UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: March 31, 2017

 

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

 

ABTECH HOLDINGS, INC.

 

(Exact name of registrant as specified in its charter)

 

Nevada   14-1994102  
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     

4110 N. Scottsdale Road, Suite 235

Scottsdale, Arizona

  85251
(Address of principal executive offices)   (Zip Code)

 

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

 

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
               
            ¨ Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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).

  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 May 15, 2017
Common stock, $.001 par value   501,678,288

 

 

 

 

ABTECH HOLDINGS, INC.

FORM 10-Q

 

March 31, 2017

 

INDEX

 

    PAGE
PART I—FINANCIAL INFORMATION   3
     
Item 1. Financial Statements   3
     
Condensed Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016   3
     
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016   4
     
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016   5
     
Notes to the Unaudited Condensed Consolidated Financial Statements   6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   14
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   20
     
Item 4. Controls and Procedures   20
     
PART II—OTHER INFORMATION   20
     
Item 1. Legal Proceedings   20
     
Item 1A. Risk Factors   21
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   21
     
Item 3. Defaults Upon Senior Securities   21
     
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 within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended, that involve many risks and uncertainties. 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. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. 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,” “future,” “ongoing,” 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 “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on March 31, 2017.

 

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, changes in assumptions 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.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) 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 GAAP for complete financial statements. The December 31, 2016 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 GAAP. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. 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, 2016.

 

  2  

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ABTECH HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

    March 31, 2017
(Unaudited) 		    December 31,
2016 		 
ASSETS                
Current assets                
Cash and cash equivalents   $ 95,490     $ 84,415  
Accounts receivable – trade, net     61,616       45,842  
Inventories, net     355,536       342,117  
Prepaid expenses and other current assets     22,261       24,373  
Total current assets     534,903       496,747  
                 
Fixed assets, net     41,799       44,406  
Security deposits     28,402       28,402  
Total assets   $ 605,104     $ 569,555  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)                
Current liabilities                
Accounts payable   $ 2,068,412     $ 1,402,777  
Accounts payable – related party     121       1,101  
Loans from stockholders     9,000       9,000  
Bank line of credit     80,354       82,870  
Notes payable, net of discounts     250,000       250,000  
Convertible promissory notes, net of discounts     822,580       850,000  
Due to investors - related party     4,663,000       3,731,000  
Accrued interest payable     485,697       364,080  
Accrued expenses     383,784       339,732  
Total current liabilities     8,762,948       7,030,560  
                 
Due to related party     70,292       71,949  
Total liabilities     8,833,240       7,102,509  
                 
Commitments and contingencies                
                 
Stockholders’ equity (deficiency)                
Common stock, $0.001 par value; 800,000,000 authorized shares; 501,678,288 shares issued and outstanding at March 31, 2017 and December 31, 2016     501,678       501,678  
Additional paid-in capital     61,054,771       61,050,271  
Non-controlling interest     (4,427,910 )     (4,197,807 )
Accumulated deficit     (65,356,675 )     (63,887,096 )
Total stockholders’ equity (deficiency)     (8,228,136 )     (6,532,954 )
Total liabilities and stockholders’ equity (deficiency)   $ 605,104     $ 569,555  

 

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

 

  3  

 

 

ABTECH HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31,

 

 

 

    2017     2016  
             
Net revenues   $ 106,562     $ 42,637  
                 
Cost of revenues     109,217       77,358  
Gross profit (loss)     (2,655 )     (34,721 )
                 
Operating expenses                
Selling, general and administrative     1,368,093       1,086,540  
Research and development     199,631       337,636  
Total operating expenses     1,567,724       1,424,176  
                 
Operating loss     (1,570,379 )     (1,458,897 )
                 
Other income (expense)                
Interest expense     (129,303 )     (24,658 )
Total other income (expense), net     (129,303 )     (24,658 )
                 
Loss before income taxes     (1,699,682 )     (1,483,555 )
                 
Provision for income taxes     -       -  
                 
Net loss     (1,699,682 )     (1,483,555 )
                 
Net loss attributable to non-controlling interest     (230,102 )     (202,375 )
                 
Net loss attributable to controlling interest   $ (1,469,580 )   $ (1,281,180 )
                 
Basic and diluted loss per common share   $ (0.00 )   $ (0.00 )
                 
Basic and diluted weighted average number of shares outstanding     501,678,288       501,678,288  

 

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

 

  4  

 

 

ABTECH HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31,

 

 

    2017     2016  
Operating Activities                
Net loss   $ (1,699,682 )   $ (1,483,555 )
Adjustments to reconcile net loss to net cash used in operating activities                
Depreciation     3,012       3,124  
Stock-based compensation expense     4,500       9,204  
Changes in operating assets and liabilities:                
Accounts receivable     (15,774 )     81,861  
Inventories     (13,419 )     7,368  
Prepaid expenses and other current assets     2,112       2,943  
Accounts payable     664,655       310,593  
Accrued interest payable     121,617       21,548  
Accrued expenses     44,052       79,609  
Net cash used in operating activities     (888,927 )     (967,305 )
                 
Investing Activities                
Purchases of fixed assets     (405 )     (1,058 )
Net cash used in investing activities     (405 )     (1,058 )
                 
Financing Activities                
Proceeds from due to investors – related party     932,000       300,000  
Draws on bank line of credit     -       90,338  
Repayments on bank line of credit     (2,516 )     -  
Repayments on convertible promissory notes     (27,420 )     -  
Decrease in related party loan     (1,657 )     (1,576 )
Net cash provided by financing activities     900,407       388,762  
                 
Net change in cash and cash equivalents     11,075       (579,601 )
Cash and cash equivalents at beginning of period     84,415       682,860  
Cash and cash equivalents at end of period   $ 95,490     $ 103,259  
                 
Supplemental cash flow information:                
Cash paid for interest   $ 7,738     $ 2,773  
Cash paid for income taxes   $ -     $ -  

 

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

 

  5  

 

 

ABTECH HOLDINGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 – ORGANIZATION

 

Abtech Holdings, Inc. (“ABHD” or the “Company”) was incorporated under the laws of the State of Nevada on February 13, 2007, and has authorized capital stock of 800,000,000 shares of common stock at $0.001 par value. ABHD is the parent holding company.

 

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. AbTech is a majority-owned subsidiary of ABHD and is the operating 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 has also licensed or developed other products that reduce bacteria, remove heavy metals or reduce the volume of polluted water through evaporation. AbTech sells products and systems for the treatment of stormwater, industrial process water and produced water in oil and gas extraction operations. The Company is headquartered in Scottsdale, Arizona and has a manufacturing facility located in Phoenix, Arizona.

 

In 2012, the Company formed a 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 a wholly owned subsidiary of the Company and the operations of AEWS for the periods reflected in these condensed consolidated financial statements are allocated 100% to the Company. The operations of AEWS, which focused on new business development activities, were transferred to AbTech in 2015 and as of March 31, 2017, AEWS was dormant. AEWS’s office, located in Raleigh, North Carolina, was closed at the end of April 2017.

 

AbTech’s wholly-owned subsidiary, Environmental Security Corporation (“ESC”), was formed by the Company in 2003 to develop a sensor array technology designed to detect impurities in water flows. ESC owns a U.S. patent on this technology and has acquired rights to another monitoring technology, but otherwise had no operations during 2017 or 2016.

 

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 Presentation – The condensed consolidated financial statements include the accounts of ABHD, AbTech, AEWS and ESC. Intercompany accounts and transactions have been eliminated. The shares of AbTech preferred stock that have not converted to shares of ABHD common stock represent the non-controlling interest shown on the condensed consolidated balance sheets.

 

The condensed consolidated financial statements as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 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 GAAP 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.

 

Significant estimates are used in determining the allowance for doubtful accounts and obsolete inventory, in valuing stock-based compensation, in valuing warrants, in determining the classification of conversion options embedded in convertible promissory notes and in evaluating the Company’s ability to continue as a going concern. Due to the uncertainties inherent in the formulation of accounting estimates, and the significance of these items, it is reasonable to expect that the estimates in connection with these items could be materially revised within the next year.

 

  6  

 

 

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

 

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

 

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

 

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

 

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

 

In 2017 and 2016, the Company recognized revenue from the sale of its Smart Sponge ® and Smart Sponge Plus products, including Ultra-Urban ® Filters, Line Skimmers, Passive Skimmers and Smart Paks ® . The Smart Paks are usually sold as a component of an engineered system such as an end-of-pipe vault or other larger multi-product treatment train. The Company provides engineering design services on some engineered solutions. Revenue from design services are recognized at the time the engineering services are rendered.

 

The Company recognizes shipping and handling fees as revenue and the related expenses as a component of cost of sales. All internal handling charges are charged to selling, general and administrative expenses.

 

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

 

Net Loss Per Share – Basic net loss per share is computed by dividing net loss attributable to controlling interests by the weighted average number of shares of common stock outstanding during the period. 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 2017 and 2016 would be anti-dilutive. The following chart lists the securities as of March 31, 2017 and 2016 that were not included in the computation of diluted net loss per share because their effect would have been antidilutive:

 

    Common Shares  
    March 31, 2017
Unaudited 		    March 31, 2016
Unaudited 		 
Options to purchase common stock     3,547,240       5,082,810  
Warrants to purchase common stock     9,359,051       13,692,311  
Convertible promissory notes     3,521,077       1,252,948  
Convertible preferred stock in AbTech     6,457,467       6,457,467  
      22,884,835       26,485,536  

 

  7  

 

 

Recent Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “ Revenue from Contracts with Customers (Topic 606) ,” which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU No. 2014-09 defines a five step process to achieve this core principle and in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. In March 2016, the FASB issued ASU No. 2016-08 which further clarifies the guidance on the principal versus agent considerations within ASU No.2014-09. In April 2016, the FASB issued ASU No. 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU No 2014-09. In May 2016, the FASB issued ASU No. 2016-12 to improve revenue recognition in the areas of collectability, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition. This update also amends the disclosure requirements within ASU No. 2014-09 for entities that retrospectively apply the guidance. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU No. 2014-09 recognized at the date of adoption. The Company is currently evaluating ASU No. 2014-09 and, based on the Company’s historical and current revenue transactions, believes that it will not have a material effect on the Company’s consolidated financial statements until such time as the Company begins to generate material revenues through contracts with customers that are the subject of ASU No. 2014-09.

 

In August 2014, the FASB issued ASU No. 2014-15, “ Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ,” which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The Company has adopted the guidance of ASU No. 2014-15 in these condensed consolidated financial statement footnote disclosures.

 

In April 2015, the FASB issued ASU No. 2015-3, “ Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs ,” which provides that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. Previously, the Company has recognized such debt issuance costs as separate assets under the caption “deferred charges.” The Company has now adopted this new standard. However, its adoption had no impact on the condensed consolidated balance sheets dated March 31, 2017 and December 31, 2016.

 

In July 2015, the FASB issued ASU No. 2015-11, “ Inventory (Topic 330): Simplifying the Measurement of Inventory, ” which requires entities to measure most inventory “at the lower of cost and net realizable value.” Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company has now adopted this new standard prospectively for fiscal years beginning after December 15, 2016, and does not expect that it will have a material effect on the Company’s measurement of inventory.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which requires that entities classify deferred tax liabilities and assets as noncurrent in a classified statement of financial position. The Company has now adopted this new standard for fiscal years beginning after December 15, 2016, although such adoption had no effect on the Company’s current presentation of deferred tax assets and liabilities because such assets and liabilities have been reduced to zero by the deferred tax asset valuation allowance.

 

In January 2016, the FASB issued ASU No. 2016-01, “ Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and affects all entities that hold financial assets or owe financial liabilities. The update takes effect for public entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the new standard and its potential impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “ Leases (Topic 842),” which, among other provisions, requires lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP. Under this new provision, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public entities. The Company has various operating leases and expects that these amendments will significantly affect the manner in which such operating leases are presented in its financial statements. While the Company expects the amendment to have a minimal effect on the amount of operating expense recognized in the consolidated statements of operations, the amendment will result in the Company including on its balance sheet a right to use asset and a corresponding liability for the lease payments due under operating leases in effect at the balance sheet dates.

 

  8  

 

 

In March 2016, the FASB issued ASU No. 2016-09, “ Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which involves simplification of several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company has now adopted this new standard for fiscal years beginning after December 15, 2016 and it has had no impact on these condensed consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the new standard which will apply to the estimation of credit losses on the Company’s trade receivables, but it is not expected to have a material effect on the Company’s measurement of such credit losses.

 

In August 2016, the FASB issued ASU No. 2016-15, “ Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which addresses how eight specific cash flow issues should be presented and classified in the statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted and the amendments are to be applied using a retrospective transition method. The Company is currently evaluating the new standard and its potential impact on the Company’s presentation of the relevant cash flow items in the Condensed Consolidated Statements of Cash Flows.

 

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. Inventory consisted of the following as of the dates indicated below:

 

    March 31, 2017     December 31, 2016  
    (Unaudited)        
Raw materials   $ 116,123     $ 99,182  
Work in process     274,004       279,045  
Finished goods     28,409       26,890  
Reserve for obsolescence     (63,000 )     (63,000 )
Total   $ 355,536     $ 342,117  

 

NOTE 4 – GOING CONCERN

 

These unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates 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 and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company’s product development activities and the costs of introducing its technologies to the market and pursuing market acceptance. In addition, the Company has a working capital deficit of approximately $8.2 million as of March 31, 2017, with approximately $6.2 million of debt and accrued interest that will become due in 2017. Realization of a major portion of the assets in the accompanying consolidated balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company’s ability to continue as a going concern. As a result, the Company’s independent registered public accounting firm included an emphasis-of-matter paragraph with respect to the Company’s audited consolidated financial statements for the year ended December 31, 2016, expressing uncertainty regarding the Company’s assumption that it will continue as a going concern.

 

  9  

 

 

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, service its debt and resolve the legal matters described in NOTE 9 – LITIGATION AND CONTINGENCIES. Management’s plans in regard to these matters are described as follows:

 

Sales and Marketing . Historically, the Company has generated revenues by selling its products directly to end customers, through distributors in key geographic markets and in recent years through alliances to penetrate key market segments such as municipal stormwater, federal facilities and industrial process water. The Company, including AEWS, pursued contracts that would enable it to bring its stormwater expertise to bear in all phases of rebuilding projects, including the design, installation and operation of water treatment systems. The Company signed its first contract for such a project with the County of Nassau in October 2013. After more than a year of work on this project which progressed slowly and was hampered by many delays, the contract was suspended by Nassau County in May 2015, following the announcement of the federal investigation of a state senator, Dean Skelos, and his son Adam Skelos, who had acted as a consultant to the Company. As a consequence of the negative publicity for the Company surrounding these events, the Company began to direct a greater portion of its sales efforts towards non-stormwater applications of its products in commercial and industrial markets, while continuing to support stormwater product sales through direct sales staff and through distributors in international markets. The Company hired a team of seasoned sales professionals with extensive experience in industrial markets. The Company has made strides to develop or refine products for these new markets intended to provide effective solutions for the treatment of produced water in the mining and drilling (fracking) industries, filtration of process water used in industrial applications and the filtration of heavy metals from water in a variety of applications. These developments show promise for future revenues once the products and systems being developed for these markets are proven and refined.

 

Financing. To date, the Company has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. During the first quarter of 2017, the Company received $932,000 in cash advances from one of its major stockholders. Terms for these loans have not been formalized, however, the Company has treated the loans as debt accruing interest at 10% per annum. While it is possible that such loans will be converted into purchases of common stock of the Company, there is no assurance that such conversions will occur.

 

Management believes that upon validation of its water treatment solutions for the stormwater, industrial and commercial markets, and with an improving economy, sales revenue can grow significantly, which would enable the Company to reverse its negative cash flow from operations and raise additional capital as needed to service debt and fund operations. However, there is no assurance that the Company’s overall efforts will be successful. 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 2017. Further, the Company is currently in default on notes that matured in April 2017; however, the Company is currently in discussions with the noteholder to extend the maturity date but there can be no assurances that the noteholder will not elect to exercise his default remedies under the notes. The Company does not currently have sufficient liquidity to repay the indebtedness. While the Company does not expect the noteholder to accelerate the indebtedness, the noteholder may do so at any time, or may initiate foreclosure actions, or seek any other remedies permitted by the terms of the notes and applicable law. Should the holders of the Company’s indebtedness seek to accelerate the indebtedness upon an event of default, the Company could be required to discontinue or significantly reduce the scope of its operations if no other means of financing its operations are or become available. Consequently, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

Accounts payable, related party – At March 31, 2017 and December 31, 2016, “Accounts payable – related party” represents amounts owed to executives of the Company for travel expenses.

 

Accrued expenses – At March 31, 2017 and December 31, 2016, accrued expenses included $221,750 and $206,750, respectively, for fees due to directors of the Company for their services as directors.

 

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Due to investors – In March 2017, an investor that is considered to be a related party because it has beneficial ownership interest in the Company of greater than 5% made cash advances to the Company totaling $932,000, as short-term loans. During 2016, this same related party investor made similar cash advances to the Company totaling $3,231,000. The specific terms of these loans have not yet been determined.

 

During 2016, another individual who is an affiliate of a greater than 5% shareholder made cash advances to the Company totaling $500,000, as short-term loans. The specific terms of these loans have not yet been determined.

 

NOTE 6 – PROMISSORY NOTES AND OTHER DEBT

 

Information regarding the various promissory notes that were outstanding as of March 31, 2017 is set forth in the table below:

 

    Principal
Amount 		    Interest
Rate 		    Maturity Date     Conversion
Rate 		 
Current promissory notes                              
Secured, convertible note   $ 72,580       11.5 %   10/31/17 (1)     $ 0.032  
Secured note     250,000       11.5 %   4/30/17 (2)       N/A  
Unsecured, convertible note     250,000       6.5 %   4/30/17 (2)     $ 0.53  
Unsecured, convertible note     500,000       6.5 %   4/30/17 (2)     $ 0.64  
Total promissory notes   $ 1,072,580                        

 

(1) On October 21, 2016, the Company and the holder of this note mutually agreed to amend the note by: (i) extending the maturity date from April 12, 2016 to October 31, 2017; (ii) continuing the interest rate at 11.5% per annum through the new maturity date; (iii) obligating the Company to make monthly payments on the note of $10,000 per month beginning in November 2016; and (iv) adding a conversion feature to the note that allows the note holder to convert the unpaid balance due under the note into shares of the Company’s common stock at a conversion rate of $0.032 per share.

 

(2) In March 2017, the Company and the holder of these notes mutually agreed to extend the maturity dates of these notes to April 30, 2017, thus curing the technical default of the notes that had occurred on the prior maturity dates of May 11, 2016 for the secured note and April 15, 2016 for the unsecured notes. As of April 30, 2017, these notes were once again in technical default and the Company is attempting to further extend the maturity dates. However, the Company gives no assurance that an agreement to extend such maturity dates will be achieved.

 

The convertible promissory notes are convertible into shares of the Company’s common stock at the indicated conversion rate. The secured notes have a security interest in all of the personal property and other assets of the Company. The note discounts resulting from warrants issued with the notes and any beneficial conversion features inherent in the convertible notes, were fully amortized prior to 2016.

 

Bank Line of Credit

 

The Company has a bank line of credit with a credit limit of $100,000. This line of credit has an annual interest rate of prime plus 6.75% and requires monthly payment of any interest due plus approximately 1% of the outstanding balance. At March 31, 2017 and December 31, 2016, the outstanding balance due on the bank line of credit was $80,354 and $82,870, respectively.

 

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NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, notes payable and convertible notes payable. It is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, 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, if any, are reported in other income (expense) as gain (loss) on change in fair value. At March 31, 2017, the Company had no financial instruments outstanding that were estimated using level 1, level 2 or level 3 inputs, other than discussed above.

 

NOTE 8 – STOCKHOLDERS’ DEFICIENCY

 

The $4,500 increase in additional paid-in capital for the three-months ended March 31, 2017 is attributable to stock based compensation for stock options vesting during the period.

 

There were no stock options or warrants granted during the three-months ended March 31, 2017.

 

NOTE 9 – LITIGATION AND CONTINGENCIES

 

On May 28, 2015, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) that stated that the staff of the SEC is conducting an investigation In the Matter of Abtech Holdings, Inc. (NY-9262) .  Generally, the SEC’s subpoena asked for all documents, agreements, and communications concerning (i) the Company’s Contract for Services with Nassau County, New York, dated October 8, 2013; (ii) Adam Skelos, Dean Skelos, and their related entities; (iii) SLC Clean Water, LLC, Axiom, Glenwood Management, and a number of other listed individuals and entities; (iv) certain Board and Board committee minutes and related materials; (v) certain policies, procedures, and internal controls in effect at the Company; (vi) certain communications with the Company’s independent registered public accounting firm, transfer agent, potential and current investors, broker-dealers, investment advisors, and finders; and (vii) certain other organizational and financial account information of the Company.  The Company is cooperating with the SEC and has provided a substantial number of documents in response to the subpoena.  In 2016 and 2017, the SEC issued additional subpoenas to two officers, a director and a prior director of the Company pertaining to this investigation. The Company believes the SEC’s subpoenas are a result of the complaint announced on May 4, 2015 that was filed by federal authorities against Dean and Adam Skelos. That trial came to an end in December 2015 when both men were convicted of eight counts each, including fraud, bribery and extortion of three separate companies – one of which was the Company. The Company cooperated fully with the United States Attorney’s Office for the Southern District of New York throughout the Skelos investigation and trial, by providing documents and other evidence and having the Company’s president and CEO testify on behalf of the government at the trial. With the trial now concluded, the Company’s involvement in this matter has ended and the Department of Justice has confirmed to the Company that the Company and its subsidiaries are not the subject or target of any ongoing public corruption investigation. The Company and its officers and directors have continued to cooperate with the SEC in responding to their subpoenas. We have not yet recorded a liability related to the cost of resolving this matter although we have incurred and recognized material compliance costs to date. At this time, no estimate of the possible loss or range of loss can be made. In the meantime, we are continuing to incur significant legal fees for compliance with the SEC subpoenas.

 

In May 2016, the Company, AEWS and AbTech received letters from the New York State Joint Commission on Public Ethics (“JCOPE”) asking for a written response to allegations constituting potential violations of lobbying laws in the state of New York. The Company’s legal counsel provided a written response to JCOPE on May 31, 2016, wherein they presented the Company’s position that it has consistently complied with all applicable lobbying laws. On August 15, 2016, JCOPE issued notices to the Company, AbTech and AEWS that JCOPE had decided to commence an investigation to determine whether a substantial basis exists to conclude that the Company knowingly and willfully violated lobbying laws in the state of New York. The Company intends to defend its position that it has consistently complied with all applicable lobbying laws and is working with JCOPE to resolve this matter. However, it is not clear at this time how the matter will ultimately be resolved.

 

In accordance with the stockholder proposal approved by the Company’s stockholders at the May 13, 2016 Annual Meeting of Stockholders, the Company has engaged legal counsel to assess whether the Company should pursue legal action to recover financial losses and damages pertaining to the United States vs. Dean Skelos and Adam Skelos case (the “Stockholder Proposal”). The Company is currently considering the recommendation of legal counsel as it pertains to this Stockholder Proposal.

 

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As of March 31, 2017, the Company had incurred approximately $2,752,000 in legal fees and other costs related to the matters described above, including approximately $694,000 incurred during the three months ended March 31, 2017. The Company cannot estimate at this time the cost of additional legal representation in resolving the SEC investigation, the JCOPE investigation or pursuing legal action pursuant to the Stockholder Proposal.

 

The Company has filed a claim for coverage for some of these legal fees under a liability insurance policy. The insurer denied the claim and the Company engaged legal counsel to dispute the insurer’s denial of the claim. In an attempt to reach a settlement with the insurer regarding this claim, a mediation hearing was held in April 2016. This mediation concluded with no resolution of the matter and, therefore, on July 11, 2016, the Company filed a formal complaint against the insurer in the United States District Court for the Southern District of New York. In December 2016, the insurer remitted a payment to the Company of $465,187 for a portion of the claim that it determined to be covered by the policy. These proceeds were offset against other legal expenses in the fourth quarter of 2016 and included in selling general and administrative operating expenses for that period. The Company is currently in discussions with the insurer in an attempt to settle the balance of the claim and ongoing legal fees incurred in these matters. However, the ultimate outcome of this claim cannot be determined at this time.

 

NOTE 10 – SUBSEQUENT EVENTS

 

Subsequent to March 31, 2017, the Company received additional short-term funding of $464,000 from an investor considered to be a related party because it has a beneficial ownership interest in the Company of greater than 5%, bringing the total due to investors for these short term loans in 2017 and 2016 to $5,127,000. The Company and the related party investors are currently working out the terms for these funded amounts.

 

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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 in Item 1 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. Please refer to page 2 of the Quarterly Report on Form 10-Q for additional information regarding forward-looking statements.

 

Overview

 

Management is focused on establishing the Company as a reliable provider of water treatment solutions in the emerging markets for the treatment of stormwater, produced water and other industrial water applications. Abtech Holdings, Inc. (the “Company” or “ABHD”) is the parent holding company. Its subsidiary, AbTech Industries, Inc. (“AbTech”), is the operating company that manufactures and sells water treatment products, many of which incorporate its patented Smart Sponge technology. AEWS Engineering LLC (“AEWS”) has provided engineering services to assist government and industry in developing effective solutions to their specific water treatment needs. The operations of AEWS were transferred to AbTech in 2015 and AEWS is currently dormant. Environmental Security Corporation is also a dormant subsidiary that holds a patent regarding a sensor array technology designed to detect impurities in water flows. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on the consolidated operations of ABHD and its subsidiaries.

 

The Company is incurring significant costs as it seeks to gain traction in its targeted water treatment markets and position itself with validated treatment solutions that, if accepted and adopted by the market, can generate significant revenues in the future. The Company’s operations reflect limited historical sales revenue as the Company attempts to engage in those business development activities that management believes have the greatest opportunity to generate future revenues. Key factors affecting the Company’s results of operations during the periods covered in this section include revenues, cost of revenues, operating expenses and interest expense.

 

Results of Operations

 

We generate revenues by selling products and services related to the treatment of contaminated water so that such water can either be discharged or reused. All of our products sold in 2017 and 2016 include some form of Smart Sponge filtration media, which we manufacture, or are accessories used for the deployment of Smart Sponge products, such as diversion collars, vessels and containment cages. Our products include a variety of designs and sizes to effectively address many applications where water treatment is needed. Our revenue for the three-month period ended March 31, 2017 was comprised of the following:

 

Product   % of Revenue  
Ultra-Urban Filters     70 %
Accessories     12 %
Smart Paks     8 %
Filtration media     4 %
Skimmers     3 %
Freight & other     3 %
Total     100 %

 

We sell our products to distributors, contractors, original equipment manufacturers and end-users.

 

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Comparison of the three months ended March 31, 2017 and 2016

 

Revenues

 

Revenues for the three months ended March 31, 2017 increased by $63,925, or 150%, compared to revenues in the same period of the prior year. The increase was due primarily to the Company’s first sale in the first quarter of 2017 of Ultra-Urban ® Filters containing a filtration media that combined Smart Sponge ® polymer with the Company’s new licensed media for filtering heavy metals. The revenue from the sale of these products totaled approximately $42,000 in the first quarter of 2017, and there were no similar revenues recognized in the first quarter of 2016. The Company has continued its redirected sales effort to focus more resources on non-stormwater applications of its products while continuing to support stormwater product sales through direct sales staff and through distributors in international markets. The Company’s redirected sales efforts did not have a significant impact on revenue in the first quarter of 2017 as most of the new opportunities being pursued have long lead times and involve the development and testing of new or modified products. All revenues recognized in the first quarter of 2017 were related to stormwater product applications.

 

For the three months ended March 31, 2017, our two largest customers were both contractors installing stormwater systems and accounted for 40%, and 10% of revenues, respectively.

 

As discussed in NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, the Company does not expect that the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” will have a material impact on revenue when adopted in 2018 based on the types of contracts with customers currently in place.

 

Gross margin

 

The Company’s gross margin on sales was negative (2)% for the three months ended March 31, 2017, compared to a gross margin on sales of negative (81)% for the same period of 2016. The negative gross margin in both years is the direct result of the costs of excess manufacturing capacity. The improved gross margin in 2017 reflects the increased sales level in that period and the corresponding increase in products manufactured which allowed the fixed manufacturing costs to be spread over a larger base of manufactured products, improving the gross margin. The Company’s manufacturing facility operated at approximately 1% operating capacity for the three months ended March 31 in both 2017 and 2016. Going forward, the Company expects that gross margin percentages, quarter by quarter, could vary widely depending on the volume of product sales and the corresponding volume of product manufacturing. We do not currently have plans to reduce manufacturing capacity and we anticipate that the excess capacity will continue to adversely affect gross margins for the remainder of 2017.

 

The Company's gross margin expectations will also vary depending on the type of products and projects that make up sales revenue. As described above, the Company expects to see increased margins for its product sales as it expands its volume to realize economies of scale. AbTech may also become involved in the sale of equipment manufactured by other vendors and may work on stormwater projects involving a combination of services, products, and work performed by other subcontractors. Accordingly, we expect to realize blended gross margin rates that could vary significantly.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased by approximately $282,000, or 26%, in the first three months of 2017 as compared to the same period in 2016. This increase was due primarily to the legal fees incurred by the Company in responding to the subpoenas issued by the SEC regarding its investigation In the Matter of Abtech Holdings, Inc. (NY-9262) and an investigation by the New York Joint Commission on Public Ethics (“JCOPE”) (for further information regarding these matters, see PART II, Item 1. “Legal Proceedings”). Fees for these matters totaled approximately $694,000 in the first quarter of 2017 compared to $209,000 of similar fees incurred in the first quarter of 2016. Excluding these expenses, other selling, general and administrative expenses were approximately $203,000 less in the first quarter of 2017 compared to the same period of 2016, due primarily to an $80,000 reduction in payroll and related travel expenses, a $52,000 reduction in other legal fees, a $33,000 reduction in fees for board compensation, public relations and investor relations services.

 

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As discussed in NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, the Company does not expect the adoption of ASU No. 2016-02, “ Leases (Topic 842),” or ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ,” to have a material impact on operating expenses upon adoption.

 

Research and development expenses

 

Research and development (“R&D”) expenses decreased by approximately $138,000, or 41%, for the three months ended March 31, 2017 as compared to the same period of the prior year. The reduced R&D expenses in 2017 were primarily attributable to work conducted to develop and test the Company’s evaporator technology intended for use in the treatment of produced water at oil and gas drilling sites. These costs totaled approximately $42,000 during the first three months of 2017 compared to $109,000 in the same period of 2016. Costs for this project are expected to increase significantly in the second quarter of 2017 as the Company continues its development efforts with this technology and modification of a prototype unit. The reduction in R&D expenses was also attributable to a decrease of approximately $65,000 in payroll and related benefits expenses in the first quarter of 2017 as compared to the same quarter of 2016.

 

Other income (expense)

 

Interest expense increased to approximately $129,000 for the three months ended March 31, 2017 as compared to $25,000 for the same period of 2016 due to the increased amount of outstanding loans from investors accruing interest at a rate of 10% per annum.

 

Liquidity and Capital Resources

 

Liquidity

 

As of March 31, 2017, the Company had a working capital deficiency of approximately $8,228,000 compared to a working capital deficit of approximately $6,534,000 at December 31, 2016. The increased working capital deficiency is primarily attributable to the use of cash for operations during the three months ended March 31, 2017, an increase in accounts payable of approximately $665,000 and the additional funding of $932,000 from a related party investor during the period. The Company’s cash balance was $95,490 at March 31, 2017 compared to $84,415 at December 31, 2016. This cash balance represents less than one month of the Company’s historical monthly cash used for operations and evidences the Company’s need to raise additional capital in the immediate short-term.

 

To date, the Company has not generated sufficient revenue to cover its operating costs and expenses and continues to operate with negative cash flow. While we hope to achieve sales growth sufficient to cover operating costs and expenses over the long-term, continued negative cash flow from operations is expected in the short-term. The Company will require additional capital to maintain current operations until the Company achieves the sales growth necessary to cover operating costs and expenses. The Company also has approximately $6,230,000 of short term debt, including accrued interest, which will need to be repaid, extended or refinanced by the Company during 2017. In addition, rapid sales growth may require the Company to enter into working capital financing arrangements. The Company has no such financing commitments in place and can provide no assurance that such a commitment can be obtained on reasonable terms, if at all. For a further discussion of management’s planned course of action to remedy the current deficiency in liquidity, see “Going Concern and Management’s Plans,” later in this section. Operations in the first three months of 2017 were primarily funded with related party loans of $932,000.

 

The Company has a bank line of credit with a credit limit of $100,000. The line of credit has an annual interest rate of prime plus 6.75% and requires monthly payment of any interest due plus approximately 1% of the outstanding balance. At March 31, 2017 the outstanding balance due on the bank line of credit was $80,354 and the effective interest rate was 10.75% per annum.

 

  16  

 

 

Comparison of cash flows for the three months ended March 31, 2017 and 2016

 

Operating Activities

 

The Company had negative cash flows from operations for the three months ended March 31, 2017 of approximately $889,000 compared to negative cash flows from operations of approximately $967,000 for the same period of the prior year. The amount of cash used in operations for the first three months of 2017 was approximately $681,000 less than the operating loss for the same period due primarily to a $665,000 increase in accounts payable and an increase of approximately $44,000 in accrued expenses during the period. Similarly, the amount of cash used in operations for the first three months of 2016 was approximately $492,000 less than the operating loss for the same period due primarily to a $311,000 increase in payables, an $80,000 increase in accrued expenses and an $82,000 reduction in outstanding accounts receivable during the period.

 

Investing Activities

 

The Company had $405 of capital expenditures for the three months ended March 31, 2017 and $1,058 of capital expenditures for the same period of 2016. As of March 31, 2017, the Company had no commitments for any material future capital expenditures.

 

Financing Activities

 

Net cash provided by financing activities for the three months ended March 31, 2017 amounted to approximately $900,000 compared to cash provided by financing activities of approximately $389,000 in the same period of 2016. The primary financing source of cash in the first three months of 2017 was cash advances of $932,000 from a related party stockholder. During the first quarter of 2017, the Company made payments totaling $30,000 to the holder of a convertible promissory note, of which $27,420 was applied to reduce the principal amount of the note to a balance of $72,580. Under the amended terms of this note, the Company is obligated to make additional payments of $10,000 per month until the note is repaid in full.

 

Going Concern and Management’s Plans

 

The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, 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 March 31, 2017 condensed consolidated financial statements, we have not established an ongoing source of revenue sufficient to cover operating expenses and have incurred net losses from operations since our inception. These losses with the associated substantial accumulated deficit raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued. As a result, the Company’s independent registered public accounting firm, in their report dated March 31, 2017, included an emphasis-of-matter paragraph with respect to our financial statements for the fiscal year ended December 31, 2016, expressing uncertainty regarding the Company’s assumption that it will continue as a going concern. The accompanying March 31, 2017 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 raise additional capital and/or generate significant sales growth in the short term and resolve the legal matters described in Part II, Item 1 Legal Proceedings of this Quarterly Report on Form 10-Q. 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 March 31, 2017 condensed consolidated financial statements. If the Company is unable to raise additional capital and/or generate significant sales growth in the near term, there is a risk that the Company could default on debt maturing during 2017. Further, the Company is currently in default on notes that matured in April 2017; however, the Company is currently in discussions with the noteholder to extend the maturity date but there can be no assurances that the noteholder will not elect to exercise his default remedies under the notes. The Company does not currently have sufficient liquidity to repay the indebtedness. While the Company does not expect the noteholder to accelerate the indebtedness, the noteholder may do so at any time, or may initiate foreclosure actions, or seek any other remedies permitted by the terms of the notes and applicable law. Should the holders of the Company’s indebtedness seek to accelerate the indebtedness upon an event of default, the Company could be required to discontinue or significantly reduce the scope of its operations if no other means of financing its operations are or become available.

 

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Off-Balance Sheet Arrangements

 

As of March 31, 2017, we did not have any material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

Contractual Obligations

 

As a smaller reporting company, as defined in Rule 12b-2 of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.

 

Critical Accounting Policies and Estimates

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the Company’s condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management 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 condensed consolidated financial statements. The SEC considers an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of the entity’s financial condition and results of operations and those that require the entity’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain when estimated.

 

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

 

Fair value of warrants and note discount

 

The Company bifurcates the value of warrants sold with promissory notes. This bifurcation results in the establishment of a note discount with a corresponding charge to equity unless the terms of the warrant require it to be classified as a liability. The warrants and corresponding note discounts are valued 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 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 common stock. 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 warrant.

 

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Inventory valuation

 

The Company’s inventory is stated at the lesser of cost or market, with cost computed on an average cost method which approximates the first-in, first-out basis. Provision is made for obsolete, slow moving or defective items where appropriate. 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.

 

Revenue recognition and allowance for doubtful accounts

 

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

 

Stock-based compensation

 

The Company uses the Black-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. There were no options granted by the Company during the three month periods ended March 31, 2017 or 2016.

 

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 GAAP 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 over the term of the notes.

 

Recent Accounting Pronouncements

 

See NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to the condensed consolidated financial statements included in this Report on Form 10-Q for a detailed description of recent accounting pronouncements.

 

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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.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended March 31, 2017, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On May 28, 2015, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) that stated that the staff of the SEC is conducting an investigation In the Matter of Abtech Holdings, Inc. (NY-9262) .  Generally, the SEC’s subpoena asked for all documents, agreements, and communications concerning (i) the Company’s Contract for Services with Nassau County, New York, dated October 8, 2013; (ii) Adam Skelos, Dean Skelos, and their related entities; (iii) SLC Clean Water, LLC, Axiom, Glenwood Management, and a number of other listed individuals and entities; (iv) certain Board and Board committee minutes and related materials; (v) certain policies, procedures, and internal controls in effect at the Company; (vi) certain communications with the Company’s independent registered public accounting firm, transfer agent, potential and current investors, broker-dealers, investment advisors, and finders; and (vii) certain other organizational and financial account information of the Company.  The Company is cooperating with the SEC and has provided a substantial number of documents in response to the subpoena.  In 2016 and 2017, the SEC issued additional subpoenas to two officers, a director and a prior director of the Company pertaining to this investigation. The Company believes the SEC’s subpoenas are a result of the complaint announced on May 4, 2015 that was filed by federal authorities against Dean and Adam Skelos. That trial came to an end in December 2015 when both men were convicted of eight counts each, including fraud, bribery and extortion of three separate companies – one of which was the Company. The Company cooperated fully with the United States Attorney’s Office for the Southern District of New York throughout the Skelos investigation and trial, by providing documents and other evidence and having the Company’s president and CEO testify on behalf of the government at the trial. With the trial now concluded, the Company’s involvement in this matter has ended and the Department of Justice has confirmed to the Company that the Company and its subsidiaries are not the subject or target of any ongoing public corruption investigation. The Company and its officers and directors have continued to cooperate with the SEC in responding to their subpoenas. We have not yet recorded a liability related to the cost of resolving this matter although we have incurred and recognized material compliance costs to date. At this time, no estimate of the possible loss or range of loss can be made. In the meantime, we are continuing to incur significant legal fees for compliance with the SEC subpoenas.

 

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In May 2016, the Company, AEWS and AbTech received letters from the New York State Joint Commission on Public Ethics (“JCOPE”) asking for a written response to allegations constituting potential violations of lobbying laws in the state of New York. The Company’s legal counsel provided a written response to JCOPE on May 31, 2016, wherein they presented the Company’s position that it has consistently complied with all applicable lobbying laws. On August 15, 2016, JCOPE issued notices to the Company, AbTech and AEWS that JCOPE had decided to commence an investigation to determine whether a substantial basis exists to conclude that the Company knowingly and willfully violated lobbying laws in the state of New York. The Company intends to defend its position that it has consistently complied with all applicable lobbying laws and is working with JCOPE to resolve this matter. However, it is not clear at this time how the matter will ultimately be resolved.

 

In accordance with the stockholder proposal approved by the Company’s stockholders at the May 13, 2016 Annual Meeting of Stockholders, the Company has engaged legal counsel to assess whether the Company should pursue legal action to recover financial losses and damages pertaining to the United States vs. Dean Skelos and Adam Skelos case (the “Stockholder Proposal”). The Company is currently considering the recommendation of legal counsel as it pertains to this Stockholder Proposal.

 

As of March 31, 2017, the Company had incurred approximately $2,752,000 in legal fees and other costs related to the matters described above, including approximately $694,000 incurred during the three months ended March 31, 2017. The Company cannot estimate at this time the cost of additional legal representation in resolving the SEC investigation, the JCOPE investigation or pursuing legal action pursuant to the Stockholder Proposal.

 

The Company has filed a claim for coverage for some of these legal fees under a liability insurance policy. The insurer denied the claim and the Company engaged legal counsel to dispute the insurer’s denial of the claim. In an attempt to reach a settlement with the insurer regarding this claim, a mediation hearing was held in April 2016. This mediation concluded with no resolution of the matter and, therefore, on July 11, 2016, the Company filed a formal complaint against the insurer in the United States District Court for the Southern District of New York. In December 2016, the insurer remitted a payment to the Company of $465,187 for a portion of the claim that it determined to be covered by the policy. These proceeds were offset against other legal expenses in the fourth quarter of 2016 and were included in selling general and administrative operating expenses for that period. The Company is currently in discussions with the insurer in an attempt to settle the balance of the claim and ongoing legal fees incurred in these matters. However, the ultimate outcome of this claim cannot be determined at this time.

 

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.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

As of April 30, 2017, there were three outstanding promissory notes payable with an aggregate principal amount of $1,000,000 that were in technical default due to the fact that they were not repaid prior to their extended maturity dates. However, the noteholder has not declared an event of default. Subsequent to April 30, 2017, the Company was in discussions with the holder of these notes to further extend the maturity dates although there can be no assurance that such discussions will result in an extension of the maturity dates of the notes or that the noteholder will not elect to exercise his default remedies under the notes. The Company does not currently have sufficient liquidity to repay the indebtedness. While the Company does not expect the noteholder to accelerate the indebtedness, the noteholder may do so at any time, or may initiate foreclosure actions, or seek any other remedies permitted by the terms of the notes and applicable law. Should the holders of the Company’s indebtedness seek to accelerate the indebtedness upon an event of default, the Company could be required to discontinue or significantly reduce the scope of its operations if no other means of financing its operations are or become available.

 

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Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

During 2017, an investor, considered to be a related party because it has a beneficial ownership interest in the Company of greater than 5%, provided short-term funding to the Company as follows:

 

Date   Amount  
1/13/2017   $ 160,000  
1/26/2017     136,000  
2/9/2017     158,000  
2/24/2017     153,000  
3/9/2017     158,000  
3/23/2017     167,000  
4/6/2017     151,000  
4/21/2017     155,000  
5/4/2017     158,000  
Total   $ 1,396,000  

 

The terms for these funded amounts have not yet been determined and as of May 12, 2017, no financing agreement had been entered into by the Company with this investor regarding the funded amounts. As soon as the parties execute definitive agreements regarding the foregoing, the Company intends to make the appropriate filing with disclosures of the related agreement terms.

 

Item 6. Exhibits.

 

Exhibit Number   Name
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.INS *   XBRL Instance Document
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

 

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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: May 15, 2017 By: /s/ Glenn R. Rink
    Glenn R. Rink
    Chief Executive Officer, President, and Director
     
Date: May 15, 2017 By: /s/ Lane J. Castleton
    Lane J. Castleton
    Chief Accounting Officer, Chief Financial Officer, Vice President and Treasurer

 

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