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EX-21.1 - EXHIBIT 21.1 - Abtech Holdings, Inc.v332903_ex21-1.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q/A

 

x AMENDED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2012

 

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

 

ABTECH HOLDINGS, INC.
(Name of registrant as specified in its charter)

 

Nevada   14-1994102
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification Number)
     

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)
         

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  YES  x   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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

  YES  x   NO  ¨

 

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

 

¨  Large accelerated filer ¨  Accelerated filer ¨

 Non-accelerated filer

 (Do not check if smaller reporting company)

x  Smaller reporting company

 

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

  YES  ¨   NO  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at July 30, 2012
Common stock, $.001 par value   49,308,115

 

 
 

 

ABTECH HOLDINGS, INC.

FORM 10-Q

 

June 30, 2012

 

INDEX

    PAGE
PART I—FINANCIAL INFORMATION   4
     
Item 1. Financial Statements   4
     
Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011   4
     
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011   5
     
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011   6
     
Notes to the Unaudited Condensed Consolidated Financial Statements   7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   13
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   19
     
Item 4. Controls and Procedures   20
     
PART II—OTHER INFORMATION   21
     
Item 1. Legal Proceedings   21
     
Item 1A. Risk Factors   21
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   21
     
Item 3. Defaults Upon Senior Securities   22
     
Item 4. Mine Safety Disclosures   22
     
Item 5. Other Information   22
     
Item 6. Exhibits   22
     
Signature Page   23
     
Certifications    
Exhibit 31.1    
Exhibit 31.2    
Exhibit 32    

 

 
 

  

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements regarding the Company. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “would,” “could,” “confident,” “forecast,” “hope,” “likely,” “plan,” “possible,” “potential,” “predict,” “project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on March 30, 2012.

 

YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS

 

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events or information as of the date on which the statements are made in this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we expect or hope.

 

Explanatory Note

 

As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our,” “ABHD” and the “Company” refer to Abtech Holdings, Inc.

 

On February 10, 2011, AbTech Industries, Inc., a Delaware corporation (“AbTech”), was acquired by ABHD (formerly known as Laural Resources, Inc.), in a reverse acquisition transaction (the “Merger”). In accordance with the merger agreement between AbTech and ABHD (the “Merger Agreement”), ABHD acquired all of the issued and outstanding common stock of AbTech, including shares issuable upon the conversion of Series A preferred stock and convertible promissory notes outstanding, in exchange for the stockholders of AbTech acquiring 46,000,000 shares of ABHD common stock. ABHD also agreed to reduce its number of common shares outstanding to 10,000,000 shares prior to the Merger. See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

 

For accounting purposes, the transaction has been accounted for as a reverse acquisition, with AbTech as the acquirer. The Condensed Consolidated Financial Statements of ABHD included in this Quarterly Report on Form 10-Q represent a continuation of the financial statements of AbTech, with one adjustment, which is to retroactively adjust the legal capital of AbTech to reflect the legal capital of ABHD.

 

This amendment (the “Form 10-Q/A”) to the Quarterly Report on Form 10-Q for the three-months and six-months ended June 30, 2012, which was filed with the Securities and Exchange Commission (“SEC”) on August 14, 2012 (the “Original Form 10-Q” and together with the Form 10-Q/A the “Form 10-Q”) 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:

 

1.Revise the Condensed Consolidated Statement of Financial Position in Item 1 of this quarterly report on Form 10-Q 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.

 

2
 

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The December 31, 2011 consolidated balance sheet included in this Quarterly Report on Form 10-Q was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

3
 

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ABTECH HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 


 

   June 30, 2012
(Unaudited)
   December 31,
2011
 
ASSETS          
Current assets          
Cash and cash equivalents  $1,634,405   $1,386,502 
Accounts receivable – trade, net   222,192    108,170 
Accounts receivable – related party, net   -    2,032 
Inventories, net   435,168    528,009 
Deferred charges, net   342,194    439,203 
Prepaid expenses and other current assets   16,642    37,988 
Total current assets   2,650,601    2,501,904 
           
Fixed assets, net   61,883    49,485 
Security deposits   28,402    17,977 
Deferred charges, net   9,956    15,020 
Total assets  $2,750,842   $2,584,386 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY          
Current liabilities          
Accounts payable  $417,291   $483,879 
Accounts payable – related party   20,365    29,703 
Loans from shareholders   9,000    9,000 
Convertible promissory notes, net of discounts   5,198,365    3,758,082 
Convertible promissory notes– related party, net of discounts   500,000    578,681 
Customer deposits   43,302    38,505 
Accrued interest payable   507,579    126,232 
Accrued expenses   403,727    122,790 
Total current liabilities   7,099,629    5,146,872 
           
Due to related party   98,890    101,524 
Convertible promissory notes   276,000    155,000 
Convertible promissory notes– related party   1,710,000    1,881,000 
Warrant liability   2,292,170    498,976 
Total liabilities   11,476,689    7,783,372 
           
Commitments and contingencies          
           
Stockholders’ deficiency          
Common stock, $0.001 par value; 300,000,000 authorized shares; 49,008,115 and 47,160,435 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively   49,008    47,160 
Additional paid-in capital   26,511,406    24,651,344 
Non-controlling interest   (1,938,941)   (1,674,105)
Accumulated deficit   (33,347,320)   (28,223,385)
Total stockholders’ deficiency   (8,725,847)   (5,198,986)
Total liabilities and stockholders’ deficiency  $2,750,842   $2,584,386 

 

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

 

4
 

 

ABTECH HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 


 

   Three Months ended 
June 30
   Six Months ended 
June 30
 
   2012   2011   2012   2011 
                 
Net revenues  $240,285   $100,734   $479,792   $144,011 
                     
Cost of revenues   153,000    120,483    310,279    201,459 
Gross profit (loss)   87,285    (19,749)   169,513    (57,448)
                     
Operating expenses                    
Selling, general and administrative   1,331,528    711,733    2,230,104    1,353,279 
Research and development   244,493    118,916    423,690    261,003 
Total operating expenses   1,576,021    830,649    2,653,794    1,614,282 
                     
Operating loss   (1,488,736)   (850,398)   (2,484,281)   (1,671,730)
                     
Other income (expense)                    
Interest expense   (1,342,414)   (1,621,651)   (2,226,835)   (1,654,837)
Gain (loss) on valuation of warrant liability   238,153    -    (678,755)   - 
Other income (expense)   902    (4,922)   1,100    88 
Total other income (expense), net   (1,103,359)   (1,626,573)   (2,904,490)   (1,654,749)
                     
Net loss before income taxes   (2,592,095)   (2,476,971)   (5,388,771)   (3,326,479)
                     
Provision for income taxes   -    -    -    - 
                     
Net loss   (2,592,095)   (2,476,971)   (5,388,771)   (3,326,479)
                     
Net loss attributable to non-controlling interest   (144,053)   (248,704)   (264,836)   (380,435)
                     
Net loss attributable to controlling interest  $(2,448,042)  $(2,228,267)  $(5,123,935)  $(2,946,044)
                     
Basic and diluted loss per common share  $(0.05)  $(0.05)  $(0.11)  $(0.07)
Basic and diluted weighted average number of shares outstanding   48,707,777    45,084,344    48,319,058    41,997,592 

 

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

 

5
 

 

ABTECH HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 FOR THE SIX MONTHS ENDED JUNE 30,

  


   2012   2011 
Operating Activities          
Net loss  $(5,388,771)  $(3,326,479)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation   12,101    13,508 
Stock-based compensation expense   205,260    191,883 
Preferred stock of subsidiary issued for interest on notes payable   -    20,784 
Interest related to beneficial conversion feature   426,144    1,620,955 
Note discount amortized as interest   785,480    - 
Deferred charges expensed as interest   600,105    10,014 
Loss on change in fair value of warrant liability   678,755    - 
Changes in operating assets and liabilities:          
Accounts receivable   (111,990)   (41,158)
Inventories   92,841    43,805 
Prepaid expenses and other current assets   21,346    (3,824)
Security deposits   (10,425)   - 
Deferred charges   (258,180)   - 
Accounts payable   (75,926)   269,854 
Customer deposits   4,797    - 
Accrued interest payable   412,562    (33,171)
Accrued expenses   280,937    24,869 
Net cash used in operating activities   (2,324,964)   (1,208,960)
           
Investing Activities          
Purchases of fixed assets   (24,499)   (5,698)
Net cash used in investing activities   (24,499)   (5,698)
           
Financing Activities          
Proceeds from issuance of common stock   -    825,000 
Repayment of borrowings   -    (597,855)
Repayment of borrowings from shareholders   -    (41,000)
Proceeds from notes payable   2,600,000    1,100,000 
Net decrease in due to related party   (2,634)   (2,508)
Net cash provided by financing activities   2,597,366    1,283,637 
           
Net change in cash and cash equivalents   247,903    68,979 
Cash and cash equivalents at beginning of period   1,386,502    4,123 
Cash and cash equivalents at end of period  $1,634,405   $73,102 
           
Supplemental cash flow information:          
Cash paid for interest  $2,511   $33,616 
Cash paid for income taxes  $-   $- 
Noncash investing and financing activities:          
Preferred stock of subsidiary issued for conversion of debt, including accrued interest  $-   $1,347,372 
Common stock issued for conversion of debt, including accrued interest  $456,217   $1,737,102 
Common stock, warrants and options issued for services  $205,260   $191,883 
Preferred shares not converting at merger  $-   $1,184,450 
Unamortized portion of debt discount  $1,326,635   $- 
Portion of debt discount in deferred charges  $239,851   $- 
Beneficial conversion feature recorded to additional paid-in capital  $1,200,433   $1,620,955 
Issuance of warrant liability  $1,114,439   $- 

 

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

 

6
 

 

ABTECH HOLDINGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 – ORGANIZATION

 

Abtech Holdings, Inc. (“ABHD” or the “Company”) (formerly Laural Resources, Inc.), was incorporated under the laws of the State of Nevada on February 13, 2007, with authorized capital stock of 300,000,000 shares at $0.001 par value.

 

AbTech Industries, Inc. (“AbTech”), a Delaware corporation with an authorized capital of 15,000,000 shares of $0.01 par value common stock and 5,000,000 shares of $0.01 par value preferred stock, was acquired by ABHD in a reverse acquisition transaction on February 10, 2011 (the “Merger”). In accordance with the merger agreement between AbTech and ABHD (the “Merger Agreement”), ABHD acquired all of the issued and outstanding common stock of AbTech, including shares issuable upon the conversion of Series A preferred stock and convertible promissory notes outstanding, in exchange for the stockholders of AbTech acquiring 46,000,000 shares of ABHD common stock. ABHD also agreed to reduce its number of common shares outstanding to 10,000,000 shares prior to the Merger. The preferred stockholders of AbTech that elected not to convert and exchange their shares for ABHD common shares represent the non-controlling interest shown on the Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011.

 

For accounting purposes, the transaction has been accounted for as a reverse acquisition, with AbTech as the acquirer. These condensed consolidated financial statements of the Company represent a continuation of the financial statements of AbTech, with one adjustment, which is to retroactively adjust the legal capital of AbTech to reflect the legal capital of ABHD. Comparative information presented in these condensed consolidated financial statements also has been retroactively adjusted to reflect the legal capital of the Company.

 

AbTech is an environmental technologies firm that provides innovative solutions to address issues of water pollution. AbTech has developed and patented the Smart Sponge® polymer technology. This technology’s oil absorbing capabilities make it highly effective as a filtration media to remove hydrocarbons and other pollutants from flowing or pooled water. AbTech is headquartered in Scottsdale, Arizona and has a manufacturing facility located in Phoenix, Arizona.

 

AbTech’s wholly-owned subsidiary, Environmental Security Corporation (“ESC”), was formed in 2003 to develop a sensor array technology designed to detect impurities in water flows. ESC owns a U.S. patent on this technology and has acquired rights to another monitoring technology, but otherwise had no operations during 2012 or 2011.

 

In May, 2012, the Company formed a new subsidiary, AEWS Engineering, LLC (“AEWS”), an independent civil and environmental engineering firm, established to provide engineering and technology innovation to the water infrastructure sector. AEWS is owned 80% by the Company and 20% by Bjornulf White, the President of AEWS and Executive Vice President of AbTech. Under the AEWS operating agreement, the Company will fund the initial start-up costs of AEWS. Any future profits will be allocated first to those members that have funded prior losses (AbTech) and then to members in proportion to their membership interests. Accordingly, the operations of AEWS for the periods reflected in these condensed consolidated financial statements are allocated 100% to the Company. AEWS Engineering LLC (“AEWS”) has an office located in Raleigh, North Carolina.

 

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

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Financial Statement PresentationThe condensed consolidated financial statements include the accounts of ABHD, AbTech, AEWS and ESC. Intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements do not include the operations of ABHD prior to the date of the Merger which are considered to be immaterial to the operations of AbTech. The equity section of the Condensed Consolidated Balance Sheets and the basic and diluted weighted average number of shares outstanding on the Condensed Consolidated Statements of Operations represent the actual shares of ABHD outstanding after the share exchanges that occurred as part of the Merger. The non-controlling interest shown on the Condensed Consolidated Balance Sheet as of June 30, 2012, 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.

 

7
 

 

The condensed consolidated financial statements for the three and six month periods ended June 30, 2012 and June 30, 2011 are unaudited and, in the opinion of the Company’s management, include all adjustments necessary for a fair presentation of such condensed consolidated financial statements. Such adjustments are of a normal recurring nature.

 

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 estimates and assumptions that affect the reported amounts 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 these estimates.

 

Net Loss Per ShareBasic net loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period. The calculation of basic loss per share gives retroactive effect to the recapitalization related to the reverse acquisition of AbTech by ABHD. The Company has other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2012 and 2011 would be anti-dilutive. The following chart lists the securities as of June 30, 2012, that were not included in the computation of diluted net earnings per share because their effect would have been antidilutive:

 

   Common Shares 
Options to purchase common stock   8,073,458 
Warrants to purchase common stock   8,042,964 
Convertible promissory notes   12,988,748 
Convertible preferred stock in AbTech   6,563,943 
    35,669,113 

 

Recent Accounting Pronouncements – With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements that are expected to have a material impact on the Company’s condensed consolidated financial statements.

 

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 became effective for the Company for fiscal years and interim periods within those years beginning in 2012. This guidance has not had a material effect on the Company’s financial statements.

 

NOTE 3 – INVENTORIES

 

The Company uses a perpetual inventory system and periodic physical test counts to determine inventory amounts at interim balance sheet dates. Inventories are stated at the lower of cost or market, with cost computed on an average cost method which approximates the first-in, first-out basis.

 

   June 30, 2012
(Unaudited)
   December 31, 2011 
Raw materials  $90,054   $76,381 
Work in process   386,085    446,538 
Finished goods   79,029    106,625 
Reserve for obsolescence   (120,000)   (101,535)
Total  $435,168   $528,009 

 

8
 

 

NOTE 4 – GOING CONCERN

 

These condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs, which raises doubts about the ability of the Company to continue as a going concern. In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management of the Company has developed a strategy, which it believes will accomplish this objective through additional equity funding and long term financing, which will enable the Company to operate for the coming year, though there can be no assurance that the Company’s efforts will be successful. As a result, the Company’s independent registered public accounting firm issued a going concern opinion on the consolidated financial statements of the Company for the year ended December 31, 2011. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

NOTE 5 – PRIVATE PLACEMENT

 

In September 2011, the Company initiated a private placement of Secured Convertible Promissory Notes (the “Secured Notes”) with detachable warrants (the “September Offering”). As of December 31, 2011 the Company had sold $4,000,000 of the Secured Notes. On February 15, 2012, the Company completed the final closing of the September Offering with the sale of an additional $2,600,000 of Secured 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, 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 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 the sales for cash by the Company of debt or equity securities generating aggregate gross proceeds of at least $5,000,000 (including the proceeds from any converting Secured Notes) (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 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 twenty percent (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 (with 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 ten percent (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 of the Original Maturity Date 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 Secured Notes issued in connection with the September Offering have been discounted by the value of the detachable warrants issued with the Secured Notes. The value of the warrants was bifurcated from the value of the Secured Notes because of certain inherent down-round price protection features and is shown separately as a warrant liability on the Condensed Consolidated Balance Sheets. The value of the warrants, and the corresponding note discount, was estimated by applying the Black Scholes model and amounted to $1,418,623. This discount amount is amortized over the life of the Secured Notes using the effective interest method. The amount of the discount amortized and charged to interest during the six-months ended June 30, 2012 was $453,291. The warrant liability value is revalued at each reporting period. As of June 30, 2012 the estimated value of the warrant liability for these warrants issued in the September Offering was $1,797,086.

 

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 in 2011 and $208,000 for the $2,600,000 received in the final closing on February 15, 2012. 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 shall 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. PA Warrants for 754,286 shares of common stock were issued to the placement agent for the entire September Offering. The initial value of these warrants was estimated by applying the Black Scholes model and amounted to $357,984. This cost was included in the deferred financing costs related to the September Offering and is being amortized over the life of the related Secured Notes. The estimated value of the corresponding warrant liability is valued at each reporting period and amounted to $311,218 for the PA Warrants as of June 30, 2012.

 

Although the Secured Notes issued in February 2012 (the “2012 Secured Notes’) had the same conversion rate as the Secured Notes issued in 2011, an increase in the market price of the Company’s common stock in 2012 resulted in the 2012 Secured Notes having a beneficial conversion feature. The intrinsic value of this beneficial conversion feature was determined to be $1,200,433 as of the issuance date and is bifurcated from the value of the 2012 Secured Notes resulting in an additional note discount credited to additional paid-in capital. This note discount is amortized as interest expense over the term of the 2012 Secured Notes and resulted in an interest charge of $311,786 for the six-months ended June 30, 2012.

 

NOTE 6 – MATURITIES OF CONVERTIBLE PROMISSORY NOTES

 

During the six months ended June 30, 2012, outstanding convertible promissory notes with a principal amount of $2,025,000 reached their original maturity dates. Holders of $200,000 of these notes elected to convert the notes, along with accrued interest of $20,936, into 368,227 shares of common stock in accordance with the terms of the notes. Holders of $1,550,000 of these maturing notes elected to extend the Original Maturity Dates of the notes by 90 days with no change to the interest rate of the notes or the number of warrant shares issued with the notes. For the remaining maturing notes totaling $275,000, the Company exercised its First Extension Option to extend the Original Maturity Dates of the notes by 90 days which increased the interest rate on the notes from 12% to 15% and required the Company to issue additional warrants to the note holders for 18,334 shares of common stock pursuant to the terms of the Secured Notes described in Note 5 – Private Placement. Holders of $100,000 of the $275,000 notes for which the First Extension Option was exercised, elected to convert their notes and the accrued interest thereon into 157,544 shares of common stock.

 

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NOTE 7 – RELATED PARTY TRANSACTIONS

 

Accounts payable, related party – represents amounts due to various officers of the Company for travel expenses and $11,412 for advertising and sponsorship fees due to a non-profit organization of which the president of the Company is a director and two directors of the Company are trustees.

 

NOTE 8 – 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. With the exception of the warrant liability, the fair value of these financial instruments approximates their carrying values using level 3 inputs, 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’s warrant liability was estimated using Level 3 inputs as shown in the reconciliation table below for the six-months ended June 30, 2012.

 

   Fair value measurements using
significant unobservable inputs
(Level 3)
 
Description  Warrant Liability 
Beginning balance, December 31, 2011  $498,976 
Total (gains) or losses   678,755 
Purchases, issuances and settlements   1,114,439 
Transfers in or out of Level 3   - 
Ending balance, June 30, 2012  $2,292,170 

 

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

 

Expected volatility   91.7%
Expected dividend yield   0%
Expected term   2.0 – 2.3 years 
Risk-free interest rate   0.72%

 

The Company has determined that the Black-Scholes model used to calculate the fair value of the warrant liability provides a reasonable estimate of 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 9 – STOCKHOLDERS’ DEFICIENCY

 

During the six-month period ended June 30, 2012, the Company issued:

 

·1,100,251 shares of ABHD common stock for the conversion of 206,667 shares AbTech Series A preferred stock as allowed under the terms of the Merger Agreement.
·221,657 shares of ABHD common stock for the conversion of two convertible notes issued by AbTech in 2006 and 2008 with an aggregate principal amount of $125,000;
·368,227 shares of ABHD common stock for the conversion of two promissory notes issued by ABHD in a private offering in July 2011, for principal and interest totaling $220,936; and
·157,544 shares of ABHD common stock for the conversion of three Secured Notes issued by ABHD in the September Offering for principal and interest totaling $110,280.

 

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Paid-in capital for the six-months ended June 30, 2012 was also affected by a $205,260 charge for the value of stock based compensation attributable to options and warrants vesting during the period and a charge of $1,200,433 for the beneficial conversion feature imputed on the Secured Notes sold by the Company during the period, which had a conversion price less than the market price of ABHD common stock at the date of issuance.

 

NOTE 10 – SUBSEQUENT EVENTS

 

In July 2012, the Company issued 300,000 shares of common stock to a vendor for services rendered to the Company. The cost of these services was accrued as of June 30, 2012 and is included in Accrued expenses in the condensed consolidated balance sheet at June 30, 2012.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of a variety of business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change.

 

Overview

 

ABHD was incorporated in the state of Nevada on February 13, 2007 under the name Laural Resources, Inc. On February 10, 2011, ABHD consummated the Merger with AbTech, pursuant to the Merger Agreement. Prior to the Merger, ABHD was a development stage company engaged in the business of acquiring and developing mineral properties, and a public reporting “shell company,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result of the Merger, ABHD acquired all of the issued and outstanding common stock of AbTech (through a reverse acquisition transaction) in exchange for the stockholders of AbTech acquiring a 78% ownership interest in ABHD, AbTech became ABHD’s majority-owned subsidiary, and ABHD acquired the business and operations of AbTech.

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on and related only to the operations of AbTech. Prior to the consummation of the Merger, ABHD was a “shell company” that did not have an active business and its results of operations are immaterial and are not included in the discussion below. Key factors affecting AbTech’s results of operations during the periods covered in this section include revenues, cost of revenues, operating expenses and income.

 

For accounting purposes, the Merger has been accounted for as a reverse acquisition, with AbTech as the acquirer. The condensed consolidated financial statements of ABHD included in this Quarterly Report on Form 10-Q represent a continuation of the financial statements of AbTech, with one adjustment, which is to retroactively adjust the legal capital of AbTech to reflect the legal capital of ABHD. See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

 

Results of Operations

 

Comparison of the six months ended June 30, 2012 and 2011

 

Revenue

 

Revenues for the first six months of 2012 increased by 233% compared to revenues in the same period of the prior year. The Company believes that these revenue figures reflect some improvement in the economic factors that affect sales of the Company’s products as well as some initial results of expanded business development efforts by the Company. The sales increase for this period was due entirely to the volume of products sold. The Company continues to expect significant sales growth in the second half of 2012 as new projects being pursued in stormwater, industrial and produced water markets begin to generate revenues. On June 6, 2012, Waste Management, Inc. (“WM”), a distributor of AbTech products, announced a program to provide a total stormwater management offering to U.S. municipalities in the form of public-private partnerships, collaborating with the Company and municipalities to design, build, operate and service stormwater infrastructure. The Company believes that this approach to the stormwater market could have a significant impact on future sales for the Company although the timing of such sales is difficult to project at this early stage.

 

Gross Margins

 

The Company’s gross margin on sales increased from a negative (40)% in the first half of 2011 to positive 35% in the same period of 2012. This improvement in gross margins is the direct result of increased levels of production in the first half of 2012 that spread fixed overhead cost over a broader base of products thus allowing the Company to achieve higher gross margins. The Company continues to have excess capacity and expects that gross margins will continue to improve as production increases to satisfy an expected increase in product sales.

 

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Selling, general and administrative expenses

 

Selling, general and administrative expenses increased by approximately $877,000 or 65% in the first half of 2012 as compared to the same period in 2011. These increases were due primarily to an expanded business development effort included increased payroll related costs of approximately $226,000 for additional employees, increased travel expenses of approximately $35,000 and increased costs for government affairs consultants of $35,000. The Company is also experiencing the higher costs associated with being a public company. These costs amounted to approximately $610,000 in the first half of 2012 versus approximately $265,000 in 2011. 2012 included increases over costs incurred in the same period of the prior year of approximately $183,000 for investor relations costs, $70,000 for public relations costs, $53,000 for legal fees, $24,000 for liability insurance and $17,000 for financial printing costs. Selling, general and administrative costs in the first half of 2012 also included an increase of $29,000 for directors’ fees and approximately $133,000 for stock based compensation expense related to stock options vesting during the period.

 

Research and development expenses

 

Research and development costs increased approximately 62% for the six-month period ended June 30, 2012 as compared to the same period of the prior year due to product development activities associated with lab and field testing of products in new applications and testing of new product designs.

 

Other income (expense)

 

Interest expense increased substantially for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 due primarily to four interest components present in 2012 but not present in 2011: (i) interest accrued during the six months ended June 30, 2012 on the convertible promissory notes issued by the Company from July 2011 through February 15, 2012, amounted to approximately $413,000; (ii) interest expense resulting from the amortization of the note discount created by the bifurcation of the warrant liability at the time the convertible promissory notes were issued amounted to approximately $777,000; (iii) interest expense resulting from the amortization of the note discount created by the bifurcation of the beneficial conversion feature inherent in the convertible promissory notes issued in February 2012, amounted to approximately $426,000; and (iv) the amortization of the deferred financing costs related to the private offerings in which the convertible promissory notes were sold resulted in interest expense of approximately $600,000. Total interest expense for the six months ended June 30, 2012 was $2,226,835. Interest expense for the same period of 2011 was $1,654,837, of which, $1,620,955 was attributable to a non-recurring charge for imputed interest on promissory notes that were converted to common stock on beneficial conversion terms during the second quarter of 2011.

 

For the six month period ended June 30, 2012, other income includes a loss of ($678,755) related to the valuation of the warrant liability. The warrant liability represents the estimated bifurcated value of certain warrants issued in conjunction with the Secured Notes sold by the Company during 2011 and 2012. The Company revalues this warrant liability (pursuant to ASC 815) at each balance sheet date using the Black-Scholes valuation model. The valuation of the warrant liability is dependent on the market value of the Company’s common stock. Because the Company’s stock price increased during the six-month period ended June 30, 2012, the value of the warrant liability also increased resulting in the imputed loss to the Company.

 

Comparison of the three months ended June 30, 2012 and 2011

 

Revenues

 

Revenues for the three months ended June 30, 2012 increased by 139% compared to revenues in the same period of the prior year. As with year to date sales, these revenue figures reflect some improvement in the economic factors that affect sales of the Company’s products as well as some initial results of expanded business development efforts by the Company. The sales increase for this period was due entirely to the volume of products sold.

 

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Gross Margins

 

The Company’s gross margin on sales increased from a negative (20)% for the three months ended June 30, 2011 to positive 36% in the same period of 2012. This improvement in gross margins is the direct result of increased levels of production in 2012 that spread fixed overhead cost over a broader base of products thus allowing the Company to achieve higher gross margins.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased by approximately $620,000 or 87% for the three months ended June 30, 2012 as compared to the same period in 2011. These increases were due primarily to an expanded business development effort that involved the addition of several new employees. The Company is also experiencing the higher costs associated with being a public company such as legal, financial printing, public relations and investor relations costs.

 

Research and development

 

Research and development costs increased approximately 106% for the three months ended June 30, 2012 as compared to the same period of the prior year due to product development activities associated with lab and field testing of products in new applications and testing of new product designs.

 

Other income (expense)

 

Interest expense increased substantially for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 due primarily to four interest components present in 2012 but not present in 2011: (i) interest accrued during the three months ended June 30, 2012 on the convertible promissory notes issued by the Company from July 2011 through February 15, 2012, amounted to approximately $226,000 (ii) interest expense resulting from the amortization of the note discount created by the bifurcation of the warrant liability at the time the convertible promissory notes were issued amounted to approximately $453,000; (iii) interest expense resulting from the amortization of the note discount created by the bifurcation of the beneficial conversion feature inherent in the convertible promissory notes issued in February 2012, amounted to approximately $312,000; and (iv) the amortization of the deferred financing costs related to the private offerings in which the convertible promissory notes were sold resulted in interest expense of approximately $339,000. Total interest expense for the three months ended June 30, 2012 was $1,342,414. Interest expense for the same period of 2011 was $1,621,651, of which, $1,620,955 was attributable to a non-recurring charge for imputed interest on promissory notes that were converted to common stock on beneficial conversion terms during the second quarter of 2011.

 

For the three month period ended June 30, 2012, other income includes a gain of $238,153 related to the valuation of the warrant liability. The warrant liability represents the estimated bifurcated value of certain warrants issued in conjunction with the Secured Notes sold by the Company during 2011 and 2012. The Company revalues this warrant liability (pursuant to ASC 815) at each balance sheet date using the Black-Scholes valuation model. The valuation of the warrant liability is dependent on the market value of the Company’s common stock. Because the Company’s stock price decreased during the three-month period ended June 30, 2012, the value of the warrant liability also decreased resulting in the imputed gain to the Company.

 

Liquidity and Capital Resources

 

Liquidity

 

To date the Company has not generated sufficient revenue to cover its operating costs and continues to operate with negative cash flow. 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.

 

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The Company’s working capital deficiency increased to approximately $4,450,000 at June 30, 2012 due primarily to the additional debt financing that occurred in February 2012 which increased short-term notes payable (net of discounts) by $1,362,000 during the period. Interest accruing on the various notes issued in the financings completed in 2011 and 2012 caused interest payable to increase by approximately $381,000 to $508,000 at June 30, 2012, which also contributed to the increase in the working capital deficiency at June 30, 2012.

 

Operations in the six months ended June 30, 2012 were funded primarily by the $2.6 million proceeds from the Secured Notes financing that occurred in February 2012.

 

Comparison of cash flows for the six months ended June 30, 2012 and 2011

 

Operating Activities

 

The Company had negative cash flow from operations for the six months ended June 30, 2012 of approximately $2.3 million compared to negative cash flows from operations of $1.2 million in the same period of 2011. The increase in negative cash flow from operations is primarily the result of a $1,040,000 increase in operating expenses, a reduction in accounts payable of approximately $76,000 and an increase in accounts receivable of approximately $112,000. Accrued expenses increased by approximately $281,000 during the six month period ended June 30, 2012 due primarily to a $240,000 accrual for the cost of 300,000 shares of common stock the Company has committed to issue for public relations services rendered during the period. These shares were issued in July, 2012. Inventory decreased by approximately $93,000 during the six months ended June 30, 2012 due in part to an $18,500 increase in the estimated reserve for obsolescence recorded during the period for old or slow moving inventory items.

 

Financing Activities

 

In February 2012, the Company completed the final closing of a private offering that raised $2.6 million from the sale of convertible promissory notes and related warrants. This transaction allowed the Company to maintain a cash balance of approximately $1.6 million at June 30, 2012 compared to $1.4 million at December 31, 2011, despite incurring negative cash flows from operations during the period. The cash balance at June 30, 2012 represents approximately 3.7 months of the average monthly operating expenses incurred during the six-months ended June 30, 2012 and approximately 4.2 months of the average monthly net cash used in operating activities for the same period.

 

The Company has $7.0 million (principal amount) of convertible promissory notes outstanding that all have original maturity dates in 2012. While each of these convertible promissory notes allows for extension periods beyond the original maturity date, such extensions, if applied, would result in both a higher interest rate and additional warrants being issued to the note holders (see Note 5 of Unaudited Condensed Consolidated Financial Statements). Prior to the original maturity dates of the notes, the Company intends to raise additional equity capital sufficient to repay any of the note holders that do not elect to convert the notes to common stock before their original maturity dates, however, there is no assurance that this will occur.

 

Investing Activities

 

The Company had approximately $24,500 of capital expenditures for the six months ended June 30, 2012. As of that date, the Company had no commitments for any material future capital expenditures. However, if the Company is successful in achieving significant sales growth in the second half of 2012, it may need to expand its manufacturing capacity or outsource some of its manufacturing. 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.

 

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Going Concern and Management’s Plans

 

The accompanying condensed 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 4 to the accompanying condensed 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 condensed 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 generate significant sales growth in the short term and/or raise additional capital. 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 4 to the accompanying condensed consolidated financial statements. If the Company is unable to generate significant sales growth in the near term and/or raise additional capital, 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.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Contractual Obligations

 

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

 

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.

 

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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 sheets at June 30, 2012 and 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 and a loss of $(678,755) for the six months ended June 30, 2012.

 

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

 

    June 30, 2012 
Expected volatility   91.7%
Expected dividend yield   0%
Expected term   2.0 – 2.3 years 
Risk-free interest rate   0.72%
Market price of common stock  $0.73 

 

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.

 

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Stock-based compensation

 

The Company uses the Black-Scholes 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.

 

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 (there were no options granted in the six months ended June 30, 2012):

 

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

 

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 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

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Item 4. Controls and Procedures.

 

Evaluation 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) and 15d-15(e) under the Exchange Act) as of June 30, 2012 (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 June 30, 2012, 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 Securities and Exchange Commission rules and forms, including 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.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the fiscal quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.

 

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PART IIOTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

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

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Private Placement of Secured Convertible Promissory Notes and Warrants

 

From September 19, 2011 through February 15, 2012, the Company sold $6,600,000 of secured convertible promissory notes (the “Secured Notes”) in a private offering (the “September Offering”), including $2,600,000 sold at the final closing which occurred on February 15, 2012. 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 (with respect to each such Secured Note, an “Original Maturity Date”). The Company may extend the maturity date by an additional ninety (90) day period, 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 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 applicable Original Maturity Date will be payable by the Company on the applicable Original Maturity Date in cash or in-kind, at the option of the payee. For all periods after the applicable 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 the sale for cash by the Company of debt or equity securities generating aggregate gross proceeds of at least $5,000,000 (including the proceeds from any converting Secured Notes (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 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, 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 twenty percent (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 (with certain exceptions to allow for potential financing arrangements for accounts receivable and inventory) pursuant to a security agreement entered into by the Company.

 

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 applicable Original Maturity Date, the Secured Note holder will receive an additional warrant for ten percent (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 of the Original Maturity Date 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.

 

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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 and an additional $208,000 for the $2,600,000 received at the final closing on February 15, 2012. 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 have an exercise price per share equal to the conversion price of the Secured Notes. The PA Warrants expire five years from the date of issuance and are in the same form as the securities sold in the September Offering, except that the PA Warrants include a “net issuance” cashless exercise feature.

 

The Company offered and sold the Secured Notes and related warrants of the September Offering in reliance on Section 4(2) and Regulation D of the Securities Act of 1933, as amended, to forty-eight investors, each of which the Company believes to be an “accredited investor” as defined in Rule 501(a) of Regulation D.

 

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

Item 6. Exhibits.

 

Exhibit Number   Name
21.1*   List of Subsidiaries
31.1 *   Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2 *   Rule 13a-14(d)/15d-14(d) Certification (Principal Financial Officer)
32 **   Section 1350 Certifications
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.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ABTECH HOLDINGS, INC.
  (Registrant)

 

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

 

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