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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

 

TAMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2011

or

 

£TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-52762

 

ABTECH HOLDINGS, INC.

 

(Exact name of registrant as specified in its charter)

 

Nevada   14-1994102

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     
4110 N. Scottsdale Road, Suite 235    
Scottsdale, Arizona   85251
(Address of principal executive offices)   (Zip Code)

 

(480) 874-4000
Registrant’s telephone number, including area code

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
None   None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

¨ Yes x No

 

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 past 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.     x Yes ¨ No

 

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 (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x Yes ¨ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K      ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “small reporting company” Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨     Accelerated filer ¨     Non-accelerated filer   ¨
(Do not check if a smaller reporting company)
  Smaller reporting company x  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes xNo

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $24,741,859

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of March 23, 2012, 48,482,344 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Exhibits incorporated by reference are referred to under Part IV.

 

 

 
 

 

ABTECH HOLDINGS, INC.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2011

 

TABLE OF CONTENTS

 

  PART I  
     
ITEM 1. BUSINESS. 1
     
ITEM 1A. RISK FACTORS. 15
     
ITEM 1B. UNRESOLVED STAFF COMMENTS. 28
     
ITEM 2. PROPERTIES. 28
     
ITEM 3. LEGAL PROCEEDINGS. 28
     
ITEM 4. RESERVED. 28
     
  PART II  
     
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES. 28
     
ITEM 6. SELECTED FINANCIAL INFORMATION. 29
     
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. 29
     
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. 36
     
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 36
     
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 36
     
ITEM 9A. CONTROLS AND PROCEDURES. 37
     
ITEM 9B. OTHER INFORMATION. 38
     
  PART III  
     
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. 38
     
ITEM 11. EXECUTIVE COMPENSATION. 38
     
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 38
     
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. 38
     
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. 38
     
  PART IV  
     
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. 38
     
SIGNATURES   41
     
FINANCIAL STATEMENTS Consolidated Financial Statements as of and for the years ended December 31, 2011 and 2010 F-1

 

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FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K 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 Item 1A. “Risk Factors” in this report on Form 10-K.

 

YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS

 

The forward-looking statements made in this report on Form 10-K relate only to events or information as of the date on which the statements are made in this report on Form 10-K. 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

 

AbTech Industries, Inc. (“AbTech Industries”) 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 Industries was acquired by AbTech Holdings, Inc., (“ABHD” or “Abtech Holdings”) (formerly known as Laural Resources, Inc.) in a reverse acquisition transaction. In accordance with the merger agreement between AbTech Industries and ABHD (the “Merger Agreement”), ABHD acquired all of the issued and outstanding common stock of AbTech Industries, including shares issuable upon the conversion of Series A preferred stock and convertible promissory notes outstanding, in exchange for the stockholders of AbTech Industries acquiring 46,000,000 shares of ABHD common stock. ABHD also agreed to reduce its number of common shares outstanding to 10,000,000. See Notes 1 and 12 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

For accounting purposes, the transaction has been accounted for as a reverse acquisition, with AbTech Industries as the acquirer. The consolidated financial statements of ABHD included in this annual report on Form 10-K represent a continuation of the financial statements of AbTech Industries, with one adjustment, which is to retroactively adjust the legal capital of AbTech Industries to reflect the legal capital of ABHD. Comparative information presented in these consolidated financial statements also have been retroactively adjusted to reflect the legal capital of ABHD.

 

This amendment (the “Form 10-K/A”) to the Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on March 30, 2012 (the “Original Form 10-K” and together with the Form 10-K/A the “Form 10-K”) is being filed for the purpose of making the following revisions to address comments received from the SEC regarding a Registration Statement on Form S-1 originally filed by ABHD on April 13, 2012:

 

ii
 

 

1.Changes to the Consolidated Financial Statements included in Item 15 of this Form 10-K report:

 

a.Revise the retroactive restatement of the statement of stockholders’ deficiency and other disclosures to reflect the reverse merger that took place during 2011. These changes are more fully described in NOTE 18 – REVISED RETROACTIVE RESTATEMENT OF STOCKHOLDERS’ DEFICIENCY TO REFLECT THE MERGER TRANSACTION.
b.Expand the Revenue Recognition footnote disclosure in NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES.
c.Restate all options and warrants issued by AbTech Industries in terms of their ABHD share and exercise price equivalents.
d.Expand NOTE 11 – STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION to describe the stock issued for services during 2011.
e.Revise Consolidated Statement of Financial Position to begin the Operating Activities section with “Net loss” rather than “Net loss attributable to controlling interest.”

 

2.Expand Management’s Discussion and Analysis of Financial Condition and Results of Operations to provide more detail regarding the results of operations, liquidity, and other disclosures including supplemental information regarding significant estimates, judgments and assumptions in implementing the Company’s critical accounting policies.

 

3.Expand the description in ITEM 1A – RISK FACTORS and the narrative in ITEM 1. BUSINESS - Regulatory, to more fully describe the status of the conditional registration approval of Smart Sponge Plus products by the Environmental Protection Agency.

 

iii
 

 

PART I

 

ITEM 1.                BUSINESS.

 

Overview and Recent Events

 

Abtech Holdings, Inc. (“Abtech Holdings,” the “Company,” “we” or the “registrant”) was incorporated in Nevada on February 13, 2007 under the name “Laural Resources, Inc.” and was initially engaged in the business of acquiring and developing mineral properties. Subsequent to its fiscal year ended May 31, 2010, Laural Resources, Inc. decided to change its business focus to clean technology products and services, specifically in the water clean-up sector. In furtherance of its business objectives, effective June 14, 2010, Laural Resources, Inc. merged with its wholly-owned subsidiary, Abtech Holdings, Inc., for the purpose of effecting a name change to “Abtech Holdings, Inc.” On October 21, 2010, the Company’s Board of Directors changed the Company’s fiscal year end from May 31 to December 31.

 

On February 10, 2011, the Company closed a merger transaction (the “Merger”) with AbTech Industries, Inc., a Delaware corporation (“AbTech Industries”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), by and among Abtech Holdings, Abtech Merger Sub, Inc., a Nevada corporation and wholly-owned subsidiary of Abtech Holdings (“Merger Sub”), and AbTech Industries.

 

As a result of the Merger, Abtech Holdings acquired all of the issued and outstanding common stock of AbTech Industries (through a reverse acquisition transaction) in exchange for the common stockholders of AbTech Industries acquiring an approximate 78% ownership interest in Abtech Holdings, AbTech Industries became a majority-owned subsidiary of Abtech Holdings, and Abtech Holdings acquired the business and operations of AbTech Industries.

 

Abtech Holdings was a “shell company” prior to the Merger and did not conduct an active trade or business. From and after the consummation of the Merger on February 10, 2011, Abtech Holdings’ primary operations consisted of the business and operations of AbTech Industries. Because Abtech Holdings was a shell company at the time of the Merger, we filed with the Securities and Exchange Commission (the “SEC”) on February 14, 2011, a “super” Form 8-K that disclosed information required by Item 2.01(f) of Form 8-K (being information that would be required if we had filed a general form for registration under Form 10 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).

 

For accounting purposes, the Merger transaction has been accounted for as a reverse acquisition, with AbTech Industries as the acquirer. The consolidated financial statements of Abtech Holdings included in this Annual Report on Form 10-K (this “Form 10-K”) represent a continuation of the financial statements of AbTech Industries, with one adjustment, which is to retroactively adjust the legal capital of AbTech Industries to reflect the legal capital of Abtech Holdings. See Note 1 of Notes to Consolidated Financial Statements included elsewhere in this on Form 10-K.

 

AbTech Industries has developed a variety of products that leverage its cornerstone filtration media technology called Smart Sponge®. This patented technology’s oil absorbing capabilities make it highly effective as a filtration media to remove hydrocarbons and other pollutants from water. AbTech Industries has introduced its products into a variety of markets resulting in over 15,000 products installed in 36 states and 8 countries to date.

 

AbTech Industries developed the Smart Sponge media, a patented polymer technology that effectively removes pollutants from water and encapsulates them so that they cannot be released back into the water, even under high pressure. AbTech Industries recently expanded the capability of the Smart Sponge technology by adding an antimicrobial agent that has proven to be effective in reducing coliform bacteria found in stormwater, industrial wastewater and municipal wastewater while maintaining its oil-absorbing capability. This expanded technology, known as Smart Sponge Plus, provides an effective solution to municipalities and other entities faced with beach closures and other hazards of bacteria-laden stormwater. This antimicrobial capability differentiates Smart Sponge Plus products from competitive stormwater treatment devices. It can be engineered to treat massive amounts of water runoff in end-of-pipe applications, such as drainage vaults or other configurations. In July 2010, AbTech Industries received notification from the United States Environmental Protection Agency (the “EPA”) that AbTech Industries’ application to register Smart Sponge Plus as a pesticide under the Federal Insecticide, Fungicide and Rodenticide Act had been conditionally approved. For additional information, see “Regulatory”.

 

1
 

 

AbTech Industries’ business is subject to several significant risks, any of which could materially adversely affect its business, operating results, financial condition, and the actual outcome of matters as to which it makes forward-looking statements. See “Risk Factors”.

 

Technologies

 

Smart Sponge

 

Over the past nine years, AbTech Industries has developed and patented its core Smart Sponge technologies based on a proprietary blend of synthetic polymers aimed at the removal of hydrocarbons and oil derivatives from surface water. The removal process starts with the physical contact between polymer and contaminant and the consequent adsorption (physical interaction, contaminant distributed on surface of adsorbing material) or absorption (contaminant distributed throughout the absorbing material). The absorption/adsorption process is determined by several polymer parameters (e.g., composition and structure, flexibility of the chain and molecular weight), as well as physical parameters (e.g., polymer physical form, contaminant molecule size and temperature). While polymer composition is the critical factor in defining the solubility, the polymer structure (amorphous or crystalline) is probably the most important factor in determining the process of absorption or adsorption.

 

AbTech Industries’ polymers are composed of amorphous products that are able to selectively absorb various hydrocarbons (contaminants) present in water, then stabilize and retain them in a gelified structure. Other traditional sorbent products, with more crystalline structures, can only adsorb the contaminants and don’t have the capability to totally retain them when the sorbent is removed from the water. AbTech Industries’ polymers, in order to selectively remove oil derivatives from water, are oleophilic (strong affinity for oils) and hydrophobic (repels water).

 

The adsorption/absorption process is also controlled by the physical size of the sorbent as diffusion is fairly proportional to the contact surface between fluid and sorbent. Finely powderized materials show the best absorption but, because of swelling, tend to gel quickly and block the contact of additional fluid with the remaining active sorbent, and are very difficult to handle. In order to overcome this problem and use the sorbent to the maximum capacity, AbTech Industries has developed a patented extrusion process that takes advantage of the different thermal behavior of the polymers used to create entanglements with the amorphous part of the other polymer, bonding the chains of the polymers in a flexible porous structure called Smart Sponge.

 

The porosity of the Smart Sponge allows the fluid containing the contaminant to penetrate into its structure, then the polymer chains selectively absorb the hydrocarbon contaminants and stably encapsulate them. Based on the level of contaminant, the entire structure begins to swell (but not collapse into a total gel) while maintaining absorption capabilities well beyond usual levels. Once reaching saturation, the Smart Sponge is easily recoverable and does not leach any of the absorbed contaminant, even in rough water or under pressure, giving it less expensive disposal options such as recycling through a waste-to-energy facility. The Smart Sponge can absorb, on average, 3.5 times its weight, depending on the contaminant absorbed and remains buoyant permitting it to remain in place until fully saturated. The malleable nature of the Smart Sponge material allows it to be formed into a variety of shapes for optimum effectiveness in a wide variety of contaminated water filtration applications.

 

The advantages of Smart Sponge based products over competing products include:

absorbing rather than adsorbing water-borne hydrocarbons;
reducing coliform bacteria found in stormwater, industrial wastewater and municipal wastewater;
locking-up or encapsulating the hydrocarbons;
transforming the encapsulated pollutant into a solid to prevent leaching;
remaining buoyant after the encapsulation in order to permit recovery;
oil-soaked product may be recycled as a waste-to-energy fuel source;
simpler and less expensive disposal due to classification as a solid “non-hazardous waste”;
easy deployment and retrieval; and

 

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possesses the ability to harvest energy from contaminated water thereby creating a sustainable media solution.

 

Due to the ability of Smart Sponge to capture and retain hydrocarbons and other contaminants within its highly porous structure, its performance can best be measured by an in-depth look at the spent material to analyze its composition and the quantity of the various contaminants retained. This type of data cannot be gleaned from the customary random sampling events typically used to test filters. Such tests are often misleading or erroneous due to the non-homogenous concentrations of pollutants in stormwater. Analyzing all contaminants entrapped in the filter over a period of time provides a better indicator of the filter’s true performance. Consequently, AbTech Industries took a more advanced approach and engaged a highly qualified, analytical laboratory to use complex analytical techniques to deconstruct used Smart Sponge polymer and selectively extract all the entrapped contaminants. This in-depth mapping and finger printing of contaminants (a first of its kind in stormwater treatment) is analogous to having a “Black Box” recording of the UUF’s filtration mechanisms and all the contaminants collected in the Smart Sponge material during the time that it is deployed. The results of this analysis were then compared to base tests performed on virgin Smart Sponge material. The difference between the two samples constitutes the contaminants collected by the field deployed Smart Sponge. By extrapolating these results, estimations were made of the total contaminants AbTech Industries’ products prevented from being discharged into open waters for entire installation projects such as at Norwalk. In Norwalk, Connecticut, 275 Ultra-Urban Filters were installed in storm drains to protect residential, commercial, waterside, and industrial manufacturing settings which flow into Norwalk Harbor. The deconstruction or meltdown of Smart Sponge media samples documented approximately 50 pounds per filter of total contaminants with the presence of several heavy metals (e.g., copper, titanium, and zinc) and a variety of hydrocarbons, (about 32 pounds per filter), including solvents, oils and cosmetic product components as well as chemical plasticizers.

 

The grand total of contaminants including hydrocarbons and heavy metals removed, extrapolated for the 275 filters, is an estimated 13,530 pounds. Essentially, the installation of the filters prevented the equivalent of an oil spill of 1,200 gallons from entering the Long Island Sound. This analysis demonstrated the effectiveness of AbTech Industries’ products with quantifiable data and added substantially to data provided by other tests that merely tested the difference between influents and effluents.

 

Smart Sponge Plus

 

The presence of bacteria in stormwater is a serious problem and poses significant health risks that increasingly result in the contamination of water bodies. Water quality standards for bacteria counts are very strictly monitored in most coastal areas and small increases in bacteria counts can trigger beach closures. The best potential to reduce this bacteria count during rain events is the control and treatment of the stormwater runoff. This control can be achieved by expensive, heavy equipment, such as ultraviolet light or chlorine treatment systems that become cost prohibitive for most municipalities. AbTech Industries has developed a set of cost-effective systems for retrofit into existing stormwater infrastructure, leveraging the antimicrobial capabilities of Smart Sponge Plus. These systems require no electricity or moving parts and create no downstream toxicity effect (a problem that must be mitigated in alternative chemical treatment approaches).

 

The technological breakthrough in creating Smart Sponge Plus occurred when AbTech Industries developed the capability to bind an antimicrobial agent to its proprietary polymers thereby modifying their surface and adding micro biostatic features while maintaining their oil absorbing capabilities. This enhanced filtration material provides a significant reduction in coliform bacteria and other pathogens frequently found in stormwater and other water streams. AbTech Industries believes that this breakthrough, coupled with additional advancements that have dramatically increased the antimicrobial strength of Smart Sponge Plus, will be key factors in penetrating the stormwater market. Accordingly, AbTech Industries has been issued three U.S. patents that protect the use of Smart Sponge Plus in stormwater filtration applications.

 

The anti-microbial agent used for this innovative technology is an organosilane derivative that is widely used in a variety of fields including medical, consumables, pool equipment and consumer goods. This anti-microbial agent is registered with the EPA for various applications and has been proven successful in those applications against a wide variety of microorganisms. As further discussed under “Regulatory,” AbTech Industries’ Smart Sponge Plus has received a time-limited registration from the EPA under the Federal Insecticide, Fungicide, and Rodenticide Act as an antimicrobial pesticide. Smart Sponge Plus will also act as a fungistatic to control fungus and mildew odor.

 

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The anti-microbial mechanism of Smart Sponge Plus is based on the agent’s electromagnetic interaction with the microorganism cell membrane, causing the disruption of the cell wall of the microorganism, but no chemical or physical change in the agent. Consequently, the anti-microbial agent is not depleted over time, maintains its long-term effectiveness and unlike any other technology (with the exception of ultra-violet light), doesn’t release any chemical or by-product into the treated water.

 

In manufacturing the Smart Sponge Plus material, the anti-microbial agent is chemically and permanently bound to the polymer surface. In the development process, AbTech Industries has been successful in increasing the amount of anti-microbial agent bound to the polymer thus increasing its antimicrobial potency 2,000% over its first generation strength. In laboratory testing, the current generation of Smart Sponge Plus material, has proven to be not only much more effective in destroying bacteria than the original generation of Smart Sponge Plus material, but also capable of reducing bacteria to meet EPA criteria for bathing and recreational waters in a much shorter period of time (residence time), a very important factor in filtration applications where the contaminated water is in contact with the Smart Sponge material for just a few minutes versus the hours required in a sanitary sewer system.

 

Engineered Deployment Systems – Stormwater/Wastewater

 

In conjunction with developing advanced filtration media, AbTech Industries engineers have also developed a variety of deployment systems that can be retrofitted into existing stormwater and wastewater infrastructure. This solves a major problem for municipalities where aging water infrastructure and increasing enforcement of water quality standards (a result of increased awareness of the detrimental environmental and public health effects) pose one of the largest infrastructure headaches in the coming decades. Cities have already determined in the vast majority of cases that so-called centralized solutions are cost-prohibitive or infeasible. These solutions include rerouting combined sewer overflow water and/or even stormwater to sanitation treatment plants for purification (which would also require the construction of additional sanitation treatment plants) or building large central stormwater/wastewater treatment “tunnels” underneath cities. AbTech Industries’ products enable decentralized solutions at the point-of-entry (e.g. stormdrains, etc.) or at the end of stormwater/combined sewer overflow outfall pipes.

 

AbTech Industries has engineered a variety of point-of-entry systems that can be dropped into storm drains with little or zero infrastructure disruption and end-of-pipe treatment “vaults” that can be built into the existing water lines and treat the flowing water as it passes through.

 

Smart Sponge versus Commonly Used Non-Advanced Media Filtration

 

AbTech Industries’ core technologies are highly-engineered advanced material that are chemically selective towards contaminants and, in the case of the antimicrobial material, create biostatic fields to disrupt the cellular membranes of pathogens. These advanced materials enable an entire set of engineered deployment systems that otherwise would be less effective or entirely ineffective using non-advanced materials.

 

Smart Sponge material has a distinct advantage over traditional polypropylene material for example. In the case of oils and hydrocarbons, once oil comes in contact with the Smart Sponge material it is permanently encapsulated in the structure of the polymer and cannot be released under any amount of pressure. In comparison, polypropylene materials adsorb or form a temporary attachment to water as well as oil, thus making them much heavier and messier to remove releasing both water and oil back into the environment.

 

Disposal Options

 

As local conditions, product use and exposure can vary widely, the end user must determine the most appropriate disposal method for a spent Smart Sponge or Smart Sponge Plus’ material. Smart Sponge samples saturated with hydrocarbons both in the lab and in the field have been tested according to the EPA’s Toxicity Characteristic Leaching Procedure (“TCLP”). These tests show that Smart Sponge is a “non-leaching” product. In addition, used Smart Sponge material can be recycled as an energy source with a British thermal unit, or BTU, value ranging from 10,000 to 18,000 based on the type of contaminant absorbed. As a result, Smart Sponge technology affords many cost effective and environmentally friendly disposal options. The following waste disposal and resource recovery industries have accepted spent Smart Sponge materials for disposal and/or recycling:

 

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Waste-to-Energy Facilities (“WTE”). A specialized segment of the solid waste industry has used spent Smart Sponge material as an alternative fuel in the production of electricity. WTE is acknowledged at the federal level as a renewable energy source under the Federal Power Act, Title IV of the Clean Air Act and is a participant in the Department of Energy’s National Renewable Energy Program.

 

Cement Kilns. This industry has used the spent Smart Sponge material as an alternative fuel in the production process of Portland Cement. This process is considered a beneficial reuse of waste products. The British thermal unit value of spent Smart Sponge material is consistently above the average acceptable levels set for this high temperature process.

 

Landfills. Used Smart Sponge products have been classified as a solid waste and are commonly accepted at Subtitle D Landfills.

 

Engineered Systems and Smart Sponge-based Products

 

AbTech Industries’ product lines are marketed under the trade name “Smart Sponge®” and “Smart Sponge Plus.” Smart Sponge Plus includes antimicrobial capability. AbTech Industries' Smart Sponge contains a unique molecular structure which is chemically selective to hydrocarbons, removing approximately three times its own weight. Smart Sponge remains buoyant when saturated and encapsulates hydrocarbons and oils, without leaching. AbTech Industries' Smart Sponge Plus is EPA approved to reduce coliform bacteria found in stormwater, industrial wastewater, and municipal wastewater, and can be engineered to meet specific performance requirements. The following products incorporate the Smart Sponge or Smart Sponge Plus material in one or more of its various forms and are designed to meet specific market needs:

 

Smart Sponge Popcorn

 

The Smart Sponge material can be formed into a variety of physical shapes to optimize its performance in a wide range of filtration applications. The Smart Sponge material is the cornerstone of AbTech Industries’ current products, and AbTech Industries continues to find new applications for its use. When produced in its “popcorn” form (clumps of polymer similar in shape to popcorn), Smart Sponge is an effective filtration media due to its high porosity and favorable hydraulic characteristics. AbTech Industries is currently pursuing the use of Smart Sponge popcorn in end-of-pipe applications such as vaults and other configurations. The Smart Sponge material can also be sold to OEMs and other users to be integrated into many different filtration pressure vessels or gravity flow structures.

 

Ultra-Urban® Filter

 

The Ultra-Urban® Filter (“UUF”) with Smart Sponge is an innovative low-cost Best Management Practice (“BMP”) that helps meet National Pollution Discharge Elimination System (“NPDES”) requirements with effective filtration, efficient application, and low maintenance. The UUF is a modular filtration unit (or Catch Basin Insert) designed in a variety of shapes and sizes for use in “curb opening” and “top down” storm drains and is used to treat stormwater runoff for new or retrofitted sites by absorbing oil and grease and capturing trash and sediment.

 

The UUF is ideal for municipal, industrial and construction applications ensuring compliance with stormwater regulations. The filter comes in three designs: the Curb Opening, Drain Insert, and Customized Drain Insert. The unique micro porosity of Smart Sponge allows the standard sized CO1414 UUF filter a hydraulic flow rate of more than 250 gallons per minute and has proven effective in removing more than 80% of hydrocarbons and total suspended solids (“TSS”) (300 microns or greater).

 

The unique design of the Curb Opening Series allows crews to easily hang the appropriate number of filters in each drain on a simple mounting bracket. The product is designed with a lateral bypass to utilize each box as well as an overflow capability to eliminate the potential for street flooding in the event of a plugged filter.

 

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The UUF Drain Insert Series offers the same filtration characteristics of the Curb Opening series for stormwater filtration of hydrocarbons, trash and sediment. The unique micro porosity of Smart Sponge allows the DI2020 UUF a hydraulic flow rate of more than 500 gallons per minute, and has proven effective in removing more than 80% of hydrocarbons and TSS (300 microns or greater). These units are designed to be suspended beneath a collar installed under the stormwater grates. This simple design allows easy access for maintenance while eliminating the potential for street flooding in the event of a plugged filter.

 

Customized drain inserts are available for those customers with shallow drains or requiring deeper bed depths. AbTech Industries’ team of engineers will work with customers to understand the site characteristics, including hydraulics and contamination levels and will confirm the appropriate Smart Sponge bed depth to achieve the project’s filtration goals.

 

Water Treatment Vaults (using advanced filtration media like Smart Sponge)

 

AbTech Industries’ water treatment vaults with advanced filtration media such as Smart Paks are an effective alternative to treating individual catch basins. These easily installed, typically pre-cast vaults are retrofitted into existing stormwater systems and are ideal for stormwater treatment at or near the end of pipe. Vault sizes can be adapted for various flow rates and contamination levels to solve a wide range of stormwater treatment issues.

 

AbTech Industries can engineer its water treatment vaults for large projects either as stand-alone applications or as part of a treatment train to polish water working with retention ponds or hydrodynamic separators. These engineered solutions can be direct or radial flow, and can easily be adapted to treat first flush while allowing the later flow of a major storm event to pass around the systems to achieve the hydraulic requirements of the watershed.

 

SMART PAK®

 

AbTech Industries' Smart Pak is designed for use in new or existing vaults that experience oil and grease pollution accompanied by sediment, trash/debris, hydrocarbons, and coliform bacteria (when specified with Smart Sponge Plus). Smart Pak helps users meet and/or exceed stormwater NPDES permit requirements with effective filtration, absorption, life expectancy and maintenance costs. Smart Pak products are constructed out of AbTech Industries' patented Smart Sponge media which is a nonhazardous material, and can be specified for a variety of applications. AbTech Industries' Smart Pak allows Smart Sponge technology to be scaled to virtually any size required in an easy-to-maintain form.

 

Absorbent Boom and Line Skimmer

 

AbTech Industries' Tubular Absorbent Booms and Line Skimmers employ the Smart Sponge absorptive technology which rejects water while absorbing even sheen levels of hydrocarbons in low energy flow environments. Tubular Absorbent Booms and Line Skimmers are designed to absorb and permanently encapsulate hydrocarbons resulting in no dewatering of oily water during removal. These products remain completely buoyant, even after being saturated allowing long term deployment and conveniently scheduled removal.

 

Passive Skimmer

 

The Passive Skimmer is designed to absorb and encapsulate hydrocarbons by floating directly on the water in catch basins, sumps, oil/water separators, and marine fueling stations. Passive Skimmers are made with Smart Sponge, are packaged in flexible mesh containers, and are available in a variety of sizes.

 

Bilge Skimmer

 

The Smart Sponge Non-Leaching Bilge Skimmer is engineered and designed for permanently encapsulating the petroleum hydrocarbons that appear as oily sheen in the engine compartment during normal boat operation. The Bilge Skimmer will absorb the contaminant and allow the boater to discharge clean water from the bilge pump.

 

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Industrial Process Water

 

AbTech Industries has a variety of solutions for treating industrial process water including gravity filters and pressure vessel filters.  Gravity filters are generally designed using Smart Paks which can be easily replaced once consumed.  All solutions and media bed depths are determined based on flow rate and the level of contaminant in the water.  AbTech Industries also uses a variety of third-party pressure vessels filled with Smart Sponge material as effective filtration devices. Depending on the design and size of the vessel, the Smart Sponge material may be deployed in convenient bag filters for ease of media change out, or it may be installed in loose form requiring change-out with the use of a vacuum truck.

 

Produced Water Products

 

AbTech Industries has developed two de-oiling solutions for the produced water market.  The first solution for the removal of free oil is AbTech Industries’ contactor(s) in a pretreatment position.  These consist of contactor tanks that are sized based on flow rate, influent concentration of contaminant, the desired change out schedule, and space or size constraints.  The contactors used are widely available ASME certified pressure vessels that are filled with loose Smart Sponge popcorn media. AbTech Industries has developed a second solution for removal of free oil and dissolved phase gasoline range organics including benzene, toluene, ethylbenzene and xylene, generally referred to as volatile organic compounds (“VOCs”).  In collaboration with QED Environmental Systems (“QED”), AbTech Industries has paired its oil removal contactors with QED air strippers and a thermal oxidizer system.  The air strippers will remove the VOCs from the water stream and the thermal oxidizer will oxidize them prior to release to the environment.  These systems can be implemented ranging from 300 to 3,000 gallons per minute.

 

Markets

 

AbTech Industries targets four major markets: stormwater/wastewater, industrial wastewater/process water, produced water applications for the oil & gas industry, and spill prevention and control markets (including marine environments).

 

Stormwater Market/Wastewater

 

This market consists of municipalities and private sector entities that for regulatory or other reasons are seeking to control the quality of water and other fluids that run off roads and other paved surfaces during wet weather, cleaning or oil spill events. Current customers include municipalities, state agencies, federal agencies, private developers, industrial facilities and businesses. Stormwater discharges are generated during a rainfall event by runoff from land and impervious areas such as paved streets, parking lots and building rooftops. The runoff water picks up a variety of pollutants, in particular bacteria and hydrocarbons, in quantities that can adversely affect water quality, and carries those pollutants into nearby rivers, lakes and oceans.

 

1.           Regulatory Drivers to the Stormwater Market

 

Stormwater discharges are subject to regulation by the U.S. Environmental Protection Agency, state and local regulatory bodies. Authorized by the Clean Water Act, the National Pollutant Discharge Elimination System (NPDES) program requires permits for sources that discharge pollutants into waters. Obtaining and complying with NPDES permits requires implementation of stormwater control measures, such as AbTech Industries’ engineered solutions.

 

Regulation of stormwater is a relatively new occurrence. The first phase of the NPDES program was promulgated in 1990 but the permit requirement was limited to only select regulated entities. The second phase of the NPDES program expanded the permit requirement significantly but did not start until 2003. The next expansion of stormwater regulations is planned for 2012 and is contemplated, amongst other things, to require retrofitting of stormwater control measures into existing development, to develop specific requirements for transportation infrastructure, and otherwise expand the scope and regulatory reach of the NPDES program.

 

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Combined Sewer Overflows also must comply with the Clean Water Act and present an opportunity for AbTech Industries’ engineered treatment solutions. Combined sewer systems serve roughly 772 communities serving 40 million people. In periods of rainfall or snowmelt, the combined stormwater and wastewater volume in a combined sewer system can exceed the capacity of the sewer system or treatment plant. This leads to the direct discharge of untreated sewage, etc. to the environment.

 

Enforcement of stormwater/CSO standards have increased, with EPA compelling installation of stormwater control measures and water quality treatment systems through consent decrees. In recent years, billions of dollars of mandated spending on stormwater/CSO systems has been created through consent decrees.

 

2.           Health and Tourism Concerns Driving the Stormwater Market

 

One area of the stormwater market that is receiving increased publicity and attention is the water pollution caused by microorganisms (bacteria). Polluted stormwater runoff can expose boaters and swimmers to bacteria, viruses and protozoans. A recent Southern California epidemiological study revealed that individuals who swim in areas adjacent to flowing storm drain outfalls were 50 percent more likely to develop a variety of symptoms than those who swim further away from the same drains. These situations are the cause for thousands of beach closings every year affecting public health and local economies dependent upon tourism and recreation. According to a report of the Natural Resources Defense Council (“NRDC”), in 2010 there were 24,091 days of closings and advisories across the country at ocean, bay and Great Lakes beaches. NRDC reported that nearly three-quarters of the 2010 beach closings and advisories were issued because water quality monitoring revealed bacteria levels exceeding health and safety standards. Given mandates for increased monitoring under the Beach Act, NRDC predicts that these numbers will continue to grow in the future.

 

3.           Going Green Initiatives

 

Knowing that polluted stormwater runoff is one of the leading causes of water pollution in the country, many companies are including on-site stormwater treatment in their environmental sustainability goals. AbTech Industries’ systems can help companies meet these goals. AbTech Industries’ Smart Sponge technology not only treats polluted water, it is also recyclable, requires no electricity or other power source and can provide users with quantifiable results of its efficacy, thus helping companies demonstrate their “going green” stewardship.

 

Industrial Wastewater Market

 

The industrial market serves manufacturers seeking to control and clean wastewater generated in various processes. The market is comprised of both heavy industry such as oil refineries, steel mills, chemical plants, pulp and paper plants and more localized concerns such as mid-size manufacturers, refuse sites and shipping/receiving areas. This market also includes private developers, gas stations and owners of developed sites (i.e., parking lots) of over one acre.

 

Industry is placing increased emphasis on water recovery and reuse in order to conserve and protect scarce water resources and the environment. These efforts create the need for effective products and services to treat the water to reduce bacteria and remove unwanted contaminants such as oil derivatives and hydrocarbons.

 

Industrial customers are also required to comply with increasingly stringent discharge regulations creating the need for products to treat runoff water or discharge water before it leaves an industrial facility. The EPA has classified over 3,000 industrial and electric utility facilities as water pollution dischargers. Each of these facilities provides its own wastewater treatment prior to discharge into an open body of water. The size of many of these plants is equal to or greater than those of many municipalities, and in many instances their processes are more complex than provided by a municipality because of the nature of the chemical pollutants being treated. The largest industrial spender on wastewater treatment processes is the chemical and petrochemical sector. There are more than 12,000 chemical/petrochemical plants in the United States and approximately 90% treat wastewater on-site. In addition, there are approximately 30 to 40 independent industrial off-site plants, most of which handle chemical and petrochemical effluent, principally from medium-sized and small companies.

 

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In the industrial market, AbTech Industries’ intent is to market its products through qualified and specialized national distributors, preferably operating in the water treatment business.

 

Produced Water and Frack Water Applications

 

Oil and gas exploration and production activities result in the production of significant volumes of contaminated water. On average there is five times as much contaminated water generated as oil or gas. Approximately 75% of this water is re-injected into the formation to maintain pressure or deep well re-injected at another site. In a traditional oil production field this water is called “produced water.” In fracking operations this can include “frac flowback water” and in gas fields this could include “gas condensate water.” Approximately 25% of all water generated from the exploration and production activities must be treated for either reuse in operations or for discharge to the environment under an NPDES permit. According to the EPA, the Clean Water Act prohibits the discharge of oil or oily waste into or upon the navigable waters of the United States or the waters of the contiguous zone if such discharge causes a film or sheen upon the surface of the water. Violators are subject to a monetary penalty. The attributes of AbTech Industries’ Smart Sponge technology and its ability to remove “oily sheen” make it specially suited to service this market. Smart Sponge can be used as a pretreatment system to remove diesel range organics and free oils prior to additional treatment by downstream technologies to remove contaminants such as volatile organic compounds, dissolved solids, and bacteria.

 

Marine Market - Spill Prevention and Control

 

There are a number of applications related to rivers, lakes, and oceans that call for the use of floating or in-line filtration products to control and reduce the presence of hydrocarbons in the water or on board transiting vessels. Customers include the cruise ship industry, recreational boaters, marina owners, port authorities, spill response organizations and commercial shippers.

 

This market also comprises airports, airport fueling facilities, U.S. Department of Defense (“DOD”) bases, transfer stations, and others concerned about oil spills. Under the Federal Clean Water Act, the EPA has issued the Spill Prevention, Control and Countermeasure (“SPCC”) rule, which requires owners or operators of facilities that store, use, process, transfer, distribute or consume oil and oil products, including airports and military bases, to have at a minimum one of the following preventative systems or its equivalent:

 

dikes, berms, or retaining walls sufficiently impervious to contain spilled product;
curbing;
culverting, gutters, or other drainage systems;
weirs, booms, or other barriers;
spill diversion ponds;
retention ponds; or
sorbent materials.

 

The risks of not adequately implementing such countermeasures are regulatory violations, fines and potential releases that result in contamination, clean-up and additional fines. The impact of these issues can result in significant costs to a facility owner/operator. There are more than 250 medium and large sized airports in the United States and more than 322 U.S. military facilities

 

AbTech Industries’ systems can be deployed for the oil and fuel contamination problems facing airports and military facilities. These systems can not only be used to address such problems as stormwater runoff, but also provide effective SPCC solutions to limit potential liabilities to customers by providing a last line of defense or perimeter protection for fuel spills.

 

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Sales, Distribution, and Marketing Support

 

Stormwater/Wastewater

 

AbTech Industries historically focused on the public sector market, primarily cities and municipalities, and sought to sell to and service those entities through a series of local geographically defined exclusive distributorships. For small companies and distributors, sales to the public sector have inherent challenges including long sales cycles and erratic budget allocations.

 

A reassessment of strategy resulted in a decision to unwind many of the geography specific distributors and focus on establishing a strategic partnership with an industry segment specific dominant market leader. In order to effectively go-to-market, AbTech Industries established the following criteria for a strategic partner: (1) market leadership or dominance, (2) a concomitant large customer base, (3) operational competence in selling and servicing public sector customers, (4) active local advocacy resources, (5) sufficient capital to dedicate to and exploit the opportunity, and (6) experience in dealing with the environmental challenges faced by the public sector.

 

AbTech Industries has now successfully unwound most of its distributorship arrangements. In January, 2011, AbTech Industries entered into a strategic relationship by executing a marketing and distribution agreement with Waste Management, Inc. to pursue the distribution of its relevant technologies and systems in the municipal stormwater market.

 

The federal sector represents a significant opportunity for AbTech Industries. AbTech Industries believes that its best approach to the sector is to identify a strong strategic partner. It established the following criteria for identifying candidates: (1) market leadership or dominance, (2) demonstrated ability to secure and service federal and military contracts, (3) appropriate engineering capabilities and support, (4) strong federal advocacy, and (5) experience and organizational emphasis on supporting “green” initiatives.

 

AbTech Industries has identified strategic partner candidates, is currently in advanced discussions, and has several proposed projects in their preliminary stages.

 

Industrial Wastewater Market

 

The industrial wastewater market is focused on the treatment of oily wastewater from industrial processes for either reuse or discharge. This market is serviced by many regional chemical and equipment supply companies that offer a catalog of solutions. Solutions may require little to no individual engineering, up to custom engineered solutions to address a customer need. AbTech Industries services this market by providing manufacturer’s representatives and engineering support services to industrial chemical suppliers, equipment suppliers and consulting engineers.

 

Oil & Gas Market

 

Treatment of contaminated produced water for the oil & gas industry focuses on the water produced during oil and gas exploration and production. Oil services companies, oil and gas producers, and engineering firms are the main customers. Applications for this market are generally engineered solutions. AbTech Industries services this market with direct AbTech Industries’ sales representatives and engineering resources, including external engineering design resources when necessary.

 

Collaboration With Consulting Firms, Academic Institutions and Public Advocacy Groups

 

AbTech Industries, both on its own, and with its distributors, has been active in seeking out and cooperating with a number of academic institutions and private groups that have interests that may advance the use of AbTech Industries’ products.

 

AbTech Industries has had an opportunity to have its products assessed by several consultants and institutions. These include:

 

Alden Labs. Alden, a recognized leader in the field of research and development, is the oldest continuously operating hydraulic laboratory in the United States and one of the oldest in the world. Alden has completed a variety of tests on AbTech Industries’ SMART PAK for hydraulic conductivity and sediment removal in vault configurations.

 

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North America Science Associates (“NAMSA”). For over 40 years, NAMSA has been supporting the medical device and pharmaceutical industries through a wide variety of testing services, all designed to ensure safety, efficacy and regulatory compliance. NAMSA has completed extensive lab efficiency tests for Smart Sponge Plus materials using varied concentrations of bacteria and exposure times.

 

Millsaps College. Millsaps is a private liberal arts college located in Jackson, Mississippi. Through the Department of Geology, Millsaps has cooperated with AbTech Industries to test the Smart Sponge’s absorption capability with different hydrocarbons, Smart Sponge porosity and performance claims for the Ultra-Urban filter and other new products designed for the aviation industry. Millsaps has completed testing for many other large corporations including 3M, Dow, Clorox and Ergon, a local supplier of polypropylene fibers and sorbents for oil spills.

 

HydroQual Inc. HydroQual is an environmental engineering and science firm. With a staff of over 100 employees, HydroQual addresses issues dealing with water quality, TMDL analyses, floatables pollution, water and wastewater treatment. HydroQual has performed a variety of tests to validate AbTech Industries’ claims regarding the performance of the Smart Sponge.

 

University of California, Los Angeles (“UCLA”). The UCLA Department of Engineering and Environmental Sciences provided independent validation of early versions of AbTech Industries’ Ultra-Urban Filter.

 

Competition

 

1.Stormwater Products

 

Four key factors differentiate AbTech Industries’ Ultra-Urban Filter from other filters in the stormwater market:

 

Anti-microbial capability. AbTech Industries’ Smart Sponge filtration media, when treated with an anti-microbial agent, can reduce bacteria and other microbes flowing through the filter. AbTech Industries believes that its Ultra-Urban Filter with Smart Sponge Plus is the only product available and approved by the EPA that can reduce bacteria at street level without the installation of additional infrastructure and retention areas. Smart Sponge products are available with or without the added anti-microbial agent.

 

Structural Filter. AbTech Industries believes that the Ultra-Urban Filter is the only product designed so that the entire structure is involved in the filtration process. Other products have inserted pads or pillows that allow some hydrocarbon removal, but the Ultra-Urban Filter directs the entire water flow through the filtration media thus enhancing the effectiveness of the filter.

 

Superior Filtration Media. An essential and superior feature of the Ultra-Urban Filter is the ability of its Smart Sponge filtration medium to absorb hydrocarbons and prohibit them from being released back into the water flow when there are subsequent rain events. The reason for this is that AbTech Industries’ proprietary blend of polymers is oleophilic - an absorbent - which means that hydrocarbons are bonded within its chemical matrix and cannot be washed off, squeezed out or leached out of the material during subsequent wetting or rain events. There are various materials used by competitors for stormwater filtration that do not have this absorbent characteristic, instead they feature an adsorbent capability that merely attracts hydrocarbons to their surface area, but cannot prevent them from leaching back into the environment during subsequent rain events. The most commonly used adsorbent in the market is polypropylene, which is currently used in many sorbent products used for the 2010 BP oil spill clean-up. Although it is generally accepted that adsorbents are clearly inferior to absorbents regarding their ability to capture and remove hydrocarbons from stormwater flows, they are widely used because of the low comparative cost. Over the last ten years, AbTech Industries has performed numerous laboratory and field tests that verify its products’ absorption capabilities and other performance features dealing with the removal of trash, sediment, debris, and other contaminants. Central to these test data is the incontrovertible conclusion that AbTech Industries’ Smart Sponge filtration medium is an absorbent.

 

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Porous Structure. AbTech Industries’ Smart Sponge technology maximizes the effectiveness of the oil-absorbing polymers by forming them into an extremely porous structure that allows effective, long-lasting absorption without clogging or channeling which is common among filter media in a powder or particulate form.

 

There are three general categories of products that deal with the treatment of stormwater: hydrodynamic separators (“HDS”), catch basin inserts and ultra-violet light systems. To give a complete competitor profile, a brief explanation of HDS systems is given below since HDS systems are more often considered an alternative to catch basin inserts in new construction projects.

 

Hydrodynamic Separators. HDS products use gravitational flow to spin the water in such a way that density differences cause sediment and other pollutants to be separated and skimmed-off the water. HDS units are large compared to catch basin inserts (smallest systems are about the size of an automobile) and are comprised of several large chambers or vaults, each designed to trap specific pollutants. These systems are much more expensive than catch basin inserts but also have the ability to handle more water flow. Unit costs for HDS systems range from $10,000 to $100,000 depending on size. These systems tend to be more cost effective in large new developments where the HDS can be designed into the stormwater system and large areas of run-off can be directed to each unit. In dealing with existing storm drains, HDS products are less desirable because they require streets and sidewalks to be torn-up, drainage redirected, and construction equipment to retrofit the drain and install the units. Catch basin inserts, on the other hand, are relatively easy to install because they fit into existing storm drain catch basins and require little or no construction.

 

Not only are HDS systems expensive, they also require significant maintenance to remove the trapped pollutants and ensure that the system continues to function properly. Some HDS vendors have purchased AbTech Industries’ Smart Sponge products to be used in conjunction with the HDS units to absorb the oil that is separated from the water, thus enhancing the performance of the systems and reducing the required maintenance. Another drawback of HDS systems is that they are designed to retain standing water after a rain or water flow event. Consequently, the HDS vaults become breeding grounds for mosquitoes (carrier of West Nile Virus), mold, mildew, bacteria and other undesirables.

 

The primary vendors of HDS systems are: ConTech (CDS Technologies, Vortechs), Stormceptor and Baysaver Technologies.

 

Catch Basin Inserts. Competing products in this category include the following:

 

“DrainPac” by PacTec
“StormBasin” by Fabco Industries
“Fossil Filter” and “Flow Guard” by Kristar
“Grate Inlet Skimmer Box” by Suntree Technologies
“Aqua Guard” by AquaShield
“Inceptor” by Stormdrain Solutions
“Hydrocartridge” by Advanced Aquatic Products
“Ultra HydroKleen” by Ultra Tech International

 

Ultra Violet Light (“UVL”). For customers seeking effective antibacterial treatment of stormwater, UVL offers a potential solution. However, the economics of these products are far different from catch basin inserts or other vault and SWAT systems offered by AbTech Industries. Because UVL systems require electricity and expensive equipment, they are very costly to implement and maintain. Consequently, they are not even a viable option for many municipalities. Furthermore, these systems become less effective in turbid waters. While AbTech Industries does not compete directly with UVL systems, such systems do provide an alternative to AbTech Industries’ antimicrobial Smart Sponge products.

 

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2.Other Markets

 

In the industrial, oil & gas and marine markets, competition primarily comes from traditional sorbent products and other particulate-based polymer adsorption products that are widely available through industrial supply vendors. AbTech Industries’ competitive advantage lies in:

 

its patented and patent-pending technologies to form these polymers in shapes, such as the propellet, that greatly enhance performance and ease of use;
its unique delivery systems, including in-line filtration cartridges and filtration vessels;
the completely hydrophobic nature of its products;
the capability to deal with more than one contaminant (i.e., hydrocarbons and microorganisms); and
the high saturation capacity.

 

Intellectual Property, Research, and Development

 

Intellectual Property

 

1.Patents

 

AbTech Industries endeavors to protect the intellectual property it develops through its research and development efforts. The United States Patent Office has issued AbTech Industries 17 patents related to the Smart Sponge technology and products. Additionally, three of the patent applications have been pursued internationally with patents issued in Australia, Belgium, Canada, China, France, Germany, Israel, Italy, Japan, Korea, Mexico and Singapore. AbTech Industries intends to pursue patent protection for new patentable technologies that it develops. AbTech Industries’ success depends, in part, on its ability to maintain trade secrecy protection and operate without infringing on the proprietary rights of third parties.

 

2.Trademarks

 

AbTech Industries has registered three trademarks with the U.S. Patent and Trademark Office: (i) Smart Sponge®, which denotes the Smart Sponge material itself in its various shapes and sizes; (ii) Ultra-Urban® Filter, which denotes AbTech Industries’ line of storm drain filtration devices; and (iii) SMART PAK®, which describes Smart Sponge material compacted into blocks, bricks or other pre-shaped forms. AbTech Industries also trademarked, but does not currently use, the name OARS®, which denotes an oil aquatic recovery system encompassing Smart Sponge products.

 

3.Trade Secrets

 

In order to protect its trade secrets and un-patented proprietary information arising from its development activities, AbTech Industries requires its employees, consultants and contractors to enter into agreements providing for confidentiality, non-disclosure and Company ownership of any trade secret or other un-patented proprietary information developed by employees, consultants or contractors during their employment or engagement by AbTech Industries. AbTech Industries also requires all potential collaborative partners and distributors to enter into confidentiality and non-disclosure agreements.

 

Research and Development

 

The current Smart Sponge technology has prompted the development of a robust line of products. However, to ensure future growth, new products and technologies must be developed. Research and development effort is expended only on projects that meet certain criteria. The project must have a reasonable commercial potential, both in terms of revenue and in terms of profit margins. The products developed from the work must inherently be differentiated from competing products, if any, or allow AbTech Industries to fill a critical gap in its products offering. The development time to achieve the new technology or product must also be reasonable.

 

AbTech Industries maintains active development programs focused on the treatment and removal of heavy metals, PCB’s, radionuclides, and phosphates from contaminated water.

 

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AbTech Industries also has ongoing projects to evaluate of Smart Sponge and other polymers to determine absorption performance under varying conditions and with a variety of contaminants. This testing not only provides independent verification of product performance but also allows AbTech Industries to provide more reliable information to customers about the product’s performance under various field conditions. In addition, AbTech Industries is evaluating various polymer combinations as the field of polymer science continues to evolve.

 

AbTech Industries’ strategy on all of these projects is to partner with third parties (universities, engineering companies and other commercial partners) for experimentation and validation of proposed concepts. AbTech Industries has worked cooperatively with, Millsaps College, California State University at Fullerton, Alden Labs, NAMSA and Hydroqual, Inc. on various projects and is looking at other qualified partners for specific projects. AbTech Industries will maintain its own R&D treatability lab for internal research and quality control of raw material and finished products.

 

Manufacturing and Engineering

 

As manufacturing volumes increase, AbTech Industries intends to maintain its core engineering competencies in the United States and create a manufacturing outsourcing network capable of supplying existing and future products around the world. The network will include some internal manufacturing (mainly assembly) capabilities but will largely comprise contract manufacturers and/or strategic partners with the required expertise and facilities to cost-effectively manufacture AbTech Industries’ products. Due to the nature of the product (very low specific gravity or density, therefore high unitary shipping cost), AbTech Industries expects to establish its manufacturing and warehousing sites in key geographic areas. The manufacturing network will have an integrated information system capable of effectively managing production orders and ensuring high quality products manufactured to consistent specifications around the world. This plan will be rolled out in two steps:

 

1.Short term (up to 12 months)

 

AbTech Industries will fully exploit its internal manufacturing capabilities at its 13,000 square foot facility in Phoenix, Arizona. While maximizing the capacity of this facility, AbTech Industries will search out and train outsourcing partners in the United States and other regions. Products not using the Smart Sponge material will be contracted to outside manufacturers.

 

2.Long term (12 months or longer)

 

AbTech Industries intends to evaluate the opportunities to outsource the manufacturing of all components and most of the finished products, focusing on total quality and consistency. Due to the very atypical process and equipment used in AbTech Industries’ manufacturing, it is unclear at this time if a suitable manufacturing partner exists. AbTech Industries would need to confirm a clear value proposition prior to outsourcing manufacturing.

 

Regulatory

 

In mid-2008, the EPA initiated a compliance action against AbTech Industries alleging that AbTech Industries was in violation of the Federal Insecticide, Fungicide and Rodenticide Act by distributing Smart Sponge Plus, which the EPA considered to be an unregistered pesticide. Despite the EPA’s prior position that registration of AbTech Industries’ Smart Sponge Plus for use in stormwater filtration applications was not required or allowed, in subsequent discussions with the EPA it became evident that the EPA considered it imperative that AbTech Industries register its Smart Sponge Plus material as a pesticide if AbTech Industries intended to make claims about its antimicrobial capability. Consequently, in 2008, AbTech Industries began to prepare a registration application for Smart Sponge Plus, which was eventually filed with the EPA in September 2009. In July 2010, AbTech Industries received notice of a time-limited registration from the EPA that contained certain conditions requiring AbTech Industries to submit additional testing data to the EPA by July 1, 2011. Subsequently, and based on information provided by the third-party laboratory contracted to perform the additional studies, EPA granted an extension of the time-limited registration until August 31, 2012. On August 23, 2012 the EPA granted an additional extension that expires on May 31, 2013. The Company is working with the third-party laboratory and the EPA to develop the necessary protocols to satisfy the data requirements of the EPA. The third-party testing will then proceed to produce the data for submission to the EPA by May 31, 2013. Provided that the data is submitted on time and is acceptable to the EPA, the time-limited condition on the registration will be lifted and the registration will be effective without a time limitation. If the data is not submitted on time and the EPA does not grant additional extensions, the registration will expire and the Company will not be able to sell Smart Sponge Plus products. However, the Company would be able to continue to sell regular Smart Sponge products that do not include the antimicrobial agent used in Smart Sponge Plus products. Under the time limited registration the Company is allowed to sell its Smart Sponge Plus products for the intended uses with EPA approved labeling. The registration number for Smart Sponge Plus is 86256-1. AbTech Industries is not aware of any other competitive product that has been approved by the EPA for outdoor use as an antimicrobial (pesticide) and believes that this registration will further differentiate Smart Sponge Plus products from other competitive products on the market.

 

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Employees

 

As of March 23, 2012, we had twenty-one full-time employees, and two full-time consultants. Nine of these individuals are involved in sales and marketing; three in production; four in research and development, and six in administrative functions.

 

Where You Can Find More Information

 

We are required to file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information with the Securities and Exchange Commission (the “SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549, by calling the SEC at 1-800-732-0330, or by accessing the SEC’s website at http://www.sec.gov. Links to these reports can also be found on our website at www.abtechindustries.com, under the INVESTORS section of the website.

 

ITEM 1A.             RISK FACTORS.

 

You should carefully consider the risks described below together with all of the other information included in our public filings before making an investment decision with regard to our securities. The statements contained in or incorporated into this Annual Report on Form 10-K that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. While the risks described below are the ones we believe are most important for you to consider, these risks are not the only ones that we face. If any of the following events described in these risk factors actually occurs, our business, financial condition, or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

The risk factors discussed below relate to our business and operations following the consummation of the Merger and, accordingly, relate primarily to Abtech Holdings and its subsidiary, AbTech Industries. As used in this “Risk Factors” section, the terms “Company,” “we,” our” and like words mean Abtech Holdings together with Abtech Industries, unless the context otherwise requires.

 

Risks Relating to Our Business

 

Our ability to generate revenue to support our operations is uncertain.

 

We are in the early stage of our business and have a limited history of generating revenues. We have a limited operating history upon which you can evaluate our potential for future success, and we are subject to the additional risks affecting early-stage businesses. Rather than relying on historical information, financial or otherwise, to evaluate our Company, you should evaluate our Company in light of your assessment of the growth potential of our business and the expenses, delays, uncertainties, and complications typically encountered by early-stage businesses, many of which will be beyond our control. Early-stage businesses in rapidly evolving markets commonly face risks, such as the following:

 

unanticipated problems, delays, and expenses relating to the development and implementation of their business plans;

 

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operational difficulties;

 

lack of sufficient capital;

 

competition from more advanced enterprises; and

 

uncertain revenue generation.

 

Our limited operating history may make it difficult for us to forecast accurately our operating results.

 

Our planned expense levels are, and will continue to be, based in part on our expectations, which are difficult to forecast accurately based on our stage of development and factors outside of our control. We may be unable to adjust spending in a timely manner to compensate for any unexpected developments. Further, business development expenses may increase significantly as we expand operations. To the extent that any unexpected expenses precede, or are not rapidly followed by, a corresponding increase in revenue, our business, operating results, and financial condition may be materially and adversely affected.

 

We have a history of losses that may continue, which may negatively impact our ability to achieve our business objectives.

 

We have incurred net losses since our inception. The Company had a net loss of approximately $5.4 million during the fiscal year ended December 31, 2011. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. There can be no assurance that future operations will be profitable. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us.

 

Our success depends on our ability to expand, operate, and manage successfully our operations.

 

Our success depends on our ability to expand, operate, and manage successfully our operations. Our ability to expand successfully will depend upon a number of factors, including the following:

 

signing with strategic partners, dominant in their field

 

the continued development of our business;

 

the hiring, training, and retention of additional personnel;

 

the ability to enhance our operational, financial, and management systems;

 

the availability of adequate financing;

 

competitive factors;

 

general economic and business conditions; and

 

the ability to implement methods for revenue generation.

 

If we are unable to obtain additional capital, our business operations could be harmed.

 

The development and expansion of our business may require additional funds. In the future, we may seek additional equity or debt financing to provide capital for our Company. Such financing may not be available or may not be available on satisfactory terms. If financing is not available on satisfactory terms, we may be unable to expand our operations. While debt financing will enable us to expand our business more rapidly than we otherwise would be able to do, debt financing increases expenses and we must repay the debt regardless of our operating results. Future equity financings could result in dilution to our stockholders.

 

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The recent global financial crisis, which has included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions or fluctuations in equity and currency values worldwide, and concerns that the worldwide economy may enter into a prolonged recessionary period, may make it difficult for us to raise additional capital or obtain additional credit, when needed, on acceptable terms or at all.

 

Our inability to obtain adequate capital resources, whether in the form of equity or debt, to fund our business and growth strategies, may require us to delay, scale back, or eliminate some or all of our operations, which may adversely affect our financial results and ability to operate as a going concern.

 

You may suffer significant dilution if we raise additional capital.

 

If we raise additional capital, we expect it will be necessary for us to issue additional equity or convertible debt securities. If we issue equity or convertible debt securities, the price at which we offer such securities may not bear any relationship to our value, the net tangible book value per share may decrease, the percentage ownership of our current stockholders would be diluted, and any equity securities we may issue in such offering or upon conversion of convertible debt securities issued in such offering, may have rights, preferences, or privileges with respect to liquidation, dividends, redemption, voting, and other matters that are senior to or more advantageous than our common stock.

 

We have completed debt financings and face risks associated with financing our operations.

 

The Company has completed several debt financings and is subject to the normal risks associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest and the risk that we will not be able to renew, repay, or refinance our debt when it matures or that the terms of any renewal or refinancing will not be as favorable as the existing terms of that debt.

 

We have debt outstanding that is secured by all of the assets of the Company

 

During 2011, we issued Secured Convertible Promissory Notes that are secured by all of the assets of the Company including its intellectual property. If we are unable to pay our obligations to our secured lenders, they could proceed against any or all of the collateral securing our indebtedness to them which could prevent the Company from continuing its operations in whole or in part.

 

You may suffer dilution if Convertible Notes are converted to common stock

 

As of December 31, 2011, the Company had approximately $6.8 million of convertible notes outstanding that if converted would require the company to issue approximately 10 million shares of common stock. Such conversion would cause the percentage ownership of our current stockholders to be diluted.

 

Outstanding convertible notes and warrants have price protection features

 

During 2012, we issued convertible notes and warrants that have certain price protection features that would allow the conversion prices or exercise prices of the outstanding notes and warrants to be decreased in the event of a financing by the Company at a price per share less than the stated conversion price of the notes or exercise price of the warrants. In the event the Company completes such a down-round financing within 15 months of the issuance dates of the affected notes and warrants, any subsequent conversion of the effected notes and/or exercise of the effected warrants would have a greater dilutive effect on current stockholders than would be expected if a down-round financing does not take place within the 15-month time period.

 

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Our independent auditors have expressed substantial doubt about the Company’s ability to continue as a going concern, which may hinder our ability to obtain future financing.

 

In their report dated March 30, 2012, our independent registered public accounting firm stated that our financial statements for the fiscal year ended December 31, 2011 were prepared assuming that the Company would continue as a going concern. Its ability to continue as a going concern is an issue raised as a result of recurring losses from operations. To date, each of Abtech Holdings and AbTech Industries have only incurred net operating losses resulting in a significant accumulated deficit. Our ability to continue as a going concern is subject to our ability to obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.

 

We depend on our officers and key employees who would be difficult to replace, and our business will likely be harmed if we lose their services or cannot hire additional qualified personnel.

 

Our success depends substantially on the efforts and abilities of our officers and other key employees. AbTech Industries has employment agreements with its chief executive officer, its chief financial officer, and certain key employees, but we do not think those agreements limit any employee’s ability to terminate his or her employment. We have key person life insurance on Glenn R. Rink, our president, chief executive officer and a director; we do not have key person life insurance covering any of our other officers or other key employees. The loss of services of one or more of our officers or key employees or the inability to add key personnel could have a material adverse effect on our business. Competition for experienced personnel in our industry is substantial. Our success depends in part on our ability to attract, hire, and retain qualified personnel. In addition, if any of our officers or other key employees join a competitor or form a competing company, we may lose some of our customers.

 

We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could seriously harm our business.

 

Due to the specialized nature of our business, our future performance is highly dependent upon the continued services of current and future key personnel and managers. Our future business depends upon our ability to attract and retain qualified engineering, manufacturing, marketing, sales, and management personnel for our operations. We may also have to compete with the other companies in our industry in the recruitment and retention of qualified managerial and technical employees. Competition for personnel is intense and confidentiality and non-compete agreements may restrict our ability to hire individuals employed by other companies. Therefore, we may not be successful in attracting or retaining qualified personnel. Our failure to attract and retain qualified personnel could seriously harm our business, results of operations, and financial condition. Furthermore, we may not be able to accurately forecast our needs for additional personnel, which could adversely affect our ability to grow.

 

The expected results from the Merger may vary significantly from our expectations.

 

The expected results from the Merger might vary materially from those anticipated and disclosed by us. These expectations are inherently subject to uncertainties and contingencies. These assumptions may be impacted by factors that are beyond our control, including, but not limited to, general economic factors impacting the U.S. economy.

 

The Merger could be difficult to integrate, disrupt business, dilute stockholder value, and harm operating results of the combined entity.

 

Our experience in acquiring and integrating businesses is limited. The recent Merger with AbTech Industries involves numerous risks, including the following:

 

problems integrating the purchased operations, services, personnel, or technologies;

 

unanticipated costs associated with the acquisition;

 

diversion of management’s attention from the core businesses;

 

adverse effects on existing business relationships with suppliers and customers of purchased organizations;

 

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potential loss of key employees and customers of purchased organizations; and

 

risk of impairment charges related to potential write-downs of acquired assets.

 

These factors and potential unforeseeable costs may result in disruption to the business of the combined entity and any such disruption could have a significant negative impact on the combined entity’s assets, revenue, expenses, and stock price.

 

The effects of the recent global economic downturn may adversely impact our business, operating results, or financial condition.

 

The recent global economic downturn has caused disruptions and volatility in global financial markets and increased rates of default and bankruptcy and has impacted levels of consumer and commercial spending. We are unable to predict the duration or severity of the current global economic and financial crisis. There can be no assurance that any actions we may take in response to further deterioration in general economic and financial conditions will be sufficient. A protracted continuation or worsening of the global economic downturn or disruptions in the financial markets could have a material adverse effect on our business, financial condition, or results of operations.

 

If we do not achieve broad market acceptance of our products and services, we may not be successful.

 

Although our products and services will serve existing needs, our delivery of these products and services is unique and subject to broad market acceptance. As is typical of any new product or service, the demand for and market acceptance of these products and services are highly uncertain. We cannot assure you that any of our products and services will be commercialized on a widespread basis. The commercial acceptance of our products and services may be affected by a number of factors, including the willingness of municipalities and other commercial and industrial entities to use our products and services to control the quality of water and other fluids. If the markets for our products and services fail to develop on a meaningful basis, if they develop more slowly than we anticipate, or if our products and services fail to achieve sufficient market acceptance, our business and future results of operations could be adversely affected.

 

Because our products may be designed to provide a solution which competes with existing methods, we are likely to face resistance to change, which could impede our ability to commercialize this business.

 

Our products may be designed to provide a solution to environmental challenges created by contaminated water and other fluids. Currently, large and well capitalized companies provide services in these areas. These competitors have strong relationships with their customers’ personnel, and there is a natural reluctance for businesses to change to new technologies, particularly in such industries as the oil and gas industries where our future products may be relevant. This reluctance is increased when potential customers make significant capital investments in competing technologies. Because of these obstacles, we may face substantial barriers to commercializing our business.

 

If we experience rapid growth and we are not able to manage this growth successfully, this inability to manage the growth could adversely affect our business, financial condition, and results of operations.

 

Rapid growth places a significant strain on our financial, operational, and managerial resources. While we engage in strategic and operational planning to adequately manage anticipated growth, there can be no assurance that we will be able to implement and subsequently improve operations and financial systems successfully and in a timely manner to fully manage our growth. There can be no assurance that we will be able to manage our growth and any inability to successfully manage growth could materially adversely affect our business, financial condition, and results of operation.

 

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We have no experience in manufacturing or assembling products on a large scale basis, and if we do not develop adequate manufacturing and assembly processes and capabilities to do so in a timely manner, we may be unable to achieve our growth and profitability objectives.

 

We have no experience manufacturing or assembling products on a large scale. We do not know whether our current or future manufacturing arrangements will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable us to meet the quality, price, engineering, design and production standards, or production volumes required to successfully mass market such products. Even if we are successful in developing manufacturing capabilities and processes, we do not know whether we will do so in time to meet our product commercialization schedule or to satisfy the requirements of our target market. Our failure to develop these manufacturing processes and capabilities, if necessary, in a timely manner, could prevent us from achieving our growth and profitability objectives.

 

If we fail to continue to develop or acquire new products, adapt to rapid and significant technological change, and respond to introductions of new products, we will not be competitive.

 

Our growth strategy includes significant investment in and expenditures for product development. We intend to sell products, primarily in the water clean-up sector, which are characterized by rapid and significant technological changes, frequent new product and service introductions, and enhancements and evolving industry standards. Without the timely introduction of new products, services, and enhancements, our products and services may become technologically obsolete over time, in which case our revenue and operating results would suffer.

 

In addition, our competitors may adapt more quickly to new technologies and changes in customers’ requirements than we can. The products that we are currently developing or those that we will develop in the future, may not be technologically feasible or accepted by the marketplace, and our products or technologies could become uncompetitive or obsolete.

 

The market for our products is highly competitive, and there can be no assurance that competitors will not emerge in the near to medium term with comparable products or technologies.

 

The markets for our products and services are expected to remain highly competitive. While we believe our products are unique and have, or will have, adequate patent protection for the underlying technologies, or unique trade secrets, there can be no assurance that competitors will not emerge in the near to medium term with comparable products or technologies. There are a number of large companies involved in the same businesses as us, but with larger more established sales and marketing organizations, technical staff, and financial resources. We may establish marketing and distribution partnerships or alliances with some of these companies, but there can be no assurance that such alliances will be formed.

 

Our business may become substantially dependent on contracts that are awarded through competitive bidding processes.

 

We may sell a significant portion of our products pursuant to contracts that are subject to competitive bidding, including contracts with municipal authorities. Competition for, and negotiation and award of, contracts present varied risks, including, but not limited to:

 

investment of substantial time and resources by management for the preparation of bids and proposals with no assurance that a contract will be awarded to us;

 

the requirement to certify as to compliance with numerous laws (for example, socio-economic, small business, and domestic preference) for which a false or incorrect certification can lead to civil and criminal penalties;

 

the need to estimate accurately the resources and cost structure required to service a contract; and

 

the expenses and delays that we might suffer if our competitors protest a contract awarded to us, including the potential that the contract may be terminated and a new bid competition may be conducted.

 

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If we are unable to win contracts awarded through the competitive bidding process, we may not be able to operate in the market for products and services that are provided under those contracts for a number of years. If we are unable to consistently win new contract awards over any extended period, or if we fail to anticipate all of the costs and resources that will be required to secure and perform such contract awards, our growth strategy and our business, financial condition, and results of operations could be materially and adversely affected.

 

We will sell products and services to companies in industries which tend to be extremely cyclical; downturns in those industries would adversely affect our results of operations.

 

The growth and profitability of our business will depend on sales to industries that are subject to cyclical downturns. Slowdowns in these industries may adversely affect sales by our businesses, which in turn would adversely affect our revenues and results of operations. In particular, our products may be sold to and used by the oil and gas industry, which historically has realized significant shifts in activity and spending due to fluctuations in commodity prices. Our revenues may be dependent upon spending by oil and gas producers; therefore, a reduction in spending by producers may have a materially adverse effect on our business, financial conditions, and results of operations.

 

The industries in which we may sell our products are heavily regulated and costs associated with such regulation could reduce our profitability.

 

Federal, state, and local authorities extensively regulate the stormwater and oil and gas industries, which are primary industries in which we may sell our products and offer our services. Legislation and regulations affecting the industries are under constant review for amendment or expansion. State and local authorities regulate various aspects of stormwater and oil and gas activities that ultimately affect how customers use our products and how we develop and market our products. The overall regulatory burden on the industries increases the cost of doing business, which, in turn, decreases profitability.

 

International sales are also subject to rules and regulations promulgated by regulatory bodies within foreign jurisdictions, and there can be no assurance that such foreign regulatory bodies will not adopt laws or regulatory requirements that could adversely affect our Company.

 

If chemical companies engage in predatory pricing, we may lose customers, which could materially and adversely affect us.

 

Municipalities and other commercial and industrial entities traditionally have used chemicals to control the quality of water and other fluids. The chemical companies represent a significant competitive factor. The chemical companies who supply chemicals to such municipalities and other commercial and industrial entities may, in order to maintain their business relationship, drastically reduce their price and seek to undercut the pricing at which we can realistically charge for our products and services. While predatory pricing that is designed to drive us out of business may be illegal under the United States anti-trust and other laws, we may lose customers as a result of any future predatory pricing and be required to file lawsuits against any companies who engage in such improper tactics. Any such litigation may be very expensive which will further impact us and affect their financial condition. As a result, predatory pricing by chemical companies could materially and adversely affect us.

 

We are, or in the future may be, subject to substantial regulation related to quality standards applicable to our manufacturing and quality processes. Our failure to comply with applicable quality standards could have an adverse effect on our business, financial condition, or results of operations.

 

The Environmental Protection Agency regulates the registration, manufacturing, and sales and marketing of products in our industry, and those of our distributors and partners, in the United States. Significant government regulation also exists in overseas markets. Compliance with applicable regulatory requirements is subject to continual review and is monitored through periodic inspections and other review and reporting mechanisms.

 

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Failure by us or our partners to comply with current or future governmental regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product recalls or related field actions, product shortages, or delays in product manufacturing. Specifically, with regard to the EPA’s conditional approval of the registration of our Smart Sponge Plus products, if we are unable to provide the additional information requested by the EPA prior to the prescribed due date of May 31, 2013, and are unable to obtain EPA approval of an extended due date, the EPA’s conditional approval of our registration of Smart Sponge Plus products will expire and the Company will not be able to sell Smart Sponge Plus products. However, the expiration of the conditional approval of Smart Sponge Plus products would not affect our ability to continue to sell the regular Smart Sponge products that do not include an antimicrobial agent. (see “OUR BUSINESS – Regulatory” on page 46 of this Prospectus). Efficacy or safety concerns and/or manufacturing quality issues with respect to our products or those of our partners could lead to product recalls, fines, withdrawals, declining sales, and/or our failure to successfully commercialize new products or otherwise achieve revenue growth.

 

If a natural or man-made disaster strikes our or a third-party’s manufacturing facility that we may use, we may be unable to manufacture our products for a substantial amount of time and our sales and profitability will decline.

 

The manufacturing facility and manufacturing equipment we use to produce our products will be costly to replace and could require substantial lead-time to repair or replace. Our facility or a third-party’s facility that we use may be affected by natural or man-made disasters. In the event they were affected by a disaster, we would be forced to set up alternative production capacity, or rely on third-party manufacturers to whom we would have to disclose our trade secrets. Although we possess insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses, may not continue to be available to us on acceptable terms, or at all, and may not address the marketing and goodwill consequences of our inability to provide products for an extended period of time.

 

We may decide to outsource manufacturing in the future. Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation.

 

As part of our efforts to streamline operations and to cut costs in the future, we may decide to outsource aspects of our manufacturing processes and other functions. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, which may preclude us from fulfilling our customers’ orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. Additionally, outsourcing may take place in developing countries and, as a result, may be subject to geopolitical uncertainty.

 

The success of our businesses will depend on our ability to effectively develop and implement strategic business initiatives.

 

We are currently implementing various strategic business initiatives. In connection with the development and implementation of these initiatives, we will incur additional expenses and capital expenditures to implement the initiatives. The development and implementation of these initiatives also requires management to divert a portion of its time from day-to-day operations. These expenses and diversions could have a significant impact on our operations and profitability, particularly if the initiatives prove to be unsuccessful. Moreover, if we are unable to implement an initiative in a timely manner, or if those initiatives turn out to be ineffective or are executed improperly, our business and operating results would be adversely affected.

 

Failure to successfully reduce our current or future production costs may adversely affect our financial results.

 

A significant portion of our strategy will rely upon our ability to successfully rationalize and improve the efficiency of our operations. In particular, our strategy relies on our ability to reduce our production costs in order to remain competitive. If we are unable to continue to successfully implement cost reduction measures, especially in a time of a worldwide economic downturn, or if these efforts do not generate the level of cost savings that we expect going forward or result in higher than expected costs, there could be a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

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If we are unable to make necessary capital investments or respond to pricing pressures, our business may be harmed.

 

In order to remain competitive, we need to invest in research and development, manufacturing, customer service and support, and marketing. From time to time, we may have to adjust the prices of our products and services to remain competitive. We may not have available sufficient financial or other resources to continue to make investments necessary to maintain our competitive position.

 

Failure to obtain sufficient supply of component materials to conduct our business may have an adverse effect on our production and revenue targets.

 

Our component and materials’ suppliers may fail to meet our needs. We intend to manufacture our products using materials and components procured from a limited number of third-party suppliers. We do not currently have long-term supply contracts with our suppliers. This generally serves to reduce our commitment risk, but does expose us to supply risk and to price increases that we may have to pass on to our customers. In some cases, supply shortages and delays in delivery may result in curtailed production or delays in production, which can contribute to an increase in inventory levels and loss of profit. We expect that shortages and delays in deliveries of some components will occur from time to time. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing delays, which could harm our relationships with current or prospective customers and reduce our sales. We may also not be able to obtain competitive pricing for some of our supplies compared to our competitors. We also cannot assure that the component and materials from domestic suppliers will be of similar quality or quantity as those imported component and materials, which may lead to rejections of component and materials by our customers. In the event the domestic component and materials do not perform as well as the imported component and materials or do not perform at all, our business, financial condition, and results of operations could be adversely affected.

 

We have limited product distribution experience and we expect to rely on third parties who may not successfully sell our products.

 

We have limited product distribution experience and currently rely and plan to rely primarily on product distribution arrangements with third parties. We may also license our technology to certain third parties for commercialization of certain applications. We expect to enter into distribution agreements and/or licensing agreements in the future, and we may not be able to enter into these agreements on terms that are favorable to us, if at all. In addition, we may have limited or no control over the distribution activities of these third parties. These third parties could sell competing products and may devote insufficient sales efforts to our products. As a result, our future revenues from sales of our products, if any, will depend on the success of the efforts of these third parties.

 

We could face significant liabilities in connection with our technology, products, and business operations, which if incurred beyond any insurance limits, would adversely affect our business and financial condition.

 

We are subject to a variety of potential liabilities connected to our technology development and business operations, such as potential liabilities related to environmental risks. As a business which manufactures and/or markets products for use by consumers and institutions, we may become liable for any damage caused by our products, whether used in the manner intended or not. Any such claim of liability, whether meritorious or not, could be time-consuming and/or result in costly litigation. Although we have obtained insurance against certain of these risks, no assurance can be given that such insurance will be adequate to cover related liabilities or will be available in the future or, if available, that premiums will be commercially justifiable. If we were to incur any substantial liability and related damages were not covered by our insurance or exceeded policy limits, or if we were to incur such liability at a time when we are not able to obtain liability insurance, our business, financial conditions, and results of operations could be materially adversely affected.

 

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Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.

 

Our success will depend in part on our ability to develop patentable products and obtain and enforce patent protection for our products in the United States and other countries. We intend to file applications, as appropriate, for patents covering our products. Patents may not be issued for any pending or future patent applications owned by or licensed to us, and the claims allowed under any issued patents may not be sufficiently broad to protect our technology. Any issued patents owned by or licensed to us may be challenged, invalidated, or circumvented, and the rights under these patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture increased market position. We could incur substantial costs to defend suits brought against us or suits in which we may assert our patent rights against others. An unfavorable outcome of any such litigation could materially adversely affect our business and results of operations.

 

We may also rely on trade secrets and proprietary know-how with which we seek to protect our products, in part by confidentiality agreements with our collaborators, employees, and consultants. Nevertheless, these agreements afford only limited protection, and the actions we take to protect our intellectual property rights may not be adequate. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently developed by our competitors. As a result, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition, or operating results.

 

In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. We cannot assure you that the outcome of any litigation will be in our favor. Intellectual property litigation may be costly and may divert management attention, as well as expend our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects, and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations, and financial condition.

 

Operational and Structural Risks

 

We can provide no assurances as to our future financial performance or the investment result of a purchase of our common stock.

 

Any projected results of operations, including the recent Merger with AbTech Industries, involve significant risks and uncertainty, should be considered speculative, and depend on various assumptions which may not be correct. The future performance of our Company and the return on our common stock depends on a complex series of events that are beyond our control and that may or may not occur. Actual results for any period may or may not approximate any assumptions that are made and may differ significantly from such assumptions. We can provide no assurance or prediction as to our future profitability or to the ultimate success of an investment in our common stock.

 

The compensation we pay to our executive officers and employees will likely increase, which will affect our future profitability.

 

We believe that the compensation we have historically paid to our executive officers is within the lower quartile of compensation paid by companies similar to our Company. Following the closing of the Merger with AbTech Industries, we increased the compensation payable to the combined entity’s executive officers and employees. An increase in compensation and bonuses payable to our executive officers and employees could decrease our net income.

 

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As a public reporting company, we are subject to corporate governance and internal control reporting requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements, could adversely affect our business.

 

We may face new corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well as new rules and regulations subsequently adopted by the Securities and Exchange Commission (the “SEC”) and the Public Company Accounting Oversight Board. These laws, rules, and regulations continue to evolve and may become increasingly stringent in the future. We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). We are a smaller reporting company as defined in Rule 12b-2 under the Exchange Act. Section 404 requires us to include an internal control report with our Annual Report on Form 10-K. The report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified. Failure to comply, or any adverse results from such evaluation, could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our securities. We strive to continuously evaluate and improve our control structure to help ensure that we comply with Section 404. The financial cost of compliance with these laws, rules, and regulations is expected to remain substantial. We cannot assure you that we will be able to fully comply with these laws, rules, and regulations that address corporate governance, internal control reporting, and similar matters. Failure to comply with these laws, rules, and regulations could materially adversely affect our reputation, financial condition, and the value of our securities.

 

As a public company, we will have significant operating costs relating to compliance requirements and our management is required to devote substantial time to compliance initiatives.

 

Our management has only limited experience operating AbTech Holdings as a public company. To operate effectively, we will be required to continue to implement changes in certain aspects of our business and develop, manage, and train management level and other employees to comply with on-going public company requirements. Failure to take such actions, or delay in the implementation thereof, could have a material adverse effect on our business, financial condition, and results of operations.

 

The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC, impose various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

 

Risks Related to our Common Stock

 

A limited public trading market exists for our common stock, which makes it more difficult for our stockholders to sell their common stock in the public markets.

 

Although our common stock is quoted on the OTCBB under the symbol “ABHD,” there is a limited public market for our common stock. No assurance can be given that an active market will develop or that a stockholder will ever be able to liquidate its shares of common stock without considerable delay, if at all. Many brokerage firms may not be willing to effect transactions in the securities. Even if a purchaser finds a broker willing to effect a transaction in these securities, the combination of brokerage commissions, state transfer taxes, if any, and any other selling costs may exceed the selling price. Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political, and market conditions, such as recessions, interest rates, or international currency fluctuations may adversely affect the market price and liquidity of our common stock.

 

Our stock price may be volatile.

 

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

limited “public float” in the hands of a small number of persons whose sales (or lack of sales) could result in positive or negative pricing pressure on the market price for our common stock;

 

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actual or anticipated variations in our quarterly operating results;

 

changes in our earnings estimates;

 

our ability to obtain adequate working capital financing;

 

changes in market valuations of similar companies;

 

publication (or lack of publication) of research reports about us;

 

changes in applicable laws or regulations, court rulings, enforcement and legal actions;

 

loss of any strategic relationships;

 

additions or departures of key management personnel;

 

actions by our stockholders (including transactions in our shares);

 

speculation in the press or investment community;

 

increases in market interest rates, which may increase our cost of capital;

 

changes in our industry;

 

competitive pricing pressures;

 

our ability to execute our business plan; and

 

economic and other external factors.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

Our common stock may be subject to the penny stock rules which may make it more difficult to sell our common stock.

 

The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price, as defined, less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities may be covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors, such as institutions with assets in excess of $5,000,000 or an individual with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with his or her spouse. For transactions covered by this rule, the broker-dealers must make a special suitability determination for the purchase and receive the purchaser’s written agreement of the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities and also affect the ability of our stockholders to sell their shares in the secondary market.

 

FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.

 

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

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Our common shares are currently traded at low volume, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.

 

We cannot predict the extent to which an active public market for our common stock will develop or be sustained. Our common shares are currently traded, but currently with low volume, based on quotations on the “Over-the-Counter Bulletin Board,” meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.

 

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include: (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market, and we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market. The occurrence of these patterns or practices could increase the future volatility of our share price.

 

We have historically not paid dividends and do not intend to pay dividends for the foreseeable future.

 

We have historically not paid dividends to our stockholders, and management does not anticipate paying any cash dividends on our common stock to our stockholders for the foreseeable future. Any determination we make regarding dividends will be at the discretion of our Board of Directors and will depend on our results of operations, our financial condition, contractual restrictions, restrictions imposed by applicable law, and other factors our Board of Directors deem relevant. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We presently intend to retain future earnings, if any, for use in the operation and expansion of our business.

 

The elimination of monetary liability against our directors, officers, and employees under Nevada law and the existence of indemnification rights to our directors, officers, and employees may result in substantial expenditures by our Company and may discourage lawsuits against our directors, officers, and employees.

 

Our articles of incorporation contain a provision permitting us to eliminate the personal liability of our directors to our Company and shareholders for damages for breach of fiduciary duty as a director or officer to the extent provided by Nevada law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our Company and shareholders.

 

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ITEM 1B.              UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

ITEM 2.                 PROPERTIES.

 

We currently maintain an administrative office located at 4110 North Scottsdale Road, Suite 235, Scottsdale, Arizona 85251. The company also leases space for its manufacturing facility located at 3610-2 E. Southern Ave., Phoenix, AZ 85040. Our telephone number is (480) 874-4000.

 

ITEM 3.                 LEGAL PROCEEDINGS.

 

None.

 

ITEM 4.                 RESERVED.

 

Not applicable.

 

PART II

 

ITEM 5.              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES.

 

Market Information

 

Our common stock is listed on the OTCBB under the symbol “ABHD.” Our common stock has been listed on the OTCBB since June 2010. Prior to that time, there was no public market for our common stock.

 

The table below sets forth, for the calendar quarters indicated, the high and low stock prices for our common stock as reported by the NASDAQ.com. These quotations may represent prices between dealers without adjustment for retail markups, markdowns, or commissions and may not represent actual transactions.

 

   Sales Price of Common Stock 
Quarter ended  High   Low 
December 31, 2011  $0.63   $0.32 
September 30, 2011  $0.75   $0.35 
June 30, 2011  $1.44   $0.25 
March 31, 2011  $1.65   $0.41 

 

   Sales Price of Common Stock 
   High   Low 
December 31, 2010  $0.99   $0.40 
September 30, 2010  $2.55   $0.86 
June 30, 2010  $2.90   $0.99 

 

Stockholders

 

As of March 23, 2012 there were 190 stockholders of record of our common stock. Our transfer agent is Worldwide Stock Transfer, LLC. The transfer agent’s address is 433 Hackensack Ave., Level L, Hackensack, NJ 07601.

 

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Dividends

 

We have never declared or paid cash dividends on our common stock, and we do not anticipate paying dividends in the foreseeable future. Our future payment of dividends will depend on our earnings, capital requirements, expansion plans, financial condition, and other relevant factors that our Board of Directors may deem relevant. Our retained earnings deficit currently limits our ability to pay dividends.

 

Purchases of Equity Securities By the Issuer and Affiliated Purchases

 

There were no issuer purchases of our equity securities during the fiscal year ended December 31, 2011.

 

ITEM 6.                SELECTED FINANCIAL INFORMATION.

 

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.

 

ITEM 7.                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.

 

Forward-Looking Statements and Factors That May Affect Results

 

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Risk Factors.

 

Overview

 

Abtech Holdings was incorporated in the State of Nevada on February 13, 2007 under the name “Laural Resources, Inc.” On February 10, 2011, Abtech Holdings consummated the Merger with AbTech Industries, pursuant to the Merger Agreement. Prior to the Merger, Abtech Holdings 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, Abtech Holdings acquired all of the issued and outstanding common stock of AbTech Industries (through a reverse acquisition transaction) in exchange for the stockholders of AbTech Industries acquiring a 78% ownership interest in Abtech Holdings, AbTech Industries became Abtech Holdings’ majority-owned subsidiary, and Abtech Holdings acquired the business and operations of AbTech Industries.

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on and relates only to AbTech Industries. Prior to the consummation of the Merger, Abtech Holdings 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 Industries’ 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 Industries as the acquirer. The consolidated financial statements of Abtech Holdings included in this annual report on Form 10-K represent a continuation of the financial statements of AbTech Industries, with one adjustment, which is to retroactively adjust the legal capital of AbTech Industries to reflect the legal capital of Abtech Holdings. See Note 1 of the December 31, 2011 Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.

 

Results of Operations

 

We generate revenues by selling water filtration products that treat contaminated water so that it can either be discharged or reused. All of our products include some form of Smart Sponge filtration media, which we manufacture. Our products include a variety of designs and sizes to effectively address many applications where water treatment is needed. In 2011, our Ultra-Urban Filter products accounted for approximately 47% of product sales and our Smart Pak products accounted for approximately 30% of product sales. We sell our products to distributors, contractors and end-users.

 

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Comparison of the years ended December 31, 2011 and 2010

 

Revenue

 

Revenues increased by approximately 24% in 2011 but continued to be adversely impacted by the effects of a worldwide economic downturn that stalled most projects with municipal and other customers. Going forward the Company expects significant sales growth due to improving general economic conditions, maturity of the market for stormwater products, strategic alliances with market dominant strategic partners and an expansion into new markets for produced water and other industrial applications of the Smart Sponge technology. The Company’s new distributor, Waste Management, Inc. (“WMI”), announced in April 2011 that it was launching its entry into the stormwater market and intended to initiate its sales efforts in four pilot market areas in 2011. As of December 31, 2011, WMI had identified and launched sales efforts in three of these pilot areas. While the Company has not yet recognized significant revenue from this distribution arrangement, gradual revenue growth is anticipated in 2012 as the Company and WMI pursue these initial efforts in the pilot market areas and expand into other geographic markets.

 

The sales in both 2011 and 2010 were affected by non-recurring, unusual items. In 2010, approximately 23% of sales were attributable to the sale of Smart Sponge products to one customer who donated the products for deployment in the Gulf of Mexico to treat the massive oil spill that occurred there during the year. In 2011, the Company recorded approximately $77,000 of revenue resulting from the forfeiture of a prepayment made by a distributor in 2007 to secure exclusive geographic marketing rights under a distribution agreement. Under the terms of the distribution agreement, the distributor was allowed to apply the prepaid fee to purchases of AbTech Industries products for a limited period of time. As of December 31, 2011, the distributor forfeited the $77,000 unused balance of the prepayment and the Company recorded it as revenue. Excluding the revenue attributable to this prepayment forfeiture, revenue was approximately $460,000 in 2011 compared to approximately $434,000 in 2010. This increase in revenue of approximately $26,000 is due entirely to the volume and mix of products sold. The Company’s pricing did not change materially during 2011.

 

Gross Margins

 

These unusual transactions in 2011 and 2010 had a favorable impact on gross margins. However, the gross margins of 14.7% and 9.7% for 2011 and 2010, respectively, are well below the gross margins that we would expect if the Company were operating near full capacity. If the Company can spread the overhead costs of operating the facility over a larger base of produced products, the margins would be expected to improve significantly. Our current manufacturing facility is capable of producing approximately 75,000 pounds of Smart Sponge material per month. We estimate that this amount of Smart Sponge material could generate $10-20 million in revenue per year at current product prices. This revenue estimate is dependent on the mix of products actually sold and the portion of sales at distributor versus retail prices. During 2011, we operated at approximately 2% of manufacturing capacity. 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 for at least a portion of 2012.

 

The polymers we use to manufacture Smart Sponge material are produced by the petrochemical industry and use crude oil as a primary raw material. Accordingly, fluctuations in the price of crude oil can have a direct and significant impact on the cost of the polymers we use. During 2010 and most of 2011, we used polymers purchased in bulk prior to 2010. The cost of these polymers represented approximately 5.1% of the list selling price of a typical Ultra Urban Filter (2.5% for antimicrobial version) and approximately 6.3% of the list selling price of a typical Smart Pak insert (3.1% for antimicrobial version). These percentages vary by product sold depending on the size of the product and the amount of Smart Sponge media used in the product. In late 2011, we purchased an additional stock of one of these polymers at a price that was 2.1 times the cost of the same polymer when it was last purchased prior to 2010. With this price change, the cost of polymers as a percentage of list selling price increased to 9.2% for Ultra-Urban Filters (4.5% for antimicrobial version) and 11.5% for Smart Pak inserts (5.7% for antimicrobial version). The Company establishes its list selling prices taking into consideration the cost of the component materials (including polymers), competitive factors and other market conditions. The cost of the polymers used in the Smart Sponge products accounted for approximately 10.6% and 7.1% of the total cost of revenues in 2011 and 2010 respectively. While the Company has no contractual right to pass along fluctuations in raw material costs to customers, it does have the right to change selling prices from time to time by giving distributors 30 days advance notice.

 

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Selling, general and administrative expenses

 

Selling, general and administrative expenses increased by $754,363 (32%) in 2011, compared to 2010. This increase was due in part to the cost of being a public company including $421,000 incurred in 2011 for investor relations activities (no comparable costs incurred in 2010) and auditing fees that were $29,000 higher in 2011 than in 2010. In 2011, the Company began a significant expansion of its business development efforts in line with its strategy of developing alliances with companies that have dominant positions in the specific industry segments targeted by AbTech Industries for distribution of Smart Sponge products. Consulting and payroll fees related to these business development activities increased by approximately $259,000 in 2011 over 2010. The Company also increased advertising expenses and travel and entertainment expenses by $23,000 and $44,000, respectively, in 2011 compared to 2010. The Company also paid executive bonuses in 2011 of $114,000 compared to zero bonuses in 2010.

 

Research and development expenses

 

Research and development efforts in 2010 were focused primarily on attempts to modify Smart Sponge products for easy and effective deployment in treating the Gulf oil spill. In 2011, the Company shifted its R&D focus to new products using the Smart Sponge technology in applications for the treatment of produced water, and other industrial applications. These efforts involved a significant amount of product testing in the lab and in the field with corresponding increased costs for personnel (employees and consultants), fees for lab analysis, equipment rental and travel costs. Costs related to product testing totaled approximately $225,000 in 2011 compared to similar costs in 2010 of approximately $108,000 and were the primary factor in the $129,713 (26%) increase in research and development costs in 2011.

 

Other income (expense)

 

Interest expense increased from $115,568 in 2010 to $2,078,704 in 2011 due largely to a non-monetary, non-recurring charge of $1,620,955 for imputed interest on promissory notes that were converted to common stock on beneficial conversion terms during 2011. (See NOTE 13 – DEBT REPAYMENT in the Consolidated Financial Statements included in Item 8 of this report on Form 10-K.) In addition, the convertible promissory notes issued by the Company during 2011 in the July Offering and the September Offering (see NOTE 14 – PRIVATE PLACMENTS in the Consolidated Financial Statements included in Item 8 of this report on Form 10-K) have interest rates of twelve percent (12%). The interest expense accrued on these notes in 2011 amounted to approximately $126,000. Interest expense was further impacted by the amortization of the deferred charges and imputed note discounts for warrants related to these offerings, that were charged to interest expense in 2011 and amounted to approximately $125,000 and $160,000, respectively.

 

In 2011, the Company settled an outstanding non-interest bearing convertible promissory note with a principal amount due of $495,000, for a cash payment of $380,000. This resulted in a gain of $115,000 which is shown on the consolidated statement of operations under other income. Also shown under other income is a gain in 2011 of $242,052 on the valuation of the warrant liability. The warrant liability represents the estimated bifurcated value of certain warrants issued in conjunction with Secured Notes sold by the Company during 2011. The Company revalues this warrant liability at each balance sheet date using the Black-Scholes valuation model. Any change in value is recorded as a gain/loss on valuation of warrant liability.

 

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Liquidity and Capital Resources

 

Liquidity

 

The Company had a working capital deficiency of approximately $2,645,000 at December 31, 2011 compared to a working capital deficiency of approximately $1,842,000 at December 31, 2010 despite an increase in cash during the period of approximately $1,382,000. This fluctuation in working capital is primarily the result of the additional short-term debt financing that occurred in 2011 which increased short-term debt from approximately $1,587,000 at December 31, 2010 to $4,345,763 at December 31, 2011. The additional short-term debt incurred during 2011 also caused interest payable to increase from $39,904 at December 31, 2010 to $126,232 at December 31, 2011, which further increased the working capital deficiency at December 31, 2011. The working capital deficiency was favorably affected in 2011 by a reduction of approximately $155,000 in the Company’s liability to customers for deposits (prepayments on orders) which resulted from such deposits either being used to purchase products during the year or being forfeited by customers pursuant to contract terms.

 

To date, the Company has not generated sufficient revenue to cover its operating costs and continues to operate with negative cash flow. At December 31, 2011, our cash balance was $1,386,502, significantly higher than the $4,123 balance reported at December 31, 2010, but representing only approximately 4 months of historical negative cash flows from operations. While we expect to achieve significant sales growth over the long-term, continued negative cash flow from operations is expected in the short term.

 

The Company may require additional capital to maintain current operations if sales growth does not occur as anticipated. In addition, rapid growth may require the Company to enter into working capital financing arrangements. The Company currently has no such financing commitments in place.

 

Operations in 2011 and 2010 were funded primarily by proceeds from the issuance of (i) AbTech Industries convertible promissory notes (the “AbTech Notes”), (ii) short-term loans, (iii) Abtech Holdings convertible notes and warrants (the “ABHD Notes”), (iv) AbTech Holdings secured convertible promissory notes and warrants (the “Secured Notes’) and (v) equity investments of $2,320,000 pertaining to the funding requirement of the Merger. These proceeds amounted to $7,322,100 in 2011 and $2,827,865 in 2010.

 

Of the proceeds received in 2011, $500,000 was received from a director of the Company who also was paid $200,000 for repayment of a non-interest bearing convertible note issued by AbTech Industries in 2008. The AbTech Notes are convertible into shares of AbTech Industries’ Series A preferred stock at a conversion rate of $3.75 per share. The Series A preferred stock is convertible into shares of Abtech Holdings common stock at a rate of 5.32 shares of Abtech Holdings common stock for each share of AbTech Industries Series A preferred stock.

 

At December 31, 2011, the principal amount of debt outstanding was $6,946,524, of which $4,700,000 pertains to ABHD Notes and Secured Notes with maturity dates in 2012. In the event that the holders of these notes elect to not convert the notes to ABHD stock at maturity, the Company will be required to raise additional capital in 2012 to repay the notes at maturity or extend the debt maturity dates and incur higher interest rates on the debt. Under the terms of the ABHD Notes and the Secured Notes, the Company may extend the maturity dates by an additional ninety (90) day period (the “First Extension Option”), during which period the interest rate will increase from twelve percent (12%) to fifteen percent (15%) per annum on the unpaid principal of the notes. The Company may also extend the maturity dates by a second additional 90 day period (the “Second Extension Option”) during which period the interest rate will increase to eighteen percent (18%) per annum on the unpaid principal of the notes. Unpaid interest accrued on notes payable as of December 31, 2011 was $126,232.

 

In February 2012, the Company completed the final closing of the private offering of Secured Notes and received $2.6 million (less closing costs) for the additional Secured Notes sold.

 

Our balance sheet at December 31, 2011 shows approximately $528,000 of inventory, a relatively large amount compared to net revenues for 2011 of $537,152. This supply of inventory on hand will mitigate some of the working capital requirements AbTech Industries will encounter in the event it successfully increases sales revenue in 2012. At December 31, 2011, AbTech Industries had customer deposits of $38,505 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.

 

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Operating Activities

 

The Company had negative cash flow from operations in 2011 of approximately $3.9 million compared to negative cash flows from operations of $2.2 million in 2010. The increase in negative operating cash flow from 2010 to 2011 is primarily the result of increased operating expenses in 2011, as discussed above under “– Results of Operations.” The Company’s negative cash flow from operations in 2011 and 2010 is the result of the Company incurring the costs of developing and marketing its products in various targeted markets in advance of the expected resultant sales revenues. The Company believes that as distribution channels mature, economic conditions improve and targeted market applications are proven and accepted, the Company will be able to generate sufficient revenue to generate positive cash flow from operations.

 

Investing Activities

 

The Company had capital expenditures of $11,606 in 2011 and $15,596 in 2010. As of December 31, 2011, the Company had no commitments for future capital expenditures. However, if the Company is successful in achieving significant sales growth in 2012, it may need to expand its manufacturing capacity or outsource some of its manufacturing. The Company believes that developing activities with distributors and new market opportunities for its products make such sales growth possible in 2012 and that such growth is expected to cause the Company to exceed its current manufacturing capacity by the end of 2012. Accordingly, the Company is currently considering both options for expanding manufacturing capacity or outsourcing some of its manufacturing. The Company estimates that it could double its current manufacturing capacity for approximately $250,000 and accommodate an annual sales rate of over $20 million.

 

Financing Activities

 

Net cash provided by financing activities for the years ended December 31, 2011 and 2010 amounted to $5,320,566 and $2,130,182, respectively. The net cash provided by financing activities for the year ended December 31, 2011 includes proceeds of $825,000 from the sale of common stock, and gross proceeds of $6,497,000 from the sale of promissory notes and warrants (less financing costs of $410,000). The Company used a portion of these proceeds to repay $1,996,457 of debt. The promissory notes sold in 2011 are all short-term notes that will mature during 2012 and are convertible into shares of ABHD common stock. The Company’s financing activities in 2012 are expected to include raising capital sufficient to repay any of these notes that are not converted to common stock.

 

Going Concern and Management’s Plans

 

The accompanying December 31, 2011 consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As discussed in Note 2 to the accompanying December 31, 2011 consolidated financial statements, we have not achieved a sufficient level of revenues to support our business and have suffered substantial recurring losses from operations since our inception. These factors raise substantial doubt about the Company’s ability to continue operations as a going concern. The accompanying December 31, 2011 consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern. Management believes that the Company’s ability to continue as a going concern will be dependent on its ability to raise additional capital and/or generate significant sales growth in the short term. The Company’s ability to achieve these objectives cannot be determined at this time. However, the Company did complete the final closing of its private offering of the Secured Notes and warrants in February 2012, which provided gross proceeds of $2,600,000 to the Company. Management’s plans in regard to these matters are described in Note 2 to the accompanying December 31, 2011 consolidated financial statements. If the Company is unable to raise additional capital and/or generate significant sales growth in the near term there is a risk that the Company could default on debt maturing during 2012, and could be required to significantly reduce the scope of its operations if no other means of financing operations are available.

 

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Contractual Obligations

 

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, Abtech Holdings is not required to provide the information required by this item.

 

Off-Balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity, or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk, or credit support to us or engages in leasing, hedging, or research and development services with us.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management re-evaluates its estimates and judgments. 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. For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. Actual results may materially differ from these estimates under different assumptions or conditions.

 

The going concern basis of presentation assumes we will continue in operation throughout the next fiscal year and into the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. As discussed above, certain conditions currently exist which raise substantial doubt upon the validity of this assumption. The financial statements do not include any adjustments that might result from the outcome of the uncertainty.

 

The methods, estimates, interpretations, and judgments we use in applying our most critical accounting policies can have a significant impact on the results that we report in our consolidated financial statements. The SEC considers an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of the entity’s financial condition and results of operations and those that require the entity’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain when estimated.

 

The following discussion provides supplemental information regarding the significant estimates, judgments and assumptions made in implementing the Company’s critical accounting policies.

 

Fair value of warrant liability and note discount

 

The warrant liability shown on the Company’s balance sheet at December 31, 2011 represents the estimated value of warrants sold with promissory notes that met the characteristics of a derivative and were required to be bifurcated from the debt and reported as a liability at fair value. This bifurcation resulted in the establishment of the estimated value of the warrant liability and a corresponding note discount in the same amount. The warrant liability was originally valued and is revalued at each balance sheet date using the Black-Scholes valuation model because there is no market price available for the warrants. This model uses estimates of volatility, risk free interest rate and the expected term of the warrants, along with the current market price of the Company’s common stock, to estimate the value of the outstanding warrants. The value of these warrants can change significantly as the market price of the underlying common stock changes. At each balance sheet date this could result in a gain or loss depending on the change in the market price of the stock, among other factors, from one valuation date to the next. The Company recognized such a gain of $242,052 for the year ended December 31, 2011.

 

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The Company used the following assumptions to estimate the fair value of the warrant liability as of June 30, 2012 and December 31, 2011:

 

   December 31, 2011 
Expected volatility   81.45%
Expected dividend yield   0%
Expected term   2.3-2.5 years 
Risk-free interest rate   0.83%
Market price of common stock  $0.38 

 

The assumptions for expected dividend yield, expected volatility and expected term reflect management’s judgment and include consideration of historical experience. Expected volatility is based on historical volatility of the Company’s shares and the historical volatility of public companies or mutual funds operating in similar markets. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

 

Inventory valuation

 

The Company has written-down its inventory to estimate the lesser of cost or market value of inventory in stock at the valuation date due to obsolescence, slow movement or defects. This estimate requires that management make certain judgments about the likelihood that specific inventory items may have minimal or no realizable value in the future. These judgments are based on the current quantity of the item on hand compared to historical sales volumes, potential alternative uses of the products and the age of the inventory item.

 

Revenue recognition and allowance for doubtful accounts

 

There are four factors that the Company uses to determine the appropriate timing of the recognition of revenue. Three of these factors (evidence of arrangement exists, delivery occurs and fee is fixed or determinable) are generally factual considerations that are not subject to material estimates or assumptions. The fourth factor involves judgment regarding the collectability of the sales price. The Company only ships product when it has reasonable assurance that it will receive payment from the customer. When such assurance is not available, the Company will require payment in advance. The assessment of a customer’s credit worthiness is reliant on management’s judgment regarding such factors as previous payment history, credit rating, credit references and market reputation. If any sales are made that ultimately become uncollectible, the Company charges the uncollected amount against a reserve for uncollectible accounts. This reserve is established and adjusted from time to time based on management’s assessment of each outstanding receivable and the likelihood of it being collected.

 

Stock-based compensation

 

The Company uses the Black-Sholes model to estimate the value of options and warrants issued to employees and consultants as compensation for services rendered to the Company. This model uses estimates of volatility, risk free interest rate and the expected term of the options or warrants, along with the current market price of the underlying stock, to estimate the value of the options and warrants on the date of grant. In addition, the calculation of compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of the stock-based awards is amortized over the vesting period of the awards. For stock-based awards that vest based on performance conditions, expense is recognized when it is probable that the conditions will be met.

 

35
 

 

 

The following table summarizes the weighted average of fair value and the significant assumptions used in applying the Black-Scholes model for options granted in 2011 and 2010:

 

   2011   2010 
Weighted average of fair value for options granted          
AbTech OptionsABHD Options  $-   $0.90 
    0.27    0.12 
Weighted average assumptions used:          
Expected dividend yield   0.0%   0.0%
Expected volatility   81.5%   13.0-15.0% 
Risk-free interest rate   1.9%   2.1%
Expected life (in years)   5.0    8.7 

 

The assumptions for expected dividend yield, expected volatility and expected term reflect management’s judgment and include consideration of historical experience. Expected volatility is based on historical volatility of the Company’s shares and the historical volatility of public companies or mutual funds operating in similar markets. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

 

Accounting for conversion options and imputed interest

 

The convertible promissory notes issued by the Company provide the note holders an option to convert the notes into the Company’s common stock at a set price. The value of these options has not been bifurcated from the value of the related notes because management has determined that such bifurcation is not required under generally accepted accounting principles due to the specific terms of the conversion option and management’s estimate that the underlying shares would not be readily convertible into cash. However, whenever such conversion options represent a right to convert at a price that is less than the market price at the date of issuance, the Company imputes the value of such beneficial conversion feature and charges it to interest expense.

 

ITEM 7A.                QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.

 

ITEM 8.                   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Reference is made to the financial statements, the report of our independent registered public accounting firm, and the notes thereto commencing at page F-1 of this report, which financial statements, report, and notes are incorporated herein by reference.

 

ITEM 9.                 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

36
 

 

ITEM 9A.                CONTROLS AND PROCEDURES.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our principal executive officer and 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) under the Exchange Act) as of December 31, 2011 (the “Evaluation Date”). No system of controls, no matter how well-designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures are designed to provide reasonable assurance that the objective of disclosure controls and procedures are met.

 

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2011, in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods in SEC rules and forms, including a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal accounting control systems are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management’s authorization and are properly recorded, and that accounting records are adequate for preparation of financial statements and other financial information. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

Based on our evaluation under the framework in Internal Control – Integrated Framework issued by COSO, our management concluded that our internal control over financial reporting was effective as of December 31, 2011, in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission.

 

March 26, 2012

 

Glenn R. Rink Lane J. Castleton
President, Chief Executive Officer Vice President, Treasurer, Chief Financial Officer

 

37
 

 

Changes in Internal Control over Financial Reporting

 

Material weaknesses in the Company’s internal control over financial reporting disclosed by Abtech Holdings in reports on Form 10-Q and Form 10-K filed prior to the Merger of AbTech Industries and Abtech Holdings, pertained to the accounting systems, staff and internal controls of Abtech Holdings which are no longer in place. Subsequent to the Merger, the accounting systems and internal controls of AbTech Industries were adopted for all accounting functions of Abtech Holdings and its subsidiaries. In our reports on Form 10-Q filed during 2011, we reported material weaknesses in our disclosure controls and procedures due to the potential weakness caused by the limited segregation of duties achievable with our small accounting staff and the limited review that had previously been completed of our internal controls over financial reporting. The evaluation of internal controls over financial reporting described in Management’s Report on Internal Control over Financial Reporting shown above, revealed that there were no material weaknesses in the Company’s system of internal control over financial reporting and that the potential weaknesses caused by the limited segregation of duties were adequately mitigated by compensating controls and procedures.

 

ITEM 9B.OTHER INFORMATION.

 

There were no items requiring reporting on Form 8-K that were not reported on Form 8-K during the fourth quarter of the year covered by this Form 10-K.

 

PART III

 

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The information required by this item will be set forth in the Company’s Proxy Statement for the 2012 Annual Meeting of Shareholders or in a subsequent amendment to this report. All such information that is provided in the Proxy Statement is incorporated herein by reference.

 

ITEM 11.EXECUTIVE COMPENSATION.

 

The information required by this item will be set forth in the Company’s Proxy Statement for the 2012 Annual Meeting of Shareholders or in a subsequent amendment to this report. All such information that is provided in the Proxy Statement is incorporated herein by reference.

 

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this item will be set forth in the Company’s Proxy Statement for the 2012 Annual Meeting of Shareholders or in a subsequent amendment to this report. All such information that is provided in the Proxy Statement is incorporated herein by reference.

 

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

The information required by this item will be set forth in the Company’s Proxy Statement for the 2012 Annual Meeting of Shareholders or in a subsequent amendment to this report. All such information that is provided in the Proxy Statement is incorporated herein by reference.

 

ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The information required by this item will be set forth in the Company’s Proxy Statement for the 2012 Annual Meeting of Shareholders or in a subsequent amendment to this report. All such information that is provided in the Proxy Statement is incorporated herein by reference.

 

PART IV

 

ITEM 15.                 EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.

 

(a)Financial Statements and Financial Statement Schedules

 

(1)Financial Statements are listed in the Index to Financial Statements on page F-1 of this report.

 

38
 

 

(b)Exhibits

 

2.1   Agreement and Plan of Merger, dated July 17, 2010, by and among the Registrant, Abtech Merger Sub, Inc., and AbTech Industries, Inc. (incorporated by reference to the Registrant’s Current Report on Form 8-K as filed with the SEC on July 22, 2010)
     
2.2   Amendment No. 1 to Agreement and Plan of Merger, dated September 17, 2010, by and among the Registrant, Abtech Merger Sub, Inc., and AbTech Industries, Inc. (incorporated by reference to the Registrant’s Current Report on Form 8-K as filed with the SEC on September 22, 2010).
     
3.1   Certificate of Incorporation (incorporated by reference to the Registrant’s Registration Statement on Form SB-2 filed on July 27, 2007, Registration No. 333-144923)
     
3.2   Articles of Incorporation (incorporated by reference to the Registrant’s Registration Statement on Form SB-2 filed on July 27, 2007, Registration No. 333-144923)
     
3.3   Bylaws (incorporated by reference to the Registrant’s Registration Statement on Form SB-2 filed on July 27, 2007, Registration No. 333-144923)
     
3.4   Amendment to Articles of Incorporation (incorporated by reference to the Registrant’s Current Report on Form 8-K as filed with the SEC on June 16, 2010)
     
4   Stock Specimen (incorporated by reference to the Registrant’s Registration Statement on Form SB-2 filed on July 27, 2007, Registration No. 333-144923)
     
10.1   Transfer Agent Agreement (filed as Exhibit 10.1 to our Annual Report on Form 10-K filed on March 30, 2012 and incorporated herein by reference.)
     
10.2   Employment Agreement dated May 13, 2009, by and between Glenn R. Rink and AbTech Industries, Inc. (filed as Exhibit 10.2 to our current report on Form 8-K filed on February 14, 2011 and incorporated herein by reference)
     
10.3   Employment Agreement dated May 13, 2009, by and between Lane J. Castleton and AbTech Industries, Inc. (filed as Exhibit 10.3 to our current report on Form 8-K filed on February 14, 2011 and incorporated herein by reference)
     
10.4   Form of Indemnification Agreement between Abtech Holdings, Inc. and each member of its Board of Directors. (filed as Exhibit 10.4 to our current report on Form 8-K filed on February 14, 2011 and incorporated herein by reference)
     
10.5   Independent Contractor Agreement dated May 1, 2010, by and between Gordon Brown and AbTech Industries, Inc. (filed as Exhibit 10.5 to our current report on Form 8-K filed on February 14, 2011 and incorporated herein by reference)
     
10.6   AbTech Industries, Inc. 2007 Stock Plan (filed as Exhibit 10.6 to our current report on Form 8-K filed on February 14, 2011 and incorporated herein by reference)
     
10.7   Form of AbTech Industries, Inc. 2007 Incentive Stock Option Agreement (filed as Exhibit 10.7 to our current report on Form 8-K filed on February 14, 2011 and incorporated herein by reference)
     
10.8   Form of AbTech Industries, Inc. 2007 Non-qualified Stock Option Agreement (filed as Exhibit 10.8 to our current report on Form 8-K filed on February 14, 2011 and incorporated herein by reference)
     
10.9   Form of AbTech Industries, Inc. Warrant Agreement (filed as Exhibit 10.9 to our current report on Form 8-K filed on February 14, 2011 and incorporated herein by reference)

 

39
 

 

21   List of Subsidiaries (filed as Exhibit 21 to our Annual Report on Form 10-K filed March 30, 2012 and incorporated herein by reference)
     
24.1   Power of Attorney (Included on the Signature Page of our Annual Report on Form 10-K filed March 30, 2012)
     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
     
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
     
32**   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.SCH***   XBRL Taxonomy Extension Schema Document
101.CAL***   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF***   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***   XBRL Taxonomy Extension Label Linkbase Document
101.PRE***   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

*Filed Herewith
**Furnished Herewith
***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.

 

40
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

  ABTECH HOLDINGS, INC.
       
Date: February 1, 2013     By: /s/ Glenn R. Rink
      Glenn R. Rink
      Chief Executive Officer,
      President and Director

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date: February 1, 2013 By: /s/ Glenn R. Rink
    Glenn R. Rink
    Chief Executive Officer,
    President and Director
     
Date: February 1, 2013 By: /s/ Lane J. Castleton
    Lane J. Castleton
    Chief Accounting Officer, Chief Financial
    Officer, Vice President and Treasurer
     
Date: February 1, 2013 By: /s/ *
    Olivia H. Farr, Director and Corporate
    Secretary
     
Date: February 1, 2013 By: /s/ *
    David Greenwald, Director
     
Date: February 1, 2013 By: /s/ *
    A. Judson Hill, Director
     
Date: February 1, 2013 By: /s/ *
    Jonathan Thatcher, Director
     
Date: February 1, 2013 By: /s/ *
    Karl Seitz, Director
     
Date: February 1, 2013 By: /s/ Steven W. Kohlhagen
    Steven W. Kohlhagen, Director

 

  *By: /s/ Lane J. Castleton
    Lane J. Castleton, as attorney-in-fact

 

41
 

  

ABTECH HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2011 AND 2010

 

 

 

CONTENTS

 

Report of Independent Registered Public Accounting Firm   2
     
Consolidated Balance Sheets   3
     
Consolidated Statements of Operations   4
     
Consolidated Statements of Stockholders’ Deficiency   5
     
Consolidated Statements of Cash Flows   6
     
Notes to the Consolidated Financial Statements   7 – 30

 

F-1
 

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders of

Abtech Holdings, Inc. and Subsidiary

 

We have audited the accompanying consolidated balance sheets of Abtech Holdings, Inc. and subsidiary as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders’ deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Abtech Holdings, Inc. and subsidiary at December 31, 2011 and 2010, and the results of its operations, stockholders’ deficiency, and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred substantial net losses in recent years resulting in a significant accumulated deficit. This factor raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Semple, Marchal & Cooper, LLP

Certified Public Accountants

Phoenix, Arizona

 

March 30, 2012, except for Note 18, as to which the date is July 24, 2012

 

F-2
 

 

ABTECH HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,

 

 

 

   2011   2010 
ASSETS          
Current assets          
Cash and cash equivalents  $1,386,502   $4,123 
Accounts receivable – trade, net   108,170    36,642 
Accounts receivable – related party, net   2,032    13,044 
Inventories, net   528,009    569,042 
Deferred charges, net   439,203    20,028 
Prepaid expenses and other current assets   37,988    76,759 
Total current assets   2,501,904    719,638 
           
Fixed assets, net   49,485    65,514 
Security deposits   17,977    17,977 
Deferred charges, net   15,020    22,673 
Total assets  $2,584,386   $825,802 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY     
Current liabilities          
Accounts payable  $483,879   $629,470 
Accounts payable – related party   29,703    7,736 
Loans from shareholders   9,000    180,500 
Notes payable   -    21,000 
Convertible promissory notes, net of discounts   3,758,082    208,679 
Convertible promissory notes – related party, net of discounts   578,681    1,156,000 
Customer deposits   38,505    193,180 
Accrued interest payable   126,232    39,904 
Accrued expenses   122,790    125,557 
Total current liabilities   5,146,872    2,562,026 
           
Due to related party   101,524    106,601 
Convertible promissory notes   155,000    1,375,865 
Convertible promissory notes – related party   1,881,000    2,581,001 
Warrant liability   498,976    - 
Total liabilities   7,783,372    6,625,493 
           
Commitments and contingencies          
           
Stockholders’ deficiency          
Preferred stock , $0.01 par value; 5,000,000 shares authorized; 3,500,000 shares designated as Series A Convertible Preferred Stock, no liquidation preference; 1,589,775 shares issued and outstanding at December 31, 2010   -    15,898 
Common stock, $0.001 par value; 300,000,000 authorized shares; 47,160,435 and 49,249,674 shares issued and outstanding at December 31, 2011 and 2010, respectively   47,160    30,786 
Additional paid-in capital   24,651,344    18,665,312 
Non-controlling interest   (1,674,105)   - 
Accumulated deficit   (28,223,385)   (24,511,687)
Total stockholders’ deficiency   (5,198,986)   (5,799,691)
Total liabilities and stockholders’ deficiency  $2,584,386   $825,802 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3
 

 

ABTECH HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,

 

 

 

   2011   2010 
         
Net revenues  $537,152   $381,517 
Net revenues – related party   -    52,141 
Total net revenues   537,152    433,658 
           
Cost of revenues   458,006    391,675 
Gross profit   79,146    41,983 
           
Operating expenses          
Selling, general and administrative   3,107,596    2,353,233 
Research and development   634,109    504,396 
Total operating expenses   3,741,705    2,857,629 
           
Operating loss   (3,662,559)   (2,815,646)
           
Other income (expense)          
Interest expense   (2,078,704)   (115,568)
Gain on extinguishment of debt   115,000    - 
Gain on valuation of warrant liability   242,052    - 
Other income (expense)   (1,592)   (27,201)
Total other income (expense), net   (1,723,244)   (142,769)
           
Net loss before income taxes   (5,385,803)   (2,958,415)
           
Provision for income taxes   -    - 
Net loss   (5,385,803)   (2,958,415)
Net loss attributable to non-controlling interest   (489,655)   - 
Net loss attributable to controlling interest  $(4,896,148)  $(2,958,415)
           
Basic and diluted loss per common share  $(0.11)  $(0.10)
           
Basic and diluted weighted average number of shares outstanding   44,160,713    30,017,868 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4
 

 

ABTECH HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY

 

 

 

   Preferred Stock   Common Stock   Additional       Non-     
   Shares   Amounts   Shares   Amounts   paid-in
capital
   Accumulated
deficit
   controlling
interest
   Total 
Balance at December 31, 2009   1,510,875   $15,109    29,264,022   $29,264   $16,617,501   $(21,553,272)   -   $(4,891,398)
Stock-based compensation expense                       239,265              239,265 
Common stock issued for services             27,034    27    19,953              19,980 
Preferred stock of subsidiary issued for debt conversion   66,667    667              249,333              250,000 
Interest paid in preferred shares of subsidiary   12,233    122              45,755              45,877 
Advances received pre-merger             1,495,000    1,495    1,493,505              1,495,000 
Net loss                            (2,958,415)        (2,958,415)
Balance at December 31, 2010   1,589,775   $15,898    30,786,056    30,786    18,665,312    (24,511,687)   -    (5,799,691)
Shares issued to effect reverse merger             10,000,000    10,000    (10,000)             - 
Preferred shares of subsidiary converting at merger   (150,161)   (1,502)   799,424    799    703              - 
Preferred shares of subsidiary that did not convert at merger   (1,439,614)   (14,396)             14,396    1,184,450    (1,184,450)   - 
Shares issued for conversion of debt at merger             1,919,320    1,919    1,347,372              1,349,291 
Shares issued for debt conversion post-merger             3,065,004    3,065    1,732,119              1,735,184 
Stock-based compensation expense                       135,545              135,545 
Common stock issued for cash             825,000    825    824,175              825,000 
Common stock issued for services             449,931    450    320,083              320,533 
Shares forfeited and cancelled             (684,300)   (684)   684              - 
Beneficial conversion feature of new debt                       1,620,955              1,620,955 
Net loss                            (4,896,148)   (489,655)   (5,385,803)
Balance at December 31, 2011   -   $-    47,160,435   $47,160   $24,651,344   $(28,223,385)   (1,674,105)  $(5,198,986)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5
 

 

ABTECH HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,

 

 

   2011   2010 
Operating Activities          
Net loss  $(5,385,803)  $(2,958,415)
Adjustments to reconcile net loss attributable to controlling interest to net cash used in operating activities          
Depreciation and amortization   27,635    47,452 
Common stock issued for services rendered   320,533    19,980 
Stock-based compensation expense   135,546    239,265 
Preferred stock of subsidiary issued for interest on notes payable   20,784    45,877 
Interest related to beneficial conversion feature   1,620,955    - 
Income from forgiveness of debt   (115,000)   - 
Note discount amortized as interest   159,657    - 
Deferred charges expensed as interest   142,836    - 
Gain on change in fair value of warrant liability   (242,052)   - 
Changes in operating assets and liabilities:          
Accounts receivable, net   (60,516)   (4,709)
Inventories, net   41,033    12,082 
Prepaid expenses and other current assets   38,771    1,905 
Deferred charges, net   (436,222)   - 
Accounts payable   (123,624)   309,505 
Customer deposits   (154,675)   (3,928)
Accrued interest payable   86,328    17,199 
Accrued expenses   (2,767)   54,414 
Net cash used in operating activities   (3,926,581)   (2,219,373)
           
Investing Activities          
Purchases of fixed assets   (11,606)   (15,596)
Net cash used in investing activities   (11,606)   (15,596)
           
Financing Activities          
Proceeds from issuance of common stock   825,000    1,495,000 
Proceeds from borrowings from shareholders   -    41,000 
Repayment of borrowings   (1,924,957)   (551,321)
Repayment of borrowings from shareholders   (71,500)   (141,500)
Proceeds from notes payable   6,497,100    1,291,865 
Net decrease in due to related party   (5,077)   (4,862)
Net cash provided by financing activities   5,320,566    2,130,182 
           
Net change in cash and cash equivalents   1,382,379    (104,787)
Cash and cash equivalents at beginning of period   4,123    108,910 
Cash and cash equivalents at end of period  $1,386,502   $4,123 
           
Supplemental cash flow information:          
Cash paid for interest  $43,642   $43,343 
Cash paid for income taxes  $-   $- 
Noncash investing and financing activities:          
Preferred stock of subsidiary issued for conversion of debt, including accrued interest  $3,084,474   $295,877 
Common stock and warrants issued for services  $456,079   $19,980 
Beneficial conversion feature recorded to additional paid-in capital  $1,620,955   $- 
Preferred shares of subsidiary not converting at merger  $1,184,450   $- 
Unamortized portion of debt discount  $463,235   $- 
Portion of debt discount in deferred charges  $118,136   $- 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6
 

 

ABTECH HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements

 

 

 

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

 

Organization and Description of Business

 

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 (the “Merger”) on February 10, 2011. 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 12 – Reverse Acquisition Transaction). The preferred stockholders of AbTech Industries 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 December 31, 2011.

 

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 consolidated financial statements also has been retroactively adjusted to reflect the legal capital of the Company, except that the number of shares of preferred stock of AbTech outstanding prior to the Merger are shown as the actual number of shares of preferred stock outstanding.

 

The Company is an environmental technologies firm that provides innovative solutions to address issues of water pollution. The Company 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. The Company 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 by the Company 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.

 

The Company operates in one business segment which is the filtration and treatment of polluted water.

 

F-7
 

 

Summary of Significant Accounting Policies

 

Basis of Financial Statement PresentationThe consolidated financial statements include the accounts of ABHD, AbTech and ESC. Intercompany accounts and transactions have been eliminated. The shares of preferred stock of AbTech outstanding prior to the merger are shown in the consolidated financial statements at their actual share amounts without giving effect to the potential of these shares to convert to shares of ABHD common stock. After the Merger, the shares of preferred stock that have not converted to shares of ABHD common stock represent the minority interest shown on the Consolidated Balance Sheet. The 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 December 31, 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.

 

Cash and Cash Equivalents – The Company considers all highly liquid debt instruments with a maturity of three months or less when acquired to be cash and cash equivalents.

 

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates are used in determining the allowance for doubtful accounts and inventory allowance, in valuing the warrant liability, beneficial conversion features, stock-based compensation and stock issued in the reverse merger and in determining the classification of conversion options embedded in convertible promissory notes. Due to the uncertainties inherent in the formulation of accounting estimates, and the significance of these items, it is reasonable to expect that the estimates in connection with these items could be materially revised within the next year.

 

Concentration of Credit Risk – Credit risk represents the accounting loss that would be recognized at the reporting date if counter parties failed completely to perform as contracted. Concentrations of credit risk that arise from financial instruments exist for groups of customers or counter parties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions described below.

 

·Cash and cash equivalents – Financial instruments that subject the Company to credit risk are cash balances maintained in excess of federal depository insurance limits. At December 31, 2011, the Company had $251,249 in cash or cash equivalent balances which were not guaranteed by the Federal Deposit Insurance Corporation. To date, the Company has not experienced any losses in such accounts and believes the exposure is minimal.
·Major customers and accounts receivable – Major customers represent any customer that accounts for more than 10% of revenues for the year. During 2011, the Company had two customers that accounted for 29% and 15%, respectively, of revenues and whose accounts receivable balances (unsecured) accounted for approximately 0% and 42%, respectively, of accounts receivable at December 31, 2011. During 2010, the Company had one customer that accounted for 23% of its revenues and whose accounts receivable balance (unsecured) accounted for approximately 12% of accounts receivable at December 31, 2010.

 

F-8
 

 

·Supplier – Major suppliers represent any vendor that accounts for more than 10% of purchases for the year. During 2011, the Company had two vendors that accounted for 34% and 41%, respectively, of its purchases. Neither of these vendors had an accounts payable balance at December 31, 2011. During 2010, the Company had two vendors that each accounted for more than 10% of its purchases at 14% and 11%, respectively. Neither of these vendors had an accounts payable balance at December 31, 2010.

 

Fair Values of Financial Assets and Liabilities– The Company measures and discloses certain financial assets and liabilities at fair value. Authoritative guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Authoritative guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company estimates fair value of the warrant liability using the Black-Scholes valuation model. Significant assumptions were determined as follows:

 

Expected term is determined under the simplified method using an average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available;
Expected volatility is measured using the historical weekly changes in the market price of the Company’s common stock, disregarding identifiable periods of time in which share price was extraordinarily volatile due to certain events that are not expected to recur during the expected term;
Risk-free interest rate is to approximate the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards; and,
Forfeitures are based on the history of cancellations of warrants granted by the Company and management’s analysis of potential future forfeitures.

 

Inventories – Inventories are stated at the lower of cost or market, with cost computed on an average cost method which approximates the first-in, first-out basis. Inventory costs include raw materials, direct labor and manufacturing overhead. Provision is made for obsolete, slow-moving or defective items where appropriate. The amount of any provision is recognized as an expense in the period the provision occurs.

 

Warranty Accrual – The Company’s products are subject to warranty periods of one year or less. The warranty accrual is based on management’s best estimate of expected costs associated with product failure and historical product failures. The Company has not incurred any significant warranty claims to date.

 

Fixed Assets – Fixed assets, stated at cost, are depreciated on the straight-line method for financial statement reporting purposes, over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvement costs are depreciated over the shorter of the lease term or their useful life. Repairs and maintenance costs are expensed as incurred. Betterments or renewals are capitalized when they occur.

 

F-9
 

 

Deferred Charges – Deferred charges are costs incurred in connection with the issuance of debt. These costs are capitalized as an asset and amortized over the term of the debt using the effective interest method. Amortization expense related to these deferred charges totaled $142,836 in 2011 and $20,029 in 2010.

 

Revenue Recognition – The Company recognizes revenue only when all of the following criteria have been met:

 

Persuasive evidence of an arrangement exists;
Delivery has occurred or services have been rendered;
The fee for the arrangement is fixed or determinable; and
Collectability is reasonably assured.

 

Persuasive Evidence of an Arrangement – The Company documents all terms of an arrangement in a quote signed or confirmed by the customer prior to recognizing revenue.

 

Delivery Has Occurred or Services Have Been Performed – The Company performs all services or delivers all products prior to recognizing revenue. Services are considered to be performed when the services are complete.

 

The Fee for the Arrangement is Fixed or Determinable – Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the quote or accepted customer purchase order.

 

Collectability Is Reasonably Assured – Collectability is assessed on a customer by customer basis based on criteria outlined by management.

 

In 2011 and 2010, the Company recognized revenue from the sale of its Smart Sponge and Smart Sponge Plus products, including Ultra-Urban Filters, Line Skimmers, Passive Skimmers and Smart Paks. The Smart Paks are usually sold as a component of an engineered system such as an end-of-pipe vault or other larger multi-product treatment train. The Company provides engineering design services on some engineered solutions but does not perform any major installation of such systems. Revenue from design services are recognized at the time the engineering services are completed. The Company recognizes shipping and handling fees as revenue and the related expenses as a component of cost of sales. All internal handling charges are charged to selling, general and administrative expenses.

 

The payment terms for sales made to distributors vary based on the credit worthiness of the particular vendor and the size of the order. Some orders require prepayment of up to 50% at the time the order is received, others require payment in full before shipping and others are made on terms requiring payment within 30 days of the date of shipment. Distributors do not have a right of return for products purchased from the Company. The Company may on occasion allow a return under appropriate conditions to promote good business practices, however, such returns have been and are expected to be minimal. Regardless of when payment is received from the distributor, revenues are recognized in accordance with the criteria for revenue recognition described above.

 

F-10
 

 

Allowance for Doubtful Accounts – The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances are calculated based on a detailed review of individual customer accounts, historical rates and an estimation of the overall economic conditions affecting the Company’s customer base. The Company reviews a customer’s credit history before extending credit. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The allowance for doubtful accounts was $16,600 at December 31, 2011 and $14,600 at December 31, 2010.

 

Customer Deposits – The Company receives from some distributors a one-time fee for the exclusive distribution rights to its products. In some cases, this nonrefundable fee represents a prepayment by the distributor for future product purchases. In such cases the deposit is recognized as revenue when products are shipped and the risks and rewards of ownership have been transferred or when the distributor forfeits the prepayment, in accordance with the terms of the distribution agreement.

 

Cost Recognition – Cost of revenues includes all direct material and labor costs and those indirect costs of bringing raw materials to sale condition, including depreciation of equipment used in manufacturing and shipping and handling costs. Selling, general, and administrative costs are charged to operating expenses as incurred. Research and development costs are expensed as incurred and are included in operating expenses. Advertising costs are expensed as incurred. Total advertising costs for 2011 and 2010 were $23,792 and $14,811, respectively.

 

Long-Lived Assets – The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. When indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount, the Company measures the amount of such impairment by comparing the assets' carrying value to the assets' present value of the expected future discounted cash flows. Impairment charges, if any, are recorded in the period realized.

 

Income Taxes –Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce a deferred tax asset to the amount expected to be realized. The Company assesses its ability to realize deferred tax assets based on current earnings performance and on projections of future taxable income in the relevant tax jurisdictions. These projections do not include taxable income from the reversal of deferred tax liabilities and do not reflect a general growth assumption but do consider known or pending events, such as the passage of legislation. The Company’s estimates of future taxable income are reviewed annually. All tax positions are first analyzed to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis, the tax benefit is measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last four years.

 

If the Company is required to pay interest on the underpayment of income taxes, the Company recognizes interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.

 

F-11
 

 

If the Company is subject to payment of penalties, the Company recognizes an expense for the amount of the statutory penalty in the period when the position is taken on the income tax return. If the penalty was not recognized in the period when the position was initially taken, the expense is recognized in the period when the Company changes its judgment about meeting minimum statutory thresholds related to the initial position taken.

 

Stock-Based Compensation – All share-based payments to employees, including grants of employee stock options, are expensed based on their estimated fair values at grant date, in accordance with ASC 718.

 

Compensation expense for stock options is recorded over the vesting period using the estimated fair value on the date of grant, as calculated by the Company using the Black-Scholes model. The Company classifies all share-based awards as equity instruments and recognizes the vesting of the awards ratably over their respective terms.

 

See Note 11 for a description of the Company’s share-based compensation plan and information related to awards granted under the plan.

 

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 Industries by AbTech Holdings. 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 (see Notes 10 and 11), and total 31,667,254 shares at December 31, 2011 and 19,271,902 shares at December 31, 2010.

 

Conversion Options – The Company bifurcates conversion options embedded in financial instruments and accounts for them at fair value when required. The Company has determined that none of its embedded conversion options require bifurcation.

 

Imputed Interest – A note issued solely for cash equal to its face amount is presumed to earn the stated rate of interest. However, in some cases the parties may also exchange unstated (or stated) rights or privileges, which are given accounting recognition by establishing a note discount or premium account. In such cases, the Company imputes interest when required.

 

Reverse Acquisition – The Company has accounted for the reverse acquisition discussed above in accordance with ASC 805-40 (Reverse Acquisitions). The 10,000,000 shares of ABHD outstanding immediately prior to the reverse acquisition represent the consideration transferred for the merger.

 

Recent Accounting Pronouncements

 

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2011, that are of significance, or potential significance, to the Company.

 

In December 2010, the FASB issued authoritative guidance clarifying the determination of the impairment of goodwill and the related calculation of that impairment (“Step 2”) when entities have reporting units with zero or negative carrying amounts. For entities with reporting units with zero or negative carrying values, Step 2 is required if it is more likely than not that a goodwill impairment exits. The adoption of this guidance had no material effect on the Company’s financial statements.

 

F-12
 

 

In May 2011, the FASB issued authoritative guidance regarding measurement of fair value and for disclosing information about fair value measurements. Application of the highest and best use and valuation premise concepts are clarified for use in measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities. New disclosures should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. This guidance becomes effective for the Company for fiscal years and interim periods within those years beginning in 2012. The Company does not anticipate adoption of this guidance will have a material effect on the Company’s financial statements.

 

In September 2011, the FASB issued authoritative guidance providing the option to first assess qualitative factors when testing goodwill for impairment. Entities have the option to first evaluate qualitative factors to determine whether the existence of events or circumstances, that in totality, would be more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative evaluation determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This guidance becomes effective for the Company for fiscal years and interim periods within those years beginning in 2012. The Company does not anticipate adoption of this guidance will have a material effect on the Company’s financial statements.

 

NOTE 2 – GOING CONCERN

 

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. As shown in the consolidated financial statements, the Company has incurred ongoing net losses since inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company’s product development activities and the costs of introducing its technologies to the market and pursuing market acceptance. In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

Management believes that the Company’s ability to continue as a going concern will be dependent on its ability to raise additional capital and/or generate significant sales growth in the short term. The Company’s ability to achieve these objectives cannot be determined at this time. Management’s plans in regard to these matters are described as follows:

 

Sales and Marketing. Historically, the Company has selected qualified distributors to represent its products in key geographic markets. The recent economic downturn and other factors have led to a significant contraction in sales revenue as municipalities, the Company’s primary customers, experienced severe budgetary and financial constraints. In an attempt to reinvigorate sales, the Company has redirected its focus on multiple market segments and has revised its go-to-market strategy by disengaging distributors with exclusive geographic territories, in favor of new alliances with larger, market-dominant companies to cover entire market segments such as municipal stormwater, federal facilities and industrial process water. In early 2011, the Company signed its first such distribution agreement with Waste Management, Inc., a company that has a major presence in the public sector market. Under this distribution agreement, market rollout was initiated in three market areas during 2011 and is planned to move into other areas of the country during 2012. The Company is also making efforts to expand into specific foreign markets and new markets addressing treatment of contaminated water.

 

F-13
 

 

Financing. To date, the Company has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. During 2011, the Company raised $825,000 in a private offering of common stock, raised $1,722,100 in a series of transactions that allowed the Company to repay or convert to stock approximately $1,350,000 of debt, raised $700,000 in a private offering of convertible promissory notes and raised $4,000,000 in a private offering of secured convertible promissory notes. In February, 2012, the Company received an additional $2,600,000 in the final closing of the private offering of secured convertible promissory notes. Management believes that with continued field validation successes, an improving economy, federal regulatory approval of the Company’s antimicrobial technologies, and new strategic alliances with companies that are dominant in key market sectors, sales revenue can grow rapidly, thus enabling the Company to reverse its negative cash flow and raise additional capital as needed. There is no assurance that the Company can achieve sustainable operations or that additional capital, if needed, will be available on acceptable terms.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

 

NOTE 3 - INVENTORIES

 

Inventories consist of the following at December 31:

 

   2011   2010 
Raw materials  $76,381   $85,711 
Work in process   446,538    394,540 
Finished goods   106,625    221,791 
Reserve for obsolescence   (101,535)   (133,000)
Total  $528,009   $569,042 

 

NOTE 4 - FIXED ASSETS

 

Fixed assets consist of the following at December 31:

 

   2011   2010 
Furniture and fixtures  $128,093   $128,093 
Computer equipment   61,831    58,231 
Machinery and equipment   250,986    242,980 
Leasehold improvements   19,348    19,348 
Total   460,258    448,652 
Less accumulated depreciation   (410,773)   (383,138)
Net book value  $49,485   $65,514 

 

F-14
 

 

Depreciation expense charged to operations during 2011 and 2010 was $27,635 and $27,423, respectively.

 

NOTE 5 - COMMITMENTS

 

Capital Leases – As of December 31, 2011 and 2010 the Company had no assets under capital lease.

 

Operating Leases – The Company leases office and warehouse space, office equipment and an automobile under various noncancelable operating leases that extend through February 2013. Total rental expense charged to operations during the years ended December 31, 2011 and 2010 were $271,906 and $259,944, respectively. Future annual minimum lease payments for the next five years, under noncancelable operating leases with initial or remaining terms of one year or more, as of December 31, 2011, are as follows: 2012: $273,008; and 2013: $29,278; Total: $302,286.

 

Indemnification Agreements - The Company enters into indemnification provisions under its agreements with officers and directors and companies in its ordinary course of business, typically with business partners, customers, landlords, lenders and lessors. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2011.

 

Other Commitments – The Company has other commitments for consulting fees that extend through 2012 amounting to $90,400. These commitments are cancellable on 15-30 days’ notice.

 

NOTE 6 - LOANS FROM SHAREHOLDERS

 

Loans from shareholders at December 31, 2011 and 2010 consist of one and four, respectively, short-term loans made by Directors of the Company to the Company or its subsidiary, ESC with balances of $9,000 and $180,500 respectively. These loans are unsecured and the single loan remaining as of December 31, 2011 was non-interest bearing and “due on demand.”

 

NOTE 7 - RELATED PARTY TRANSACTIONS

 

Accounts receivable; related party – represents amounts due from distributors owned by certain ABHD stockholders. Management deems the remaining balance at December 31, 2011, net of reserves taken, to be collectible.

 

F-15
 

 

Royalty Agreement – In 2009, the Company entered into a Royalty Agreement (the “Agreement”) with Hydrophix of California (“Hydrophix”), a distributor owned by two stockholders of the Company. The Agreement requires the Company to pay to Hydrophix a royalty equal to 5-10% of revenues generated by AbTech on certain products sold by AbTech, up to a maximum total royalty of $1,086,000. The first $104,665 of royalties due under the Agreement is to be retained by AbTech as payment for outstanding amounts due from Hydrophix. The term of the Agreement is ten years or the date on which total royalty payments reach $1,086,000. As of December 31, 2011, $1,906 of royalties had been earned by Hydrophix and applied under this Agreement to amounts due from Hydrophix. The remaining $102,759 due from Hydrophix, that is to be offset by future royalties payments due under the Agreement, is included in “Prepaids and other current assets” net of a $77,000 reserve.

 

Due to related party – represents amounts owed to a related company for services provided in the form of office and clerical support, and cash advances. On December 31, 1998, the Company executed a loan document in the amount of $127,353, with an original maturity date of December 31, 2003 (extended to December 31, 2013), with interest accruing at the rate of 5% per annum until the loan is paid in full. In the event of default of principal or interest, the entire unpaid balance, including principal and interest, will be due and payable without notice, with interest accruing at 8% from the date of default.

 

Convertible Promissory Notes – In 2011, director purchase a Convertible Note and accompanying warrant for 333,333 shares, for $500,000 in the July Offering (see Note 14 – PRIVATE PLACEMENTS). $200,000 of the purchase price was remitted in the form of a non-interest bearing Senior Convertible Promissory Note due from AbTech Industries in the amount of $200,000. In 2011, a Convertible Note held by this director in the principal amount of $100,000 was purchased by another investor and converted with interest into 198,980 shares of Company common stock. Refer to Note 10 – CONVERTIBLE PROMISSORY NOTES for a summary of debt held by related parties at December 31, 2011 and 2010.

 

Equity- In 2011, the Company granted 16,000 shares of common stock to a director for financial services provided by the director to the company. The shares were valued at $0.42 per shares and recorded as stock issued for services.

 

Stock Options – All of the 4,734,300 stock options granted by the Company in 2011 were granted to directors and officers of the company (see Note 11 – STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION).

 

NOTE 8 – ACCRUED EXPENSES

 

Accrued expenses consist of the following at December 31:

 

   2011   2010 
Accrued payroll  $62,180   $53,860 
Deferred rent   21,941    36,172 
Accrued vacation   32,692    26,307 
Accrued warranty reserve   5,000    5,000 
Other accruals   977    4,218 
   $122,790   $125,557 

 

NOTE 9 - INCOME TAXES

 

There is no current or deferred tax expense for the years ended December 31, 2011 and 2010 due to the Company’s loss position and the full reserve taken on the Company’s deferred tax asset in both years.

 

F-16
 

 

A reconciliation of statutory rates is as follows at December 31:

 

   2011   2010 
Statutory Rate   34.0%   34.0%
State income taxes, net of federal income tax benefit   5.0%   5.0%
Reduction in valuation allowance related to net operating loss carry-forwards and change in temporary differences   -39.0%   -39.0%
    0.0%   0.0%

 

The tax effects of temporary differences that give rise to deferred tax assets (liabilities) are as follows at December 31:

 

   2011   2010 
Deferred tax assets (liabilities):          
Net operating loss carryforwards  $10,447,000    9,154,000 
Accumulated depreciation   (13,000)   (13,000)
Less valuation allowance   (10,434,000)   (9,141,000)
Net deferred tax assets  $-    - 

 

During the years ended December 31, 2011 and 2010, net deferred tax benefit was approximately $1,293,000 and $520,000, respectively. At December 31, 2011 and 2010, the Company has federal loss carryforwards of approximately $27.9 million and $24.6 million, respectively, and state loss carryforwards of approximately $12.5 million and $9.6 million, respectively, which are available to reduce future taxes, if any. These net operating loss carryforwards expire through 2031 and 2016, respectively. The net change in the total valuation allowance for the years ended December 31, 2011 and 2010 was a net increase of approximately $1,293,000 and $520,000, respectively. Based on the Company’s loss position and projection of future taxable income, management believes that it is more likely than not that the Company will not fully realize the benefit of its net deferred tax assets. Pursuant to Internal Revenue Code Section 382, annual utilization of the Company’s net operating loss carryforwards may be limited if a cumulative change in ownership of more than 50% is deemed to occur within any three-year period. The Company believes that the Reverse Acquisition Transaction will not cause any limitation on future utilization of net operating loss carryforwards.

 

NOTE 10 – CONVERTIBLE PROMISSORY NOTES

 

At December 31, 2011 and December 31, 2010 the Company had promissory notes outstanding of $6,372,763 and $5,321,545, respectively, convertible into shares of the Company’s common stock. The conversion rate, interest rate and maturity dates of the notes outstanding at December 31, 2011 are shown in the table below:

 

Type of Financing  Principal
Amount
   Interest
Rate
   Conversion
Rate
   Maturity Date
Related Party                  
Junior Convertible Notes  $100,000    0%  $0.50   9/30/2011
Senior Convertible Notes   750,000    0%  $0.70   3/31/2013
Senior Convertible Notes   400,000    0%  $0.70   7/7/2013
Senior Convertible Notes   200,000    0%  $0.70   12/19/2013

 

F-17
 

 

Type of Financing  Principal
Amount
   Interest
Rate
   Conversion
Rate
   Maturity Date
Senior Convertible Notes   325,000    0%  $0.70   2/3/2014
Senior Convertible Notes   200,000    0%  $0.70   4/16/2014
Senior Convertible Notes   6,000    0%  $0.70   5/11/2014
ABHD Convertible Notes   500,000    12%  $0.60   4/30/2012
Unamortized discount on ABHD Convertible Notes   (21,319)             
Subtotal - related party   2,459,681              
Non-related party                  
Senior Convertible Note   55,000    0%  $0.70   4/8/2014
Senior Convertible Notes   100,000    0%  $0.70   11/25/2014
ABHD Convertible Notes   200,000    12%  $0.60   4/30/2012
Secured ABHD Notes   25,000    12%  $0.70   5/15/2012
Secured ABHD Notes   25,000    12%  $0.70   5/18/2012
Secured ABHD Notes   50,000    12%  $0.70   5/22/2012
Secured ABHD Notes   550,000    12%  $0.70   6/3/2012
Secured ABHD Notes   675,000    12%  $0.70   6/19/2012
Secured ABHD Notes   650,000    12%  $0.70   7/24/2012
Secured ABHD Notes   1,645,000    12%  $0.70   8/18/2012
Secured ABHD Notes   380,000    12%  $0.70   8/24/2012
Unamortized discount on Secured ABHD Notes   (441,918)             
Subtotal - non-related party   3,913,082              
Total  $6,372,763              

 

The conversion rate (stated in terms of the conversion rate into shares of ABHD common stock), interest rate and maturity dates of the notes outstanding at December 31, 2010 are shown in the table below:

 

Type of Financing  Principal
Amount
   Interest
Rate
   Conversion
Rate
   Maturity Date
Related Party                  
Junior Convertible Notes  $1,156,000    0%  $0.50   9/30/2011
Senior Convertible Notes   750,000    0%  $0.70   3/31/2013
Senior Convertible Notes   400,000    0%  $0.70   7/7/2013
Senior Convertible Notes   200,001    0%  $0.70   8/27/2013
Senior Convertible Notes   200,000    0%  $0.70   12/19/2013
Senior Convertible Notes   325,000    0%  $0.70   2/3/2014
Senior Convertible Notes   200,000    0%  $0.70   4/16/2014
Senior Convertible Notes   6,000    0%  $0.70   5/11/2014
Senior Convertible Notes   500,000    12%  $0.70   6/26/2014
Subtotal - related party   3,737,001              
Non-related party                  
Senior Convertible Notes   100,000    0%  $0.70   10/3/2013
Senior Convertible Notes   100,000    0%  $0.70   1/8/2014
Senior Convertible Notes   50,000    0%  $0.70   10/3/2013
Senior Convertible Note   55,000    0%  $0.70   4/8/2014
Senior Convertible Note   100,000    0%  $0.70   5/8/2014
Senior Convertible Notes   50,000    0%  $0.70   6/12/2014

 

F-18
 

 

Type of Financing  Principal
Amount
   Interest
Rate
   Conversion
Rate
   Maturity Date
Senior Convertible Notes   50,000    0%  $0.70   11/5/2014
Senior Convertible Notes   100,000    0%  $0.70   11/25/2014
Senior Convertible Note   100,000    0%  $0.70   2/5/2015
Senior Convertible Notes   185,000    0%  $0.70   2/9/2015
Senior Convertible Note   25,000    0%  $0.70   2/12/15
Senior Convertible Note   300,000    0%  $0.70   4/13/15
Senior Convertible Note   125,865    0%  $0.70   7/15/15
Senior Convertible Note   35,000    0%  $0.70   9/10/15
Promissory Note   83,679    12%  $0.70   8/2/10
Promissory Note   100,000    12%  $0.70   8/26/10
Promissory Note   25,000    12%  $0.70   5/2/11
Subtotal - non-related party   1,584,544              
Total  $5,321,545              

 

The terms of the various types of convertible notes included in the tables above are described as follows:

 

Junior Convertible Notes and Senior Convertible Notes – These notes are convertible into shares of AbTech Series A preferred stock and, consequently, into shares of ABHD common stock. The conversion rate shown in the table above reflects the rate at which the notes could be converted into shares of ABHD common stock. The notes are due in full at maturity but may be prepaid at any time prior to the maturity date with proper notice to the note holder. In the event of liquidation of AbTech, the Senior Convertible Notes have priority in right of payment over the Junior Convertible Notes. Additionally, holders of Senior Convertible Notes have priority over any amounts due stockholders of AbTech, regardless of the form of payment which may be due. Two notes included in the table above have maturity dates prior to December 31, 2011; however, each of the note holders has indicated their intention to convert the notes in accordance with their terms in 2012.

 

ABHD Convertible Notes – These notes were issued as part of the July Offering (see Note 14 - PRIVATE PLACEMENTS).

 

Secured ABHD Convertible Notes – These notes were issued in the September Offering (see Note 14 - PRIVATE PLACEMENTS).

 

Aggregate maturities of debt obligations commencing in 2012 are:

 

2012   2013   2014   Total 
$4,800,000   $1,350,000   $686,000   $6,836,000 

 

NOTE 11 – STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Stock Options

 

The Company grants stock options to officers, directors, employees and consultants under stock plans.

 

F-19
 

 

AbTech’s 2007 Stock Plan - Prior to the Merger with ABHD, AbTech issued stock options under a plan (the “2007 Stock Plan”) that allowed up to 15% of the capital stock outstanding of AbTech to be available for awards granted under the plan. Options granted under the plan expire on the earlier of the stated expiration date or, in the case of incentive stock options, ninety days after the date employment ends or, in the case of non-statutory options, 30 days after the optionee ceases to be a service provider to the Company. The stated expiration dates occur between 2012 and 2020. Stock options were granted at the fair market value of the common stock as determined by the Board of Directors on the date of grant and are exercisable subject to vesting provisions and performance objectives. All outstanding stock options granted by AbTech outstanding as of the date of the reverse acquisition transaction with ABHD automatically convert into options for the purchase of shares of ABHD common stock at the rate of 5.32 shares of ABHD stock for each share of AbTech stock. ABHD will issue new authorized shares for the AbTech stock options exercised after February 10, 2011, the date of the Merger.

 

ABHD’s 2012 Incentive Stock Plan – In December 2011, the Board of Directors of ABHD approved the 2012 Incentive Stock Plan (the “2012 Plan”), which allows for up to 9,000,000 shares of common stock awards to be granted during the term of the plan. The exercise price of options granted under the 2012 Plan is determined by the 2012 Plan Committee and may not be less than 100% of the fair market value of the common stock of ABHD on the grant date. Options expire not more than 10 years from the date of grant. Options granted under the plan have a minimum vesting period of one year from the date of grant.

 

For the years ended December 31, 2011 and 2010, compensation expense of $77,532 and $163,420, respectively, for stock options accounted for under ASC 718 is included in Selling, general and administrative expense in the consolidated statements of operations. There was no related tax benefit recognized due to the Company’s loss position. At December 31, 2011, the Company had approximately $1,338,963 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 1.7 years. No cash was received from the exercise of stock options during 2011 or 2010.

 

Compensation expense was determined from the estimates of fair values of stock options granted using the Black-Scholes option pricing model. The following table summarizes the weighted average of fair value and the significant assumptions used in applying the Black-Scholes model for options granted in 2011 and 2010:

 

   2011   2010 
Weighted average of fair value for options granted          
AbTech Options  $-   $0.90 
ABHD Options   0.27    0.12 
           
Weighted average assumptions used:          
Expected dividend yield   0.0%   0.0%
Expected volatility   81.5%   13.0-15.0% 
Risk-free interest rate   1.9%   2.1%
Expected life (in years)   5.0    8.7 

 

The assumptions for expected dividend yield, expected volatility and expected term reflect management’s judgment and include consideration of historical experience. Expected volatility is based on historical volatility of the Company’s shares and the historical volatility of public companies or mutual funds operating in similar markets. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

 

F-20
 

 

The Company’s stock option activity for the years ending December 31, 2011 and 2010 is summarized below (all share amounts for option granted by AbTech have been restated to give effect to the merger exchange ratio and reflect the equivalent number of ABHD shares):

 

AbTech Options

 

   Number of
AbTech Shares
Under Option
   Weighted 
Average 
Exercise Price
   Weighted 
Average 
Remaining Term
 
Balance at December 31, 2009   4,152,551   $0.70    4.97 
Granted   3,306,069    0.70      
Exercised   -    -      
Forfeited or expired   (2,129,513)   0.70      
Outstanding at December 31, 2010   5,329,107    0.70    6.56 
Forfeited or expired   (2,629,949)   0.70      
Outstanding at December 31, 2011   2,699,158   $0.70    3.45 

 

As of December 31, 2011, there were 2,699,158 stock options outstanding and exercisable with a weighted average remaining life of 3.45 years and an intrinsic value of $0.

 

ABHD Options

 

   Number of
ABHD Shares
Under Option
   Weighted 
Average 
Exercise Price
   Weighted 
Average 
Remaining
Term
 
Balance at December 31, 2009   -   $-    - 
Granted   640,000(1)   0.55      
Outstanding at December 31, 2010   640,000    0.55    4.86 
Granted   4,734,300    0.42      
Outstanding at December 31, 2011   5,374,300   $0.44    9.58 
(1)These options were previously excluded, however, the exclusion had no effect on the consolidated statement of operations as the options did not begin to vest until 2011.

 

F-21
 

 

As of December 31, 2011, there were 5,374,300 stock options outstanding with a weighted average remaining life of 9.6 years and an intrinsic value of $0. As of December 31, 2011, there were approximately 320,000 options exercisable with a weighted average remaining life of 3.86 years and an intrinsic value of $0. Of the non-exercisable stock options outstanding at December 31, 2011, 3,865,000 stock options vest over time between 2012 and 2015 and 1,189,300 stock options vest only upon the Company achieving specific performance objectives in 2011.

 

The following table summarizes the activity of the shares and weighted-average grant date fair value of the Company’s non-vested common stock options during the years ending December 31, 2011 and 2010:

 

   Non-vested AbTech Shares   Non-vested ABHD Shares 
   Number of
Shares
   Weighted-
average
grant date
fair value
   Number of
Shares
   Weighted
-average
grant date
fair value
 
Non-vested at December 31, 2009   1,426,769   $0.28    -      
Granted   3,306,069    0.17    640,000   $0.12 
Vested   (990,218)   0.17    -      
Forfeited or expired   (1,240,442)   0.27    -      
Non-vested at December 31, 2010   2,502,178    0.18    640,000   $0.12 
Granted   -         4,734,300   $0.27 
Vested   (399,284)   0.10    (320,000)  $0.12 
Forfeited or expired   (2,102,894)   0.20    -      
Non-vested at December 31, 2011   -   $-    5,054,300   $0.27 

 

Common stock

In conjunction with the Merger that occurred in February 2011, the Company sold 2,320,000 shares of common stock for $2,320,000 of cash, of this amount 1,495,000 shares were issued during 2010 and 825,000 shares were issued during 2011 (see Note 12 - REVERSE ACQUISITION TRANSACTION).

 

During 2011, the Company issued 449,931 shares of common stock to five entities for services rendered to the Company during the year. These shares were valued at the closing market price of the Company’s common stock on the measurement date in accordance with the provisions of ASC 505-50-30. The resulting expense of $320,533 is included in Selling, general and administrative expense in the consolidated statements of operations.

 

Warrants

 

In 2011 the Company issued the following warrants:

·Thirty investors participating in the September Private Placement (see Note 14 - PRIVATE PLACEMENTS) received warrants to purchase 2,666,667 shares of ABHD common stock. In addition, the placement agent received warrants to purchase 533,333 shares of ABHD common stock.
·Three individuals participating in the July Offering (see Note 14 - PRIVATE PLACEMENTS) received warrants to purchase 466,666 shares of ABHD common stock.
·Two individuals received warrants to purchase 530,000 shares of ABHD common stock as compensation for consulting services provided to the Company. These warrants have an exercise price of $0.50 per share. One warrant for 30,000 shares expires on July 23, 2013 and the other warrant for 500,000 shares expires on February 28, 2014. Compensation expense related to these warrants of $58,014 was included in Selling, general and administrative expense in the consolidated statements of operations.

 

F-22
 

 

In 2010 the Company issued the following warrants (all share amounts for warrants granted by AbTech have been restated to give effect to the merger exchange ratio and reflect the equivalent number of ABHD shares):

·Four individuals received warrants to purchase 692,092 shares of ABHD common stock as compensation for consulting services provided to the Company. Warrants for 638,854 shares have an exercise price of $0.80 per share and are exercisable at any time prior to January 11, 2015. Warrants for 53,238 shares have an exercise price of $0.70 per share and are exercisable at any time prior to April 17, 2015. Compensation expense related to these warrants of $68,024 was included in Selling, general and administrative expense in the consolidated statements of operations.
·One individual received a warrant to purchase 58,205 shares of ABHD common stock with an exercise price of $0.70 per share as a finder’s fee in conjunction with raising capital. The warrants are exercisable at any time prior to April 7, 2015 and April 30, 2015, respectively. Compensation expense related to this warrant of $7,821 was included in Other income (expense) in the consolidated statements of operations.

 

A summary of common stock warrants outstanding at December 31 is as follows:

 

   AbTech Warrants   ABHD Warrants 
   Number of
Warrants
   Weighted-
average
Exercise Price
   Number of
Warrants
   Weighted-
average
Exercise Price
 
Outstanding at December 31, 2009   4,422,877   $0.79    -   $- 
Granted   750,297    0.79    -    - 
Exercised   -    -    -    - 
Forfeited or expired   (106,476)   0.70    -    - 
Outstanding at December 31, 2010   5,066,698    0.79    -    - 
Granted   -    -    4,196,666    .59 
Exercised   -    -    -    - 
Forfeited or expired   (3,306,069)   0.80    -    - 
Outstanding at December 31, 2011   1,760,629   $0.77    4,196,666   $.59 

 

The 1,760,629 exercisable AbTech warrants outstanding at December 31, 2011 expire at various dates through 2015 and have a weighted average remaining life of 2.5 years.

 

The 4,196,666 exercisable ABHD warrants outstanding at December 31, 2011 expire at various dates through 2016 and have a weighted average remaining life of 4.5 years.

 

AbTech Series A Convertible Preferred Stock

 

AbTech has designated 3,500,000 of its 5,000,000 authorized preferred shares as Series A Convertible Preferred Stock (“Series A Stock”) and has 1,439,614 of such shares issued and outstanding at December 31, 2011. These shares represent the non-controlling interest in the Company’s subsidiary as shown on the Consolidated Balance Sheets and Consolidated Statements of Operations. Series A Stock has a par value of $0.01 and no liquidation or dividend preferences.

 

F-23
 

 

The holders of Series A Stock may at any time elect to convert any or all such shares into common shares of the Company at a conversion rate initially set at one share of common stock for each share of Series A Stock, subject to certain anti-dilution adjustments that protect Series A Stockholders if the Company issues new shares at less than $3.75 per share. The Series A Stock will automatically convert into common shares upon either (a) the closing of a firm underwritten public offering, (b) subsequent listing on the New York Stock Exchange or the NASDAQ Global Market, or (c) upon the sale or transfer of substantially all the assets or the consolidation or merger with an entity solely for cash or solely for cash and securities listed on the New York Stock Exchange or the NASDAQ Global Market.

 

While Series A Stockholders have no voting rights as ABHD stockholders, they do have specific rights pertaining to the governance of AbTech, ABHD’s subsidiary. As long as Series A Stockholders hold, on a converted basis, at least 8% of the Common Stock of the Company, they will be granted a pre-emptive right to maintain their respective ownership percentages, as determined on a fully-diluted basis, in subsequent sales of Common Stock or Common Stock Equivalents conducted by the Company. Series A Stockholders have a right to designate up to three Directors to the Board of Directors (Series A Directors) and the Series A Directors are entitled to choose at least one member of the Audit Committee and one Member of the Compensation Committee. Corporate governance provisions were also modified to require various levels of supermajority approval by the Board for specific, major actions taken by the Company. For some actions, approval of 2/3rds of the Series A Directors is required.

 

Common shares reserved for future issuance

 

As of December 31, 2011, ABHD common shares reserved for future issuance were as follows (all shares are stated in ABHD share equivalent):

 

Conversion of convertible AbTech preferred stock   7,664,193 
Shares issuable upon conversion of debt   9,972,309 
Stock options outstanding   8,073,458 
Warrants to purchase common stock   5,957,294 
    31,667,254 

 

NOTE 12 – 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.

 

F-24
 

 

·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. Subsequent to the date of the merger 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.
·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 Stock outstanding as of December 31, 2010, is listed separately on the Consolidated Balance Sheet as of December 31, 2010. The Preferred Stock that converted to ABHD common stock at the Merger or subsequent to the Merger, is included in common stock in the Consolidated Balance Sheet as of December 31, 2011. 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 December 31, 2011.
·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 AbTech, whereupon such common shares would be exchanged for the Merger Consideration.
·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.
·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 $1,349,291 of such notes were converted into 1,919,320 shares of common stock of ABHD. The notes retained by the holders may be converted into shares of ABHD stock at the same rate as if they had been converted at the time of the merger.

 

F-25
 

 

NOTE 13 – 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. The Company 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, during the nine months ended September 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 of common stock 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 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 14 – PRIVATE PLACEMENTS

 

Private Placement in July 2011

 

In July 2011, the Company sold $700,000 of Convertible Promissory Notes (the “July Offering”). The Convertible Promissory Notes (the “Notes”) bear interest at a rate of twelve percent (12%) per annum from the closing date through April 30, 2012; fifteen percent (15%) per annum from May 1, 2012 through July 31, 2012 and eighteen percent (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 Note holder 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”). 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, Note holders will have 5 days to either convert the Notes in accordance with their terms or accept the cash repurchase price from the Company.

 

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Each subscriber in the July Offering also received a warrant for the purchase of the number of shares of the Company’s common stock equal to forty percent (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.

 

Private Placement in September 2011

 

From September 19 through December 31, 2011, the Company sold $4,000,000 of Secured Convertible Promissory Notes (the “September Offering”). The Secured Convertible Promissory Notes (the “Secured Notes”) bear interest at a rate of twelve percent (12%) per annum and are due and payable in full on the nine (9) month anniversary of issuance (the “Original Maturity Date”). The Company may extend the maturity date by an additional ninety (90) day period (the “First Extension Option”), during which period the interest rate will increase to fifteen percent (15%) per annum on the unpaid principal of the Secured Note. The Company may also extend the maturity date by a second additional 90 day period (the “Second Extension Option”) during which period the interest rate shall increase to eighteen percent (18%) per annum on the unpaid principal of the Secured Note. All interest accrued on the Secured Notes through the Original Maturity Date will be payable by the Company on the Original Maturity Date in cash or in-kind, at the option of the payee. For all periods after the Original Maturity Date, all accrued interest will be payable quarterly in cash by the Company. The Secured Notes may be converted into shares of common stock of the Company at any time prior to a Qualified Financing at the conversion rate of $0.70 per share (the “Conversion Price”). However, if the Company at any time while a Secured Note is outstanding, issues any debt or equity securities (with certain exceptions) entitling investors to subscribe for, purchase, or convert such securities into shares of Company common stock at a price per share less than the Conversion Price (the “New Securities Issuance Price”) then the Conversion Price for such outstanding Secured Notes shall be reduced effective concurrently with such issuance to the New Securities Issuance Price.

 

In the event of a Qualified Financing by the Company, as defined above, each subscriber in the September Offering will have the option to (i) convert their Secured 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 Secured Note to the Company for immediate repayment of principal and accrued and unpaid interest. The Secured Notes may be prepaid in whole or in part without the prior written consent of the payee at any time following not less than ten (10) days prior written notice to the subscriber notifying the subscriber of the Company’s decision to prepay the Secured Notes.

 

The Secured Notes are secured by all of the Company’s right, title and interest in, to and under all personal property and other assets of the Company (the certain exceptions to allow for potential financing arrangements for accounts receivable and inventory) pursuant to a Security Agreement entered into by the Company.

 

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Each subscriber in the September Offering also received a warrant for the purchase of the number of shares of Company common stock equal to forty percent (40%) of the number of shares of common stock into which the Secured Notes are convertible on the closing date of the Qualified Financing. In the event a Secured Note remains outstanding beyond the Original Maturity Date, the Secured Note holder will receive an additional warrant for 10% of the principal amount of the Secured Note outstanding at that date divided by the Conversion Price. The number of warrant shares that the Payee will be entitled to under the terms of the warrant issued by the Company to subscribers in connection with the September Offering shall be increased by ten percent (10%) for each Extension Option exercised by the Company. The warrants will have an initial exercise price equal to the exercise price of the warrants purchased by investors in the Qualified Financing. In the event the Holder elects to exercise the warrant prior to the consummation of a Qualified Financing, the number of shares exercisable will be based on an assumed conversion price of $0.60 per share (the “Assumed Conversion Price”) and the exercise price will be $0.60 per share (the “Base Exercise Price”). However, in the event that the Company issues shares of common stock or common stock equivalents (with certain exceptions) at any time after the issuance of the warrant and prior to a Qualified Financing at a price per share less than the Base Exercise Price (the “New Securities Exercise Price”) then the Base Exercise Price and the Assumed Conversion Price shall each be reduced effective concurrently with such issuance to the New Securities Exercise Price. Each warrant will be exercisable for a five (5) year period.

 

The Notes issued in connection with the July Offering and the Secured Notes issued in connection with the September Offering have been discounted by the value of the detachable warrants issued with the Notes and the Secured Notes. The value of the warrants was bifurcated from the value of the Notes and shown separately as warrant liability because of certain down-round price protection features of the warrants. The warrant liability value is revalued at each reporting period. The value of the warrants was estimated by applying the Black Scholes model and amounted to $622,895. This corresponding note discount is amortized over the life of the Secured Notes using the effective interest method. The amount of the discount amortized and charged to interest as of December 31, 2011 was $159,657. The estimated value of the warrants upon grant is $741,028 and the estimated value of the warrant liability at December 31, 2011 is $498,976 (see Note 15 – FAIR VALUE OF FINANCIAL INSTRUMENTS).

 

The Company paid the Placement Agent engaged in connection with the September Offering a cash placement fee equal to eight percent (8%) of the aggregate purchase price paid by each investor. This fee amounted to $320,000 for the $4,000,000 received through December 31, 2011. The placement agent will also receive a cash fee equal to four percent (4%) of all amounts received by the Company in connection with the exercise by investors of any warrants received by investors in connection with the September Offering. In addition to the placement agent fee, the Company will issue to the placement agent warrants to purchase a number of shares of the Company’s common stock obtained by dividing eight percent (8%) of the gross proceeds from the sale of securities by the conversion price of the Secured Notes (the “PA Warrants”). The PA Warrants issued in connection with the September Offering will have an exercise price per share equal to the conversion price of the Secured Notes. The PA Warrants will expire five years from the date of issuance and will be in the same form as the securities sold in the September Offering, except that the PA Warrants will include a “net issuance” cashless exercise feature. As of December 31, 2011, PA Warrants for 533,333 shares of common stock were due to the placement agent. The value of these warrants was estimated by applying the Black Scholes model and amounted to $118,133, upon grant. The balance was recorded as a deferred financing charge and its estimated fair value at December 31, 2011 is included in the warrant liability at December 31, 2011.

 

NOTE 15 –FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, convertible notes payable, notes payable and warrant liability. It is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values based on their short maturities or for long-term debt based on borrowing rates currently available to the Company for loans with similar terms and maturities. Gains and losses recognized on changes in fair value of financial instruments are reported in other income (expense) as gain (loss) on change in fair value. The Company estimates the fair value of level 3 inputs using the Black-Scholes valuation model using historical volatility as the method to estimate expected volatility. At December 31, 2011, the Company had no financial instruments outstanding that were estimated using level 1 or level 2 inputs. The Company’s warrant liability was estimated using Level 3 inputs as shown in the reconciliation table below for the year ended December 31, 2011.

 

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   Fair value measurements
using significant
unobservable inputs
(Level 3)
 
Description  Warrant Liability 
Beginning balance, December 31, 2010   - 
Purchases, issuance and settlements  $741,028 
Total (gains) or losses   (242,052)
Transfers in or out of Level 3   - 
Ending balance, December 31, 2011  $498,976 

 

The Company used the following assumptions to estimate the fair value of the warrant liability at December 31, 2011:

 

Expected volatility   81.45%
Expected dividend yield   0%
Expected term   2.3-2.5 years 
Risk-free interest rate   .83%

 

The Company has determined that the Black-Scholes model used to calculate the fair value of the warrant liability provides a reasonable estimate at such value considering the terms of the warrants, and the unlikelihood of events occurring that would create valuation complexities requiring a more robust analysis by valuation experts.

 

NOTE 16 – LITIGATION, CLAIMS AND ASSESSMENTS

 

The Company experiences routine litigation in the normal course of its business. The Company is not aware of any pending or threatened litigation that would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

NOTE 17 – SUBSEQUENT EVENTS

 

In February, 2012, the Company sold an additional $2,600,000 of Secured Notes and warrants in the final closing of the September Offering (see NOTE 14 – PRIVATE PLACEMENTS), bringing the total amount raised in the September Offering to $6,600,000.

 

In February, 2012, two stockholders holding a total of 206,667 shares of AbTech Industries Series A Preferred Stock elected to convert such shares into 1,321,908 shares of ABHD common stock in accordance with the terms of the Merger Agreement (see Note 12 – REVERSE ACQUISITION TRANSACTION).

 

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NOTE 18 – REVISED RETROACTIVE RESTATEMENT OF STOCKHOLDERS’ DEFICIENCY TO REFLECT THE MERGER TRANSACTION

 

Subsequent to the issuance of the 2011 audited consolidated financial statements, the Company concluded that the retroactive restatement of stockholders’ deficiency and other disclosures to reflect the reverse merger that took place during 2011 should be revised as follows:

 

a)The 10,000,000 shares of ABHD common stock that were outstanding prior to the Merger are now shown as having been issued in 2011 to effect the reverse merger rather than being issued and outstanding prior to the date of the Merger.
b)The preferred stock of Abtech Industries that was outstanding prior to the Merger is now shown as a separate component of stockholders’ deficiency as of December 31, 2010. Previously, these preferred shares had been retroactively reflected prior to the date of the Merger as if converted into ABHD common stock. Shares of preferred stock that converted to ABHD common stock at the time of the Merger are now reflected as having converted during 2011 and the shares of preferred stock that did not convert at the time of the Merger are shown as the non-controlling interest.
c)Because the Merger is being treated as a reverse recapitalization rather than a business combination, there should not be any goodwill recorded as part of the transaction. Accordingly, the Company has eliminated the goodwill of $10,000 that was previously shown on the balance sheet after the Merger.
d)In Notes 10 and 11, the number of shares, exercise prices and conversion rate for the options, warrants and convertible debt of AbTech Industries have been restated using the merger exchange ratio to their equivalent shares of ABHD common stock.

 

As a consequence of these changes, the basic and diluted loss per common share for the year ended December 31, 2010 changed from $(0.06) per share to $(0.10) per share. There was no change to the basic and diluted loss per common share for the year ended December 31, 2011. There was no change to the net loss reported for either year.

 

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