UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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 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).

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.

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

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

		PAGE
PART I—FINANCIAL INFORMATION		3
Item 1.  Financial Statements		3
Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012		3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012		4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012		5
Notes to the Unaudited Condensed Consolidated Financial Statements		6
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.  Quantitative and Qualitative Disclosures About Market Risk		17
Item 4.  Controls and Procedures		17
PART II—OTHER INFORMATION		18
Item 1.  Legal Proceedings		18
Item 1A.  Risk Factors		18
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 3.  Defaults Upon Senior Securities		18
Item 4.  Mine Safety Disclosures		18
Item 5.  Other Information		18
Item 6.  Exhibits		19
Signature Page		20
Certifications
Exhibit 31.1
Exhibit 31.2
Exhibit 32

 

 

 

  PART I—FINANCIAL INFORMATION

		September 30, 2013			December 31,
		(Unaudited)			2012
ASSETS
Current assets
Cash and cash equivalents		$	620,568		$	2,543,898
Accounts receivable – trade, net			149,111			74,180
Inventories, net			431,994			397,804
Deferred charges, net			7,424			10,128
Prepaid expenses and other current assets			27,675			14,077
Total current assets			1,236,772			3,040,087
Fixed assets, net			67,819			72,981
Security deposits			33,940			33,940
Deferred charges, net			-			4,892
Total assets		$	1,338,531		$	3,151,900
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current liabilities
Accounts payable		$	583,788		$	263,379
Accounts payable – related party			53,771			52,636
Loans from stockholders			9,000			9,000
Bank line of credit			20,000			-
Convertible promissory notes, net of discounts			1,750,000			620,000
Convertible promissory notes– related party			-			1,185,000
Promissory notes, net of discounts			500,000			-
Capital lease obligation – current portion			3,832			3,739
Customer deposits			42,849			41,584
Accrued interest payable			27,975			28,676
Accrued expenses			194,648			190,782
Total current liabilities			3,185,863			2,394,796
Due to related party			92,015			96,181
Convertible promissory notes – non-current portion			-			6,000
Convertible promissory notes– related party – non-current portion			-			525,000
Capital lease obligation – non-current portion			3,774			6,654
Total liabilities			3,281,652			3,028,631
Commitments and contingencies
Stockholders’ equity (deficiency)
Common stock, $0.001 par value; 300,000,000 authorized shares;
67,843,879 and 64,638,372 shares issued and outstanding at
September 30, 2013 and December 31, 2012, respectively			67,844			64,638
Additional paid-in capital			42,721,319			40,372,764
Non-controlling interest			(2,052,816)			(1,814,388)
Accumulated deficit			(42,679,468)			(38,499,745)
Total stockholders’ equity (deficiency)			(1,943,121)			123,269
Total liabilities and stockholders’ equity (deficiency)		$	1,338,531		$	3,151,900

 

 

	3

		Three Months ended						Nine Months ended
		September 30						September 30
		2013			2012			2013			2012
Net revenues		$	72,476		$	81,208		$	306,079		$	561,000
Cost of revenues			90,326			69,327			280,643			379,606
Gross profit (loss)			(17,850)			11,881			25,436			181,394
Operating expenses
Selling, general and administrative			1,259,351			1,038,372			3,778,169			3,268,476
Research and development			216,129			176,559			607,208			600,249
Total operating expenses			1,475,480			1,214,931			4,385,377			3,868,725
Operating loss			(1,493,330)			(1,203,050)			(4,359,941)			(3,687,331)
Other income (expense)
Interest expense			(33,857)			(1,480,123)			(58,979)			(3,706,958)
Loss on valuation of warrant liability			-			(553,536)			-			(1,232,291)
Other income			1			25,421			769			26,521
Total other income (expense), net			(33,856)			(2,008,238)			(58,210)			(4,912,728)
Net loss before income taxes			(1,527,186)			(3,211,288)			(4,418,151)			(8,600,059)
Provision for income taxes			-			-			-			-
Net loss			(1,527,186)			(3,211,288)			(4,418,151)			(8,600,059)
Net loss attributable to non-controlling interest			(178,395)			(172,289)			(549,044)			(437,125)
Net loss attributable to controlling interest		$	(1,348,791)		$	(3,038,999)		$	(3,869,107)		$	(8,162,934)
Basic and diluted loss per common share		$	(0.02)		$	(0.06)		$	(0.06)		$	(0.17)
Basic and diluted weighted average number of shares outstanding			67,765,628			51,481,822			66,571,873			49,381,008

 

---

		2013			2012
Operating Activities
Net loss		$	(4,418,151)		$	(8,600,059)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			22,311			17,711
Common stock issued for services rendered			192,000			240,000
Stock-based compensation expense			256,626			297,247
Interest related to beneficial conversion feature			-			971,514
Accrued interest converted to common stock			36,736			-
Note discount amortized as interest			10,399			1,243,812
Deferred charges expensed as interest			7,596			867,053
Loss (gain) on change in fair value of warrant liability			-			1,232,291
Changes in operating assets and liabilities:
Accounts receivable			(74,931)			(102,906)
Inventories			(34,190)			114,854
Prepaid expenses and other current assets			(13,598)			(18,275)
Security deposits			-			(15,963)
Deferred charges			-			(258,181)
Accounts payable			321,544			(140,973)
Customer deposits			1,265			3,219
Accrued interest payable			(701)			360,496
Accrued expenses			3,866			18,342
Net cash used in operating activities			(3,689,228)			(3,769,818)
Investing Activities
Purchases of fixed assets			(17,149)			(30,632)
Net cash used in investing activities			(17,149)			(30,632)
Financing Activities
Proceeds from sale of common stock and warrants			-			3,450,337
Proceeds from exercise of warrants			-			220,000
Proceeds from bank line of credit			20,000			-
Proceeds from notes payable			1,770,000			2,600,000
Repayment of borrowings			-			(275,000)
Repayments under capital lease obligation			(2,787)			-
Net decrease in due to related party			(4,166)			(3,953)
Net cash provided by financing activities			1,783,047			5,991,384
Net change in cash and cash equivalents			(1,923,330)			2,190,934
Cash and cash equivalents at beginning of period			2,543,898			1,386,502
Cash and cash equivalents at end of period		$	620,568		$	3,577,436
Supplemental cash flow information:
Cash paid for interest		$	4,949		$	264,051
Cash paid for income taxes		$	-		$	-
Non-cash investing and financing activities:
Common stock issued for conversion of debt, including accrued interest		$	1,892,736		$	2,540,221
Stock based compensation expense		$	256,626		$	297,247
Common stock issued for services rendered		$	192,000		$	240,000
Unamortized portion of debt discount		$	-		$	342,241
Portion of debt discount in deferred charges		$	-		$	239,851
Beneficial conversion feature recorded to additional paid-in capital		$	-		$	1,200,433
Issuance of warrant liability		$	-		$	1,133,747
Warrant Liability reclassed to paid-in capital upon exercise of warrant		$	-		$	212,780
Fixed assets purchased through capital lease		$	-		$	11,600

 

 

Basis of Financial Statement Presentation  – The condensed consolidated financial statements include the accounts of ABHD, AbTech, AEWS and ESC. Intercompany accounts and transactions have been eliminated.  The non-controlling interest shown on the Condensed Consolidated Balance Sheet as of September 30, 2013, represents the ownership interest in AbTech of the holders of AbTech Series A preferred stock that elected not to exchange their Series A preferred shares for common shares of ABHD as allowed by the Merger Agreement.

 

	6

 

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 Share – Basic net loss per share is computed by dividing net loss attributable to common stockholders 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 2013 and 2012 would be anti-dilutive.  The following chart lists the securities as of September 30, 2013 and 2012 that were not included in the computation of diluted net loss per share because their effect would have been antidilutive:

	Common Shares
	September 30, 2013  Unaudited			September 30, 2012
				Unaudited
Options to purchase common stock		9,529,863		9,223,458
Warrants to purchase common stock		7,094,839		8,339,599
Convertible promissory notes		2,807,008		9,758,700
Convertible preferred stock in AbTech		6,457,467		6,563,943
		25,889,177		33,885,700

 

Recent Accounting Pronouncements – 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.

		September 30, 2013			December 31, 2012
		(Unaudited)
Raw materials	$	98,724		$	105,971
Work in process		389,658			354,554
Finished goods		53,612			47,279
Reserve for obsolescence		(110,000)			(110,000)
Total	$	431,994		$	397,804

 

 

	7

Accounts payable, related party –  At December 31, 2012, the accounts payable – related party balance included $42,500 of fees due to directors of the Company for unpaid directors fees earned during 2012 and $10,000 for advertising and sponsorship fees due to a non-profit organization of which the president of the Company is a director.

 

 

	8

 

   

Interest Components			2013			2012
1.	Interest accrued on notes outstanding and other finance charges.		$	40,984		$	624,580
2.	Amortization of the note discount created by the bifurcation of the warrant value for warrants issued with convertible promissory notes.			10,399			1,243,812
3.	Interest imputed on promissory notes issued with beneficial conversion terms.			-			971,513
4.	Amortization of deferred financing costs related to private offerings of debt.			7,596			867,053
	TOTAL INTEREST EXPENSE		$	58,979		$	3,706,958

Included in other income (expense) for the nine months ended September 30, 2012 was a loss of $1,232,291 on the valuation of a warrant liability.  The warrant liability represented the estimated bifurcated value of certain warrants issued in conjunction with convertible promissory notes sold by the Company during 2011 and 2012.  The Company revalued this warrant liability at each balance sheet date resulting in a gain or loss for the period.  As of December 31, 2012, the warrant liability had been reclassified to additional paid-in capital due to the expiration of certain factors that had originally qualified the warrants to be classified as a derivative, and was, therefore, not revalued as of September 30, 2013.  Accordingly, there is no gain or loss recorded for the nine months ended September 30, 2013.

 

 

	12

 

Revenues

 

Revenues for the three months ended September 30, 2013 decreased by $8,732 (11%) compared to revenues in the same period of the prior year.  As with year to date sales, these revenue figures reflect the challenges the Company has met in moving projects forward in the face of continued funding constraints for new municipal and federal facility stormwater projects and the complexities of developing public private partnerships (“P3s”) for large municipal projects.  The reduction in revenue for this period was due entirely to the volume of products sold.

Gross Margin

 

The Company’s gross margin on sales of negative (25)% for the three months ended September 30, 2013 declined significantly from the 15% gross margin reported for the same period of the prior year reflecting the high sensitivity of gross margins to production levels and the corresponding absorption of fixed production costs by the units produced.  Unabsorbed production costs drive the gross margin down in periods of low production.  In the third quarter of 2013, the Company’s production facility operated at only 2% of capacity.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased by approximately $221,000 or 21% for the three months ended September 30, 2013 as compared to the same period in 2012.  This increase in SG&A expenses was largely attributable to new operations of AEWS of $89,000, legal fees of $24,000 resulting from SEC filings, investor relations expenses of $112,000 resulting from the issuance of stock for services to an investor relations consultant, and other consulting fees of $33,000. These expense increases were partially offset by a reduction in government affairs consulting expenses in the amount of $24,000.

Research and development

 

Research and development costs increased by approximately $40,000 or 22% for the three months ended September 30, 2013 as compared to the same period of the prior year due primarily to approximately $37,000 of costs for research conducted for AbTech by a university. 

 

Other income (expense)

 

Interest expense decreased substantially for the three months ended September 30, 2013 as compared to the same period of 2012.  The various components of interest expense that accounted for the decrease are summarized in the table below:

Interest Components			2013			2012
1.	Interest accrued on notes outstanding and other finance charges.		$	22,401		$	209,474
2.	Amortization of the note discount created by the bifurcation of the warrant liability at the time the convertible promissory notes were issued.			8,924			458,332
3.	Interest imputed on promissory notes issued with beneficial conversion terms.			-			545,369
4.	Amortization of deferred financing costs related to private offerings of debt.			2,532			266,948
	TOTAL INTEREST EXPENSE		$	33,857		$	1,480,123

Included in other income (expense) for the three months ended September 30, 2012 was a loss of $(553,536) on the valuation of a warrant liability.  The warrant liability represented the estimated bifurcated value of certain warrants issued in conjunction with convertible promissory notes sold by the Company during 2011 and 2012.  The Company revalued this warrant liability at each balance sheet date resulting in a gain or loss for the period.  As of December 31, 2012, the warrant liability had been reclassified to additional paid-in capital due to the expiration of certain factors that had originally qualified the warrants to be classified as a derivative, and was, therefore, not revalued as of September 30, 2013.  Accordingly, there is no gain or loss recorded for the three months ended September 30, 2013.

 

 

On August 9, 2013, the Company borrowed $600,000 pursuant to a secured convertible promissory note with an interest rate of 6.5% per annum and a feature that allows conversion into shares of the Company’s common stock at a conversion rate of $0.70 per share (later adjusted to $0.53 per share). This note is due January 31, 2014.

 

Comparison of cash flows for the nine months ended September 30, 2013 and 2012

The Company had approximately $17,000 of capital expenditures for the nine months ended September 30, 2013 compared to $31,000 for the same period of 2012. As of September 30, 2013, 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 2013, it may need to expand its manufacturing capacity or outsource some of its manufacturing. The Company is currently considering both options. 

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 warrants.  During the nine months ended September 30, 2013, the Company made $2,787 of scheduled payments pursuant to an outstanding capital lease, reduced the amount due to related party by $4,166 and borrowed $1,790,000 pursuant to the various promissory notes referenced in the discussion under “Liquidity” above.

 

Going Concern and Management’s Plans

 

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, 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. As such, the Company’s independent registered public accounting firm has expressed an uncertainty about the Company’s ability to continue as a going concern in their opinion attached to the Company’s audited financial statements for the year ended December 31, 2012. 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 raise additional capital. The Company’s ability to achieve these objectives cannot be determined at this time. 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 raise additional capital, there is a risk that the Company could default on debt maturing during 2013, 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

 

 

Critical Accounting Policies and Estimates

 

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on ABHD’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, management evaluates these estimates and assumptions. Management bases the estimates on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

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

 

The Company’s inventory is stated at the lesser of cost or market value of inventory in stock at the valuation date due to obsolescence, slow movement or defects. This estimated valuation 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. 

 

 

	16

   

 

On February 28, 2013, the Company filed a complaint (the “Complaint”) with the Superior Court of the State of Arizona against Arctech, Inc. (“Arctech”) arising from the Company’s License, Supply and Distribution Agreement with Arctech, dated June 6, 2012 (the “Agreement”).  The Complaint claims that, due to fraudulent misrepresentations and omissions made by Arctech regarding the performance of their Humasorb technology, which technology is the subject of the Agreement, the Agreement should be declared null, void, unenforceable, and should be rescinded, such that the Company and Arctech should be placed in their respective positions prior to the execution of the Agreement. The Complaint also requests that the Company should be awarded damages and attorney’s fees in an amount to be determined at trial.  Prior to filing the Complaint, the Company made payments of $75,000 to Arctech which, under the terms of the Agreement, were to be creditable against certain products and services to be provided to the Company by Arctech.  On April 4, 2013, Arctech filed with the court a response to the complaint largely denying the Company’s claims and making certain counterclaims alleging that the Company had breached the Agreement by not making certain periodic payments to Arctech as specified in the Agreement, that Arctech had suffered damages of at least $220,000 as a result and that Arctech should be awarded damages, attorney’s fees, costs and interest in an amount to be determined at trial. The Company believes it has meritorious defenses and intends to aggressively defend its position regarding this matter.

 

In July 2013, the Company issued 7,941 shares of ABHD common stock pursuant to the cashless exercise of a warrant for 30,000 shares and an exercise price of $0.50 per share.  The number of shares issued represented the difference between the market price at the date of exercise and the $.50 per share exercise price multiplied by the number of warrant shares being exercised, divided by the market price per share at the date of exercise. The Company issued the common stock pursuant to the exemption contained in Section 4(2) of the Securities Act.