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 September 30, 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 September 30, 2017 and for the three and nine months ended September 30, 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.
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. Revenues 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 September 30, 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
|
|
|
|
September 30, 2017
Unaudited
|
|
|
September 30, 2016
Unaudited
|
|
Options to purchase common stock
|
|
|
3,485,240
|
|
|
|
4,363,240
|
|
Warrants to purchase common stock
|
|
|
8,800,737
|
|
|
|
12,632,009
|
|
Convertible promissory notes
|
|
|
4,222,681
|
|
|
|
1,252,948
|
|
Convertible preferred stock in AbTech
|
|
|
6,457,467
|
|
|
|
6,457,467
|
|
|
|
|
22,966,125
|
|
|
|
24,705,664
|
|
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 intends to use the cumulative effect approach in adopting the new standard. However, based on the Company’s historical
and current revenue transactions, the new standard is unlikely to 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. The adoption of ASU No. 2014-15 had a material impact on the Company’s 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.
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 price 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 the adoption has not had 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 believes that it will not have a material 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 consolidated financial statements. While the Company expects the amendment to have a minimal effect on the amount of operating
expense recognized in the condensed 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.
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.
In June 2017, the FASB issued ASU No. 2017-09,
“Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”
which provides guidance
on which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting in
ASC Topic 718. The standard is effective for annual periods beginning after December 15, 2017, and for interim periods within those
annual periods. Early adoption is allowed. The Company is currently evaluating the new standard, but it is not expected to have
a material effect on the Company’s consolidated financial statements.
NOTE 3 – INVENTORIES
The Company uses a perpetual inventory system and periodic physical
test counts to determine inventory amounts at interim balance sheet dates. Inventories are stated at the lower of cost or net realizable
value, with cost computed on an average cost method which approximates the first-in, first-out basis. Inventory consisted of the
following:
|
|
September 30, 2017
(Unaudited)
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
121,796
|
|
|
$
|
99,182
|
|
Work in process
|
|
|
246,458
|
|
|
|
279,045
|
|
Finished goods
|
|
|
25,500
|
|
|
|
26,890
|
|
Reserve for obsolescence
|
|
|
(63,000
|
)
|
|
|
(63,000
|
)
|
Total
|
|
$
|
330,754
|
|
|
$
|
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, the costs of introducing its technologies to the market and
pursuing market acceptance and, more recently, substantial legal expenses. In addition, the Company has a working capital deficit
of approximately $9.7 million as of September 30, 2017, with approximately $8.5 million of debt and accrued interest that will
become due in 2017. Realization of a major portion of the assets in the accompanying condensed 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.
In order to continue as a going concern,
management believes the Company will need to generate additional revenue through sales growth in the short term, raise additional
capital to fund its operating losses and 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. Management believes that these developments show promise for future revenues
through sales growth once the products and systems being developed for these markets are proven and refined, although no assurance
can be given that such future sales growth will occur.
Financing.
To date, the Company
has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. During the
first nine months of 2017, the Company received $2,908,000 in cash advances from two 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. The Company expects to continue to finance its operations, as needed, with loans from shareholders, however, there
is no assurance such loans from these related parties will continue in the future.
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. There can be no assurance that noteholders will grant additional
maturity date extensions or waive any default provisions of our outstanding notes or that we will be able to timely refinance or
repay such notes. 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. There can be no assurances that the noteholder will not elect to
exercise his default remedies under the notes and 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 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.
NOTE 5 – RELATED PARTY TRANSACTIONS
Accounts payable, related party –
At September 30, 2017 and December 31, 2016, “Accounts payable – related party” represents amounts owed to
executives of the Company for travel expenses.
Accrued expenses –
At September
30, 2017 and December 31, 2016, accrued expenses included $251,750 and $204,125, respectively, for fees due to directors of the
Company for their services as directors.
Due to investors
– In the
first nine months of 2017, two investors considered to be related parties because they individually beneficially own greater than
5% of the Company’s issued and outstanding common stock, made cash advances to the Company totaling $2,908,000, as short-term
loans. During 2016, these same related party investors made similar cash advances to the Company totaling $3,731,000. The specific
terms of these loans have not yet been determined. However, the Company is accruing interest on these loans at a rate of 10% per
annum, which accrued interest totaled approximately $533,000 at September 30, 2017 and $146,000 at December 31, 2016.
NOTE 6 – PROMISSORY NOTES AND
OTHER DEBT
Information regarding the various promissory
notes that were outstanding as of September 30, 2017 is set forth in the table below:
|
|
Principal
Amount
|
|
|
Interest
Rate
|
|
|
Maturity Date
|
|
Conversion
Rate
|
|
Current promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured, convertible note
|
|
$
|
44,546
|
|
|
|
11.5
|
%
|
|
11/15/17
(1)
|
|
$
|
0.015
|
|
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
|
|
$
|
1,044,546
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
On July 17, 2017, the Company
and the holder of this note mutually agreed to further amend the note by: (a) extending the maturity date from October 31, 2017
to November 15, 2017; (b) granting to the holder of the note a right to convert the entire outstanding unpaid balance of the note,
including any unpaid accrued interest thereon, into shares of the Company’s common stock at a conversion rate of $0.015 per
share through November 15, 2017; and (c) tolling the Company’s obligation to make monthly payments on the note until after
November 15, 2017, at which time, if the note has not been settled by conversion or otherwise, the maturity date will be further
extended and the Company will resume making payments of $10,000 per month until the note is paid in full.
|
(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 September 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 rates. 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 September 30, 2017 and December 31, 2016, the outstanding
balance due on the bank line of credit was $71,725 and $82,870, respectively.
Due to Investors
The amount shown in the condensed consolidated
balance sheets as due to investors represents short-term loans made to the Company by related party investors (see NOTE 5 –
RELATED PARTY TRANSACTIONS – Due to Investors). The terms of these loans have not yet been determined. However, the Company
is accruing interest on the outstanding balance of the loans at a rate of 10% per annum, which management believes will approximate
the final negotiated rate.
NOTE 7 – FAIR VALUE OF FINANCIAL
INSTRUMENTS
The Company’s financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, capital leases, due to investors,
bank line of credit, 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
September 30, 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 $13,500 increase in additional paid-in
capital for the nine months ended September 30, 2017 is attributable to stock-based compensation for stock options vesting during
the period.
There were no stock options or warrants
granted during the nine months ended September 30, 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) Dean Skelos, his son, Adam Skelos, who acted as a consultant to the Company, 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 has provided a substantial number of documents in response to the SEC subpoena.
In 2016 and 2017, the SEC issued additional subpoenas pertaining to this investigation to two officers, a director, a prior director,
a prior employee of the Company, the Company’s independent accountants and several law firms who have counseled the Company
from 2013 to the present.
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 subpoenaed documents and
other evidence and having the Company’s president and CEO testify on behalf of the government at the trial. In September
2017, a federal appeals panel overturned the 2015 corruption convictions of Dean Skelos and Adam Skelos. The Company is uncertain
at this point if it will have any further involvement in this matter.
The investigation by the SEC is ongoing
and no resolution can be predicted at this time. 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 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 “Stockholder Proposal”),
the Company 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 Company, through its legal counsel, is currently in discussions
with one entity regarding damages claimed by the Company. However, it cannot be determined at this time how this matter will ultimately
be resolved.
As of September 30, 2017, the Company had
incurred approximately $3,213,000 in legal fees and other costs related to the matters described above, including approximately
$1,154,000 incurred during the nine months ended September 30, 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. After an unsuccessful attempt to resolve the dispute through mediation, the
Company filed a formal complaint against the insurer on July 11, 2016, 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 the insurer
determined to be covered by the policy. During 2017, the insurer remitted additional payments totaling $941,118 to the Company,
or directly to the applicable law firms, for legal fees related to these matters. The payments made by the insurer were offset
against other selling, general and administrative operating expenses in the periods in which such payments were received. The ultimate
outcome of the litigation with the insurer cannot be determined at this time.
NOTE 10 – SUBSEQUENT EVENTS
Subsequent to
September 30, 2017, the Company received additional short-term funding of $249,000 from an investor considered to be a related
party because it beneficially owns greater than 5% of the Company’s issued and outstanding common stock, bringing the total
due to investors for these short-term loans in 2017 and 2016 to $6,888,000. The Company and the related party investors are currently
working out the terms for these funded amounts (see
NOTE 6 – PROMISSORY NOTES AND OTHER DEBT – Due to Investors).