturers, any one of which can satisfy our market requirements for the next 18 months. So whether we go to a large supplier now, or later, we feel our manufacturing plan is a solid one.

For those of you who would like to see the specifications and photos of the Residential Energy Hub, visit www.rosewaterenergy.com and click on the "Residential" tab.

Although we are very enthusiastic about the Residential Energy Hub, we are not diverting our attention from the markets and potential customers we have been working with for years.  The transportation market is a primary focus for us – especially micro-hybrid cars and battery-powered locomotives.  In those areas we are working with Norfolk Southern, BMW, a large US-based car company and other automotive OEMs.  It is worth repeating that the largest single order for PbC batteries we have had to date was from Norfolk Southern, for the conversion of a yard locomotive to all battery electric operation.  Railroads are the green backbone of the US transportation industry, and they don't move forward without exhaustive testing and study, but we believe we are well on the way to being a primary provider of PbC batteries for this market.

The electric utility market is a primary focus too, and our first step there was the November 2011 connection of our Power Cube™ to the substantial PJM Interconnection electrical grid.  We are building on this first Cube in continued dialog with several utilities. An important second step, earlier this year, was the installation of our mini-Cube in an energy independent "zero energy" office building at the Washington DC Navy Yard. 

We probably will not ship many Residential Energy Hubs in the fourth quarter of 2012, because time is too short, the UL certification process is pending and Rosewater is still introducing the product line to its network.  I promise, however, to keep you apprised of developments.  We are very optimistic about our strategic relationships in this market, and about the short and long term potential for our Residential Energy Hub.

Thank you for your continued support of Axion Power.

Regards,

Thomas Granville
Chairman and CEO

SOURCE Axion Power International, Inc.