Item 1. Financial Statements.
ABTECH HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
June 30, 2018
(Unaudited)
|
|
|
December 31,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
136,352
|
|
|
$
|
58,435
|
|
Accounts receivable – trade, net
|
|
|
52,123
|
|
|
|
36,650
|
|
Accounts receivable – trade, related party
|
|
|
28,194
|
|
|
|
-
|
|
Inventories, net
|
|
|
364,498
|
|
|
|
326,679
|
|
Prepaid expenses and other current assets
|
|
|
53,198
|
|
|
|
22,625
|
|
Total current assets
|
|
|
634,365
|
|
|
|
444,389
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
141,665
|
|
|
|
141,629
|
|
Security deposits
|
|
|
17,977
|
|
|
|
17,977
|
|
Total assets
|
|
$
|
794,007
|
|
|
$
|
603,995
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,615,581
|
|
|
$
|
1,401,637
|
|
Loans from stockholders
|
|
|
9,000
|
|
|
|
9,000
|
|
Bank line of credit
|
|
|
50,123
|
|
|
|
65,625
|
|
Notes payable, net of discounts
|
|
|
250,000
|
|
|
|
250,000
|
|
Convertible promissory notes
|
|
|
794,546
|
|
|
|
794,546
|
|
Due to investors – related party
|
|
|
9,016,000
|
|
|
|
7,413,000
|
|
Related party loan
|
|
|
61,548
|
|
|
|
65,102
|
|
Capital lease obligation – current portion
|
|
|
13,149
|
|
|
|
12,651
|
|
Accrued interest payable
|
|
|
1,453,593
|
|
|
|
1,005,983
|
|
Accrued expenses
|
|
|
545,528
|
|
|
|
391,801
|
|
Total current liabilities
|
|
|
13,809,068
|
|
|
|
11,409,345
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation – noncurrent portion
|
|
|
26,910
|
|
|
|
33,612
|
|
Total liabilities
|
|
|
13,835,978
|
|
|
|
11,442,957
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficiency)
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 800,000,000 authorized shares; 504,872,558 and 501,678,288 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
|
|
|
504,873
|
|
|
|
501,678
|
|
Additional paid-in capital
|
|
|
58,927,875
|
|
|
|
61,068,271
|
|
Non-controlling interest
|
|
|
(2,714,279
|
)
|
|
|
(4,724,713
|
)
|
Accumulated deficit
|
|
|
(69,760,440
|
)
|
|
|
(67,684,198
|
)
|
Total stockholders’ equity (deficiency)
|
|
|
(13,041,971
|
)
|
|
|
(10,838,962
|
)
|
Total liabilities and stockholders’ equity (deficiency)
|
|
$
|
794,007
|
|
|
$
|
603,995
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ABTECH HOLDINGS, INC. AND SUBSIDIARIES
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
Three Months ended
June 30
|
|
|
Six Months ended
June 30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
149,153
|
|
|
$
|
88,048
|
|
|
$
|
297,599
|
|
|
$
|
194,610
|
|
Cost of revenues
|
|
|
127,612
|
|
|
|
88,720
|
|
|
|
221,395
|
|
|
|
197,937
|
|
Gross profit (loss)
|
|
|
21,541
|
|
|
|
(672
|
)
|
|
|
76,204
|
|
|
|
(3,327
|
)
|
Selling, general and administrative expenses
|
|
|
633,194
|
|
|
|
10,115
|
|
|
|
1,470,025
|
|
|
|
1,378,208
|
|
Research and development expenses
|
|
|
178,630
|
|
|
|
241,245
|
|
|
|
356,470
|
|
|
|
440,876
|
|
Gain on disposal of fixed assets
|
|
|
-
|
|
|
|
(5,552
|
)
|
|
|
-
|
|
|
|
(5,552
|
)
|
Operating loss
|
|
|
(790,283
|
)
|
|
|
(246,480
|
)
|
|
|
(1,750,291
|
)
|
|
|
(1,816,859
|
)
|
Interest expense
|
|
|
(239,188
|
)
|
|
|
(154,242
|
)
|
|
|
(457,218
|
)
|
|
|
(283,545
|
)
|
Loss before income taxes
|
|
|
(1,029,471
|
)
|
|
|
(400,722
|
)
|
|
|
(2,207,509
|
)
|
|
|
(2,100,404
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(1,029,471
|
)
|
|
|
(400,722
|
)
|
|
|
(2,207,509
|
)
|
|
|
(2,100,404
|
)
|
Net loss attributable to non-controlling interest
|
|
|
(53,141
|
)
|
|
|
(25,566
|
)
|
|
|
(131,267
|
)
|
|
|
(255,668
|
)
|
Net loss attributable to controlling interest
|
|
$
|
(976,330
|
)
|
|
$
|
(375,156
|
)
|
|
$
|
(2,076,242
|
)
|
|
$
|
(1,844,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of shares outstanding
|
|
|
504,872,558
|
|
|
|
501,678,288
|
|
|
|
503,566,613
|
|
|
|
501,678,288
|
|
The accompanying
notes are an integral part of these condensed consolidated financial statements
.
ABTECH HOLDINGS, INC. AND SUBSIDIARIES
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
FOR THE SIX MONTHS ENDED JUNE 30,
|
|
|
|
2018
|
|
|
2017
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,207,509
|
)
|
|
$
|
(2,100,404
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
10,784
|
|
|
|
6,161
|
|
Stock-based compensation expense
|
|
|
4,500
|
|
|
|
9,000
|
|
Gain on sale of fixed assets
|
|
|
-
|
|
|
|
(5,552
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(43,667
|
)
|
|
|
16,757
|
|
Inventories
|
|
|
(37,819
|
)
|
|
|
(13,787
|
)
|
Prepaid expenses and other current assets
|
|
|
(30,573
|
)
|
|
|
3,897
|
|
Accounts payable
|
|
|
213,944
|
|
|
|
(109,057
|
)
|
Accrued interest payable
|
|
|
447,610
|
|
|
|
269,321
|
|
Accrued expenses
|
|
|
153,727
|
|
|
|
35,575
|
|
Net cash used in operating activities
|
|
|
(1,489,003
|
)
|
|
|
(1,888,089
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(10,820
|
)
|
|
|
(25,095
|
)
|
Proceeds from sale of fixed assets
|
|
|
-
|
|
|
|
10,000
|
|
Net cash used in investing activities
|
|
|
(10,820
|
)
|
|
|
(15,095
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from due to investors – related party
|
|
|
1,603,000
|
|
|
|
1,982,000
|
|
Repayments on bank line of credit
|
|
|
(15,502
|
)
|
|
|
(5,762
|
)
|
Repayments on convertible promissory notes
|
|
|
-
|
|
|
|
(55,681
|
)
|
Repayments under capital lease obligation
|
|
|
(6,204
|
)
|
|
|
(1,939
|
)
|
Decrease in due to related party
|
|
|
(3,554
|
)
|
|
|
(3,381
|
)
|
Net cash provided by financing activities
|
|
|
1,577,740
|
|
|
|
1,915,237
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
77,917
|
|
|
|
12,053
|
|
Cash and cash equivalents at beginning of period
|
|
|
58,435
|
|
|
|
84,415
|
|
Cash and cash equivalents at end of period
|
|
$
|
136,352
|
|
|
$
|
96,468
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
9,723
|
|
|
$
|
12,599
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Fixed asset purchased with a capital lease
|
|
$
|
-
|
|
|
$
|
54,171
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ABTECH HOLDINGS, INC. AND SUBSIDIARIES
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. As of June 30, 2018, 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 2018 or 2017.
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 June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 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, 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
|
A.
|
Significant accounting policy
– Revenue is measured based on the consideration specified
in a contract with a customer and excludes any sales incentives. The Company recognizes revenue when it satisfies a performance
obligation by transferring control over goods or services to a customer.
|
Taxes assessed by a governmental
authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company
from a customer, are excluded from revenue. The Company recognizes shipping and handling fees associated with outbound freight
after control over a product has transferred to a customer as revenue and the related expenses as a fulfillment cost included in
cost of revenues.
|
B.
|
Nature of Goods and Services
– The Company generates its revenue from one segment,
the filtration and treatment of polluted water. The Company sells various filtration products that contain various types of filtration
media along with ancillary equipment used for the deployment of the filtration products, such as diversion collars, vessels and
containment cages. The Company is focused on two application markets for its products, stormwater and industrial.
|
|
C.
|
Disaggregation of revenue
– In the following table, revenue for the three and six
month periods ended June 30, is disaggregated by primary geographical and application markets.
|
|
|
Three Months ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2018
Unaudited
|
|
|
June 30, 2017
Unaudited
|
|
|
June 30, 2018
Unaudited
|
|
|
June 30, 2017
Unaudited
|
|
Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
137,624
|
|
|
$
|
88,048
|
|
|
$
|
285,993
|
|
|
$
|
188,310
|
|
Foreign
|
|
|
11,529
|
|
|
|
-
|
|
|
|
11,606
|
|
|
|
6,300
|
|
|
|
$
|
149,153
|
|
|
$
|
88,048
|
|
|
$
|
297,599
|
|
|
$
|
194,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stormwater
|
|
$
|
116,279
|
|
|
$
|
88,048
|
|
|
$
|
264,725
|
|
|
$
|
194,610
|
|
Industrial
|
|
|
32,874
|
|
|
|
-
|
|
|
|
32,874
|
|
|
|
-
|
|
|
|
$
|
149,153
|
|
|
$
|
88,048
|
|
|
$
|
297,599
|
|
|
$
|
194,610
|
|
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 2018 and 2017
would be anti-dilutive. The following chart lists the securities as of June 30, 2018 and 2017 that were not included in the computation
of diluted net loss per share because their effect would have been antidilutive:
|
|
Common Shares
|
|
|
|
June 30, 2018
Unaudited
|
|
|
June 30, 2017
Unaudited
|
|
Options to purchase common stock
|
|
|
2,629,194
|
|
|
|
3,547,240
|
|
Warrants to purchase common stock
|
|
|
8,765,737
|
|
|
|
9,359,051
|
|
Convertible promissory notes
|
|
|
4,990,143
|
|
|
|
2,637,905
|
|
Convertible preferred stock in AbTech
|
|
|
3,263,197
|
|
|
|
6,457,467
|
|
|
|
|
19,648,271
|
|
|
|
22,001,663
|
|
Recent Accounting Pronouncements
–
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 Company has now adopted this
new standard. However, its adoption had no material impact on the condensed 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 condensed 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 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 Company has
now adopted this new standard. However, its adoption had no material impact on the condensed consolidated financial statements.
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 Company has now adopted this new standard. However, its adoption had no material impact on the condensed consolidated
financial statements.
Changes in accounting policies
–
Beginning in 2018, the Company adopted Topic 606, Revenue from Contracts with Customers. While the adoption of this new standard
is a change in accounting policy for revenue recognition, the change had no material effect on the amount or timing of the recognition
of revenue as reflected in these condensed consolidated financial statements. Accordingly, there is no difference for the Company
between using the retrospective or cumulative approaches to adopting the new standard in these condensed 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:
|
|
June 30, 2018
(Unaudited)
|
|
|
December 31, 2017
|
|
Raw materials
|
|
$
|
111,112
|
|
|
$
|
117,048
|
|
Work in process
|
|
|
300,485
|
|
|
|
243,810
|
|
Finished goods
|
|
|
15,901
|
|
|
|
28,821
|
|
Reserve for obsolescence
|
|
|
(63,000
|
)
|
|
|
(63,000
|
)
|
Total
|
|
$
|
364,498
|
|
|
$
|
326,679
|
|
NOTE 4 – GOING CONCERN
These 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
$13.2 million as of June 30, 2018, with approximately $11.5 million of debt and accrued interest that will become due in 2018 or
is due on demand. 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, 2017, 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 in order to help facilitate
sales growth. 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 half of 2018, the Company received $1,603,000 in additional cash advances from two of its major stockholders, bringing the
total amount of outstanding loans from these shareholders to $9,016,000 at June 30, 2018. 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 or other private placements; however, there
is no assurance such loans or private placements will occur in the future or be sufficient to cover the costs of our operations.
Management believes that upon validation
of its water treatment solutions for the stormwater, industrial and commercial markets, and if economic conditions improve in the
Company’s target markets, 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 2018. 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 condensed consolidated 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 receivable, related party –
In the second quarter of 2018, the Company recognized $28,194 of revenue on the sale of stormwater products to a customer that
is considered to be a related party because it beneficially owns greater than 5% of the Company’s issued and outstanding
common stock. At June 30, 2018, “Accounts receivable – related party” represents the amount due from this customer,
which amount was paid by the customer in July 2018.
Accrued expenses –
At June
30, 2018 and December 31, 2017, accrued expenses included $276,875 and $269,375, respectively, for fees due to directors of the
Company for their services as directors.
Due to investors
– In the
first half of 2018, 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 $1,603,000, as short-term loans.
During the year ended December 31, 2017, these same related party investors made similar cash advances to the Company totaling
$3,682,000. 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 $1,115,000 at June 30, 2018 and $709,000 at December
31, 2017.
NOTE 6 – PROMISSORY NOTES AND
OTHER DEBT
Information regarding the various promissory
notes that were outstanding as of June 30, 2018 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
|
%
|
|
|
4/30/18
(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
|
|
$
|
1,044,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
On February 27, 2018, the
Company and the holder of this note mutually agreed to further amend the note by: (a) extending the maturity date from November
15, 2017 to April 30, 2018; and (b) further tolling the Company’s obligation to make monthly payments on the note until after
April 30, 2018, at which time, the maturity date was further extended and the Company was to resume making payments of $10,000
per month until the note is paid in full.
In August 2018, the Company
and the holder of this note mutually agreed to further amend the note by: (a) extending the maturity date from April 30, 2018 to
November 30, 2018; (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 30, 2018; and (c) tolling the Company’s obligation to make monthly payments on the note until after
November 30, 2018, at which time, 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 June 30, 2018, these notes were once
again in technical default. However, the note holder has not declared an event of default. The Company is attempting to further
extend the maturity dates on these notes. However, the Company gives no assurance that an agreement to extend such maturity dates
will be achieved.
|
The convertible promissory notes and related
accrued interest 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 June 30, 2018 and December 31, 2017, the outstanding balance
due on the bank line of credit was $50,123 and $65,625, 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
June 30, 2018, 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
In March 2018, the holder of 600,000 shares
of AbTech preferred stock converted such shares into 3,194,270 shares of ABHD common stock in accordance with the terms of the
reverse acquisition transaction that occurred between AbTech and ABHD in 2011. This conversion reduced the number of AbTech preferred
shares outstanding to 612,947 and reduced the minority interest of preferred shareholders in AbTech from approximately 15.3% to
8.5%. Accordingly, the carrying amount of the non-controlling interest was reduced by $2,141,701, which amount was applied to reduce
additional paid-in capital by the same amount, in the first quarter of 2018.
For the six months ended June 30, 2018,
additional paid-in capital was increased by $4,500 for stock-based compensation resulting from stock options vesting during the
first quarter of 2018.
There were no stock options or warrants
granted during the six months ended June 30, 2018.
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 of Directors (“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 registered public
accounting firm 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. In July 2018, a second
trial of these individuals was held and both were convicted on similar counts as in the first trial. No officer or director of
the Company was asked to testify in the second trial.
As of the date of this Quarterly Report,
the Company is in negotiations with the SEC with respect to a proposed settlement in connection with the SEC Investigation (the
“Proposed Settlement”). Any final settlement with respect to the SEC Investigation will be subject to approval of
the SEC and the Company. As of the date of this Quarterly Report, the Proposed Settlement will require the Company to pay a penalty
to the SEC of $100,000, plus a disgorgement fee and pre-judgement interest of approximately $33,400. Although the Proposed Settlement
is not final, has not yet been approved by the SEC or the Company, and could change, because the amount of the penalty and fees
is reasonably estimable, the Company elected to accrue this $133,400 expense in the second quarter of 2018 in accrued expenses
on the balance sheet. Once a final settlement has been agreed to and approved by the SEC and the Company, the Company will disclose
the terms of such final settlement in more detail.
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 June 30, 2018, the Company had incurred
approximately $4,240,000 in legal fees and other costs related to the matters described above, including approximately $719,000
incurred during the first six months of 2018. 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 2018 and 2017, the insurer remitted additional payments totaling $500,575 and $1,138,984,
respectively, 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 June 30, 2018, the Company
received additional short-term funding of $354,000 from an investor considered to be a related party because it individually has
a beneficial ownership interest in the Company of greater than 5%, bringing the total due to investors for these short-term loans
to $9,370,000. 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).
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 “Quarterly Report”). This discussion contains 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 this Quarterly Report 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. The operations
of AEWS Engineering LLC (“AEWS”), a wholly-owned subsidiary, were transferred to AbTech in 2015 and AEWS is currently
dormant. Environmental Security Corporation is also a dormant wholly-owned 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 has and continues to incur 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, could greatly increase 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 2018 and 2017 included some form of Smart Sponge filtration media, which we manufacture, or were 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 first half of 2018
was comprised of the following:
Product
|
|
% of Revenue
|
|
Ultra-Urban
®
Filters
|
|
|
60
|
%
|
Smart Paks
®
|
|
|
8
|
%
|
Accessories
|
|
|
10
|
%
|
Skimmers
|
|
|
3
|
%
|
Filtration media
|
|
|
15
|
%
|
Freight & other
|
|
|
4
|
%
|
Total
|
|
|
100
|
%
|
We sell our products to distributors, contractors,
original equipment manufacturers and end-users.
Comparison of the six months ended June 30, 2018 and 2017
Revenues
Revenues for the six-months ended June 30,
2018 increased by $102,989 to $297,599, or 53%, compared to revenues in the same period of 2017. The increase was due entirely
to the increase in the quantity of product sales and included several relatively large orders from prior customers. Sales in the
first half of 2018 continued to be predominantly attributable to products used in stormwater treatment applications. 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 half of 2018 as most of the new opportunities
being pursued have long lead times and involve the development and testing of new or modified products.
In the first half of 2018, our largest customer
was a distributor, whose order for a stormwater project at a military base in the United States, accounted for approximately 25%
of revenues. An order from a customer for an industrial application of Smart Sponge accounted for approximately 11% of revenues
in the first half of 2018. In the first half of 2017, our two largest customers were both contractors installing stormwater systems
and accounted for 22% and 6% of revenues, respectively.
As discussed in NOTE 2 –SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES to the condensed consolidated financial statements included in this Quarterly Report, the adoption of Accounting
Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” had no material
impact on revenue when adopted in 2018. However, the new standard could have a significant impact on the recognition of revenue
if the Company begins to generate material revenues through contracts with customers which are the subject of the new standard.
Gross Margin
The Company’s gross margin on sales was
$76,204, or 26% for the six-months ended June 30, 2018, compared to a negative gross margin on sales of $(3,327), or negative (2%),
for the same period of 2017. The significant improvement in gross margin in 2018 is attributable to the increase in product sales
and the mix of products sold during the period, which included several relatively high margin products.
The Company continues to have excess manufacturing
capacity which adversely impacts gross margins. The Company’s manufacturing facility operated at approximately 2% of its
Smart Sponge
®
production capacity for the first half of 2018 and 2017.
Going forward, the
Company expects that gross margin percentages, quarter by quarter, could vary widely depending on the volume of product sales,
the corresponding volume of product manufacturing activity and the mix of products sold. We do not currently have plans to reduce
manufacturing capacity and we anticipate that the excess capacity will continue to adversely affect gross margins during 2018.
The Company expects to see improved margins for its product sales as it expands its volume to realize economies of scale
and spread its fixed manufacturing costs over a larger base of manufactured products. 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 were approximately $92,000 higher in the first half of 2018 than in the same period of 2017. This increase
in 2018 is the net result of several significant increases in some expense items and decreases in others. Net legal expenses
were
approximately $203,000 higher in the first half of 2018 than in the same period of 2017.
The majority
of these legal fees are related to the investigation by the SEC
In the Matter of Abtech Holdings, Inc. (NY-9262)
(the “SEC Investigation”), which began in 2015. Legal fees for this matter in the first half of 2018 totaled approximately
$711,000. Insurance reimbursements received in the first half of 2018 amounted to approximately $501,000 reducing the net amount
for such fees to approximately $210,000 for the first half of 2018. In the first half of 2017, legal expenses related to the SEC
investigation totaled approximately $888,000, with insurance reimbursements of approximately $884,000 resulting in net expense
for the period of $4,000.
Legal expenses related to the SEC Investigation
are expected to continue into the third quarter of 2018 as the Company works to complete a settlement with the SEC (see PART II,
Item 1. Legal Proceedings). Selling, general and administrative expenses in the second quarter of 2018 also included $133,000 for
the amount of the penalty and disgorgement expected to be included in the settlement.
These expense increases in the first half of
2018, compared to the same period of 2017, were partially offset by a decrease of approximately $172,000 for payroll related expenses
as the Company downsized to 12 full-time employees as of June 30, 2018. Rental expense was also reduced in 2018 by approximately
$32,000 with the closure of the AEWS office in Raleigh, North Carolina, which occurred in mid-2017.
As discussed in NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES to the condensed consolidated financial statements included in this Quarterly Report, 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
The Company’s primary research and development
(“R&D”) focus in 2018 and 2017 has been new products for the treatment of produced water, and other industrial
applications. These activities have included the development of filtration media for the treatment of heavy metals and evaporative
technologies to treat produced water. In both years, these efforts involved a significant amount of product testing in the lab
and in the field with corresponding costs for personnel (employees and consultants), fees for lab analysis, equipment rental and
travel costs.
R&D expenses decreased by approximately
$84,000, or 19%, in the first half of 2018 compared to the same period in 2017. The reduced R&D expenses in 2018 were primarily
attributable to a decrease of approximately $129,000 in expenses related to the evaporative technology including outside testing
services, field testing expenses and consulting fees. The Company anticipates that additional costs will need to be incurred to
ready this technology for commercialization, although the extent and timing of such costs is currently being evaluated. The comparison
of R&D expenses in the first half of 2018 and 2017 was also affected by a $34,500 credit to R&D expenses recorded in 2017
for the transfer to inventory of costs expensed in 2016 related to an experimental production run of the Company’s heavy
metal filtration media, which after thorough testing and evaluation was determined in 2017 to be market-ready and qualified for
inclusion in inventory.
Other income (expense)
Interest expense increased to $457,218 for
the six months ended June 30, 2018 as compared to $283,545 for the same period of 2017 due to the increased amount of outstanding
loans from investors accruing interest at a rate of 10% per annum.
Comparison of the three months ended June 30, 2018 and 2017
Revenues
Revenues for the three-months ended June 30,
2018 increased by $61,105 to $149,153, or 69%, compared to revenues in the same period of 2017. The increase was due entirely to
the increase in the quantity of product sales and included several relatively large orders from prior customers. Sales in the second
quarter of 2018 continued to be predominantly attributable to products used in stormwater treatment applications, although one
order for approximately $33,000 was for an industrial application. 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 second quarter of 2018 as most of the new opportunities being pursued have long lead times and involve
the development and testing of new or modified products.
In the second quarter of 2018, our largest
customer was an industrial business, whose order for Smart Sponge media accounted for approximately 22% of revenues. An order from
a related party customer for a stormwater project at one its facilities accounted for approximately 19% of revenues in the second
quarter of 2018. In the second quarter of 2017, there no customers that accounted for more than 10% of revenues.
Gross Margin
The Company’s gross margin on sales was
$21,541, or 14% for the three-months ended June 30, 2018, compared to a negative gross margin on sales of $(672), or negative (1%),
for the same period of 2017. The significant improvement in gross margin in 2018 is attributable to the increase in product sales
and the mix of products sold during the period.
The Company continues to have excess manufacturing
capacity which adversely impacts gross margins. The Company’s manufacturing facility operated at approximately 3% of its
Smart Sponge
®
production capacity for the second quarter of 2018 and less than 2% for the same period of 2017.
Going forward, the
Company expects that gross margin percentages, quarter by quarter, could vary widely depending on the volume of product sales,
the corresponding volume of product manufacturing activity and the mix of products sold. We do not currently have plans to reduce
manufacturing capacity and we anticipate that the excess capacity will continue to adversely affect gross margins during 2018.
The Company expects to see improved margins for its product sales as it expands its volume to realize economies of scale
and spread its fixed manufacturing costs over a larger base of manufactured products. 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
totaled $633,194 in the second quarter of 2018 compared to $10,115 for the same period of 2017, representing an increase of $623,079.
This large increase resulted from the receipt of insurance proceeds in the second quarter of 2017 which offset most other expenses
during that period. Since 2015 the Company has incurred significant legal fees related to the SEC Investigation. These legal fees
are expensed as incurred and when insurance proceeds are received as reimbursements for those fees, the reimbursements are credited
against expenses in the period received. In the second quarter of 2017, the Company incurred approximately $218,000 of legal fees
for this matter but received approximately $884,000 in reimbursements, resulting in a net negative expense of approximately $666,000
for the quarter. For the second quarter of 2018 the Company incurred legal fees related to the SEC Investigation of approximately
$285,000 and insurance reimbursements of approximately $357,000 resulting in a net negative expense of approximately $72,000 for
the quarter.
Legal expenses related to the SEC Investigation
are expected to continue into the third quarter of 2018 as the Company works to complete a settlement with the SEC (see PART II,
Item 1. Legal Proceedings). Expenses in the second quarter of 2018 also included $133,000 for the amount of the penalty and disgorgement
expected to be included in the settlement.
These expense increases in the second quarter
of 2018, compared to the same period of 2017, were partially offset by a decrease of approximately $81,000 for payroll related
expenses as the Company downsized to 12 full-time employees as of June 30, 2018. Rental expense was also reduced in 2018 by approximately
$31,000, primarily as a result of the closure of the AEWS office in Raleigh, North Carolina, which occurred in mid-2017.
Research and development expenses
The Company’s primary research and development
(“R&D”) focus in 2018 and 2017 has been new products for the treatment of produced water, and other industrial
applications. These activities have included the development of filtration media for the treatment of heavy metals and evaporative
technologies to treat produced water. In both years, these efforts involved a significant amount of product testing in the lab
and in the field with corresponding costs for personnel (employees and consultants), fees for lab analysis, equipment rental and
travel costs.
R&D expenses decreased by approximately
$63,000, or 26%, in the second quarter of 2018 compared to the same period in 2017. The reduction in R&D expenses in 2018 was
primarily attributable to a decrease of approximately $89,000 in expenses related to the evaporative technology including outside
testing services, field testing expenses and consulting fees. The Company anticipates that additional costs will need to be incurred
to ready this technology for commercialization, although the extent and timing of such costs is currently being evaluated. These
R&D expense reductions in the second quarter of 2018 were partially offset by an increase of approximately $9,000 for polymer
materials that were scrapped during the period. In addition, R&D travel expenses increased by approximately $12,000 in the
second quarter of 2018, compared to the same quarter of 2017.
Other income (expense)
Interest expense increased to $239,188 for
the three months ended June 30, 2018 as compared to $154,242 for the same period of 2017 due to the increased amount of outstanding
loans from investors accruing interest at a rate of 10% per annum.
Liquidity and Capital Resources
Liquidity
At June 30, 2018, the Company had a working
capital deficiency of approximately $13,175,000 compared to a working capital deficiency of approximately $10,965,000 at December
31, 2017. This increase in the working capital deficit during the first half of 2018 is primarily attributable to the use of cash
for operations. The Company’s cash balance of $136,352 at June 30, 2018 increased by approximately $78,000 during the first
half of 2018. 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 continues to operate with negative cash flow. While we hope to achieve significant sales
growth 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 expects to raise additional capital through continued financing arrangements with its shareholders or
other private offerings. As of June 30, 2018, the Company had $11,584,687 of short term debt, including accrued interest, which
will need to be repaid, extended or refinanced by the Company during 2018. 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 half of 2018 and 2017
were funded primarily by proceeds from short-term loans from related party stockholders. The net proceeds from these loans amounted
to $1,603,000 and $1,982,000 in the first half of 2018 and 2017, respectively. Subsequent to June 30, 2018 and prior to the filing
of this Quarterly Report, the Company received additional short-term loans from a related party stockholder totaling $354,000.
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. The outstanding balance due on the bank line of credit as of
June 30, 2018 and December 31, 2017 was $50,123 and $65,625, respectively.
Comparison of cash flows for the six months ended June 30,
2018 and 2017
Operating Activities
The Company had negative cash flow from operations
in the first half of 2018 of $1,489,003 compared to negative cash flows from operations of $1,888,089 for the same period of 2017.
The reduction of negative cash flow in the first half of 2018 is largely attributable to the $367,671 increase in accounts payable
and accrued expenses during the period compared to a net decrease for these items of $73,482 in the same period of 2017. In the
first half of both years the Company had significant increases in accrued interest, totaling $447,610 and $269,321 in 2018 and
2017, respectively, which contributed to negative cash flow in those periods being significantly less than the corresponding net
loss. This favorable effect on cash flow was partially offset in the first half of 2018, by the impact of increases in accounts
receivable of $43,667, inventory of 37,819 and prepaid expenses of $30,573. The increase in prepaid expenses in 2018 was primarily
due to a prepayment made to a vendor for a purchase of raw materials.
Investing Activities
The Company had capital expenditures in the
first six months of 2018 and 2017 totaling $10,820 and $25,095, respectively. These capital expenditures were primarily related
to equipment installed for the manufacture of the newly developed heavy metals filtration media. The capital expenditures in the
first six months of 2017 were offset by proceeds from the sale of $10,000 of fixed assets. As of June 30, 2018, the Company had
no commitments for any material future capital expenditures.
Financing Activities
Net cash provided by financing activities for
the six months ended June 30, 2018 and 2017 amounted to $1,577,740 and $1,915,237, respectively. The primary financing sources
of cash for both periods were cash advances from two related party stockholders totaling $1,603,000 in 2018 and $1,982,000 in 2017.
During the six months ended June 30, 2018 and 2017, the Company made no draws on the bank Line of credit and made repayments of
$15,502 and $5,762, respectively.
During the first half of 2017, the Company
made payments totaling $60,000 to the holder of a convertible promissory note, of which approximately $55,000 was applied to reduce
the principal amount of the note. There were no payments made on this note in the first half of 2018 and the principal amount due
on the note as of June 30, 2018 was $44,546. Under amended terms of this note, the Company is obligated to begin making additional
monthly payments of $10,000 on the note beginning December 31, 2018, provided the note remains outstanding as of that date.
Going Concern and Management’s Plans
The accompanying June 30, 2018 condensed consolidated
financial statements have been prepared in conformity with GAAP, which contemplates 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 June 30, 2018 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,
along 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 April 3, 2018, included an emphasis-of-matter paragraph with respect to
our financial statements for the fiscal year ended December 31, 2017, expressing uncertainty regarding the Company’s assumption
that it will continue as a going concern. The accompanying June 30, 2018 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
Part II, Item 1 Legal Proceedings
of this Quarterly Report. 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 June 30, 2018 condensed consolidated financial statements.
If the Company is unable to raise additional capital and/or generate significant sales growth in the near term, and resolve the
legal matters, there is a risk that the Company could default on debt maturing during 2018. Further, the Company is currently in
default on notes that matured in April 2017; however, the Company is currently in discussion with the noteholder to extend the
maturity date but there can be no assurance 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.
Off-Balance Sheet Arrangements
As of June 30, 2018, we did not have any off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, that have or are reasonably likely to have a current
or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to investors.
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 condensed consolidated 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.
Inventory valuation
The Company’s inventory is stated at
the lesser of cost or net realizable value, 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
Revenue is measured based on the consideration
specified in a contract with a customer and excludes any sales incentives. The Company recognizes revenue when it satisfies a performance
obligation by transferring control over goods or services to a customer. Taxes assessed by a governmental authority that are both
imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are
excluded from revenue. The Company recognizes shipping and handling fees associated with outbound freight after control over a
product has transferred to a customer as revenue and the related expenses as a fulfillment cost included in cost of revenues.
Allowance for doubtful accounts
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. 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 six month periods ended June 30, 2018 or 2017.
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 Quarterly Report for a detailed description of recent
accounting pronouncements.