Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - Abtech Holdings, Inc. | Financial_Report.xls |
| EX-32 - EXHIBIT 32 - Abtech Holdings, Inc. | v231682_ex32.htm |
| EX-31.2 - EXHIBIT 31.2 - Abtech Holdings, Inc. | v231682_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - Abtech Holdings, Inc. | v231682_ex31-1.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended: June 30, 2011
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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ABTECH HOLDINGS, INC.
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(Name of registrant as specified in its charter)
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Nevada
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14-1994102
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification Number)
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4110 N. Scottsdale Road, Suite 235
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Scottsdale, Arizona
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85251
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(Address of Principal Executive Offices)
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(Zip Code)
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(480) 874-4000
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(Registrant’s telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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YES x
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NO ¨
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required o submit and post such files).
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YES ¨
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NO ¨
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
(Do not check if smaller reporting
company)
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x
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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YES ¨
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NO x
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class
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Outstanding at August 8, 2011
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Common stock, $.001 par value
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47,261,471
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ABTECH HOLDINGS, INC.
FORM 10-Q
June 30, 2011
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PAGE
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PART I—FINANCIAL INFORMATION
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3
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Item 1. Financial Statements
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3
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Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
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3
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Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010
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4
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Unaudited Condensed Consolidated Statements of Cash Flows for the six month period ended June 30, 2011 and 2010
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5
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Unaudited Notes to the Condensed Consolidated Financial Statements
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6
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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10
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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12
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Item 4. Controls and Procedures
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12
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PART II—OTHER INFORMATION
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14
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Item 1. Legal Proceedings
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14
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Item 1A. Risk Factors
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14
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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14
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Item 3. Defaults Upon Senior Securities
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15
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Item 4. [Reserved]
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15
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Item 5. Other Information
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15
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Item 6. Exhibits
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15
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Signature Page
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16
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Certifications
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Exhibit 31.1
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Exhibit 31.2
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Exhibit 32
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FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “would,” “could,” “confident,” “forecast,” “hope,” “likely,” “plan,” “possible,” “potential,” “predict,” “project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth under the heading “Risk Factors” in our Annual report on Form 10-K for the fiscal year ended December 31, 2010, filed on April 4, 2011.
YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS
The forward-looking statements made in this report on Form 10-Q relate only to events or information as of the date on which the statements are made in this report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we expect or hope.
Explanatory Note
As used in this Form 10-Q, “we,” “us,” “our,” “ABHD” and the “Company” refer to Abtech Holdings, Inc.
AbTech Industries, Inc. (“AbTech”) is a Delaware corporation with an authorized capital of 15,000,000 shares of $0.01 par value common stock and 5,000,000 shares of $0.01 par value preferred stock. On February 10, 2011, AbTech was acquired by AbTech Holdings, Inc. (formerly known as Laural Resources, Inc.), in a reverse acquisition transaction. In accordance with the merger agreement between AbTech and ABHD (the “Merger Agreement”), ABHD acquired all of the issued and outstanding common stock of AbTech, including shares issuable upon the conversion of Series A preferred stock and convertible promissory notes outstanding, in exchange for the stockholders of AbTech acquiring 46,000,000 shares of ABHD common stock. ABHD also agreed to reduce its number of common shares outstanding to 10,000,000 shares prior to the Merger. See Notes 1 and 4 of the Notes to consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
For accounting purposes, the transaction has been accounted for as a reverse acquisition, with AbTech as the acquirer. The condensed consolidated financial statements of ABHD included in this quarterly report on Form 10-Q represent a continuation of the financial statements of AbTech, with one adjustment, which is to retroactively adjust the legal capital of AbTech to reflect the legal capital of ABHD. Comparative information presented in the condensed consolidated financial statements also have been retroactively adjusted to reflect the legal capital of ABHD.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The December 31, 2010 consolidated balance sheet included in this Form 10-Q was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
2
Item 1. Financial Statements.
ABTECH HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, 2011
(Unaudited)
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December 31,
2010
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ASSETS
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Current assets
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Cash and cash equivalents
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$ | 73,102 | $ | 4,123 | ||||
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Accounts receivable – related party, net
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2,110 | 13,044 | ||||||
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Accounts receivable – trade, net
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88,734 | 36,642 | ||||||
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Inventories, net
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525,237 | 569,042 | ||||||
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Prepaid expenses and other current assets
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93,186 | 96,787 | ||||||
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Total current assets
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782,369 | 719,638 | ||||||
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Fixed assets, net
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57,705 | 65,514 | ||||||
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Security deposits
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17,977 | 17,977 | ||||||
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Deferred charges, net
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20,084 | 22,673 | ||||||
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Goodwill
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10,000 | 10,000 | ||||||
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Total assets
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$ | 888,135 | $ | 835,802 | ||||
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LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
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Current liabilities
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Accounts payable
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$ | 826,977 | $ | 629,470 | ||||
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Accounts payable – related party
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80,083 | 7,736 | ||||||
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Loans from shareholders
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39,500 | 180,500 | ||||||
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Notes payable
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50,000 | 21,000 | ||||||
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Convertible promissory notes – related party
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595,000 | 1,156,000 | ||||||
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Convertible promissory notes
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- | 208,679 | ||||||
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Customer deposits
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193,180 | 193,180 | ||||||
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Accrued interest payable
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6,733 | 39,904 | ||||||
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Accrued expenses
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150,426 | 125,557 | ||||||
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Total current liabilities
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1,941,899 | 2,562,026 | ||||||
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Due to related party
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104,093 | 106,601 | ||||||
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Convertible promissory notes – related party
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2,081,001 | 2,581,001 | ||||||
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Convertible promissory notes
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155,000 | 1,375,865 | ||||||
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Total liabilities
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4,281,993 | 6,625,493 | ||||||
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Commitments and contingencies
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Stockholders’ deficiency
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Common stock, $0.001 par value; 300,000,000 authorized shares; issued and outstanding shares: June 30, 2011 – 47,261,471; December 31, 2010 – 49,249,674
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47,261 | 49,250 | ||||||
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Additional paid-in capital
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24,397,046 | 18,672,746 | ||||||
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Non-controlling interest
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(1,564,885 | ) | - | |||||
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Accumulated deficit
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(26,273,280 | ) | (24,511,687 | ) | ||||
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Total stockholders’ deficiency
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(3,393,858 | ) | (5,789,691 | ) | ||||
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Total liabilities and stockholders’ deficiency
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$ | 888,135 | $ | 835,802 | ||||
3
ABTECH HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months ended
June 30
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Six Months ended
June 30
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2011
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2010
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2011
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2010
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Net revenues
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$ | 100,734 | $ | 95,381 | $ | 144,011 | $ | 166,382 | ||||||||
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Cost of revenues
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120,483 | 42,638 | 201,459 | 134,684 | ||||||||||||
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Gross profit (loss)
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(19,749 | ) | 52,743 | (57,448 | ) | 31,698 | ||||||||||
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Operating expenses
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Selling, general and administrative
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711,733 | 498,241 | 1,353,279 | 916,182 | ||||||||||||
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Research and development
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118,916 | 119,084 | 261,003 | 237,579 | ||||||||||||
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Total operating expenses
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830,649 | 617,325 | 1,614,282 | 1,153,761 | ||||||||||||
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Operating loss
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(850,398 | ) | (564,582 | ) | (1,671,730 | ) | (1,122,063 | ) | ||||||||
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Other income (expense)
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Interest expense
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(1,621,651 | ) | (36,725 | ) | (1,644,823 | ) | (62,922 | ) | ||||||||
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Other income (expense)
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(4,922 | ) | (5,006 | ) | (9,926 | ) | (10,010 | ) | ||||||||
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Total other income (expense), net
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(1,626,573 | ) | (41,731 | ) | (1,654,749 | ) | (72,932 | ) | ||||||||
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Net loss before income taxes
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(2,476,971 | ) | (606,313 | ) | (3,326,479 | ) | (1,194,995 | ) | ||||||||
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Provision for income taxes
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- | - | - | - | ||||||||||||
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Net loss
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(2,476,971 | ) | (606,313 | ) | (3,326,479 | ) | (1,194,995 | ) | ||||||||
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Net loss attributable to non-controlling interest
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(248,704 | ) | - | (380,435 | ) | - | ||||||||||
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Net loss attributable to controlling interest
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$ | (2,228,267 | ) | $ | (606,313 | ) | $ | (2,946,044 | ) | $ | (1,194,995 | ) | ||||
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Basic and diluted loss per common share
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$ | (0.05 | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.04 | ) | ||||
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Basic and diluted weighted average number of shares outstanding
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45,084,344 | 29,267,557 | 41,997,592 | 29,265,798 | ||||||||||||
4
ABTECH HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
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2011
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2010
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Operating Activities
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Net loss attributable to controlling interest
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$ | (2,946,044 | ) | $ | (1,194,995 | ) | ||
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Adjustments to reconcile net loss to net cash used in operating activities
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Depreciation and amortization
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23,522 | 24,111 | ||||||
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Stock-based compensation expense
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191,883 | 75,844 | ||||||
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Preferred stock issued for interest on notes payable
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20,784 | 38,066 | ||||||
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Interest related to beneficial conversion feature
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1,620,955 | - | ||||||
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Net loss attributable to non-controlling interest
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(380,435 | ) | - | |||||
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Changes in operating assets and liabilities:
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Accounts receivable, net
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(41,158 | ) | (17,832 | ) | ||||
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Inventories, net
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43,805 | (90,113 | ) | |||||
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Prepaid expenses and other current assets
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(3,824 | ) | 1,761 | |||||
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Accounts payable
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269,854 | 82,740 | ||||||
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Customer deposits
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- | (3,029 | ) | |||||
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Accrued interest payable
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(33,171 | ) | 20,178 | |||||
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Accrued expenses
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24,869 | 1,813 | ||||||
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Net cash used in operating activities
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(1,208,960 | ) | (1,061,456 | ) | ||||
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Investing Activities
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Purchases of fixed assets
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(5,698 | ) | (1,580 | ) | ||||
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Net cash used in investing activities
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(5,698 | ) | (1,580 | ) | ||||
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Financing Activities
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Proceeds from issuance of common stock
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825,000 | - | ||||||
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Repayment of borrowings
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(597,855 | ) | (200,000 | ) | ||||
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Repayment of borrowings from shareholders
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(41,000 | ) | (141,500 | ) | ||||
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Proceeds from notes payable
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1,100,000 | 1,395,000 | ||||||
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Net decrease in due to related party
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(2,508 | ) | (2,418 | ) | ||||
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Net cash provided by financing activities
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1,283,637 | 1,051,082 | ||||||
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Net change in cash and cash equivalents
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68,979 | (11,954 | ) | |||||
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Cash and cash equivalents at beginning of period
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4,123 | 108,910 | ||||||
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Cash and cash equivalents at end of period
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$ | 73,102 | $ | 96,956 | ||||
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Supplemental cash flow information:
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Cash paid for interest
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$ | 33,616 | $ | - | ||||
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Cash paid for income taxes
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- | - | ||||||
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Noncash investing and financing activities:
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Common stock issued for conversion of debt, including accrued interest
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$ | 3,084,473 | $ | 78,066 | ||||
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Common stock warrants issued for services
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191,883 | 75,844 | ||||||
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Beneficial conversion feature recorded to additional paid-in capital
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1,620,955 | - | ||||||
5
ABTECH HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 – ORGANIZATION
Abtech Holdings, Inc. (“ABHD” or the “Company”) (formerly Laural Resources, Inc.), was incorporated under the laws of the State of Nevada on February 13, 2007, with authorized capital stock of 300,000,000 shares at $0.001 par value.
AbTech Industries, Inc. (“AbTech”), a Delaware corporation with an authorized capital of 15,000,000 shares of $0.01 par value common stock and 5,000,000 shares of $0.01 par value preferred stock, was acquired by ABHD in a reverse acquisition transaction on February 10, 2011 (the “Merger”). In accordance with the merger agreement between AbTech and ABHD (the “Merger Agreement”), ABHD acquired all of the issued and outstanding common stock of AbTech, including shares issuable upon the conversion of Series A preferred stock and convertible promissory notes outstanding, in exchange for the stockholders of AbTech acquiring 46,000,000 shares of ABHD common stock. ABHD also agreed to reduce its number of common shares outstanding to 10,000,000 shares prior to the Merger. (See Note 4 – Reverse Acquisition Transaction).
For accounting purposes, the transaction has been accounted for as a reverse acquisition, with AbTech as the acquirer. These consolidated financial statements of the Company represent a continuation of the financial statements of AbTech, with one adjustment, which is to retroactively adjust the legal capital of AbTech to reflect the legal capital of ABHD. Comparative information presented in these condensed consolidated financial statements also have been retroactively adjusted to reflect the legal capital of the Company.
AbTech is an environmental technologies firm that provides innovative solutions to address issues of water pollution. AbTech has developed and patented the Smart Sponge® polymer technology. This technology’s oil absorbing capabilities make it highly effective as a filtration media to remove hydrocarbons and other pollutants from flowing or pooled water. AbTech is headquartered in Scottsdale, Arizona and has a manufacturing facility located in Phoenix, Arizona.
AbTech’s wholly-owned subsidiary, Environmental Security Corporation (“ESC”), was formed in 2003 to develop a sensor array technology designed to detect impurities in water flows. ESC owns a U.S. patent on this technology and has acquired rights to another monitoring technology, but otherwise had no operations during either 2011 or 2010.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation – The consolidated financial statements include the accounts of ABHD, AbTech, and ESC. Intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements do not include the operations of ABHD prior to the date of the Merger which are considered to be immaterial to the operations of AbTech. The equity section of the Consolidated Balance Sheets and the basic and diluted weighted average number of shares outstanding on the Consolidated Statements of Operations for periods prior to the date of the Merger have been restated to give retroactive effect to the merger transaction and to show the shares outstanding at the Balance Sheet dates as if such shares had been exchanged for ABHD shares in accordance with the terms of the Merger Agreement. The equity section of the Consolidated Balance Sheets and the basic and diluted weighted average number of shares outstanding on the Consolidated Statements of Operations for periods ended after the date of the Merger, represents the actual shares of ABHD outstanding after the share exchanges that occurred as part of the merger transaction. The non-controlling interest shown on the Consolidated Balance Sheet as of June 30, 2011, represents the ownership interest in AbTech of the holders of AbTech Series A preferred stock that elected not to exchange their Series A preferred shares for common shares of ABHD as allowed by the Merger Agreement.
6
In the opinion of the Company’s management, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of such condensed consolidated financial statements. Such adjustments are of a normal recurring nature.
Net Loss Per Share – Basic net loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period. The calculation of basic loss per share gives retroactive effect to the recapitalization related to the reverse acquisition of AbTech by ABHD. The Company has other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2011 and 2010 would be anti-dilutive. These potentially dilutive securities include Series A preferred stock, options, warrants and convertible promissory notes.
Recent Accounting Pronouncements – The Company does not expect that the adoption of recent accounting pronouncements will have a material impact on its condensed consolidated financial statements.
NOTE 3 – INVENTORIES
The Company uses a perpetual inventory system and periodic physical test counts to determine inventory amounts at interim balance sheet dates. Inventories are stated at the lower of cost or market, with cost computed on an average cost method on the first-in, first-out basis.
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June 30, 2011
Unaudited
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December 31, 2010
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Raw materials
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$ | 88,960 | $ | 85,711 | ||||
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Work in process
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382,469 | 394,540 | ||||||
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Finished goods
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136,617 | 221,791 | ||||||
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Reserve for obsolescence
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(82,809 | ) | (133,000 | ) | ||||
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Total
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$ | 525,237 | $ | 569,042 | ||||
NOTE 4 – REVERSE ACQUISITION TRANSACTION
On February 10, 2011, ABHD closed a reverse acquisition transaction (the “Merger”) with its wholly-owned subsidiary, Abtech Merger Sub, Inc., and AbTech pursuant to an Agreement and Plan of Merger dated July 17, 2010. As a result of the Merger, ABHD acquired all of the issued and outstanding common stock of AbTech in exchange for the common stockholders of AbTech (including Series A preferred stockholders and holders of convertible debt with rights to convert their holdings into shares of AbTech common stock) acquiring an approximate 78% ownership interest in ABHD. In addition, AbTech became the “Surviving Corporation” a majority-owned subsidiary of ABHD, and ABHD acquired the business and operations of AbTech.
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·
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Issuance of Common Stock – At the closing of the Merger, ABHD issued 32,009,801 shares of its common stock to the stockholders of AbTech in exchange for 100% of the issued and outstanding common stock of AbTech. Immediately prior to the Merger, ABHD had 10,000,000 shares of common stock issued and outstanding, excluding the shares issued as part of a $3 million funding required by the Merger Agreement. $1,645,000 of the $3 million funding was received by ABHD prior to closing ($150,000 of the $1,645,000 was received after December 31, 2010). The financier issued a promissory note (the “Note”) to ABHD for the $1,355,000 balance of the financing commitment which was to be funded in cash after the Merger closing. The Note was secured by a total of 1,145,000 shares of ABHD common stock pledged by the financier (the “Collateral”). ABHD elected to hold the Note as a funding commitment only and did not record the Note or issue any shares in exchange for the Note. From the date of the merger through June 30, 2011, ABHD received $675,000 of the remaining $1,355,000 due on the Note. Of the 675,000 common shares due to investors for these payments, the Company issued 500,000 shares and held the remaining 175,000 shares as additional collateral for the Note. In May of 2011, the financier defaulted on the $680,000 balance due on the Note, released 509,300 shares of the Collateral and relinquished its rights to the 175,000 shares of additional collateral held by the Company.
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7
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·
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Conversion of AbTech’s Preferred Stock – At the effectiveness of the Merger, 1,439,614 shares of Series A Preferred Stock (“Preferred Stock”) of AbTech outstanding immediately prior to the Merger were converted into 1,439,614 shares of preferred stock of Surviving Corporation (i.e., AbTech, post-Merger). The privileges, rights, and preferences of the Preferred Stock were not affected or altered by such conversion. Accordingly, the Preferred Stock may be converted at any time into common shares of AbTech as the Surviving Corporation and subsequently such common shares of the Surviving Corporation will be exchanged for shares of the common stock of ABHD at the same exchange rate in effect for common shares of AbTech at the date of the Merger (the “Merger Consideration”). The preferred stockholders that elected to not convert and exchange their shares for ABHD common shares, represent the non-controlling interest shown on the Consolidated Balance Sheet as of June 30, 2011. Because the condensed consolidated balance sheet as of December 31, 2010 has been restated to give retroactive effect to the Merger, the common stock shown as of December 31, 2010 includes the par value ($.001 per share) of the 10,000,000 shares of ABHD stock outstanding at the time of the merger plus all shares of AbTech common and preferred stock outstanding as of December 31, 2010, as if converted into ABHD common shares at the Merger exchange rate. Because some of the preferred stockholders of AbTech elected to not convert their shares to ABHD common stock at the time of the Merger, the condensed consolidated balance sheet as of June 30, 2011 shows a decrease in the amount of common stock outstanding.
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·
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Conversion of AbTech’s Warrants – At the effectiveness of the Merger, 480,266 warrants to purchase AbTech common stock outstanding immediately prior to the Merger were converted into warrants to purchase 2,557,153 shares of common stock of ABHD. At the effective time of the Merger, 471,444 warrants to purchase AbTech Preferred Stock outstanding immediately prior to the Merger were converted into warrants to purchase 471,444 shares of preferred stock of the AbTech as the Surviving Corporation. The aggregate exercise price and other terms of such warrants were not affected or altered by such conversion and, upon exercise of any such warrants, the shares of preferred stock received upon such exercise would be convertible at any time for common shares of the Company, whereupon such common shares would be exchanged for the Merger Consideration.
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Conversion of AbTech’s Options – At the effectiveness of the Merger, options to purchase 992,000 shares of AbTech common stock outstanding immediately prior to the Merger were converted into options to purchase 5,281,855 shares of common stock of ABHD. The aggregate exercise price and other terms of such options were not affected or altered by such conversion.
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Conversion of AbTech‘s Convertible Debt – As of the closing of the Merger, $3,980,666 of outstanding notes of the Company that were convertible into Preferred Stock of AbTech prior to the Merger were retained by the holders and $1,347,372 of such notes were converted into 1,919,315 shares of common stock of ABHD.
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NOTE 5 – GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs, which raises doubts about the ability of the Company to continue as a going concern. In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management of the Company has developed a strategy, which it believes will accomplish this objective through additional equity funding and long term financing, which will enable the Company to operate for the coming year, though there can be no assurance that the Company’s efforts will be successful. As a result, the Company’s independent registered public accounting firm issued a going concern opinion on the consolidated financial statements of the Company for the year ended December 31, 2010. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE 6 – DEBT REPAYMENT
In March 2011, the Company initiated an offering to raise funds to repay approximately $1,960,000 of existing debt obligations of AbTech that were then due or would become due during 2011 (the “Targeted Notes”). Investors in the offering (“New Investors”) were given the option to either purchase a portion of the Targeted Notes and convert it immediately to ABHD common stock, or buy new convertible notes from ABHD (the “New Notes”) that would convert to ABHD common stock. The intended objective was to complete the transactions with the same net effect as if all the Targeted Notes were converted by their terms to ABHD common stock. Accordingly, the conversion rate given New Investors for conversion of either the purchased Targeted Notes or the New Notes was a blended rate of approximately $0.57 per share. As of June 30, 2011, the Company had received $747,100 from New Investors interested in purchasing Targeted Notes. These funds were forwarded to the Targeted Noted Holders to purchase the Targeted Notes. The New Investors subsequently converted the purchased Targeted Notes to 1,320,454 shares of ABHD common stock.
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In addition, during the three months ended June 30, 2011, the Company received $975,000 from New Investors interested in buying New Notes. From these proceeds the Company repaid approximately $604,100 of outstanding debt and used the balance of the funds for operating capital. The New Notes were all automatically converted to shares of ABHD common stock resulting in the issuance of 1,723,255 shares by the Company.
Due to the beneficial conversion feature implied in these transactions, at the time of each investment by a New Investor the applicable Targeted Notes or New Notes were discounted by the lesser of: (i) the intrinsic value of the beneficial conversion feature, or (ii) the proceeds realized from the New Investor. These discounts aggregated $1,620,955 and were charged to “additional-paid-in-capital” and interest expense. The Targeted Notes that were purchased by New Investors and the New Notes issued to New Investors were converted by the New Investors into common shares of ABHD common stock during the second quarter of 2011 and upon such conversion the discounts were charged to income as interest expense.
NOTE 7 – RELATED PARTY TRANSACTIONS
Accounts payable, related party – represents amounts due to various officers of the Company for compensation and travel expenses.
Convertible Promissory Notes – As part of the debt repayment transaction described in Note 6 above, $1,050,000 of Convertible Promissory Notes due to related parties were repaid or purchased by New Investors and converted into common shares of ABHD during the six months ended June 30, 2011. One of these notes for $500,000 had an interest rate of 12% per annum and the other notes were non-interest bearing. In addition, one Convertible Promissory Note for $11,000, held by a related party was converted into shares of ABHD common stock as part of the Merger Transaction.
NOTE 8 – SUBSEQUENT EVENTS
Private Placement
In July 2011, the Company sold $700,000 of Convertible Promissory Notes (the “Offering”). The Convertible Promissory Notes (the “Notes”) bear interest at a rate of 12% per annum from the closing date through April 30, 2012; 15% per annum from May 1, 2012 through July 31, 2012 and 18% per annum for any period after July 30, 2012 that the Note remains outstanding. All interest accrued on the Notes will be due and payable at maturity. Any Notes outstanding on November 1, 2012 will be redeemed in cash equal to the face amount plus any unpaid accrued interest thereon. In the event of a Qualified Financing by the Company, as defined below, each subscriber in the Offering will have the option to (i) convert their Note into the securities purchased by investors in a Qualified Financing at a 20% discount to the price paid by investors in the Qualified Financing; or (ii) tender their Note to the Company for immediate repayment of principal and accrued and unpaid interest. A “Qualified Financing” is defined as the sale for cash by the Company of debt or equity securities generating aggregate gross proceeds of at least US $5,000,000 (including the proceeds from any converting Notes). In the event that the Company does not close a Qualified Financing on or prior to November 1, 2012, the subscriber shall have the option to convert the Note into shares of Company common stock at a conversion price equal to $0.60 per share (the “Conversion Price”).
Each subscriber in the Offering also received a warrant for the purchase of the number of shares of Company common stock equal to 40% of the amount invested divided by the Conversion Price. In the event a Note remains outstanding as of April 30, 2012, the Note holder will receive an additional Warrant for 10% of the principal amount of the Note outstanding at that date divided by the Conversion Price. In the event the Note remains outstanding as of July 31, 2012, the Note holder will receive an additional Warrant for 10% of the principal amount of the Note outstanding at that date divided by the Conversion Price. The Warrants will have an exercise price equal to the Conversion Price and a five year term.
The Company may, at any time on ten business days’ notice, repurchase any or all outstanding Notes in cash for the face amount of such Notes, plus any unpaid, accrued interest thereon. Upon such notice from the Company, Investors will have 5 days to either convert the Notes in accordance with their terms or accept the cash repurchase price from the Company.
The Company has also engaged an investment banker to assist with a private offering on similar terms for up to $2,500,000.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included elsewhere in this quarterly report. This discussion includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of a variety of business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change.
Overview
ABHD was incorporated in the state of Nevada on February 13, 2007 under the name Laural Resources, Inc. On February 10, 2011, ABHD consummated the Merger with AbTech, pursuant to the Merger Agreement. Prior to the Merger, ABHD was a development stage company engaged in the business of acquiring and developing mineral properties, and a public reporting “shell company,” as defined in SEC Rule 12b-2 under the Exchange Act. As a result of the Merger, ABHD acquired all of the issued and outstanding common stock of AbTech (through a reverse acquisition transaction) in exchange for the stockholders of AbTech acquiring a 78% ownership interest in ABHD, AbTech became ABHD’s majority-owned subsidiary, and ABHD acquired the business and operations of AbTech.
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on and related only to the operations of AbTech. Prior to the consummation of the Merger, ABHD was a “shell company” that did not have an active business and its results of operations are immaterial and are not included in the discussion below. Key factors affecting AbTech’s results of operations during the periods covered in this section include revenues, cost of revenues, operating expenses and income, and taxation.
For accounting purposes, the Merger transaction has been accounted for as a reverse acquisition, with AbTech as the acquirer. The condensed consolidated financial statements of ABHD included in this quarterly report on Form 10-Q represent a continuation of the financial statements of AbTech, with one adjustment, which is to retroactively adjust the legal capital of AbTech to reflect the legal capital of ABHD. See Note 1 of the Notes to condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on AbTech’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, management evaluates these estimates and assumptions. Management bases the estimates on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Results of Operations
During the six-month period ended June 30, 2011, the Company continued to experience the negative effects of a worldwide economic downturn resulting in sales that were 13% lower than in the same period of the prior year. Sales were also negatively impacted by the Company’s decision in 2010 to terminate most of its exclusive distribution agreements in anticipation of engaging a nationwide distributor for its stormwater products. The Company’s new distributor, Waste Management, Inc., announced in April 2011, that it was launching its entry in to the stormwater market and intended to initiate its sales efforts in four pilot market areas in 2011. The Company has not yet recognized significant revenue from this distribution arrangement and anticipates gradual revenue growth with initial efforts in the pilot market areas and, if successful, expansion into additional geographic markets beginning in 2012.
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The Company continues to operate with significant excess manufacturing capacity. The costs associated with the excess capacity are charged to “cost of revenues” in the period incurred and resulted in negative gross margins for the three and six-month periods ended June 30, 2011. During the three month period ended June 30, 2010, the Company experienced higher than normal production levels as it built inventory for anticipated demand. This increased level of production reduced the cost of excess capacity and resulted in a positive gross margin of 55% for the period. We do not currently have plans to reduce excess manufacturing capacity, and we anticipate that the excess capacity will continue to adversely affect gross margins at least through 2011.
Selling, general and administrative expenses increased by $213,492 (43%) and $437,097 (48%), respectively, during the three and six month periods ended June 30, 2011 as compared to the same periods in 2010. These increases were due primarily to the costs associated with the Merger and the additional costs of operating as a public company including legal, audit, public relations and financial printing costs. In addition, the Company engaged three senior level individuals as employees or full time consultants during the six months ended June 30, 2011 that were not on board during the same period of 2010. Other part-time consultants were also engaged during the period to assist the Company in its market development and public relations efforts. Research and development costs were about the same during the three-months ended June 30, 2011 as in the same period of the prior year but remained higher for the 6-months ended June 30, 2011 due to a variety of new product development activities and the associated internal and external testing of such products incurred in the first quarter of 2011.
Interest expense increased substantially for the three-months ended June 30, 2011 due to a $1,620,335 charge for imputed interest on promissory notes that were converted to common stock on beneficial conversion terms during the period. This is a non-recurring charge that will not continue in subsequent periods.
In summary, due primarily to decreased sales, increased operating expenses and a non-recurring charge for imputed interest, the net loss for the three and six-month periods ended June 30, 2011, increased by $1,870,658 and $2,131,484, respectively, as compared to the corresponding periods in 2010.
Liquidity and Capital Resources
To date, the Company has not generated sufficient revenue to cover its operating costs and continues to operate with negative cash flow. The Company’s cash balance of $4,123 at December 31, 2010 was insufficient to cover the $1,208,960 of net cash used in operations for the six months ended June 30, 2011. During the six months ended June 30, 2011, the Company raised $825,000 from the private offering conducted to fulfill the $3,000,000 funding commitment associated with the Merger transaction. At June 30, 2011, $680,000 of this commitment remained unfunded and the Company now considers it unlikely that it will be funded in the future.
In March 2011, the Company initiated an offering to raise funds to repay approximately $1,960,000 of debt obligations that were due in 2011 (the “Targeted Notes”). Investors in the offering were given the option to either purchase a portion of the Targeted Notes and convert it immediately to ABHD common stock, or buy new convertible notes from ABHD that would convert to ABHD common stock upon confirmation by AbTech that the proceeds had been used by AbTech to repay the intended Targeted Notes. The intended objective was to complete the transactions with the same net effect as if all the Targeted Notes converted by their terms to ABHD common stock. The Company raised $1,722,100 in this offering, of which approximately $1,351,000 was used to repay, or purchase and then convert, Targeted Notes. The balance of the offering proceeds was used to fund operations.
The Company raised an additional $700,000 during July 2011 in a private placement of Convertible Promissory Notes, See Note 7 of Notes to the Condensed Consolidated Financial Statements (unaudited) included in Part I of this Form 10-Q.
The Company’s balance sheet at June 30, 2011 shows an inventory level of $525,237, $43,805 less than the level at December 31, 2010. This relatively large amount of inventory, as compared to net revenues, will mitigate somewhat the working capital funding that will be required in the event the Company successfully increases sales revenue in the future. The Company anticipates that it will need approximately $200,000 to acquire raw materials inventory in the third quarter of 2011.
At June 30, 2011, the Company had received customer deposits of $193,180 as prepayments by certain distributors for future product orders. Future sales to these distributors will not generate positive cash flow until the prepayments are depleted. The Company also intends to reduce the relatively large balance of accounts payable ($907,060 at June 30, 2011) which would also have a negative effect on cash flow.
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The Company had no significant capital expenditures for the six months ended June 30, 2011 or the year ended December 31, 2010. As of June 30, 2011, the Company had no commitments for any material future capital expenditures.
The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs, which raises doubts about the ability of the Company to continue as a going concern. In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management of the Company has developed a strategy, which it believes will accomplish this objective through additional equity funding, and long term financing, which will enable the Company to operate for the coming year though there can be no assurance that the Company’s efforts will be successful. As a result, the Company’s independent registered public accounting firm issued a going concern opinion on the consolidated financial statements of the Company for the year ended December 31, 2010. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information under this item.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Principal Executive Officer, and our Principal Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2011 (the “Evaluation Date”). Based upon that evaluation, our Principal Executive Officer along with our Principal Financial Officer concluded that our disclosure controls and procedures are not effective as of the Evaluation Date in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our interim financial statements will not be prevented or detected on a timely basis. These material weaknesses include the following:
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We have not achieved the optimal level of segregation of duties relative to key financial reporting functions.
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There is no system in place to review and monitor internal control over financial reporting. This is due to our Company maintaining an insufficient complement of personnel to carry out ongoing monitoring responsibilities and ensure effective internal control over financial reporting.
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We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud related risks and the risks related to non-routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.
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We are currently reviewing our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the near term, including identifying specific areas within our governance, accounting and financial reporting processes to add adequate resources and personnel to potentially mitigate these material weaknesses.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the fiscal quarter ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.
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Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Not applicable.
In connection with the consummation of the Merger on February 10, 2011, ABHD issued 32,009,801 shares of common stock to the stockholders of AbTech in exchange for 100% of the common stock of AbTech. The issuance of the common stock to the stockholders of AbTech pursuant to the Merger Agreement was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(2) and Regulation D thereof. We made this determination based on the representations of the stockholders of AbTech which included, in pertinent part, that such shareholders, as applicable, were “accredited investors” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, and that such stockholders were acquiring our common stock for investment purposes for their own accounts and not as nominee or agent, and not with a view to the resale or distribution thereof, and that such stockholders understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom. Pursuant to the Merger Agreement, at the effectiveness of the Merger, 480,266 warrants to purchase common stock of AbTech Industries immediately prior to the Merger were converted into warrants to purchase 2,557,153 shares of common stock of the Company; 471,444 warrants to purchase AbTech Industries Preferred Stock outstanding immediately prior to the merger were converted into warrants to purchase 471,444 shares of preferred stock of AbTech Industries as the Surviving Corporation; and options to purchase 992,000 shares of common stock of AbTech Industries immediately prior to the Merger were converted into options to purchase 5,281,855 shares of common stock of the Company. For more information regarding the issuance, please refer to the information provided under Items 1.01, 2.01 and 3.02 of the Company’s Current Report on Form 8-K filed on February 14, 2011 (the “Super 8-K”), and the Company’s Current Form on Form 8-K/A filed on March 1, 2011, amending the Super 8-K, both of which are incorporated herein by reference.
As part of a $3 million funding required by the Merger Agreement, $1,645,000 of the $3 million funding was received by ABHD prior to closing of the Merger, including $150,000 that was received after December 31, 2010. A financier issued a promissory note to ABHD for the $1,355,000 balance of the funding commitment which was to be funded by cash after the Merger closing. The Note was secured by a total of 1,145,000 shares of ABHD common stock pledged by the financier (the “Collateral”). ABHD elected to hold the Note as a funding commitment only and did not record the Note or issue any shares in exchange for the Note. From the date of the merger through June 30, 2011, ABHD received $675,000 of the remaining $1,355,000 due on the Note. Of the 675,000 common shares due to investors for these payments, the Company issued 500,000 shares and held the remaining 175,000 shares as additional collateral for the Note. In May of 2011, the financier defaulted on the $680,000 balance due on the Note, released 509,300 shares of the Collateral and relinquished its rights to the 175,000 shares of additional collateral held by the Company. The issuance of the ABHD common stock to the investors was exempt from registration under the Securities Act pursuant to Section 4(2), Regulation S and Regulation D thereof.
In March 2011, the Company initiated an offering to raise funds to repay approximately $1,960,000 of existing debt obligations of AbTech that were currently due or would become due during 2011 (the “Targeted Notes”). Investors in the offering (“New Investors”) were given the option to either purchase a portion of the Targeted Notes and convert it immediately to ABHD common stock, or buy new convertible notes from ABHD (the “New Notes”) that would convert to ABHD common stock. The intended objective was to complete the transactions with the same net effect as if all the Targeted Notes were converted by their terms to ABHD common stock. Accordingly, the conversion rate given New Investors for conversion of either the purchased Targeted Notes or the New Notes was a blended rate of approximately $0.57 per share. As of June 30, 2011, the Company had received $747,100 from New Investors interested in purchasing Targeted Notes. These funds were forwarded to the Targeted Note Holders to purchase the Targeted Notes. The New Investors subsequently converted the purchased Targeted Notes to 1,320,454 shares of ABHD common stock. In addition, the Company received $975,000 from New Investors interested in buying New Notes. From these proceeds the Company repaid approximately $604,100 of outstanding debt and used the balance of the funds for operating capital. The New Notes were all automatically converted to shares of ABHD common stock resulting in the issuance of 1,723,255 shares by the Company. The Company offered and sold the Targeted Notes and the New Notes in reliance on Section 4(2) and Regulation D of the Securities Act.
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Item 3. Defaults Upon Senior Securities.
A promissory note with preferred stock conversion rights in the principal amount of $100,000, issued by AbTech, was in default from its maturity date on August 2, 2010 until it was paid in full on March 30, 2011. On February 14, 2011, AbTech received notice from a Convertible Senior Promissory Note holder declaring an event of default under the terms of the note and accelerating the due date of the note, making it immediately due and payable, as a result of the failure of AbTech to make the required quarterly interest payment on time. The delinquent interest was remedied with an interest payment of $20,219 on February 22, 2011, and the principal amount of the note, with all remaining accrued interest, in the amount of $506,247, was repaid in full on April 7, 2011.
Item 4. [Reserved]
Item 5. Other Information
None
Item 6. Exhibits.
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Exhibit Number
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Name
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31.1*
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Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
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31.2*
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Rule 13a-14(d)/15d-14(d) Certification (Principal Financial Officer)
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32**
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Section 1350 Certifications
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101.SCH***
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XBRL Taxonomy Extension Schema Document
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101.CAL***
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XBRL Taxonomy Extension Calculation Linkbase Document
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101 DEF***
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XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB***
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE***
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XBRL Taxonomy Extension Presentation Linkbase Document
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*
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Filed herewith.
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**
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Furnished herewith.
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***
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Furnished herewith. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
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15
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ABTECH HOLDINGS, INC.
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(Registrant)
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Date: August 15, 2011
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By:
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/s/ Glenn R. Rink
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Glenn R. Rink
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Chief Executive Officer, President, and Director
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Date: August 15, 2011
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By:
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/s/ Lane J. Castleton
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Lane J. Castleton
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Chief Accounting Officer, Chief Financial Officer, Vice President and Treasurer
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